Slowly, but not so surely - Economics weekly

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Slowly, but not so surely - Economics weekly

Economic conditions across the globe are ‘somewhat improved’ according to the IMF, which edged up its global growth forecast for this year from 3.3% to 3.5%.

Economic Analysis

23 April 2012

It makes a change to have some good news, but of course there are risks – unsurprisingly mainly from the Eurozone. The IMF is worried that low growth and a need to boost capital will cause banks to increase their pace of deleveraging. This would send another chill through the financial system and could jeopardise global recovery. It is a real risk but, for now, it is still just that. Maybe we should take heart that there was still appetite for new Spanish government bonds, albeit at a price. On top of this, the IMF’s success in obtaining pledges for an additional US$340bn, even without defining its purpose, might suggest that there is a slight improvement in confidence. 

Monetary Policy Committee gets twitchy about sticky inflation

The minutes of the April Monetary Policy Committee (MPC) meeting contained a few hints that the Committee is getting fed up with inflation. The rate of price growth was expected to fall quickly this year as factors like higher VAT and fuel prices in 2011 fell out of the calculation. But it’s been stickier than anticipated and this has caused a shift of sentiment on the MPC, leaving David Miles alone in voting for more monetary easing. The MPC is now waiting to see what light May’s inflation report will shed on the outlook before its next move. Right now it seems unlikely that there will be more QE in May.

UK inflation rose for the first time in six months in March

Consumer prices rose by 3.5%y/y in March. It was only 0.1 percentage points above expectations but the news was taken badly. The culprits were food, clothing and recreation and culture. The rising costs of essentials put extra pressure on household budgets. But on the positive side downward pressure from electricity, gas and other fuels and transport took some of the heat off.

Real earnings growth fell – again

UK average earnings grew just 1.1% in the three months to February, but with inflation at 3.5% real earnings fell. A 6.2%y/y fall in bonus pay dragged down the overall earnings growth number. This is now the 22nd successive month that earnings growth has failed to keep pace with the cost of living. Average earnings in wholesaling and retailing grew fastest at 3.1%, but the finance and business services sectors saw no growth at all. Regional differences also abound. Since the start of 2008 the North East and Wales saw the largest gains in money wages, while Scotland, the West Midlands, Northern Ireland and the South East lagged behind.

UK retail sales surge in March

After a couple of sluggish months, retail sales rounded off Q1 in style, growing by an impressive 1.8%m/m in value terms. Even excluding the "jerry can" effect, ex-fuel sales were up a healthy 1.5%m/m, with strong growth in clothing & footwear. All told, this means that retail sales will have made a decent contribution to GDP growth in Q1. But retail sales don't tell the whole story. Consumer spending away from the high street has been lacklustre and this will drag on consumers’ input to GDP.

UK unemployment fell unexpectedly in February

UK unemployment fell by 35,000 in the three months to February, bringing the rate down from 8.4% to 8.3%. This was the first fall since May 2011 and brought the number of people unemployed down to 2.65 million. The good news was also shared by the young. The rate of youth unemployment (excl. full time education) fell by 0.2 percentage points to 20.5%. But looking behind the data shows that all of the fall in overall unemployment was due to an increase in employment of part-time workers. The number of people settling for part-time work because they can't find full-time jobs rose to 1.4 million, its highest level since records began in 1992.

US retail sales buoyant in March

Just like their UK cousins, US retailers were also happy. The strong start to the year continued with sales growth of 0.8%m/m in March, which lifts the annual growth rate to 6.5%. It’s encouraging that this performance is consistent with an economic recovery which is steadily building momentum. But let's not get carried away. Again, like the UK, other areas of consumer spending are feeling the pinch. And it's worth bearing in mind that after a similarly buoyant start last year, sales quickly lost pace. As Ben Bernanke, Chairman of the Fed, has already warned, the labour market will need to keep improving if the US economic recovery is to stay on its upward path.

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