As you might expect, economic risks loom large. ‘Chronic fiscal imbalances’ is one of two risks appearing in the top five of both impact and likelihood. But there are also water supply crises and the unforeseen consequences of life science technologies to contend with. As scary as the global economic outlook might seem at times, there is plenty more to keep us all awake at night.
No New Year fireworks from the Monetary Policy Committee
The MPC was widely expected to leave policy unchanged and duly met those expectations, leaving rates on hold at 0.5% and quantitative easing unchanged at £375 bn. It may not have been the most exciting decision, but that’s fine with most large companies: by and large, chief financial officers think the Bank of England has got monetary policy right, according to a survey by Deloitte. Just don’t mention regulation, infrastructure, energy policy or immigration if you’re going to a business dinner and don’t want to ruin the mood around the table! More generally, the survey suggested that companies entered 2013 with a sense of cautious optimism.
Continuity matters more than quality, as RPI left unchanged
I normally don’t comment on the result of statistical investigations. But last week’s decision to leave the retail price index (RPI) unchanged was important – and surprising. Important, because the RPI is still hugely influential in the setting of prices on everything from government bonds to rail fares. Surprising, because the RPI is fundamentally flawed – it tends to overstate the rate of inflation by 0.5-1.0 percentage points. Even so, the Office for National Statistics opted to maintain the status quo for reasons of continuity. The RPI is the UK’s oldest measure of inflation, and it was felt that this strength was more important than the upward bias.
House prices: one up, one down. House prices were broadly flat in 2012
They rose by 2.6% on the Halifax index, but were 1% lower according to Nationwide (both changes measured over the year to December). As ever, there were some big differences in regional performance. Sticking with the Nationwide index, homeowners in Northern Ireland saw an 8.1% fall in prices, while Scotland saw a 3.3% fall. London and the South West were the top performers, with prices rising 0.7% and 0.2%, respectively.
Manufacturing decline adds to worries about UK GDP in Q4
Let’s start with the good news: UK industrial production rose by 0.3%m/m in November 2012. The bad news is that this was weaker than expected, due to a disappointing fall in output in the manufacturing sector. Manufacturing may be more of a middleweight than a heavyweight as far as the UK economy is concerned, but it still packs a punch. So the decline has added to speculation that the UK economy may have contracted in Q4. At least the trade data were more positive. There was a small reduction in the UK’s deficit from £3.7bn in October to £3.5bn in November. Somewhat surprisingly, this was driven by a sharp increase in exports to the EU.
President Draghi upbeat as ECB leaves rates at 0.75%
Mario Draghi struck an upbeat tone at the ECB’s first meeting of 2013, as he highlighted the encouraging stabilisation in financial markets. But, being a central banker, he added two qualifications. First, he warned against complacency on the part of politicians. In particular, he stressed the importance of maintaining progress with structural reforms (e.g. the opening up of markets). Second, he noted that the improvement in financial markets had not yet fed through to the real economy. Last week’s data for unemployment and retail sales were a timely reminder (see below). The ECB doesn’t expect the real economy to improve until the second half of the year.
Eurozone’s economic woes continue
Unemployment in the Eurozone increased for a fourth consecutive month in November, to hit a record high of 11.8%. Jobless rates have increased in every member state over the past 12 months apart from Germany, Estonia and Ireland. Conditions remain most alarming in Greece and Spain, which are suffering from chronic unemployment of 26% and 27%, respectively. Given this dire labour market backdrop it is not surprising to see a struggling retail sector on the continent. In November, retail sales were down 2.6% from a year earlier.
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