Policy pudding - Economics weekly


Policy pudding - Economics weekly

Granted it’s pretty hard to spot the similarities between Christmas pudding and changes to monetary policy.

Economic Analysis

17 December 2012

I guess it helps to be an economist. Yet both can be divisive. You either like it or you don’t. So when Bank of England Governor elect, Mark Carney, ruminated on changes to inflation targeting - monetary policy doctrine for the past 20 years - forces for and against soon mustered. What is likely is that the Bank will start providing more explicit policy guidance. Last week, the US Federal Reserve Chairman Ben Bernanke announced such an approach. EU leaders also agreed on further details for the banking union and a roadmap for the completion of the Economic and Monetary Union (EMU). But with all policy announcements, the proof will be in the pudding.

Five golden rings for the UK labour market

One, UK unemployment fell to 7.8% in the three months to October. Two, employment rose by 40k. Three, the increase was driven by people working full time. Four, the number of part time and temporary workers reporting that they couldn’t find full time work fell. Five, youth unemployment fell (although it remains alarmingly high). All in all, the labour market has been the stand-out performer in the UK economy this year. Retailers will be hoping this transforms into a little more Christmas spending on the high street.

New year, new governor, new focus for monetary policy

Bank of England Governor elect, Mark Carney, discussed what more central banks can do to boost growth. He highlighted the benefits of using guidance on future policy. This can include explicit views on interest rates or the conditions under which policy would be altered. Canadian and US central banks use both. More radical still, Carney discussed the implications of a move towards “nominal GDP targeting" as opposed to the Bank’s current inflation target focus. In normal times the practical differences are small, but following a recession, nominal GDP targeting would focus on encouraging the economy to "catch up" with its previous trend.

UK regional data highlights big differences in wealth

Like Santa Claus the regional GDP release comes just once a year. Though only incorporating data up to 2011, the report did highlight some interesting differences in regional economic performance. The South East was the star performer with the North East at the back of the pack. Surprisingly, London posted a below-average performance but it remains in a world of its own. In terms of prosperity, GDP per head is £33k in London compared to just £19k for the rest of the country. In the North East, GDP per head is just £16k - less than half of London. The question is, how should this disparity be addressed?

The pace of Eurozone economic decline eases a little

The preliminary estimate of the composite Purchasing Managers’ Index (PMI), covering manufacturing and services, rose to 47.3 for December, up from 46.5. While remaining below 50, signalling further contraction in business activity, the pace of decline is moderating. German figures supplied some more hearty Christmas cheer. Output in the Europe’s largest economy returned to growth for the first time in eight months.

Fed moves to more explicit policy targets

The US Federal Reserve gave more explicit guidance on when interest rates might start to rise. Previously it stated that interest rates would remain exceptionally low "at least through mid-2015". This has been replaced with specific conditions of unemployment being below 6.5% and inflation projections not more than 0.5% above the Fed’s 2% target. So absent an inflation problem, it’ll be a long time before interest rates start rising.

Mixed signals from US in advance of the fiscal cliff

November’s industrial production rebounded after Hurricane Sandy. Lower energy costs also helped restrain the rising cost of living to 1.8%y/y, from 2.2%y/y in October. On a less positive note, a slump in US exports saw October’s trade deficit grow to $42.2bn, from $40.3bn. But it’s the fiscal cliff that could be the Grinch that steals Christmas this year.

That’s all folks

This will be my last Weekly Brief for 2012. It’s been another tough year for the economy. With all the gloom it’s easy to loose sight of the bigger picture. So to end the year on a positive note here’s a few happier stats. The world is $1.7 trillion richer than it was last Christmas. That’s equivalent to three-quarters the size of UK economy. The number of people in poverty has halved since 1991. The average person born today can expect five more years of life than their parents. On that note, I would like to wish you and your families well for the festive season. Merry Christmas! My Weekly’s back on 7th January.

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