Inflation and the
Global Economics Weekly Brief
Concerns about inflation led the European Central Bank (ECB) and the People’s Bank of China to increase their main interest rates by a quarter point last week. But the UK’s Monetary Policy Committee left its Bank Rate unchanged, even though UK inflation is further above target (present at 4.9%). The Fed doesn’t meet in July so there was no change to its rate, but it looks likely to stay put for now too. Across the globe there has been an underlying downward shift in sentiment about the pace of global growth. This is threatened even more by the risk of further sovereign defaults in Europe and even a ratings downgrade in the US. When the UK increase their interest rate(s) in the future they will rise rapidly! Look at the UK history on interest rates! More rises to come globally on interest rates in the coming months.
No change in UK interest rates – for the 28th month. The Monetary Policy Committee (MPC) kept rates at 0.5% and the asset purchase programme at £200bn in July. Nobody expected anything different. Shrinking household real incomes have been keeping a lid on domestic demand and weaker sentiment about the strength of global recovery - not least because of problems with sovereign debt - has been acting as a drag. The MPC’s challenge is not getting any easier. The economy is still sluggish and bigger than expected rises in gas and electricity prices will push inflation up even more. On balance, it looks like interest rates will stay where they are for at least another six months. Then, rapid rises!
UK services growth flat in June, but confidence levels falling. The Purchasing Managers index (PMI) for services was virtually unchanged from May at 53.9 (a number above 50 indicates expansion). But the growth of new business, while still respectable, fell to its lowest level since February. This may be a sign of slower times ahead, especially as confidence among service providers has fallen to levels not seen since October last year. More issues to come! The major meltdown in the high street continues. Profit warnings soar as big names are engulfed in crisis. Big names including HMV, Dixons, Carpetright and Argus owner Home Retail contributed to a grim tally of 26 warning, according to research from accountancy giant Ernst & Young. Plus, the UK as lost many big names from the high street in 2011 already with the names of TJ Hughes, Focus DIY are just a few with more to come!
UK industrial production disappointed in May, but manufacturing output rebounded. UK industrial production increased by only 0.9%m/m in May, after falling 1.7%m/m in April. But within this, activity in manufacturing was more encouraging. Output grew by 1.8%m/m in May, recovering well from the 1.6%m/m fall in April. The rebound is partly normalisation after the extra holidays in April, but it also suggests some easing in supply constraints from Japan.
Bank of England may start printing money again as fears for economy grow. The possibility of a further hugh injection of money to underpin the economy will be discussed by policymakers at the Bank of England this week, pushing back until deep into next year the prospect of any rise in interest rates from their `all-time` low of 0.50%. A further £50 billion in `quantitative easing`, colloquially termed `QE` or `printing money`, could be announced by the Bank as early as next week, though many commentators think they will postpone a move until the picture becomes clearer still.
UK Energy shock as bills jump 45%. Energy customers who signed up for market-leading discounted deals face shock price rises of up to 45% this summer - three times as high as recent increases in standard bills. With more rises on the way in the winter.
Eurozone rates rise in spite of slower activity and ongoing sovereign debt problems. The ECB raised rates by 25bps to 1.5% last week, the second hike this year. This wasn’t a surprise, but there were a few worried faces as recent data suggests the recovery has lost some momentum. Sovereign debt concerns have grown too. Italian 10 year bond yields shot up to 5.7% - a nine year high and Portugal’s ratings downgrade raised the spectre of contagion again. But on the inflation front there are signs of easing. Factory gate prices fell for the first time since September 2009 in May as oil prices softened. Will Italy be the next `problem` country to bail out?
Eurozone growth fell to a 20-month low in June as services growth weakened sharply. The Eurozone services PMI fell sharply to 53.7 from 56 in May. This brought the composite PMI to a 20-month low of 53.3, down from 55.8 in May. Growth is slowing across the Eurozone, but there are still two speeds. Like Sebastian Vettel, Germany is well ahead of the pack with a reading of 56.3 in June, but even this is an eight month low. At the other end of the range, PMIs in Spain and Italy fell below the magic 50 into contraction in June, while Ireland is only just expanding with a reading of 51.3.
China joined the ECB with a quarter point rate rise. China increased rates by another 25bp last week. With inflation at 6.4% it is taking a tough stance, particularly as data have been softer recently and business optimism is at its lowest level since the series began in 2005. Consumer demand is still growing, but evidence of a contraction in consumer services demand is slightly concerning. A solid expansion in services is essential for China to rebalance its economy toward domestic consumption.
The US economy faces more challenges as its labour market recovery stalled in June (more unemployment to come). Only 18,000 jobs were created in the US in June (most part-time), the smallest increase in nine months. To put how small this is into some context, Australia, which is only about 8% the size of the US economy, created 23,400 jobs in the same period. These weak data will fuel concerns that the economy could be heading for a deeper and more persistent slowdown than previously thought. The US ISM survey of non-manufacturing firms adds to this concern. The survey averaged 58.8 for Q1 2011, but the average for the last three months is a more muted 53.6. And this comes on top of continued political wrangling about raising the government borrowing level. If a compromise isn’t reached soon, US debt could lose its AAA rating – with serious repercussions for the global economy. The US debt is so high and rising rapidly daily will the US be in a position to pay back their borrowings?
Globally `Spending` our way out of worldwide recession will take years to pay back--and create a lot of pain. ( Global unemployment on large scales, rapid food and fuel rises, plus social unrest). First predicted here in 2008.
A crisis that need not have happened
This problem could have been averted (in theory) as people had been pointing to these issues for decades. Yet, of course, during periods of boom no-one (let alone the financial institutions and their supporting ideologues and politicians largely believed to be responsible for the bulk of the problems) would want to hear of caution and even thoughts of the kind of regulation that many are now advocating. To suggest anything would be anti-capitalism or socialism or some other label that could effectively shut up even the most prominent of economists raising concerns.
Of course, the irony that those same institutions would now themselves agree that those “anti-capitalist” regulations are required is of course barely noted. Such options now being considered are not anti-capitalist. However, they could be described as more regulatory or managed rather than completely free or laissez faire capitalism, which critics of regulation have often preferred. But a regulatory capitalist economy is very different to a state-based command economy, the style of which the Soviet Union was known for. The points is that there are various forms of capitalism, not just the black-and-white capitalism and communism. And at the same time, the most extreme forms of capitalism can also lead to the bigger bubbles and the bigger busts.
Quoting Stiglitz again, he captures the sentiments of a number of people:
We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures — yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.
America’s financial system failed in its two crucial responsibilities: managing risk and allocating capital. The industry as a whole has not been doing what it should be doing … and it must now face change in its regulatory structures. Regrettably, many of the worst elements of the US financial system … were exported to the rest of the world.
— Joseph Stiglitz, The fruit of hypocrisy; Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out, The Guardian, September 16, 2008
Some of these regulatory measures have been easy to get around for various reasons. Some reasons for weak regulation that entrepreneur Mark Shuttleworth describes include that regulators
Are poorly paid or are not the best talent
Often lack true independence (or are corrupted by industries lobbying for favors)
May lack teeth or courage in face of hostile industries and a politically hostile climate to regulation.
It may be that this time round a more fundamental set of measures need to be considered, possibly global in scope. The very core of the global financial system is something many are now turning their attention to. Greed must be stopped if we are `all` to survive!
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This was your report on inflation from the Global Economics Weekly Brief.