Global Economics Weekly Brief
The Chancellor of the Exchequer, George Osborne, is getting his Budget ready. Yet lobbyists looking for some pennies for their favourite cause shouldn’t hold their breath. Despite very disappointing news on UK unemployment, Mr Osborne is likely to stick to plan A, especially as Fitch joined Moody’s rating agency in putting the UK’s AAA credit rating on negative watch.
But continuing signs of improvement in the US are sending out positive signals for a recovery elsewhere in the world. And once recovery is well underway, the Chancellor may be more minded to loosen the straitjacket on his fiscal policy. Maybe only!
UK unemployment rose in the three months to January. The number of people unemployed rose by 27,700 in the three months to January. This brings the unemployment rate up to 8.4% compared with 8.3% in the three months to October. More unemployment amongst women was the reason for the rise, but that was because more of them started looking for jobs rather than fewer being in work. Plus, UK Jobless forced into unpaid work boost numbers of the `hidden unemployed`. Hundreds of thousands of people have been pushed into part-time working, self-employment and unpaid work for a family business. The number of people working part-time rose by 71,000 in the three months to December 2011 to reach 7,871,000.The self-employment has risen from 3,975,000 to 4,076,000 as more people are `pushed` into self-employment. The number of people `pushed` into unpaid work is over 1,000.000. So what is the `true` full unemployment in the UK? Possibly over 10,000,000 +.
UK average earnings growth falls to 1.4% in January. Annual average earnings growth slowed 0.5 percentage points from 1.9% in the previous quarter. Earnings growth has now slowed in every month since July 2011 and is at its lowest rate since July 2010. The slowdown in financial services was particularly sharp, driven by a -6.2% y/y decline in bonuses. The need for households to maintain living standards probably explains the increase in females seeking employment. More unemployment in females is forecast for this year.
Despite higher exports, the UK trade deficit widens in January. The UK's overall trade deficit increased to £1.8bn in January, up from £1.2bn in December, despite higher UK exports. Despite a £0.5bn increase in exports, this was overshadowed by a £0.8bn increase in imports. UK services sector exports also disappointed in January, falling to its smallest surplus since November 2010. Exporters to Europe are finding it tough, but non-EU exports hit a record high. Manufacturing in many sectors was effected by higher material costs and a decline in exports.
Eurozone inflation is stickier than expected. Eurozone consumer inflation (CPI) reached 2.7% in February, having increased for three consecutive months. A 9.5%y/y rise in energy prices was the main culprit, but increases were spread across the board. Even though inflation is down from last year’s 3% peak, it's a disappointing result. Especially as euro area households are already hurting with the unemployment rate at a record high of 10.7%. More rises in fuel and energy costs for the remainder for 2012 will push up inflation.
Eurozone industrial production improves in January, but only just. Overall industrial production increased by 0.2%m/m in January. This was lower than the 0.7% expected, but far better than the 1.1%m/m fall in December. While welcome, this may not be enough to prevent a technical recession in the Eurozone, particularly after a disappointing performance recorded in manufacturing surveys. But it does add to the signs of stabilisation mentioned by ECB’s President Mario Draghi. We believe Europe is in recession?
The Fed takes a breather. After a flurry of policy announcements at its January meeting, the Federal Open Markets Committee left everything alone last week. So, interest rates stay at practically zero. While there have been some improvements in the economy, particularly in the labour market, we will have to wait for the minutes to see if this was enough to convince any committee members that interest rates should rise before mid 2015. Many part-time jobs with few full time jobs!
US retail sales pick up speed. The 1.1%m/m growth in retail sales in February added to the run of positive US economic data. Lower unemployment means that sales have increased for nine months in a row, lifting the annual growth rate to 6.5%.
Ireland and Iceland welcome the possible end to their economic winter. Ireland and Iceland encapsulated the precrisis boom and suffered the heavy blows of the subsequent crash. Yet both are showing signs of lasting recovery. Ireland's trade surplus hit a record high in 2011. This is hugely important for the export-dependent economy. Iceland, on the other hand, has repaid, ahead of schedule, around one-fifth of its IMF debt (or about $443 million). What’s interesting is that both countries opted to solve their economic woes in different ways. Iceland defaulted, while Ireland decided to wear the hair shirt of austerity. Either way, compared with some other Eurozone economies, Ireland and Iceland are the poster-children of recovery. As in the 1930’s, it helps to acknowledge early that your economy’s in trouble. In other words, Portugal, Spain and others are likely to find recovery harder to create and sustain. Interesting times ahead!
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!
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