Pressing matters - Economics weekly


Pressing matters - Economics weekly

It isn’t easy being a central banker these days. Many developed economies remain in dire straits as traditional interest rate policy has been exhausted.

Economic Analysis

03 September 2012

Good news for the US housing market, but it's still on the doctor’s watch list

As measured by the Case-Shiller Index, average US home prices increased by 2.2%q/q in Q2, the largest such increase since 2005. Year-on-year prices were up by 1.1%, the first annual rise since 2003. Prices increased in all 20 of the cities in the index over the month. These are the first reliable signs of a broad-based strengthening in US house prices. But let's not get carried away. Better is different from good and the average house was still worth 31% less in nominal terms in Q2 than at the peak in Q1 2006.

Fed preparing the ground for more stimulus?

August's Beige Book report on US economic conditions says that recent growth has been "gradual", a downgrade in Fed speak from June's "modest to moderate" growth. That's consistent with the Fed's view that growth will be insufficient to bring unemployment close to the target any time soon and is another argument for QE3. Indeed, Chairman Bernanke dropped a big hint that further monetary stimulus could be on its way. Speaking at the Jackson Hole conference, Bernanke emphasised that the Fed will provide “additional policy accommodation as needed”. A signal that the Fed is warming up the printing presses ahead of the September 12-13 meeting perhaps?

Corporate deleveraging continues apace in the UK

Lending fell across a broad swathe of sectors in the three months to July. Meanwhile corporate deposits were up 1.5%y/y as companies are still wary about taking the investment plunge. Cheaper borrowing via the Government's new Funding for Lending scheme may help to tempt them into action, but with the UK in recession and the Eurozone crisis raging on, their reluctance isn't surprising. On the bright side, stronger balance sheets will put companies in a better position to move once sentiment begins to change.

Households are still struggling to reduce their debt levels

While households have reduced their reliance on consumer credit, overall debt levels have increased this year. Outstanding consumer credit balances fell by 0.4%m/m and 4.9%y/y in July and are 24.4% lower than in July 2008. This decline has been driven by a reduction in personal loans and overdrafts. But secured lending has prevented overall consumer debt from falling. Even though secured balances grew at only 1%y/y, compared to a more typical pre-crisis average of 9%, their sheer size mean that this is much more difficult for households to get on top of. Household deposit growth was a robust 4.2%y/y in July, although much of this is likely to be explained by deposits of large PPI settlements paid out this year.

Record high unemployment a real headache for Eurozone policymakers

The aggregate Eurozone unemployment rate remained at a record 11.3% in July, up from 10.1% just 12 months ago. The number of unemployed people increased by 88,000 in July to a total of 18 million as the sovereign debt crisis continues to take its toll. Spain is suffering most with unemployment climbing to a frightening 25.1%. Austerity in the face of such chronic labour market conditions is clearly a tough task. Even core countries are now showing signs of deterioration. The Netherlands continues to enjoy a low unemployment rate of 5.3%, but even this has increased from 4.3% over the past 12 months.

The clash of the central bankers

It is all hands to the pump at the ECB ahead of a pivotal meeting later this week. Despite this, President Draghi found time to confront critics of his proposals to buy sovereign debt from troubled Eurozone member states. Weidmann, the head of the Bundesbank had warned that countries could become addicted “like a drug” to central bank support, and thus avoid much needed reforms. Draghi countered that “our mandate sometimes requires us to go beyond standard monetary-policy tools”. Touché!

Central bankers have therefore been forced to turn to unconventional policy tools, which some see as highly controversial. In the US, Federal Reserve Bank chairman Bernanke’s hints about more quantitative easing (QE) haven’t been taken well by some politicians who believe that QE is akin to treason! At the European Central Bank (ECB), president Draghi stands ready to restart sovereign bond purchases. This too has attracted criticism from the head of the German Bundesbank, who believes this policy is too close to monetary financing. Five years on from the start of the credit crunch central bankers remain directly in the firing line.

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