Global Economics Weekly
UK Economy Tracker Focus
While the UK Governor’s correspondence with the Chancellor is more formal than a postcard, he must be feeling at least a little edgy with inflation at least `twice` its target and set to move higher rapidly. And this is at a time when the risks to growth are skewed to the downside too. Energy prices are affecting inflation across the world `big time`, leading to fears that more unrest in the Middle East may have nasty consequences for the global recovery. But sentiment is improving in the Eurozone and the Fed is becoming more confident about the pace of recovery in the US.
The Bank of England’s growth projections have weakened since November. The Bank still expects the recovery to continue, albeit in a choppy way! But this largely depends on the assumption that world demand continues to grow and sterling’s past depreciation enables the UK to rebalance towards net trade. A pick-up in private investment could add some oomph to growth, but uncertainty about the impact of fiscal consolidation and the continued squeeze on households’ spending power mean the risks are skewed to the downside.
Inflation reached twice its target in January – and is expected to rise further. Consumer prices rose by 4%y/y in January, driven by higher fuel costs as crude oil prices climbed. The rise in VAT also bolstered January’s number, although in the retail sector, seasonal sales are likely to mean retailers absorbed at least some of this. A bigger pass through in the coming months, along with the commodity price pressures already in the pipeline, suggests inflation won’t fall just yet (especially if unrest in the Middle East causes another increase in oil prices). Indeed, the Bank of England’s projection for inflation was revised up in February’s Inflation Report, and the Governor openly talks about it rising to 4-5% y/y midyear.
UK households’ real incomes are still falling. Average weekly earnings increased by only 1.8%y/y in the last quarter of 2010, but with CPI at 4%y/y and RPI at 5.1% y/y workers are experiencing the biggest fall in real take-home pay since records began. This puts enormous pressure on households, but it is comforting for the Governor that this erosion of spending power has not fed into higher pay demands ( especially from the public sector). The amount of slack in the labour market will be the reason why. Unemployment will continue to rise rapidly as the year goes by. Plus, a flow of people from other European countries still continue to take jobs in the UK at lower wages!
The UK labour market disappoints again. The number of people out of work increased by 44,000 to 2.49m in the last three months of 2010, increasing the unemployment rate to 7.9% from 7.8%. Figures were particularly bleak for younger age groups. Unemployment among 16 to 24-year olds rose by 66,000 to 965,000, the highest since records began in 1992. On a more positive note, full-time employment increased by 66,000, with improvements for both men and women ( which countries did theses workers come from?). 2011 is likely to be a tough year for jobseekers, particularly when the spending cuts begin to affect public sector jobs.
UK consumers took full advantage of the January sales this year. Updated retail sales data shows confirms just how terrible December was. But a spending spree in January meant sales caught right back up. Growth of 1.9% in January, following Decembers 1.4% fall, means that over the last two months retail sales have grown by 0.5% in total.
The Eurozone economy grew by a modest 0.3%q/q in the final quarter of 2010. It survived the severe weather which caused the UK economy to shrink in the same period. Germany is responsible for the growth. Its economy grew by 4.0%y/y in Q4 and some of this spilled over to its Dutch and Austrian neighbours. Elsewhere activity has been tepid by comparison. Spanish and Italian GDP rose by 0.2%y/y 1.3%y/y respectively. But these countries are booming in comparison to Greece where output fell by 6.6% in 2010. European economic sentiment is, however, improving. The ZEW index of current economic sentiment increased to 85.2 from 82.8 in January and the forward indicator of investment confidence rose strongly, from 25.4 to 29.5 in February.
Energy prices hit US inflation too. US CPI inflation hit an eight month high of 1.6% y/y in January, up from 1.5% in December, driven by rising energy prices. Core inflation (which excludes food and energy) also increased, reaching 1% in January. These numbers seem subdued compared with the UK, but the minutes of the January meeting of the Federal Open Market Committee revealed concerns about the effect of rising commodity prices on inflation. But these were not strong enough to prevent a unanimous decision to proceed with quantitative easing. The Fed revised its growth forecasts up, but there are still worries that the pace of recovery will not be enough to reduce unemployment. More energy price rises to come with higher unemployment.
UK Economy tracker
UK GDP Growth:
The UK's economy grew by 0.7% in the third quarter of 2010, compared with the previous three months, the latest set of official figures have shown.
WHAT IS GDP?
* Gross domestic product
* A measure of a country's economic activity, namely of all the services and goods produced in a year
The figure was a downwards revision from the initial estimate of 0.8% growth.
The Office for National Statistics also lowered the growth figure for the April to June quarter to 1.1% from 1.2%, and the first quarter growth figure to 0.3% from 0.4%.
It blamed the revisions on weaker growth in the construction, business services and manufacturing sectors.
UK Inflation Chart 2000-2011
The Consumer Prices Index (CPI) UK inflation rate jumped to 4.0% in January from 3.7% in December, according to the Office for National Statistics.
The CPI figure is the highest since November 2008, and the measure has now been one percentage point or more above target for 14 months.
January's rise in the rate of VAT to 20% from 17.5% and rising fuel prices were cited as factors behind the increase in the inflation rate.
The Retail Prices Index (RPI) measure of inflation rose to 5.1% in January from 4.8% the month before.
Recession Comparison Chart:
After 16 years of growth, the collapse of the US housing market and a banking crisis caused the credit markets to freeze and started the first recession of the 21st century, which is still globally fighting its way out of recession.
The total number of unemployed people increased by 44,000 over the quarter to reach 2.49 million, according to the Office for National Statistics (ONS). The number of people claiming Jobseeker's Allowance (the claimant count) rose by 2,400 in January to reach 1.46 million.
Youth unemployment has also risen - the number of unemployed people aged 16 to 24 went up 66,000 in the three months to December to 965,000, the highest figure since such records began in 1992.
Long-term unemployment also deteriorated, with 17,000 more people out of work for more than a year, to a total of 833,000.
While unemployment rose in England, Wales and Northern Ireland, ONS figures show that unemployment fell in Scotland by 13,000.
Comparing Recessions (See
Historical Recession Charts here)
Note: In August 2010 the ONS revised the way it calculates claimant count figures as a result of changes in the state pension age for women. Included in the July figures for the first time are women aged 60-64 who are out of work and claiming unemployment benefit. The result of this change has caused an approximately 0.2-0.3 percentage point difference in the rates.
UK Individual Bankruptcy:
The figure spiked in 2006 when banks encouraged individuals in difficulty to seek voluntary arrangements. Now, bankruptcies are rising again, and 86% are initiated by the debtors themselves.
Individual insolvency figures also include self-employed small traders. Company bankruptcies have also been rising rapidly..
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UK Economy Tracker update.