Global Economics Weekly Brief
Until last August 2013, the Monetary Policy Committee (MPC) showed its hand on Bank Rate one month at a time. Then it introduced forward guidance, setting out its longer-term intentions. Its purpose was to convince you that rates would stay low for a long time.
Not wanting to risk inflation taking-off, this wasn’t a promise. So, the MPC said it would hold Bank Rate at 0.5% at least until unemployment fell to 7.0%, reckoning that would happen in late 2016. Well, unemployment is 7.1% and falling. So, what’s a Governor to do? In his Davos speech, Mark Carney was clear: “the attainment of the 7% threshold will not be associated with any immediate need to raise Bank Rate.” And even when rises come, “any such move would be gradual.” Do you believe Mark Carney?
MPC in no hurry to hike. The labour market was front and centre in the MPC's deliberations in January. It noted that the unemployment rate would reach the 7% threshold "materially earlier than previously expected" - and that was before we had the November data (see below). But it played down the significance of this development, because it thinks the so-called "equilibrium" rate of unemployment might have fallen, which would imply more downward pressure on pay growth (and, therefore, inflation) for any given rate of unemployment. As Mark Carney confirmed later in the week, these developments mean forward guidance will evolve, starting with the Bank’s Inflation Report next month. The present employment levels are not all full time jobs (see details below).
Jobs up, pay under pressure. The labour market continued its good run with unemployment falling to 7.1% in the three months to November, the lowest rate since early 2009. Employment increased by 280,000q/q. Job vacancies were up 4.0%q/q/ and 15.2%y/y. However, wage growth remained muted. Average weekly earnings increased by 0.9%y/y, well behind inflation. Only in manufacturing and in retailing, wholesaling and hospitality are wages rising faster than prices. Look very close at the `real` levels of wages against rapid rising prices of fuel, energy, food and many other products!
Full time employees in the UK = only 47% of the total employed, therefore the UK celebrates far too early! Plus, wages are being kept low as many foreign employees accept lower wages to secure a job?
Good news all round. The latest Bank of England (BoE) Agents' Survey of Business Conditions reads like a feel-good page turner. Profits - up; sales - up; employment intentions - up; credit availability - up. As a result, spare capacity fell to what the BoE called normal levels. However, firms say that they would prefer to increase employment to meet rising demand rather than invest. That was reflected in the Trends in Lending survey, which reported that lending to business fell in November, albeit at a slower pace. This happened despite increased competition to provide loans and lower costs of credit. And lest we forget households, the news here was that housing market activity continued to strengthen, reflected by a 19% rise in mortgage approvals in the year to November. New mortgages fuelled by UK Government housing subsidy! Is this another boom and bust issue?
Balancing act. Despite the largest number of mortgage approvals in six years, the value of outstanding mortgages fell 0.1%y/y in December, as the drive to repay continued apace. The impact of Help to Buy was evident in the gross lending figures, up 37%y/y, the fastest rate of increase during 2013. Credit card spending was more popular, rising 4.2%y/y while personal loans and overdrafts fell 3.5%y/y. A mixed bag for household lending, likely part of the reason the latest MPC minutes referred to "the mixed signal from different indicators" of the housing market. Credit card/domestic debt borrowing at record high!
Receipts up, spending down. Public sector net borrowing was £96.1bn in the financial year to December, down £4.8bn y/y. Public sector debt, net of its assets, was 75.7% of GDP, up from 74.4% at the end of 2012. Current receipts were £1.4bn higher in December and current spending was £1.5bn less. The reasons? Higher receipts in particular of VAT and corporation tax on the one hand and lower interest payments on the other. All of the savings in December itself came from central government, with local government and public corporations borrowing slightly more than in December 2012. Is this another bubble ready to burst?
A good start to the year for the euro zone. Private sector activity grew for the seventh consecutive month in January according to the Purchasing Managers Index (PMI). The pace of growth accelerated to its fastest rate since early 2011 with the PMI reaching 53.2. Manufacturing led the way as domestic and international new orders rose robustly, sending that index to 53.9, from 52.7 in December. Services continued to expand, too, but a more moderate pace, rising to 51.9 from 51.0. National differences persisted. Germany remains top of the table while output in France continues to contract, albeit at a slower pace, and activity in the periphery is picking up!
Taper trouble. Emerging markets started to feel the pain of the US Fed’s decision to taper quantitative easing. Argentina’s currency fell 18% against the US dollar over the week, with Turkey’s lira down 4%. Exiting extraordinary monetary policy is tricky at home for central banks but, as we saw in 1994 when the Fed raised rates, it can have much wider effects. Global issues to start rising and social unrest in many countries will be a major factor in 2014!
85 Richest People have Half of World`s Wealth! Wealthiest `85 people` have as much as poorest `3.5 billion people` globally! The 85 richest people on the planet have accumulated as much wealth between them as half of the world`s population, political and financial leaders have been warned ahead of their annual gathering in the Swiss resort of Davos. Their wealth is estimated as $18.5 trillion cash with investments in companies hidden away in tax havens around the world. The power of these 85 people on the world leaders is staggering! While 70% of people globally live in countries where the gap between rich and poor has grown rapidly over the last few years. Where will it end? What do you believe will happen globally because of the wider gap of the poor becoming more poor and the rich getting richer?
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