Global Economics Weekly Brief
Greece and the EU in Focus
Last week’s crunch meeting of European finance ministers had echoes of crisis-driven summits from 2010. But despite the Oscar-worthy build up, this time a deal was done without the need to work the weekend.
More challenges ahead when they all default - who will pay? Global borrowing/debt are at the highest levels ever recorded! Where have we seen this before?
Breathing space. Greece has a new deal from its lenders, but it is only a short one. The 4 month extension to its current bail-out programme gives time to negotiate a longer term solution. That solution must tackle thorny issues like how much debt Greece can afford to pay back and what further reforms it must implement. It is good news that both sides are willing to compromise, but reaching agreement won’t be easy. Expect plenty of bumps in the road as the new deadline approaches. What deal? More mendacious issues that repeat time and time again!
More good news. It is getting harder to write anything gloomy about the UK's labour market. Unemployment was 5.7% in the three months to December, down from 7.2% a year earlier. 134k full-time jobs were created in the final quarter and almost 500k over the year as a whole. Indeed, full-time jobs made up over 80% of the rise in employment in 2014. Meanwhile the percentage of part-time workers who would like a full-time job has fallen to 16%. To round things off a greater proportion of us are in work with the employment rate hitting a record high of 73.2%. How many people are employed on `full time` contracts? Not that many people! So what is the `true` unemployment number? Very high!
Heartening. The spending power of British workers’ wages fell almost without interruption for more than six years from early 2008. Towards the end of 2014, real pay began growing and by December, it was rising at 1.2%y/y. Part of that was because wages themselves were growing faster, at around 1.7%y/y. But falling inflation was the biggest factor. That’s good news on two fronts. Despite rising employment, there are no signs yet of wages rising so quickly that higher inflation is a concern. Second, it means peoples’ wages will go a little further. Look very closely at the `true` costs and buying power!
The healthy option. UK inflation hit a new low of 0.3% in January as cheaper oil and food continues to lean down on prices. Falling inflation has raised the spectre of deflation, but on current evidence the deflationary threat isn't materialising. Core prices, which strip out energy costs, are rising at 1.4% a year. That's not very fast, but it has crept up in each of the last two months. The UK’s low inflation remains exactly that, low inflation. Wages are still far behind, so when will they rise?
Short term vs. long term. The Bank of England's rate setting committee believes the UK economy faces opposing forces. In the near term the MPC thinks there is a better than evens chance that inflation will dip below zero and go negative. But it will be short lived. The long-term rests on labour market slack (i.e. the unemployed and workers seeking more hours). That slack is being used up as we speak. So the MPC will be trying to judge how far it can let that trend continue before it needs to put rates up. Until recently markets thought there was very little likelihood of that being in 2015, but now they are putting a 1 in 3 chance on a rate hike by the end of the year. More challenges will hit soon!
Back on track. A bountiful month for tax receipts gave the public finances their biggest January surplus for seven years. Previous changes to the top rate of income tax may have boosted self assessment receipts so it isn’t entirely that the UK’s recovery is finally better revenue for the taxman, though. The good news for the Government is that it now looks like the borrowing target of £91.3bn for the financial year, a 6% reduction on last year’s figure, will be met. The UK still owe £1.5 trillion!
Shopping yes, dropping no. Lower food and oil prices and bumper job creation is clearly helping the UK retail sector. The volume of retail sales has grown by over 5% in the past three months. Shops (exc. food) are experiencing sales growth of around 6%y/y, a level that has not been seen for a decade. But the real action is in internet sales which are growing by over 12%y/y. Average weekly internet sales totalled £750 million in January, up from £600 million just two years earlier. The prices need to be lower!
Growth for all. Growth across many of the UK’s regions appears to have been at or above their historical average in 2014, despite a slowdown at the end of the year. Top of the class was London, driven by its massive professional services and information & communications technology sectors. It was not, however, a case of a North/ South divide, as the North West and the East Midlands were the second and third respectively. Many more sectors are not performing and therefore where are these statistics?
Low for even longer. The US economy is motoring along nicely, with job creation especially brisk. That’s why some members of the Federal Open Market Committee (FOMC) are concerned that leaving the Fed Funds where it is could lead to high inflation. But the majority reckon that raising rates too soon would hamper the recovery and push inflation further below target. So FOMC members left policy on hold and on balance reckon rates should stay close to zero for longer still. More growth on its way!
Controlled, for now. China is still managing to keep new credit growth controlled, or certainly relative to its recent past. New credit over the past four months is around 10% less than the corresponding period last year. It means that the stock of credit is growing at around 16%y/y, which is the slowest pace since early 2006. The authorities are showing restraint for now. The question is whether they can continue to do so as growth slows further. The future is slower growth and borrowing to high, the bubble is about to burst!
The return of volatility. After a period of calm financial markets woke up with a start last week. There were big falls on the stock exchanges around the world as markets grew more pessimistic about global growth. The pain was felt in commodity prices too, with oil now down to $50 a barrel. Weaker growth forecasts translated into delaying the expected date that interest rates start rising around the world. In response yields on bonds in the UK, US and Germany fell sharply. But not everyone moved in the same direction. Government borrowing costs spiked in Spain, Italy, Portugal and Greece. A lack of growth is a big threat to the credit-worthiness of these countries, something investors have started worrying about again. Money lending to these countries is drying up! Global growth, where is it? Trouble on the way with Russia putting pressure on Europe and world unrest!
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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Dr Colin Thompson
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Breathing Room for Greece and EU - Economics Weekly