Auld claithes and porridge - Economics weekly

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Auld claithes and porridge - Economics weekly

Forgive the Scottish dialect, but it sums up where we are. After the excitement, achievements and celebrations at the Olympic Games, it is back to economic reality.

Economic Analysis

13 August 2012

The global economic slowdown is affecting us all, so there is no money for luxuries. As the Governor of the Bank of England made clear, “we are navigating rough waters and storm clouds continue to roll in from the euro area.” European problems are closest to home and the biggest threat to the UK, but there are worries from further afield too. US consumers are still holding back, and even the Chinese data have been disappointing. Given the importance of China to the global economy, this isn’t welcome news. It will be a long hard slog, so even renewed and inspired by Team GB’s performance, in comfy old clothes with a belly full of porridge, the UK will have to put its nose firmly back to the grindstone to pull off a recovery.

The European debt crisis casts a long(er) and dark(er) shadow over the UK’s economic forecasts.

The Bank of England cut its forecasts for economic growth in 2012 and 2013. The actual numbers aren’t out yet, but the charts in the Inflation Report suggest the Bank expects the economy to shrink a little more this year before returning to modest growth in 2013. It will take about another two years to get back to the pre-recession peak, but making up for lost ground means it will be a long slog before we feel more comfortable. Europe’s debt crisis, austerity and tight credit conditions will still hold us back, but lower inflation will help liven things up as a bit of consumers' spending power is restored. The Bank is also optimistic that the Funding for Lending Scheme will boost bank lending and encourage companies to invest more.

Is a cut on the cards?

The Bank of England’s gloomy economic forecast is based on market expectations for interest rates, which include a cut to 0.25% in the no-too-distant future. So the question is, will the Monetary Policy Committee take the plunge and cut rates? We think that is unlikely – as does Bank Governor Mervyn King, apparently. He pointed out that such a small change “is not going to be the difference between having a recovery and not having a recovery”. It might even do more harm than good, he acknowledged, if it led to weaker profits for UK banks and so discouraged them from lending.

UK production slumped due to public holidays

Industrial production fell by 2.5%m/m in June with the manufacturing sector down 2.9%m/m. The ONS highlighted the extra bank holidays as a key factor in the declines over the month. In annual terms both industrial and manufacturing output fell 4.3%y/y. While these data are undoubtedly poor, the decline was in fact smaller than the ONS had anticipated when compiling its first estimate of Q2 GDP. All things being equal, these figures imply a 0.1%q/q upward revision to the Q2 GDP horror show. Just the 0.6%q/q contraction then…

UK trade deficit reached a record high in June

Public holidays affected the trade data too. The UK’s trade deficit in goods and services increased by £1.6bn, to £4.3bn in June. This is a huge 43% higher than June last year and much bigger than expectations. Exports fell by £2.2bn or 8.4%m/m, largely due to the decline in exports of oil, chemicals and especially cars. Exports to the Eurozone fell by 7.1% and exports to Non-Eurozone countries fell 9.6%. This ends the party following May’s data which showed the first improvement in the trade balance in four months. With slowing global growth, these poor trade data only add to the Bank of England’s prediction that it will be a long hard road to recovery ahead.

Chinese industrial production and trade data disappointed in July

Chinese industrial output growth slowed to a threeyear low in July. It rose by 9.2%y/y, down from 9.5% y/y in June, against expectations of a rebound. This was disappointing enough, but Chinese trade data came in below expectations too. Exports increased by just 1%y/y in July, down from 11.3%y/y in June. Meanwhile imports rose by 4.7%y/y compared with 6.3%y/y in June. Lower exports show slowing global demand while lower imports show domestic demand is also ebbing. This is disappointing for UK exporters too, particularly as they struggle to rebalance towards exports to developing economies. Read more about the impact of China on UK trade.

Chinese consumer inflation continues to fall

More evidence of weakening domestic demand in China came with the latest inflation data and retail sales data. Consumer prices increased by just 1.7%y/y compared with 2.2%y/y in June and 3% y/y in May. The dip brought the Chinese consumer inflation rate to a 30 month low. Retail sales fell too, but only from 13.7%y/y in May to 13.1%y/y. The good news is that falling inflation leaves the authorities some room to loosen policy and stimulate the economy again.

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