Global Economics Weekly Brief
The Central Bankers Bash
Last week’s annual get-together of central bankers didn’t reveal a clear way forward for gauging labour market slack or when interest rates will rise – topics that have recently dominated discussions at the Bank of England and the US Fed.
But it did see the European Central Bank float new ideas on how to bolster the Eurozone recovery. Borrowing money globally is not the answer to growth - read the book `The Rise and Fall of the Roman Empire` and the contents will show you how the world continues to repeat itself time and time again! Why do politicians not read about global history?
Changing tack. Jackson Hole, Wyoming, is the setting for the world’s top central bankers’ annual get-together. In the past the event has seen big policy announcements and prescient warnings of financial instability. This year it was Mario Draghi’s turn to steal the show. The European Central Bank (ECB) President stated that government spending could play a greater role in helping the recovery and bringing down unemployment. He also highlighted falling inflation expectations across the single-currency area, which could mean that the ECB is inching closer to further action. The only people making money are the bankers themselves on the back of YOU!
A little iffy. The 'flash' reading of the Eurozone’s Purchasing Managers Index (PMI) for August continued the run of disappointing data for the single-currency area. The key survey of private sector activity fell to its lowest level this year with the manufacturing sector delivering the lowest reading since last summer. And France’s growth is still looking sluggish. The good news is that Germany's service sector reading remains healthy with plenty of new business coming in. Unfortunately it doesn't change the Eurozone's growth outlook from being a very weak one. It’s more food for thought for the ECB. The Eurozone is burning itself out by high borrowing, low manufacturing out-put, very high unemployment and foolish strategy!
Wait and see. US rates will be on hold for some time yet. That’s the conclusion from the minutes of the Federal Open Market Committee (FOMC) published last week. Members are actively debating how they will tighten policy. As to when that will happen, it’s a case of wait and see. They want more information about the pace of growth and improvement in the labour market before changing their view that rates will stay on hold for a considerable time after asset purchases end. US are borrow money at a level of debt standing at $17 trillion and growing rapidly - how/when will the US ever pay back this money?
Echoes. The FOMC’s concern is how to gauge job market slack. Does rising employment mean that inflation could take-off sooner than expected? In echoes of debates at the BoE, they are concerned that the unemployment rate doesn’t tell the whole story. But they fret that any labour market indicator is imperfect. Most of all, they want to avoid focusing on measures that could become moving targets. For now, they’ll describe what they see: an improving job market with significant slack. Inflation globally is on the way back!
Outnumbered. Two members of the Bank of England's (BoE) Monetary Policy Committee voted for rates to rise to 0.75% in August, whilst the other seven members preferred to keep them at 0.5%. The dissenting votes surprised markets, who had been shifting their expectations of rate hikes later into 2015. Now bets are back on for Q1 2015. But dissent doesn't automatically mean action. In 2011 three members voted for rates to rise for four consecutive months, only to have their hopes dashed as the outlook in the Eurozone soured. The parallels with today's situation are clear to see. If the bank rate rises there will be many people faulting their mortgages and other borrow! Boom and bust again, again - when will governments and bankers learn from history?
Go your own way. More of us are working for ourselves than at any time in the last 40 years. UK self-employment has risen by 760k since 2008 to 4.6 million, with cabbies and construction workers topping the charts. Fully two-thirds of total job growth has come from the self-employed. Oddly, that’s not mainly because ever-more people have chosen self-employment. Rather, fewer people than in the past have given it up. Working for yourself is something most people do for love, or necessity, rather than money: the typical self-employed person works longer and earns less than average. Most people working for themselves cannot get employment jobs - why? To many foreign workers in the UK will work for less than a UK born person! What do you believe?
At odds. The annual rate of UK inflation fell from 1.9% to 1.6%y/y in July. Clothing and footwear contributed most to the slowdown, with prices in this category down 5.7% from July. The cost of furniture and fittings also fell, by 1.5%m/m, as did food prices, down by 0.2%m/m. Like the slowdown in wages, low-ish inflation stands at odds with an otherwise strong economy. However, they're probably related. Employers may be more willing to hire when wage growth is subdued, while low inflation keeps household spending power from slipping further. The niggling question is how long can this last?
Still spending. UK consumers continued to turn browsing into buying in July, with the quantity of goods bought up 2.6%y/y. But growth has been slowing for the past 3 months, led by weaker food retailing and non-store retailing. Internet sales now account for 10.3% of total sales - 5 years ago it was 5.9%. Strikingly, average retail prices, including fuel, have been falling almost constantly since February this year. The impacts of a stronger pound are clearly being felt. Very high credit card borrowings at very high interest rates is the main buying power - how will people pay the money back?
Changing of the season? Last week, numbers from Right move showed an unexpectedly large August drop in UK housing asking prices. Meanwhile figures from the ONS showed moderating house price growth in the 12 months to June – although prices are still growing at a healthy 10.2%y/y. Add in the results from the most recent survey from the Royal Institution of Chartered Surveyors, which also points to a cooling, and the leaves are most certainly starting to change colour. Many foreign people buying UK property as an investment!
About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, 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/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
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Written and submitted by:
Dr Colin Thompson
Direct: + 44 (0) 121 247 4589
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The Cavendish Academy
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Central Bankers Bash!