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Japan and the Middle East - Global Economics Weekly

Japan and the Middle East Effects on the Economy

Global Economics Weekly Brief

As if the problems in Japan weren’t enough to make the markets nervous, events in the Middle East caused yet more jitters about global growth. Japan and the Middle East: Energy prices have risen on the back of Japan and Germany switching some power generation towards fossil fuels. This, along with rising uncertainty over oil supplies, threatens to slow the pace of the global recovery and add to inflation at a very fragile time. Interest rate futures are adjusting as markets expect the monetary authorities to be cautious, but the inflation bogeyman is still there - and he’s likely to get scarier the longer this goes on. It is too early to say how long it will take for things to settle, but it looks like we are in for some volatile times ahead for a long time frame. Also, with these major issues it will give global governments the reason for low growth, energy prices rapidly rising, inflation and banks making mega profits!

The implications of the Japanese nuclear tragedy are hitting the markets. As conditions at the nuclear plants deteriorated, sentiment about the effect on the global economy worsened. The closure of some factories led to worries that global supply chains would be interrupted. But this became a small concern once the implications for energy became clear. The loss of nuclear capacity in Japan shifted power generation demand towards fossil fuels, causing sharp price rises. This was made worse by Germany deciding to shut down seven of its 17 nuclear reactors as a precaution. Yet more pressure on oil prices is coming from uncertainty of supply due to more unrest in the Middle East. This may settle down, but the risks for global inflation are clear. Yes, global inflation will happen!

OECD revises its UK growth forecast down. The OECD reduced its 2011 forecast for UK GDP growth to 1.5%, significantly below the OBR’s estimate of 2.1%. While supportive of the plan for deficit reduction, it warned that large cuts in public investment are a risk to long-term growth. But it was in favour of loose monetary policy to help the recovery, even with inflation significantly above target. Major unemployment set to rise!

UK unemployment reaches 17 year high and earnings growth remains low. The number of people out of work climbed by 27,000 to 2.53 million in the three months to the end of January. Public sector employment fell by 132,000 in 2010, but, encouragingly, the private sector created 428,000 jobs in the same period. The Chancellor’s hope that the private sector will continue to mop up public sector job losses will have been boosted by a 5.2%q/q increase in vacancies in the three months to February – although this falls to 2%q/q when adjusted for temporary jobs created for the 2011 Census. Major increases in EU persons and other persons from outside the EU entering the UK and taking up jobs!

Earnings growth remains modest. With inflation running at 4%y/y household are feeling the squeeze, but there is still scant evidence that this is feeding into pay demands. Average weekly earnings increased by an average of 2.3%y/y in the three months to January but much of this was driven by bonus payments. Regular pay increased by a modest 2.2%y/y. Fears of job losses will be playing a part in keeping wage demands low, but expectations of inflation over the next year crept up from 3.9%y/y in November to 4%y/y in February. Inflation is a major threat.

Eurozone inflation rose to its highest rate in two and a half years. The eurozone's annual inflation rate rose to 2.4%y/y in February from 2.3%y/y in January, the highest rate since October 2008. This is unchanged from the flash estimate which prompted Trichet to signal an early rate rise, but events of the last week have taken some of the pressure off and market expectations have softened. Still more high inflation on the way!

EU leaders strive to find a solution to the debt crisis. Japan and the Middle East aside, Germany and France drove a 6.6%y/y increase in eurozone industrial production, but European policymakers are still dealing with the debt issues. Ministers agreed to increase the lending capacity of the European Financial Stability Fund to €440bn up from €250bn, but also tightened budget discipline. These measures come after repeated blows to sovereign credibility in the peripheral countries. After dealing with Spain and Greece in the previous week, Moody’s downgraded Portugal’s debt and Standard and Poor’s is reviewing its rating too.

Food and energy stoke US inflation. Consumer price inflation increased to 2.1%y/y in February. This is its fastest pace since April 2010 and up from 1.6%y/y in January. Food and energy were the culprits, but even core inflation which excludes these factors, rose at its fastest rate since March last year. The Fed kept interest rates on hold at 0-0.25% at its March meeting. There was some optimism about the economic recovery, particularly in the labour market. But there are still drags. Low housing market confidence and large foreclosure supply contributed to the 22.5%y/y fall in housing starts in February. Major unemployment on the rise!
Millionaire Bankers

RBS paid average salary of £1.2 million to risk-taking staff

Disclosures show RBS is paying top earners more than HSBC
The Royal Bank of Scotland paid out £375 million to its senior risk-taking staff in 2010, it has been revealed.

The bank, which is 83 per cent owned by the UK taxpayer, has disclosed that the total salaries of those in risk-sensitive roles, known as ‘code staff’ as part of its commitments under EU rules and the Project Merlin agreement with the government. There are 323 such staff, so the figure implies average pay for these workers of £1.2 million.

The bank also confirmed that the five biggest earners below board level were paid £21 million between them, with two of them taking home £5.9 million each. Meanwhile, chief executive Stephen Hester is eligible for a reward package of £7.7 million for 2010, although the final amount he receives is subject to share performance and deferred compensation arrangements.

The figures show that RBS is paying less than competitor Barclays, which paid 231 code staff an average of £2.4 million each, but higher than HSBC, where 280 code staff earned £1 million on average. Lloyds Banking Group has yet to reveal its equivalent figures.

The disclosures have fuelled anger among those who feel that such high remuneration is inappropriate in a publicly-owned bank. Japan and the Middle East on the side, Labour MP John Mann, who sits on the Treasury Select Committee, said that RBS was “sticking two fingers up to the British taxpayer,” while Lord Oakeshott, the Liberal Democrat peer who resigned from the government over Project Merlin, said that it proved “mediocre” people were being over-rewarded. “Why on earth do taxpayers need to pay hundreds of middle-ranker bankers over a million pounds at RBS?" he said.

Bankers globally from many banks are still receiving mega salaries and bonuses in these very hard times!

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This has been your weekly global economics bulletin on Japan and the Middle East.

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