Much ado about nothing - Economics Weekly


Much ado about nothing - Economics Weekly

The UK Budget wasn’t very exciting from an economic perspective. The Chancellor's statement: "There will be no deficit funded giveaways…nor do we need to tighten further" translates into: "tight fiscal policy and ultra-loose monetary policy will remain the central plan for economic recovery".

26 March 2012

However, there has been concern that this plan might not provide enough growth. In an attempt to allay these fears, Chancellor Osborne took the opportunity to put a bit more meat on the bones of the Government’s industrial policy. Some elements designed to improve productivity, such as improving education and the planning system, are familiar from previous eras. But there also seems to be an emerging policy to support the technology, life sciences and energy sectors. Without any cash to spend it will be a long haul though. Sticking to Plan A will keep the Government’s hands tied for some time, so it's unlikely that this will have been the last Budget that was much ado about nothing.

Public sector borrowing shot up in February

It was no surprise George Osborne stuck to plan A after he saw February's borrowing figures. The net public sector borrowing figure (excluding support for banks) rose to a shocking £15.2bn, almost twice the £8bn expected and reversing January's £7.9bn surplus. Thankfully this wasn't enough to imperil the Government’s borrowing target for the financial year, but it does underline how long and arduous the process of reducing the deficit will be.

UK inflation stuck to the script in February

The Monetary Policy Committee will have been relieved to see that UK consumer price inflation fell to 3.4% in February - its lowest rate for 15 months. The largest downward pressures came from gas and electricity bills, air fares and a dramatic decline in the price of digital cameras. But on the other side of the coin, alcohol prices moved up. So far, inflation is sticking to the script, but it is still well above its 2% target and the rate of growth of earnings. As long as this remains the case, consumers will continue to feel the squeeze.

A reality check on the UK high street

The effect of the strain on consumers' purses was brought home clearly in retail sales figures. Retail sales fell sharply in February and January’s data was revised down too. Sales fell by 0.4%m/m in value terms in February, or by 0.8%m/m in volume terms. The decline was broad-based; even non-store sales, e.g. markets, mail order and the internet, edged down. Things are still much better than last year though. Retail sales grew 4.5%y/y in value terms and 1.7%y/y in volume terms.

Ireland goes back into recession

The Irish economy is struggling under the weight of austerity. It is also being held back by the overhang of the financial crisis and the taint of having been bailed out. This is now showing up in its growth figures. In Q4 2011 Gross National Product (GNP) fell 2.2%q/q, after a drop of almost 2%q/q in the previous quarter. After two consecutive quarters of contraction, Ireland has officially re-entered recession.

US housing sector is still in the doldrums

The number of new homes started in the US in February was down 1.1% on the previous month. There has been a very slight improvement in the trend since the autumn, but new building is still at only half of its long run average. Housing sales are also struggling with monthly declines recorded in both January and February. The housing market has long been a drag on the post-crisis recovery in the US and this seems unlikely to change just yet.

Eurozone private sector activity points towards a recession

The composite Purchasing Managers Index (PMI), a key survey of activity across manufacturers and service providers, fell again in March. The index fell from 49.3 in February to 48.7 in March, remaining firmly in the sub-50 contraction territory. Both the manufacturing and the services sectors were slow and the weakness is apparent across the whole region – even in Germany. These numbers point to a second quarter of contraction, which would qualify as a technical recession. The European Central Bank’s liquidity operations may have stabilised markets, but they now need to deliver a boost to economic growth.

China's struggling manufacturing sector points toward more monetary easing

The flash HSBC manufacturing PMI was disappointing. The March index fell to 48.1 from 49.7 in February which makes it five consecutive months that it’s been below 50. Bank lending is lower than expected and the property sector is struggling under the weight of government efforts to take the heat out of it. With this background more monetary easing from the authorities is probably not too far away.

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