Global Economics Weekly Brief
The only way is up?
Last week provided a little food for thought on the UK economy. House prices are `heating up` to boiling point! but housing transactions are cooling. Productivity growth remains poor, giving little scope for wage rises. Meanwhile there was a reminder of the global economy’s over-reliance on debt to fuel growth. When we people learn that building growth on `very` high debt is not successful!
The only way is up? UK house prices continued their charge in May, rising by an average 11.8%y/y, according to Nationwide. London not only continued to lead the way, but saw average prices jump by 25.8%y/y, growth unseen since 1987. House prices relative to earnings in the capital are now the highest on record. But low rates continue to mean that mortgage payments relative to average incomes are still below where they were in 2007. Only in Scotland, Yorkshire and the North are house prices growing at a slower rate than their historical averages. This is now more than a one region show. Boom and bust again, when will people learn!
The MMR bump. Mortgage approvals fell 1.7%m/m in May, the first month following the implementation of the new Mortgage Market Review (MMR) rules. It is too early to tell whether the MMR will be a speed bump slowing mortgage market activity or something more significant. But what is clear is that there are fewer mortgaged house purchases happening. Approvals have fallen every month this year while the value of new lending in May fell by the most in two years. And fixed mortgage rates have also been edging up. House prices are still increasing, but without growth in transactions, this cannot go on for much longer...can it? When will people learn!
Bumper jobs. The Purchasing Managers' Indices (PMIs) painted a healthy picture of the UK economy. The services PMI fell marginally but at 57.7 it points to robust growth. The new business component recorded its highest level this year while firms are hiring at their fastest rate in 18 years. Meanwhile, an influx of new orders is driving the manufacturing sector's recovery. And finally the construction PMI is fired up on the back of house-building. Here too the employment component is at a record high. The strong start to the year is continuing. What will the next twelve months look like? Watch this space for news!
More for less. For an advanced economy, increasing productivity, the amount produced in an hour's work, is the only sustainable source of growth. And higher productivity is the best justification for higher wages. So it’s a issue that we seem to getting less efficient at producing goods and services. Productivity in 2013 was just 1.8% higher than it was in 2009 - the worst 4-year performance since measurements began in the 1940s. And twice as bad as the previous low point in the four years to 1980 when the UK was recovering from the second oil price shock. Turning this performance around is the real barometer of a lasting recovery. Employ better workers that live in the UK with the `right` training/skills/experience and then productivity will rise!
The long view. The Bank for International Settlements (BIS) is known for providing an economic and financial reality-check. And so it was again last week. The heart of their concern is that the global economy remains at risk of financial boom and bust. Growth is too dependent on debt. In response, policy-makers need to start taking a longer-term view when setting interest rates. For countries that have experienced a financial bust, like the UK, it's about raising productivity. This would reduce the heavy burden that is currently placed on monetary policy to stimulate growth. But cheap and easy policies to boost productivity are in short supply. The global economy is `only` based on `very high debt` so the future will be a massive burden to handle again!
A long, hard, look at pay. Globalisation and technological progress have transformed the workplace over the last forty years, and wages have been no exception. The average full-time employee is now paid double that of his 1975 counterpart, after adjusting for inflation. Higher earners have seen their wages rise faster, with the top 5% enjoying a 150% rise in real terms. For those below average it has been between 80-100%. We cannot do much about technological progress but policy matters. The national minimum wage has driven a rise of between 90%-150% for the bottom 5% of earners. We need to work harder/longer/ to reduce very high debt before there are less jobs/money globally!
Jobs for all. The US economy added 288k new jobs in June. The increase was broad-based, with large gains across a host of sectors, including professional and business services, retail trade, food services and health care. All told, the US added 1.4m jobs in the first six months of 2014, which represents the best half-year since 1999. And it’s helped drive the unemployment rate down to a six-year low of 6.1%. Based on a very high debt of $17 trillion dollars and growing at an enormous rate, that is very frightening!
Pressing on. The Institute of Supply Management reported slightly weaker growth in US manufacturing and services in June but continued expansion nonetheless. Employment growth remained strong, accelerating in services, while new orders advanced again. It's all further evidence that falling output in Q1 was a temporary blip. Like the UK, strong growth and low unemployment should spark more debate on when interest rates should begin to rise. When interested rates start to rise, watch out globally for the negative impact!
