Alright now - Economics Weekly

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Alright now - Economics Weekly

The sighs of relief in Athens and Frankfurt were almost audible in the UK last week after private investors agreed to a deal on Greek debt which allows the next bailout to go ahead.

15 March 2012

It was touch and go whether they would. Fortunately 86% of them did and participation will increase to 96% when 'collective action clauses', put in place to avoid any deal being scuppered by a minority, are implemented. The deal is harsh. Private investors swap existing bonds, for new ones worth less than half of the originals. On top of this the new bonds pay less interest and be will repaid later. But it means that Greece will avoid defaulting on bonds due for repayment next week. Things might be alright for a bit in Europe now, but there's still a long way to go before the euro's sovereign debt issues are solved and we can really break out into song.

Three down, three to go

The Monetary Policy Committee (MPC) voted to keep the UK policy at 0.5% in March, making it three whole years that the rate hasn't moved. The UK's fragile economic outlook suggests that rates will stay put for a good while yet. Markets are pricing in a rise in Q4 2014, but there's a good chance it won't happen until well into 2015. The outlook for asset purchases is less clear and with so much uncertainty around the 'wait-and-see' approach seems the most sensible option, at least until the impact of October and February's schemes are assessed. News from the Bank of England's Q1 Inflation Attitudes Survey will have pleased the Committee as it revealed a drop in households' expectations of inflation in the year ahead from 4.1% in November, to 3.5% in February.

UK service sector continues to grow but lost some momentum

The services Purchasing Managers' Index (PMI) slipped to 53.8 in February, from a stellar 56 in January. Despite the monthly drop, this reading indicates that the sector is still expanding quite robustly. Indeed, the survey showed new orders increased which helped to boost employment. This in turn sent the confidence reading to its highest level in a year. Nonetheless, the external environment is challenging and firms have had to absorb higher costs due to rising oil prices. Unfortunately, this is unlikely to be enough to offset government spending cuts, which present a sizeable headwind to the labour market.

UK industrial production disappointed in January

Overall industrial production fell by 0.4%m/m in January because of another fall in oil and gas extraction. This pushed industrial production back to its lowest level since October 2009. But manufacturing output rose by 0.1%m/m, even though producers passed on oil price rises. Producer output prices rose by a chunky 0.6%m/m in February. This is the largest monthly increase since April 2011, when the index rose 1.1%.

Eurozone rates stay put but economic forecasts fall

The ECB also left interest rates unchanged last week in spite of the pressure on inflation from higher oil prices. Eurozone rates have been at 1% for three consecutive months now. President Draghi is confident that the second round of loans to banks has averted the immediate threat of another financial crisis in the Eurozone and "removed tail risk from the environment". But it hasn't prevented the ECB from revising down its forecast for GDP growth to between -0.5% and 0.3% in 2012 and between 0% and 2.2% in 2013.

The US service sector expanded briskly in February

The Institute for Supply Management's index of non-manufacturing activity rose to 57.3 points, up from 56.8 in January. This is firmly in expansion territory, where a reading above 50 indicates growth. It is also the fastest rate of expansion in a year, which raises hopes that the recovery in the states is well founded.

US labour market improves again

The US economy added a more than expected 227,000 jobs in February. The unemployment rate stayed at 8.3% but this is still well below last year's rate and at its lowest since 2009. The persistent improvement in the US labour market over the last few months will help to cement confidence that its economy is gathering strength and will continue to recover.


China's inflation rate fell in February

The Chinese inflation rate fell to 3.2%y/y in February, down from 4.5%y/y in the previous month. This is the lowest rate since July 2010 when it peaked at 6.5%y/y. The fall is due to lower food prices. This will be welcome news to the Chinese authorities, as it will allow them more leeway to stimulate the economy. China's output is slowing, but softer price rises will allow the authorities to boost output without worrying too much about inflation getting out of control.

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