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The Economy is Like The Weather - Economics Weekly

The Economy = The Weather

The economists are like weatherman in an economic climate which is hard to predict. Perhaps though, they are telling us something more than meets the eye..

Global Economics Weekly Brief

Like the spring weather, the economic climate has been blowing hot and cold. This makes understanding what’s going on now, never mind forecasting, a very difficult task. The latest to offer their outlook is the Organisation for Economic Cooperation and Development (OECD), which estimates the UK fell back into recession in Q1. This differs from the Office for Budget Responsibility (OBR) and many other forecasters, who believe the UK will avoid this, albeit narrowly, and maintain positive growth.

The views may seem contradictory but actually tell a similar story. Most forecasts point to a very difficult outlook for the UK with headwinds blowing from weak global growth, the fallout from Eurozone massive debt problems and continued austerity. Elevated oil prices add another layer of uncertainty. If they persist, the global recovery could be undermined. So even though the evenings are lighter, it’s still difficult to see clearly the economic road ahead. What do you believe?

UK economic growth was revised down for 2011. The UK economy shrank by 0.3% in Q4 2011, a downward revision from the 0.2% contraction as first thought. This brings down the annual growth for 2011 to just 0.7%. The relative strength of net trade (exports minus imports) was the only reason annual growth was positive. Household consumption, which accounts for about two thirds of expenditure in the UK economy, fell by 1.2%y/y. Although positive net trade is good, the UK is still struggling to rebalance. The service sector did well last year but the manufacturing sector, which should be driving the rebalancing, contracted. More recent data point to a modest improvement, but the economy remains fragile. What do you think?

UK house prices fell in March. It wasn't a surprise that Nationwide reported a 1%m/m fall in prices in March. Previous months had been buoyed by the race to buy before the end of the stamp duty holiday. UK house prices are now 0.9% lower than a year ago. This is the first annual fall in prices in six months. Price falls in the quarter were broadly based across the UK. Only Scotland and the North of England saw price rises, while Wales took over from Northern Ireland as the area where prices fell fastest. London prices fell 0.7%q/q, but this follows a 2.1%q/q increase in Q4 2011.

Mortgage approvals fell to their lowest since June 2011 in February. There aren’t any signs that demand for housing is getting any better. The number of approvals for house purchase fell to 49k in February, from 58K the previous month and is the lowest level of approvals since June 2011. The Bank of England Credit Conditions Survey can shed some light on this. It shows that more approvals were failing credit scoring in Q4, and that this was expected to get worse in Q1. But the end of the stamp duty holiday will also have played a part. There may be a small bounce back in coming months, but it will be a long time before we get back to the 100,000 per month we were used to before the financial crisis.

Help, We`re going to need to work: but where will the jobs come from? Today, 40 million workers across advanced economics are unemployed. At the same time, businesses in those nations say that they often cannot find workers with the skills need! Yes, these workers are available and are of a mature age that employers do not wish to keep because of cost! Plus, the influx of workers from the other EU countries that are in serious trouble are arriving in the UK every day! The immediate cause for the surge in unemployment has of course been the recession, but behind this cyclical issue is the structural weakness of the mismatch in skills. Economic growth will not of itself bring the jobs, for many of the jobs lost will never return. So, why do the UK allow all the people from the EU arrive in the UK to put themselves forward in competition with home grown people, more than likely because new arrivals will accept lower wages. What do you think?

In contrast, US house prices may be stabilising at last
. The Case Shiller US 20 City house price index was unchanged in January after an average fall of 0.6%m/m in each of the previous five months. The annual fall was 3.8%, broadly similar to the previous five months. It could be that an improvement in the labour market and confidence in a US recovery is beginning to feed through into the housing market. But it’s too early to be sure that things are getting back to normal yet. This small improvement is very patchy.

Eurozone boosts its emergency cash pile. Eurozone finance ministers took a step forward by expanding their bailout fund from EUR 500 billion to 700 billion. This gives the Eurozone an extra buffer against countries falling into financial trouble. The fund was enlarged with the specific intention of offering more protection to the larger economies of Spain and Italy. Although welcome, even this very large sum does not fully protect these large economies, particularly if both were to enter into trouble. And the warning lights on Spain are beginning to flash. The country’s borrowing costs have been rising again despite enforcing harsh austerity measures to meet budget deficit targets mandated by Brussels. This is a very short term measure before more money will be needed in the future.

Oil is becoming a bigger worry. With oil prices hovering above $120 per barrel, national authorities have been seriously considering releasing some of their strategic reserves to ease price pressures. Speculation about such a move appears to have had the desired effect, although it’s not clear whether it will be enough to keep them down. Markets really have the jitters. And it's no wonder. Unrest in the Middle East (again) is the source of the problem as sanctions on the purchase of Iranian crude and Iran's threats to close the Strait of Hormuz threaten future supplies. And this is despite increased output from Saudi Arabia. Rising oil prices have the capacity to undermine economic growth. One concern is the US. Although the world’s largest economy has been improving, US households and firms could be hit by rising pump prices.

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

Accreditation: UK Registered Learning Provider:10025755

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.

The Economy is Like The Weather !

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