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Deflation - Global Economics Weekly

Deflation - Global Economics Weekly Brief


Market movements last week showed just how important the global outlook is to the health and wealth of the UK economy. Worries about Euro zone deflation and slowing global growth trumped yet another fall in unemployment.
Yet, `unemployment` in the other EU countries has rapidly increased, this is why the UK is very attractive for people to move to the UK, which is already very full! The UK infrastructure cannot cope with any more people! There will be social unrest in the future!

Growth slows as global recovery begins to falter. Economic growth globally slowed in the third quarter, official figures are expected to show this week, fuelling fears in financial markets that the global economic recovery is faltering. European stock markets are in deep trouble and the worrying echo of the euro crisis, the value of bonds in struggling euro zone countries such as Greece fell sharply. The bout of volatility on world markets has already caused planned flotation of many companies and they are delaying their listings until the stock markets have improved. The world is in turmoil due to many issues that impact on the future!

UK Employment up… it was more good news for the UK labour market. First, there were 736k more people in employment than one year ago, with 80% of that rise coming from additions to full time employment. Second, the number of people unemployed dipped below the two million mark and the rate dropped to 6% - within one percentage point of its average between 2000 and 2007 and 1.7% lower than a year ago. The scale of the UK’s jobs recovery continues to impress. The UK cannot continue to take in any more people as the infrastructure is at breaking point and in many cases it is already broken, (hospitals cannot cope/roads are collapsing/schools are full/lack of housing/crime on the increase/etc,etc!

…UK real earnings down… The numbers change, but the song remains the same. It is now more than six years since growth in regular pay fell below increases in the cost of living. The latest figures have pushed the UK a little closer to the promised land of increases in purchasing power, but once again, earnings disappointed. Excluding bonuses, it was only in the manufacturing sector that average earnings growth kept pace with inflation. People striking as started and will continue in 2015 and beyond! Wages need to rise otherwise there will be social unrest!

…and UK inflation down too. UK inflation dropped to just 1.2% in the year to September, a whisker away from the low of 1.1% reached in the depths of the 2009 recession. This compounds the headache for monetary policy makers. With unemployment falling as far and as fast as it has the MPC’s estimates of slack in the economy are falling. But this stands in contrast to the failure of pay to outpace inflation. Add falling inflation into the mix and the MPC will be even less keen to raise interest rates as price growth heads further away from the 2% target. Two speeches this week gave MPC members the opportunity to explain their thinking… More challenges on the way!

To hike or not to hike? One has voted to increase UK Bank Rate the other, to keep it where it is. This week, Martin Weale and Andy Haldane spoke in defence of their actions. For Weale, the crucial issue is how to make policy when you are uncertain about the future, the data and how the economy works. In this world, it is changes in the data that matter most, so he naturally has been attaching prime importance to falling unemployment. For Haldane, whose speech gave us a "misery index" an "ecstasy index" and an "agony index", the future is one of extremes - either the sun is shining brightly or it is raining. In his view, recent global developments have raised the risk that the UK weather is about to take a big turn for the worse, so now is the time to keep rates lower for longer. The future is a big challenge!

Wrong direction. Euro zone GDP growth ground to a halt in Q2, so there is intense focus on whether the slide towards recession can be averted in Q3. The evidence from the latest industrial production data is pointing in the wrong direction though. Output in August was 1.9% lower than last year and 1.4% down on the Q2 average. The industries covered in this data only account for a fifth of all Euro zone GDP, so the end result is far from certain. But a particularly disappointing performance from Germany (-4.3% y/y for August) adds to fears that growth is struggling even in countries that were previously growing. Rapid unemployment continues in main land Europe!

Still flirting. The Euro zone continues to flirt with deflation. Consumer prices rose by just 0.4%y/y in France during September. Germany is little better with prices rising just 0.8%y/y. Prices are now falling in Spain and Italy, but at this stage the falls are mild at just -0.3% in Spain and -0.1% in Italy. High levels of unemployment and associated weak demand are to blame. With inflation so far from the European Central Bank's target of "below, but close to 2%" pressure will remain for further action from the central bank. Euro zone countries in very big trouble!

Controlled, for now. China is still managing to keep new credit growth controlled, or certainly relative to its recent past. New credit over the past four months is around 10% less than the corresponding period last year. It means that the stock of credit is growing at around 16%y/y, which is the slowest pace since early 2006. The authorities are showing restraint for now. The question is whether they can continue to do so as growth slows further. The future is slower growth and borrowing to high, the bubble is about to burst!

The return of volatility. After a summer of calm financial markets woke up with a start last week. There were big falls on the stock exchanges around the world as markets grew more pessimistic about global growth. The pain was felt in commodity prices too, with oil now down to $85 a barrel. Weaker growth forecasts translated into delaying the expected date that interest rates start rising around the world. In response yields on bonds in the UK, US and Germany fell sharply. But not everyone moved in the same direction. Government borrowing costs spiked in Spain, Italy, Portugal and Greece. A lack of growth is a big threat to the credit-worthiness of these countries, something investors have started worrying about again. Money lending to these countries is drying up!


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Written and submitted by:

Dr Colin Thompson
Managing Partner
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Deflation
- Global Economics Weekly

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16-09-2016 19:55:18
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darrendemers
18-11-2016 07:24:22
One has voted to increase UK Bank Rate the other, to keep it where it is. This week, Martin Weale and Andy Haldane spoke in defence of their actions. For Weale, the crucial issue is how to make policy when you are uncertain about the future, the data and how the economy works. View Our Home Improvement Site , View Our Home Improvement Site , View Our Home Improvement Site , View Our Home Improvement Site , View Our Law Site , View Our Law Site , View Our Law Site , View Our Law Site , View Our Law Site , View Our Real Estate Site In this world, it is changes in the data that matter most, so he naturally has been attaching prime importance to falling unemployment. For Haldane, whose speech gave us a "misery index" an "ecstasy index" and an "agony index", the future is one of extremes - either the sun is shining brightly or it is raining. In his view, recent global developments have raised the risk that the UK weather is about to take a big turn for the worse, so now is the time to keep rates lower for longer.
 
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