Captain Consumer to the rescue?

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Captain Consumer to the rescue?

Economic Analysis

20 August 2012

The UK Monetary Policy Committee (MPC) added sterling to its list of concerns

Minutes from August's meeting of the MPC showed members were unanimous in the decision to leave rates and the asset purchase scheme unchanged. The usual worries about Europe and global economic growth were discussed, but the appreciation of sterling was added to the list of concerns. The pound is still 15% lower than in 2007 in trade weighted terms, but it has now climbed 5% above its 2011 average. This is partly because of the UK’s safe haven status, but if it continues it will hinder the export-led recovery craved by UK policymakers.

Good news on UK unemployment

The number of unemployed fell by 46k in Q2 to 2.56 million, bringing the headline rate down from 8.2% in Q1 to 8% in Q2. Self-employment has been a big factor in 2012, accounting for 46% of the growth in jobs. But total unemployment is still higher than last year and long term unemployment (over 12 months) has increased to its highest rate since Q3 1997. The fall in unemployment is good news for the UK, but unless economic conditions pick up, employers may begin to reassess their workforce needs.

But not such good news on real earnings

Total pay increased by 1.6%y/y in the three months to June and pay without bonuses increased 1.8%.That’s hard enough for struggling households, but its worse when inflation is taken into account. Inflation has fallen to 2.8%, but it’s still well above pay growth, which means real wages fell at least 1%y/y in June. It also means that inflation has outstripped earnings growth for 26 consecutive months.

Summertime, and the shopping is (relatively) easy

Despite falling real earnings UK consumers seem to have re-kindled their love of shopping. The volume of retail sales rose by 2.8%y/y in July and June’s data were revised up by a whole percentage point to 2.6%y/y. Lower inflation may be the key. The value of retail sales rose just 3.1%y/y, which suggests 'high street' inflation could be as low as 0.3%y/y. So it seems discounting is encouraging shoppers back to the stores.

US shoppers fall in love again too

After three successive monthly declines, US retail sales rebounded in July. Sales were up 0.8%m/m and 4.1%y/y. It’s not wise to get carried away with one month's data but this is encouraging. Consumers are important to the US economy and this news will raise hopes that they will help the recovery get back on track.

US inflationary pressures are draining fast

Like the UK, lower prices could be the key to the consumer revival in the US.The Consumer Price Index increased by 1.4%y/y in July and core inflation - which strips out volatile elements like energy and food - was almost smack on the Fed's target at 2.1%. But prices were flat between June and July for the third time in four months. This could give the Fed room to loosen policy in September.

Better news from the US coal face and factory floor

Industrial production increased by 0.5%m/m in July and 4.4%y/y. The detailed figures are consistent with evidence from the Fed that the proportion of industrial capacity being used by firms is almost back to pre-crisis levels. That’s good news for activity, but may have some implications for inflation.

Eurozone economy shrinking as debt crisis rages on

The Eurozone economy shrank 0.2%q/q in Q2 following a stagnant Q1 (0.0%q/q). Once again it was the periphery dragging things down. Spain contracted -0.4%q/q, Italy -0.7% and Portugal -1.2%. The core economies were more resilient. Germany grew 0.3%q/q but deteriorating global (and regional) growth conditions means this pace may not be sustainable. While the Eurozone economy has avoided recession so far, aggregate output has fallen by 0.4% over the past 12 months and forward looking indicators point to a further slowdown in activity.

Your country needs you! It seems that shoppers may have responded to the battle cry in both the UK and US, raising hopes that the all important consumer may get economic recovery back on track. This is encouraging news, particularly given the importance of consumers to these large economies. Lower prices seem to be the key to their return, but improving labour markets could be helping too. However, there are lots of headwinds so it’s too early to celebrate yet. Consumers will find it tough as real earnings are still being squeezed, especially as food price inflation seems likely to pick up because of adverse weather in major grain producing countries. More headaches for policymakers, but they’ve known for a long time that it wasn’t going to be easy.


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