Global Economics Weekly Brief
EU Unemployment Woes
The Euro zone recovery, already anaemic, has run out of steam without much impact on the region’s unemployment rate. Joblessness in the Euro zone equals more than half of Spain’s population.
Monday, September 1, 2014 -
And with inflation falling further in August, the European Central Bank may finally be prepared to provide an appropriate response. More unemployment on its way and the Euro zone is in free fall to nowhere!
Idle hands. The Euro zone's economic woes are most clearly and painfully manifested in the region's unemployment rate, which stood at 11.5% in July. The fact that it's fallen from 11.9% in July 2013 provides small comfort for either the `25 million Euro zone jobless` currently looking for work, or officials charged with rejuvenating Europe's many moribund economies. High unemployment hurts both the public and private sectors. First, by worsening already stretched public finances as high unemployment means lower tax receipts and higher welfare payments. Second, because there’s less money for consumption spending or desire for business investment. Euro zone countries in deep financial trouble with nowhere to go!
A helping hand? Weak demand brought about by high unemployment has helped slow the rate of inflation in the Euro zone, which fell further to just 0.3%y/y in August - a figure that’s too low for comfort. Falling prices would raise the real cost of debt and give consumers an incentive to delay spending because they think prices might be lower in future than now. Given the terrible twins of high unemployment and deflation fears, it is no wonder that Mario Draghi, President of the European Central Bank, appears to be inching toward mimicking his central bank counterparts by adopting quantitative easing. These Euro zone leaders need to learn the art of budgeting/strategy planning/managing people and organisations!
More slack? The Bank of England has regularly spoken of its surprise at the amount of ‘slack’ in the labour market. One possible explanation is the pick-up in net migration (immigration minus emigration). Net migration was 220k in the year to March and it’s been on an upward trend since late 2012, coinciding approximately with the UK’s economic upturn. So it could be contributing to the current low inflation environment. At the least, it’s something the Bank of England will likely be mindful of as it deliberates when to hike rates. Who says the UK as low unemployment? The UK have over 2 million people on benefits who do not work/over 1 million people on training contracts/over 3 million people who cannot find employment so become self-employed/so tell me what is the `real` figure for unemployment in the UK?
Food for thought. UK house prices continued to increase at a robust pace in August, up 11%y/y according to Nationwide. And this is happening despite a fall in the number of mortgage approvals. Latest figures show that there were 43k approvals in July - a pick-up on April and May, but fewer than in the first three months of the year. However, unless house price growth slows considerably and earnings growth rises, the Financial Policy Committee’s limits on higher loan to income lending will start to take effect sooner than in mid-2015, the Bank of England’s central forecast. And if it does, it will be London and the south that will most likely feel the pinch. Both regions have average loan to income ratios well in excess of the UK average. What is the real issue with buying houses in the UK? Many overseas buyers who will pay over and above the `real` price of houses! Many buy-to-let buyers who believe the Return on Investment in houses is more than leaving more in the bank! More challenges on the way for the housing market!
Better. US GDP grew by 4.2% in Q2, a little higher than the initial estimate of 4.0%. Over the first half of the year as a whole, growth was a disappointing 0.5%, with Q1 affected by bad weather. Investment was the strongest performer in H1, up 2.4% with factory and office construction leading the way. Exports continued to struggle, falling slightly. Looking ahead, the expectation is for the US to stay in recovery mode in the coming quarters!
Soft landing? US house prices are still rising quickly but the rate of inflation has slowed markedly this year. According to Case Shiller, prices were up 6.2%y/y in June. Six months earlier inflation had been running at an unhealthy 11%. This is consistent with the gradual increase in housing supply in H1 which has been sufficient to blunt the effects on prices of rising demand. Could the US be about to pull off a rare trick and see a housing price bubble slowly deflate rather than burst?!
Not budging. US personal consumption inflation was unchanged in July at 1.6%y/y, but this stable headline obscured two underlying trends. Much of this inflation is coming from the services side of the economy, where prices are currently rising at 2.2% a year. The cost of goods is going up much more slowly and the cost of durable goods, such as household appliances, is actually falling. The $1.3trn Americans spend on durables this year will get them even more bang for their buck. The US debt is $17 trillion and rapidly rising on the hour, who will/can pay back this debt?
Emerging more slowly. India’s economy grew by 5.7%y/y in Q2, the fastest pace since early 2012. At last the country may be beginning to put its recent slowdown behind it. But there’s a lot of work for the new government to do to get growth back up to the 9% plus growth seen pre-crisis. Asia’s other growth stars have also experienced a slowdown. Indonesia grew by 5.1% in Q2. Back in 2011 it was growing by 6.5%. The good news is to be found in the Philippines. A much-needed bout of investment has helped propel growth to a multi-year high with the economy growing by 6.4%y/y in Q2. And these economies increasingly matter. The combined size of the Philippines and Indonesian economies is almost the same as Italy. Asia growth is slowing rapidly!
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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EU Unemployment Woes...