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Monetary Policy and China - Global Economics Weekly Brief

Monetary Policy, China and More

Global Economics Weekly Brief

The IMF’s annual economic health check on the UK was fairly good, considering. Christine Lagarde, the head of the IMF, is clearly anxious about growth. But she has a few therapies up her sleeve, including lower interest rates and more quantitative easing (QE) (who will pay for this in the future, your children). If that fails, she thinks the good work put in on deficit reduction so far gives the Chancellor room to ease fiscal conditions to support growth and employment, without sacrificing the UK’s credibility.


But while the crisis in the Eurozone carries on, independent actions in the UK can only do so much. European leaders continued to muse over Greece’s future, but there were no policy decisions. The consensus is that Greece should remain in the euro, but only if the conditions of the bailout continue are met. Which way it goes will probably depend on the outcome of the Greek election on 17th June. They should all read the publication, `The Rise and Fall of the Roman Empire` and then they will learn about what`s happening now and the future! Repeat, repeat! If only people read history!

UK consumer inflation fell sharply in April.
The rate of consumer price inflation in the UK fell to 3% in April from 3.5% in March. This is welcome news, but as more than half of the fall was due to the effect that the timing of the Easter holidays had on air and sea transport costs, we shouldn’t expect it to continue to fall at this rate. It should carry on falling because of lower commodity prices and the effect of a stronger pound on import prices, but probably more slowly than we would like.

The Monetary Policy Committee (MPC) is still cautious. Even though the MPC expects inflation to come down, it is still wary about loosening monetary policy. The last boost to QE, of £125bn, has now ended, but despite the weak economic outlook, only one member voted for more at the May meeting. With increasing tensions in the Eurozone and weaker than expected data at home, it’s likely that votes will soon swing the other way, especially as decisions were “finely balanced”.

The public sector was in record surplus in April. Public sector net borrowing was in surplus by a record £16.5bn in April. But this was almost entirely due to the transfer of Royal Mail pension assets to the public sector. The bad news is that this will be more than offset by the liabilities which also moved across. Otherwise, the government met the spending targets set out in the March Budget. Receipts have been very poor at the start of the financial year, but one piece of good news is that borrowing in 2011/12 was revised down by £1.6bn - a 1.3% reduction in the annual deficit. Every little helps. More reduction is needed urgently!

UK retail sales faltered in April. Retail sales fell sharply in April, dragging the growth rate down to 0.4%y/y - its lowest since January 2010. There are two reasons. First, UK consumers are buying less. Sales volumes were down 1.1% y/y. A reversal of the "jerry-can" effect was a factor here, as petrol sales fell sharply. Second, a sharp slowdown in price growth. The price deflator, which can be interpreted as store price inflation, slowed to just 1.7%y/y in April, down from 4.5%y/y six months ago. The retail sector has done a decent job of swimming against the economic tide over the past year or two, but these data will prompt fears that this may now be changing.

The UK's double dip recession is (ever-so) slightly deeper than first thought. The UK economy shrank by 0.3% in the first quarter of this year, a bit worse than the first estimate of 0.2%.The economy has shrunk by 0.6% in the current recession. Not nice, but far less than the 7% contraction in 2008/09. Construction was the main culprit but most sectors performed poorly. The big worry is that the recovery is not only failing to gain traction but is actually slipping. Even before adjusting for inflation, the UK grew just 0.1%q/q. This is probably why tax receipts have underperformed. Employee’s pay didn’t grow at all, which is partly why consumption is so weak (up just 0.1%q/q). No wonder the recovery is a long way off.

Eurozone downturn looks to be deepening. The composite Purchasing Managers’ Index (PMI) fell for the fourth consecutive month due to weaker business activity and new orders. The manufacturing index fell to a near three-year low, and the service sector disappointed too. The Eurozone avoided a recession in Q1 but these data suggest output will contract in Q2 as weakness in the periphery is spreading and is even affecting Germany and France. The Eurozone is in very deep trouble!

China’s manufacturing continues to contract. Chinese manufacturing PMI data were also disappointing. Activity has now fallen for 11 of the past 12 months, suggesting that China's manufacturing sector has moved to a period of structurally lower growth. China's economy has not picked up in the current quarter and with little monetary easing and the difficult global environment, there is little reason to believe that there will be a pronounced upturn in H2. More decline in the next months!

China are stagnating!

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, 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's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Monetary Policy and China

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