Tour de Force - Economics weekly


Tour de Force - Economics weekly

Bradley Wiggins’s success in the Tour de France was a much needed lift for the UK amid gloomier economic news.

Economic Analysis

23 July 2012

The IMF reduced its 2013 global growth forecast but revised the UK’s forecast down more sharply than any other advanced economy (from 2% to 1.4%). And it warned that the pace of austerity should slow if the economy hasn’t begun to improve by 2013. UK policymakers are acutely aware of the risks and like team cycling, success doesn’t depend on just one man. On top of more quantitative easing and two policies to stimulate growth through lending, the Government announced a new measure to provide guarantees for infrastructure investment. But with the biggest risks coming from the Europe and the US, there are still lots of foreign potholes which could buckle the wheels of recovery. In the Eurozone, fear increased again as Spanish bond yields rose above 7%, despite the recent banking bailout. Meanwhile across the pond, concerns about the US fiscal cliff still refuse to go away. These are tough times indeed and we will need some strong legs to keep going.

UK inflation fell to its lowest rate since November 2009

UK Consumer Price Inflation (CPI) fell for the third consecutive month in June, to reach its lowest rate in more than two and a half years. At 2.4% it is now at less than half of the September 2011 peak of 5.2%. A 4.2%m/m fall in clothing and footwear prices, probably due to the poor weather, was the biggest drag. But consumers also benefitted from lower prices on the forecourt and on food and non-alcoholic drinks. Meanwhile Eurozone inflation was unchanged at 2.4%y/y in June.

UK unemployment fell by 65,000 in three months to May

A 181,000 rise in employment caused the unemployment rate to fall to 8.1% in the 3 months to May. The data show that the UK’s entrepreneurial spirit is alive and well with selfemployment the overwhelming driver behind employment growth. Indeed, there are 144,000 fewer employees than at the start of the year, but 166,000 more self-employed. But others are losing skills, and more failing to gain them. The number unemployed for more than 12 months rose to its highest level since mid-1996 and youth unemployment rose again too. The number of 18-24 year olds unemployed and not in full-time education went up by 6,000 to 724,000.

UK earnings growth was unchanged in May

Average weekly earnings grew by 1.5%y/y in May, but spending power continued to fall as earnings were outpaced by inflation once again. Real earnings shrank by 1.3%y/y. Private sector earnings grew by 1.8%, while public sector earnings grew by 1.1%. Consumers will be happy that inflation is falling, but with earnings growth so low it has to fall a great deal further before they will be able to loosen their belts, even just a little bit.

UK retail sales were weaker than expected in June

The value of retail sales fell by 0.5%m/m in June, while volumes edged up by just 0.1%m/m. Store price inflation - the rate at which prices are going up in the shops - slowed to 0.3%. This is the lowest rate since October 2009. Cheaper clothing and footwear was one of the main reasons for the rise in volume, but sales were still up on last year by 1.9% in value and 1.6% in volume. All the same, it was a disappointing result given the extra spending hoped for around the Jubilee.

The Monetary Policy Committee (MPC) voted 7-2 for looser policy

The minutes of July’s MPC meeting revealed that all nine members felt that the deterioration in the growth outlook warranted some stimulus. Everyone agreed that the policy rate should be left at 0.5%, although they didn’t rule out a change in future. But there was disagreement about whether the Funding for Lending Scheme (FLS), the Extended Collateral Term Repo Facility (ECTR) and the prospective slackening of regulatory liquidity requirements would provide enough of a boost on their own. Only two members thought so. The others felt conditions were weak enough to warrant another £50bn expansion to the asset purchase scheme.

US Fed show no signs of easing – yet

Despite the weak outlook for the US economy, falling retail sales and ‘frustratingly slow’ progress on unemployment, Federal Reserve Chairman Ben Bernanke’s address to Congress gave no hint that he is minded to loosen monetary policy yet. There may be some element of strategy in the stance as the Chairman once again raised the impact of the impending fiscal cliff on confidence. Previously he has made it clear that monetary policy can only do so much and that Congress has to play its part - and soon. We will have to wait and see who blinks first. More information on the US fiscal cliff (PDF - 118KB).

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