Global Economics Weekly Brief
Stagnation, the curse of low growth, is the new spectre haunting Europe according to Mark Carney. Still, that’s better than recession or deflation, both of which remain realistic probabilities despite better than expected data last week.
Just as real wages are turning positive the MPC has yet another reason to be cautious on interest rate rises. Europe is still in very deep trouble and the Euro zone countries are struggling to keep out of recession/depression!
Phew. Just a month ago the IMF put the probability of recession in the Euro zone at nearly 40% over the coming year. Last week Europe took one small step away from that precipice. The single currency area grew by 0.2% in Q3. Hardly blistering, but better than expected. Particularly pleasing were improved performances from the giants of Germany and France. France managed 0.3% growth, its best result for over a year. Whilst Germany reversed Q2's minor fall in output to post the smallest increase (0.1%). Elsewhere Spain maintained its good growth momentum, with output now 1.6% higher than a year ago. But Italy shrank yet again, meaning its economy is now almost 10% smaller than before the crisis. Much work remains in Europe for it to grow and survive long term!
Bumping along the bottom. Inflation in the Euro zone inched up to 0.4% in October but remains perilously close to `negative` territory. Price growth has averaged less than 1% for an entire year now. And that's in spite of the ECB's repeated efforts to get growth going through rate cuts, asset purchases and discounted loans. Falling oil prices, now down 30% since the summer, will add further downward pressure on inflation over the coming months. The absence of meaningful inflation in Italy in particular makes dealing with its public debt burden even harder. Italy are getting deeper into debt, how will they survive?
How much longer? Since the Bank of England's August inflation report markets have pushed out their expectation of when interest rates will rise from the first quarter of 2015 to the last. The MPC's analysis of the UK economy did nothing to dispel that shift. It expects inflation to be lower for longer, only reaching its 2% target in three years time and possibly falling below 1% in the meantime as falling energy and food prices take effect. Sluggish price growth should help consumers' purchasing power but wage growth is expected to be too low to support higher spending. Instead the MPC thinks Britain's households will save less to sustain the pace of growth. They've done that before, but this makes the UK's growth outlook vulnerable to a knock in confidence. And with the growth outlook in Europe so bleak, it’s not hard to imagine where that might come from. Energy prices will continue to rise quarter on quarter and very high profits for these energy companies! Greed all over again, when will it stop?
A pause. Both the unemployment and employment rates stayed where they were in the three months to September, at 6% and 73%, respectively. All of the gains in employment were among employees, as Q3 saw a reduction in the number of self-employed compared with the previous three months. Total hours worked fell by 0.3%q/q. Given that the economy expanded by an estimated 0.7%q/q, UK productivity experienced some all too rare growth. With the youth unemployment rate down to 16.2%, long-term unemployment falling by 53k people and a reduction in the numbers of part-time workers looking for a full-time job, Q3 brought plenty of good news for the UK! The very big issue is people entering the UK for work!
Almost there. On a like for like basis, the headline rate of pay growth (excluding bonuses) was almost the same as inflation in the third quarter of the year. A bit more growth would finally end a situation that has persisted almost uninterrupted since July 2008. And with falls in the price of oil likely to bear down further on consumer price inflation, there is every reason to be hopeful. Private sector pay grew by 1.6%y/y, already above increases in the cost of living. Manufacturing pay growth was out in front at 1.8%y/y, while wholesale and retail sector pay growth only managed 0.6%y/y growth. Is the UK labour market finally starting to run out of spare capacity?
London calling. For the third month in a row house price expectations in the capital have weakened. Just as striking is that more surveyors are reporting that prices are already falling than are reporting that they are rising. Is this the last call for the latest London housing party? If it is, it does not bode well for the rest of the UK, where price growth is expected to weaken over the next six months. While expectations for London are more pessimistic (which is unusual for the RICS survey) there is no question that in the UK, the animal spirits that drive house prices tend to move together. We await future surveys to see just how weak these expectations will get. Boom and bust on the way AGAIN, WHEN WILL PEOPLE LEARN?
Can the UK build it? UK construction grew by 2.9% in Q3 compared with a year ago, led by house building. Both public and private housing construction grew rapidly, at 35%y/y and 22%y/y, respectively. But it was another disappointing 12 months for infrastructure, which saw building decrease by 5.5%y/y. The importance of housing to our fixed capital stock should not be underestimated. It accounted for 41% of the total in 2013, while commercial and industrial buildings made up 36%. The remainder was split between machinery and equipment, intellectual property products and other commercial equipment. House Building companies are making mega profits on the back of high house prices again! Is another boom and bust about to happen in 2015?
Steady. The US continues to make steady if unspectacular progress. The Institute of Supply Management (ISM) reported service sector growth for a 57th consecutive month, although at a slower rate than in September. The Index fell 1.5 to 58.6. Manufacturing growth accelerated by 2.4 to 59.0. Both surveys indicated further rises in employment and slowing price inflation. The US jobs machine kept purring, if not motoring, with employment up 214,000m/m and the unemployment rate falling to 5.8%, its lowest level since June 2008. Wages are rising but with productivity increasing, too, there are no signs of growth bumping up against a shortage of labour, so no reason for the Fed to think about raising rates soon. The US on the way forward again with their recovery!
Controlled, for now. China is still managing to keep new credit growth controlled, or certainly relative to its recent past. New credit over the past four months is around 10% less than the corresponding period last year. It means that the stock of credit is growing at around 16%y/y, which is the slowest pace since early 2006. The authorities are showing restraint for now. The question is whether they can continue to do so as growth slows further. The future is slower growth and borrowing to high, the bubble is about to burst!
The return of volatility. After a summer of calm financial markets woke up with a start last week. There were big falls on the stock exchanges around the world as markets grew more pessimistic about global growth. The pain was felt in commodity prices too, with oil now down to $75 a barrel. Weaker growth forecasts translated into delaying the expected date that interest rates start rising around the world. In response yields on bonds in the UK, US and Germany fell sharply. But not everyone moved in the same direction. Government borrowing costs spiked in Spain, Italy, Portugal and Greece. A lack of growth is a big threat to the credit-worthiness of these countries, something investors have started worrying about again. Money lending to these countries is drying up! Global growth, where is it? Trouble on the way with Russia putting pressure on Europe and world unrest!
About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, 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/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
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Written and submitted by:
Dr Colin Thompson
Direct: + 44 (0) 121 247 4589
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