A sticky wicket? Economics weekly


A sticky wicket? Economics weekly

Not a reference to the England cricket team’s difficulties on the subcontinent but a term economists use when inflation is resistant to change. Should we then be overly alarmed to see inflation stuck at 2.7% for three months straight?

Economic Analysis

21 January 2013

Perhaps not, but against this backdrop it is little surprise that retail sales were weak over Christmas and the high street is struggling. Conditions for US households are more benign and there is increasing evidence that the housing market has finally turned a corner in the world’s largest economy. The pretender to this crown, China, is also showing signs of improvement. Dampening the New Year cheer in the global economy is the news that the previously resilient Germany seems to have succumbed to the downturn in the Eurozone.

UK retail sales fell over Christmas

December can be a make-or-break month for retailers, so the “official” data last week were keenly anticipated. In the end, they were disappointing but not catastrophic. The value of sales fell 0.1%m/m, pulling the y/y growth rate down to just 0.7%.

If we strip out price increases and focus on volumes (i.e. the quantity of stuff we bought, rather than the amount we spent), the y/y growth rate was just 0.3%. With the exception of 2010, when the “Big Freeze” hit, that represents the weakest December since 1998. When you put it like that, the disappointing news that we may be losing some well-known retailers from the high street does not look so surprising.

UK inflation unchanged but the squeeze on households continues

Consumer prices rose 2.7%y/y in December, the same rate as in November and October. The pressure on inflation is being caused by utility prices (gas prices rose 5.2%y/y) and food prices (up 3.9%y/y). There was some respite on the petrol forecourt, however, where pump prices fell slightly. Inflation therefore remains higher than income growth, with average weekly earnings rising just 1.8% over the year to October. Against that backdrop, 2013 could be another difficult year for retailers.

Inflation less of a headwind across the Atlantic

Conversely, US CPI inflation edged down to 1.7%y/y in December, whilst the core measure that excludes food and energy was stable at 1.9%. Inflation averaged 2.1% last year, comfortably below 3.2% in 2011 and the 10yr average of 2.5%. Risks that poor harvest yields and tensions in the Middle East would push commodity prices higher failed to materialise. This will have been a relief for households who seem to have been more exuberant over Christmas. Retail sales were up 4.7%y/y in volume terms in December – a stark contrast with the UK.

A busy end to 2012 for America's bricklayers

New housing starts were up 12%m/m in December to an annualised 954,000 - the highest level since June 2008. For the year as a whole the increase was even more striking: a total of 871,000 houses were started, 28% more than in 2011. Along with a declining supply of repossessed homes, modest support from rising employment and steadily rising prices, it looks as if the US housing market finally turned a corner last year.

Germany dragged into the mire

There was evidence that economic weakness in the Eurozone periphery is spreading to the core, as German GDP contracted (0.5%q/q) at the end of 2012. For the year as a whole Germany grew by just 0.7%, down from 3% in 2011, partly due to a slowdown in export growth. Things may get worse before they get better. Germany’s central bank cut its GDP growth projections to just 0.4% in 2013. Certainly this is an economy that is highly sensitive to the health of its trading partners. Ominously, almost 40% of German exports head to neighbouring countries in the Eurozone.

Eurozone inflation steady

Inflation was unchanged at 2.2%y/y in December. The ECB sees inflation dropping below its 2% target during the course of 2013, given weak economic activity and high unemployment. This will take some pressure off consumers’ disposable income but will be far from sufficient to achieve a recovery in the Eurozone. Indeed it is likely that conversations will again remain firmly centred on the Eurozone crisis at the Davos meeting in Switzerland this week.

China re-accelerates, but the true test still to come

China's economy grew 7.9%y/y in Q4, bringing an end to the growth slowdown that had lasted almost two years. China has achieved this by spending more on infrastructure – the government's favourite tool for stimulating growth. The true test of China's new leadership will be rebalancing the economy towards consumer spending.

So far, it has merely talked-the-talk on reform. In this context there is some good news. Disposable income growth is running at almost 13%y/y for city dwellers, well above average. We discuss China and the wider global economy, including an outlook for 2013, in our latest Global Economy Barometer.

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