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10-Year Recovery - Global Economics Weekly

The 10-Year Recovery?

Global Economics Weekly Brief


Some weeks the economic news seems almost uniformly negative. Last week was one of those weeks. Inflation rose to a five-month high, once again causing real wages to fall. October’s retail sales were unsurprisingly shaky, but it’s hardly helpful in the run up to Christmas. The Bank of England also downgraded its UK growth forecast. There was some good news. Unemployment fell again. (Mostly part-time workers are filling the void).



As the Bank of England governor said, we’re in the “zigzag” economy. To paraphrase his words further, although last week was more a ‘zag’ than a ‘zig’, the underlying story remains the same. It’s a long hard road to recovery. The recover can/will take at least 10 years at the present position!

Bank of England dampens expectations. The Bank of England set out another pessimistic forecast for the UK economy in its quarterly inflation report. Having previously expected growth in Q4 of next year to be 2.2%y/y,(will the Bank of England ever get their forecasts right?) it now expects a figure of around 1.7%y/y. The upshot is output will not reach its pre-crisis peak until 2015 at the earliest. In the near-term, Governor King indicated the possibility of a `negative` Q4 GDP reading after Q3’s 1%y/y welcome surprise. As for consumer prices, the Bank expects inflation to remain above the 2% target until 2014, despite the weak economy. But shouldn’t weaker growth mean a slower pace of inflation? Not necessarily. According to the Bank of England, poor productivity performance means that the economy’s supply-side has also been hit. As inflation depends on both demand and supply, if supply is weaker then inflation can remain high. Inflation will get higher over the next ten years!

September’s inflation reading underlines the Bank’s concerns regarding prices. The consumer price index (CPI) rose 0.5% between September and October as higher university tuition fees kicked in. This pushed the annual rate of inflation from 2.2% to 2.7% - the highest rate since May. The rise in inflation was also underpinned by higher food and motor fuel prices, adding to the strain on household budgets. Furthermore, recent announcements of higher energy prices by some of the main utility companies are yet to hit. The squeeze on incomes looks set to continue for some time.

The UK unemployment rate fell to 7.8% in the three months to September – the lowest rate in over a year. Despite unemployment falling, the share of the unemployed who have been without a job for more than 12 months climbed again to almost 36%, a level last reached in mid-1997. More positively, the employment rate also rose, to 71.2%, which was last seen in early 2009. And the total number of people in employment is as high as it has ever been. Less encouraging is that much of the rise in employment is being driven by `part-time jobs`. And wages increased by just 1.8%y/y in the three months to September – again failing to keep pace with inflation. But it does pay to be working in some sectors, including the public sector and the wholesale and retail sector where earnings rose by at least as much as consumer prices. The hardest hit sectors are, construction, traditional printing, media newspapers and manufacturing covering many sectors!

UK retail sales make a shaky start to Q4. The value of retail sales fell slightly in October (-0.4%). Most areas were weak, but clothing & footwear retailers had an especially bad month. The overall decline was even sharper in volume terms, which lends weight to Mervyn King's suggestion that GDP might contract again in Q4. The report will doubtless fuel concerns about weak trading over the festive season (only 36 days do go!), though it is worth pointing out that sales have had a good run in recent months, so we shouldn't attach too much weight to one data point. Christmas isn't cancelled - yet. Watch what happens between now and New Year regarding sales!

The eurozone economy slipped back into recession in Q3. The eurozone economy shrank 0.1%q/q in Q3 following a decline of 0.2% in the previous quarter. The troubled periphery economies are the culpable parties with Spain’s GDP falling 0.2%q/q, Italy -0.3% and Portugal -0.8%. But it was a slump of 1.1%q/q in the Netherlands (the eurozone’s 5th largest economy) that did the damage. France escaped recession by unexpectedly expanding 0.2%q/q, while Germany slowed a touch from 0.3%q/q in Q2 to 0.2%q/q in Q3, as the economic malaise spreads across the region. With so much bad news from the Eurozone it’s surprising that the growth figures were not worse!

Fed Chairman Bernanke sounds a warning about US housing. There have been reasons for modest optimism about US housing recently as activity and prices ticked up. But in a speech last week, Bernanke accentuated the negative. 20% of borrowers are in negative equity. 7% of mortgages are either more than 90 days overdue or the house is being repossessed. Meanwhile, new mortgage lending is at its lowest level since 1995. In other words, a number of headwinds remain and even a modest trip over the fiscal cliff could take the fragile housing market recovery with it. More unemployment on its way with another housing decline at the highest level that will be recoded!

The Chinese economy continues modest improvement as the new leadership takes over. October’s industrial production growth rose to 9.6%y/y and retail sales growth increased. The economy is likely to experience a modest near-term reacceleration, but the long-term picture is that it has reached a structural turning point. China’s new leaders take over with the investment and export led growth model deemed to have run its course. A rebalancing toward consumption is a necessity for sustained economic catch-up with the West. ‘Natural’ forces, including less favourable demographics, will aid this rebalancing but ‘policy’ forces are arguably more important. Tentative steps toward rebalancing have been taken recently, including a loosening of control over the banking sector. Wage demands, health demands, better living demands are hitting the leadership `big-time`. The new leaders must accelerate such reforms rapidly otherwise more unsocial unrest will be the main headline!

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

ENDS
Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.


Read more newly added articles, which you can add to, on NewsUSA-MyFeedPortal: http://newsusa.myfeedportal.com/i/libor-scandal <--- The Largest Scandal The World has Ever Seen - The LIBOR Scandal.


Colin Thompson
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email: colin@cavendish-mr.org.uk

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http://www.colinthompson.org.uk


10-Year Recovery? Let's hope not!

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