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Euro zone Negative Inflation Central Banks - Global Economics

Global Economics Weekly Brief

Euro zone Negative Inflation and Central Banks Near Zero Interest Rates, the World Over

Central banks’ unconventional actions – near-zero interest rates, quantitative easing (QE) – are designed to ward-off the threat of deflation. But inflation is negative in the Euro zone and below target in the UK and the US. Many challenges globally! - will world governments and bankers send the world into another recession?

Launch. The European Court of Justice has opened the door for Mario Draghi & co. to embark on QE, which is likely to start this week. In anticipation, the Swiss National Bank last week gave up trying to control the value of its currency. Despite also cutting its main interest rate to -0.75% (not a typo), the franc rose by 20% against the euro, imparting a further deflationary jolt to the Swiss economy where prices are already falling. Wow - this is not good news!

A drop. UK consumer prices rose by 0.5%y/y in December, the slowest on record and a big fall on the previous month’s 1%y/y. Energy costs were the driving force. Falling pump prices cut motoring costs by 10.5%. This is mainly the “right kind” of low inflation, caused more by low world energy prices than a weak domestic economy. But “core” inflation that strips out volatile elements fell, too, to 1.3%y/y. That’s one reason why markets reckon Bank Rate will not rise until late next year. The world in turmoil!

Transition. With transactions falling -0.8%y/y in November, slower house price growth is here. Prices rose 10%y/y in November according to the ONS, down from a peak of 12.1%y/y in September. London is leading the way, with the latest RICS survey pointing to a further slowdown. With the mortgage market steam out of running, attention is switching to credit cards and personal loans, with the interest rate on a £10k personal loan now almost as low as a variable rate mortgage. Money is so cheap - but credit levels for the population are the highest ever recorded. What will happen when the interest rates start moving up? People will not be able to afford the repayments - so another disaster on its way again. When will governments and bankers learn that they are the problem and not the solution!

Services flying. Average UK service sector profitability was the highest on record in Q3 of last year, buoyed by the economic recovery. Manufacturing profitability also climbed, to its highest rate since early 2002. However, it was not all good news, as falling oil prices took their toll on companies operating on the UK Continental Shelf. Profitability plunged to the lowest on record, dipping below that of services companies for the first time since records began in 1997. These actions will impact on the share prices of these companies whereby pension funds have large investments! Yet more turmoil!

Sweet spot. US inflation slowed to 0.8%y/y in the last month of 2014, down from 1.3%y/y a month earlier. The falling oil price meant petrol (or gas if you prefer) was 20% cheaper than a year ago. Core inflation, which excludes food and energy prices, also fell but by just 0.1% to 1.6%y/y. There’s nothing in these numbers to encourage the Fed to raise rates. More time needed to observe the impact before changes appear!

Window shopping. US retail sales fell 0.9%m/m in December, with most types of retailers suffering. That’s a steep decline, more like the kind of number we’d see in a recession. It’s also a surprising one. It contrasts with an economy adding jobs at a rapid rate and in which consumer confidence is strong and actually grew in December. However, the annual growth rate of 3.2%y/y was better. For the moment, it’s best to treat this as a blip!

Debt - aphonics not - so - anonymous. Last week it was more investment, this week it's more debt. The news from China in the early part of the year is all too familiar. There was £180bn in new borrowing during December (including bank loans and corporate bonds). That’s more than half of the value of London's economy in a year. Despite this, the last six months of 2014 saw the lowest growth of credit in over ten years. If China is binning the debt bottle, it's proving susceptible to numerous relapses. China`s bumble is about to burst!

Oil importers rejoice. The UK’s trade deficit has narrowed on the back of lower oil prices. Other oil importers are benefitting too. China and the Euro zone already had big trade surpluses but these reached record highs in both regions in Q4 2014 as a result of cheaper oil. Meanwhile, Japan's current account surplus rose to its highest level since early 2011. Oil again, and higher earnings from its investments abroad thanks to the drop in its currency provided the leg-up. This is excellent news!

An Oscar-winning performance. Euro zone industrial output rose in November 2014. The 0.2% monthly increase may not sound like much. But it's welcome news both across the single currency area as well as the UK. The Oscar went to Ireland, the region's star producer. Industrial output slowed, that's slowed, to 4.6%m/m (that's 72% annualised in the improbable event it remains the same). The “Razzie” went to Norway, outside the EU and the Euro zone, where output fell by 1.6%m/m. More challenges ahead!

It’s an ill-wind that blows no one any good. One consequence of the Swiss National Bank’s decision to let its currency appreciate is that any Swiss national looking to buy a house in Switzerland's most popular London destination of Kensington and Chelsea saw average prices fall from 2.15mn francs at 9:29am to 1.86mn francs at 11:30am. Wow - who caught a cold with a very bloody nose?

World Billionaires Double Since 2008 Crash

The number of dollar billionaires in the world has more than doubled to 1,645 since the financial crisis of 2008. Also, the 85 richest people saw their fortunes increase by a total of £150 billion over the past year - equivalent to £415 million a day! Plus, earlier research found these 85 people had access to wealth equal to that of half the world's population. This = the issue/problem of global inequality! Also, these billionaires could/should invest in the future by using their wealth the world will grow more prosperous!

What will the future bring?

Please share your views below.

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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Euro zone Negative Inflation Central Banks - Global Economics

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