The Bank of England last week announced measures that would check the housing market in future if household indebtedness rises towards levels that would threaten financial stability. We’re not there now or are we?. So, the Bank’s actions are best viewed as a combination of an insurance policy against future risks and an incentive for lenders and borrowers not to go there.
A loose fitting cap. The Financial Policy Committee made what it called a pre-emptive move, by placing new restrictions on mortgage lending. Banks can now only devote a maximum of 15% of their new lending to mortgages where the size of the loan is more than or equal to 4.5 times the borrower's income (currently the market devotes about 10% to these). Further, all lenders will now have to make sure that mortgage applicants can afford mortgages if Bank Rate rises by three percentage points. These changes are not designed to alter the current mortgage landscape. Rather, they represent a safeguard against lending becoming significantly riskier than it is now.
Limited and gradual. In front of the Treasury Select Committee, Bank of England Governor Mark Carney again highlighted the buoyant economy, while pointing to the softness of pay growth. It's weak enough to convince the Bank that output still has room to grow without it pushing prices up too sharply, for now. The day is coming when Bank Rate will rise and Monetary Policy Committee members want us to understand four things. Rates will rise in small amounts. They will rise gradually, over many years. We should have in mind something no more than 3% a few years from now. And it will be many years indeed before Bank Rate returns to 5%.
Right direction. The country’s statisticians have put a bit more colour on what drove the UK’s solid 0.8% growth in Q1 of this year. Households are still spending, but in Q1 they refrained from dipping further into their savings to do so. Business investment was one of the fastest growing areas, now 10% higher than this time last year and back up to levels last seen in 2008. Trade made a contribution but it was down to less imports rather than more exports. Overall this is a better picture that bodes well for the sustainability of future growth, particularly with investment picking up. Is it?
Puzzling. US GDP fell by 2.9% in the first quarter, the largest drop in five years. Bad weather is the popular suspect and it could have contributed to the large inventory rundown, which was the biggest drag on growth. Most indicators suggest a subsequent Spring bounce. But the weather explanation leaves a lingering doubt. The places where it was worst all border Canada, where GDP grew by 0.3%. Does Canada deal so much better with bad weather?
Not quite. With sales of new homes up 18.6%y/y in May and Case Shiller reporting prices rising 10.8%y/y in April it would be easy to believe that the US housing market is in `bubble territory`. The picture is more nuanced. Sales of existing homes account for around 90% of transactions. They were up 4.9%m/m in May but down 5.0%y/y. And estate agents said the supply of homes on the market was 6.0% higher than a year ago, which should help curb price rises. Will it?
The straggler. The eurozone’s Purchasing Mangers’ Index (PMI), a key survey of private sector activity covering both manufacturers and service providers, continued to point to steady, if unspectacular, growth in June. Germany, Spain and Italy are delivering readings above 50 and therefore indicating continued expansion. But not for the first time in recent years it’s France that is letting the side down. Its composite reading fell further into negative territory and meant that the reading for the region as a whole was the lowest this year. Plus, more unemployment on its way!
A challenging outlook. Evidence continues to mount that China’s post-crisis investment and debt binge is beginning to take its toll on growth. The manufacturing PMI is hovering around the neutral 50 mark. Property prices have begun to correct and as a consequence investment and construction are slowing. The reacceleration of the US and eurozone economies would lend a helping hand to the country’s exports. But with the investment engine spluttering, a continued gradual slowdown in growth seems likely in the coming months. Very high debt is continuing so how will it impact on the future? The future will be decline with mass unemployment and no one to repay the global debt!
More to do. How is Japan’s attempt at economic rejuvenation, dubbed ‘Abenomics’, faring? The labour market is in the best shape it’s been since the 1990s with unemployment at 3.5%. And on the face of it, there is success to report in the fight against deflation. The core rate of inflation was 2.2% in May – the highest in 17 years. But a sharp fall in the currency over the past 18 months, which makes imports more expensive, and a VAT hike in April is artificially boosting the figure. With wage growth very weak, there is more than a lingering doubt that Japan has not achieved the great escape, yet.
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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The Only Way is Up? Global Economics Weekly