Quantitative Easing, Easing
Quantitative Easing, Easing?
Is QE about to run out?
Global Economics Weekly Brief
Speculation on when US quantitative easing (QE) will end has been moving markets since US Federal Reserve Chairman Ben Bernanke’s testimony to Congress in May. People who study the Fed’s tea leaves think Bernanke’s press conference last week heralds the slowing of QE from the autumn.
Some fear that reining in the stimulus later this year is a risky move, but the US economy looks far stronger than its counterparts in Europe. More challenges ahead for the USA, Eurozone and Asia with far too much QE, over stocking, over manufacturing and dumping of goods below cost!
Steady as she goes at the Fed…for now. The Fed kept rates on hold and maintained the pace of its quantitative easing programme. But after stimulating the economy for nearly six years, thoughts in Washington are turning to the end game. It’s complicated. The Fed has two jobs. First, to keep inflation under control. This isn’t a problem at the moment with prices up 1.4%y/y in May and Fed chiefs expecting inflation to stay below their 2% target beyond 2015. The second job is to maximise employment. The pace of job creation has been decent this year but not enough to make a big dent in unemployment, which at 7.6%, remains too high. What's more, some of the fall in the rate is down to people leaving the labour market. On both fronts, therefore, there is a case for the Fed to keep its foot on the gas. But Fed Chairman Ben Bernanke is preparing us for a slowdown in QE. If it comes this year, it will be a Christmas gift. What will the real cost be?
A bit of retail therapy in the UK. It might have been the coldest May since 1996 but that did not stop UK consumers spending more after a poor April. Retail sales were up 2.1%m/m in May as sales volumes rose to their highest level. Most retailers other than department stores saw growing sales volumes. Food stores in particular recorded strong growth, albeit off the back of a slump last month. While May's figures add to the possibility of stronger economic growth in Q2, they also highlight the pressure faced by consumers to maintain their standard of living. Between Q1 2008 and Q1 2013, the volume of retail sales grew by just over 1%, while the value of retail sales rose by close to 13%. Far too much buying on credit this will sting in the coming months!
Squeeze on consumers tightens a little in May. After April's larger than expected fall in CPI inflation, normal service resumed in May as the rate of inflation rose to 2.7%y/y, from 2.4% in April. This puts inflation back around the level experienced over the six months since October last year. The main culprits squeezing tighter on consumers’ wallets were the cost of air fares, motor fuels and clothing. Consumers were spared on the food and non-alcoholic beverages front, with prices unchanged on the month. More rising costs of food, fuel and energy in the coming months, with more challenges!
The minutes of the MPC's June meeting were a humdrum affair. Whilst the Fed’s meeting moved world financial markets, the Bank of England’s rate setters did little to merit investors’ attention. There was no change in voting (6-3 to hold quantitative easing at £375 billion; unanimous to hold the Bank rate at 0.5%) and the Committee noted there had been nothing unexpected in economic indicators over the month. Arguably the most interesting development for MPC watchers was the hint of a split among the majority who voted to leave QE unchanged, between those who think the policy is a spent force and those who think it could yet serve a useful purpose. We always assumed this was the case. But the suggestion that there are at least two people in the latter group means that if the UK's recent purple patch peters out, it may not be the beginning of the end for QE on this side of the Atlantic. Indeed, we could yet see more QE in the second half of 2013!
Eurozone struggles to turn the corner. The Eurozone composite Purchasing Managers’ Index (PMI), covering both the manufacturing and services sectors, rose from 47.7 to 48.9. Being below 50 still indicates a contraction in activity, but June’s reading does represent a 15-month high, so at least it’s heading in the right direction. Germany's services PMI moved back above 50 for the first time in three months, but unfortunately its manufacturing index went the other way. Depressed new export orders point to weak global demand, just when the Eurozone could do with a trade-led boost. The Eurozone is deeper in decline with mass unemployment and rising costs!
