Global Economics Weekly Brief
To a fanfare of average economic growth numbers, the US Fed decided not to start talking up rate rises. Patience is the watch-word. Across the pond, the UK posted its own perfectly average economic growth numbers for 2014.
On the other side of the Channel, in the wake of the QE announcement, the Euro zone slid further into deflation. Watch the Euro zone countries very closely!
Still waiting. Most forecasters expect the US to be the first major economy to raise rates. That view has strengthened in recent months as central banks across the rest of the world have been cutting rates and loosening policy. But we are all going to have to wait. “Patient” is the word the US Federal Reserve used to describe its approach to raising rates. The statement that accompanied last week's FOMC meeting showed more weight being put on developments outside the US. That includes everything from the Euro zone's battle against deflation to China's rapidly slowing economy. In that context and with a strengthening dollar, which pushes down import prices, the Fed is happy to wait and see. World banks are panicking again!
American spending. US GDP grew by 2.6% on an annualised basis in Q4. It's less than the 3% that was expected and the 5% recorded in the previous quarter. But there was better news underneath. And it came from the consumer. Personal consumption rose 2.8%y/y and made its strongest contribution to growth since 2006. Net exports dragged GDP growth down but this was less about exports being poor and more about rising imports on the back of strong consumer spending. Overall the economy grew 2.5%y/y in Q4, almost identical to the UK's 2.6%. The US seem to be growing faster than the rest of the world, but at what cost? The US debt is $17 trillion and rapidly increasing!
Fuelling confidence. Underlining the GDP figure was a strong reading in a key survey of consumer sentiment, which rose to its highest level in 11 years in January. With 2014 being the strongest year of job creation since 1999 and a 'gallon of gas' having almost halved since June there are plenty of reasons why US consumers are feeling upbeat. Is this short term or long term?
Curious. US house prices fell by 0.1%m/m in November, the third successive monthly drop. Annual inflation, which had been over 10% at the start of the year, slowed to 4.7%. That’s despite the supply of houses on the market slipping to its lowest level since 2005, rising sales of existing homes, mortgage rates close to record lows and a growing economy. These forces should see house price inflation accelerate again in the next few months!
Average. Britain’s economy matched its long-run average in 2014, growing by 2.6%. Comparing Q4 2014 with a year earlier, output was 2.7% higher. However, the pace of expansion slowed in Q4. Services continued to grow at a decent rate but construction contracted while manufacturing just about broke even. It’s too soon to sound any alarms but in November the Bank of England had expected output in Q4 to be more than 3% higher than a year earlier. That rate rise is slipping further into the distance. The UK government debt is rising at a rapid rate at present it stands at £1.5 trillion! Think Greece is in a mess? Wait till the UK`s debt mountain explodes in the face of the UK government and residents!
Light at the end? There is no question that the UK housing market is slowing down. According to Nationwide, average prices grew 6.8%y/y in January, the slowest rate in over a year. And a 17%y/y fall in mortgage approvals suggests that there is more to come. But there is an indication that the current deceleration may end in the third quarter of this year. The much-watched survey produced by the RICS is showing that expectations for future house price growth, which had been falling since February, have started to rise again. The season for buying/selling houses is March to October!
Ker-ching. The mortgage market may be slowing, but the credit card and personal lending markets are going from strength to strength. With lending up 5.2%y/y and 7.6%y/y respectively, it would appear that households are continuing to return to borrowing as a means to finance their spending. And with personal loan rates now as low as the rate on an SVR mortgage, is it any surprise? But lest we get too excited, there is still a long way to go before UK households as a whole return to the heady heights of 2007. Unsecured debt was 22% of incomes pre-crisis. It’s 14% now. UK domestic debt is the highest ever recorded and is rapidly growing month on month, is this another boom and bust story ready to explode? Why do banks/lenders make it so easy to borrow money?
Ain't no stopping us now. Euro zone prices fell by 0.6%y/y in January, far steeper than December's 0.2% drop. With energy prices down 8.9%y/y, the decline in oil prices is now flowing through steadily into consumer prices. An annual 0.6% decline has happened before, in July 2009. Yet back then prices were rising again well before Christmas. There's a sense of something much more entrenched about falling prices this time, despite the European Central Bank’s efforts on quantitative easing. More positively, the region's unemployment rate fell to 11.4% in December, down from 11.5% in November. Not much granted, but welcome nonetheless. Energy prices are still too high, so why are they not decreasing quicker?
In the world of the year 2015 will continue to fight Ebola/Vladimir Putin/Islamic State Terrorism and many more challenges. Western Europe is back in an economic rut/Japan`s recovery is faltering big time/China looks as if its heading for its slowest growth since 1990. There are good things happening too, Like, many challenges they are continuous year by year and we all have to look at new ways to recover and bring growth globally. Everyone should read history and then we could plan better for the future!
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
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Economic Growth - Global Economics Weekly