Slowing growth in China and bad signs for global trade. China's manufacturing PMI for June fell to 48.4 - the lowest level since last September. But most concerning was a sharp fall in new export orders. The five-point fall to 44 is the lowest level since the dark days of early 2009 when global trade froze following the financial crisis. A repeat of that period is unlikely, though global trade remains stuck in a low gear. But the big story in China is a sharp rise in the interest rates that banks charge one another (China's version of LIBOR). China has been trying to slow its exceptionally high credit growth recently. Keeping the banks short of cash seems to be the new tactic. The goal is undoubtedly a sensible one but the approach does raise the possibility of a serious credit crunch and drop in growth if mishandled. Over manufacturing, over stocking of raw materials and dumping goods below costs!
The UK labour market has weathered the storms thrown at it surprisingly well. This week we take a look at one aspect of its flexibility in particular – the vital role being played by self-employment – and ask, is this a golden age for entrepreneurs?
UK unemployment unchanged as the self-employed prop up the labour market. Unemployment was stable at 7.8% in the three months to April, with just over 2.5 million people out of work. But the self-employment boom continues. There are now 4.2 million people working for themselves, meaning that almost one in seven workers is their own boss. Doubts have been expressed as to whether this reflects genuine entrepreneurial activity, or is actually a result of jobseekers filling in their time with whatever work they can get. In the wake of the 1990s recession self-employment rose to a similar proportion of the workforce as now, showing that a weak job market is clearly an important factor. But relatively few of those self-employed positions disappeared once that recovery got going, suggesting that the entrepreneurial bug might be hard to kick even when a more secure job is available. Either way, without the current self-employment boom unemployment would now be pushing 9%. That’s a good enough reason to give our current crop of first time entrepreneurs a round of applause.
Private job creation still outweighing public sector cuts. There were 112k fewer public sector jobs over the 12 months to March 2013. That brings the running total of public sector losses to 463k since September 2009. But the private sector continues to more than compensate for this adding 544k jobs over the last year. Since 2009 the private sector has created almost three jobs for every public sector loss. But long-term unemployment continues to be an ever increasing blight. There are 898k people who have been out of work for more than 12 months and who are still looking for a job. We have to go back to early 1996 to find the last time this number was higher.
Average pay up slightly, but new research shows how age matters. Whole economy total pay grew by 1.3%y/y in the three months to April, the first time that the growth rate has increased since September 2012. Only the manufacturing sector saw earnings growth outpace inflation, while the beleaguered construction sector saw average pay fall -0.8%y/y, the seventh successive monthly decline. But new data showed how the performance of income has been dependent on your age. Since 2007 the only age group not to see a real fall in median income has been those over the age of 60. Meanwhile average incomes for households of adults in their 20s fell by 12%.
Eurozone industrial production beats expectations in April. Industrial production was up 0.4%m/m from March. The better-than-expected result was boosted by a strong 2.7% increase in the production of capital goods (e.g. machinery), and a more modest 0.7% rise in non-durable consumer goods. But energy production shrank by 1.5% on the month and durable consumer goods dropped by 2.7%m/m. Industrial output continued to decline in peripheral economies such as Spain, Italy, Portugal and Greece, while the situation in the so called core economies was a bit more varied. Output returned to growth, by 2.3%m/m, in France and continued to expand in Germany, but dropped by 4.3% in The Netherlands. Whilst far from stellar, this performance might just be enough to drag the Eurozone out of recession in Q2.
Is grumbling about red tape another sign of US recovery? The National Federation of Independent Business reported its small business optimism index rose again in May to hit its highest level in a year. Firms say the biggest problems they face are taxes and government red tape. Not too long ago it was the level of demand, which has slipped to third place. Perhaps worrying about things other than the flow of business is another sign of recovery. Consumers are feeling upbeat as well. Confidence eased down from last month’s six month high, but at 82.7 it’s still pretty good. Retail sales advanced 0.6%m/m, consistent with a continuing steady but modest contribution to growth by consumers. There was more evidence, too, of strengthening in commercial property where values are up by around 7%y/y with distressed sales at their lowest level since 2008 according to CoStar, a real estate information company. The week was rounded off by the IMF declaring that the US recovery would be even stronger if government spending cuts weren’t so severe. Unfortunately pronouncements from the IMF are unlikely to break the budget deadlock. More challenges ahead!
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Quantitative Easing Easing
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