A little more conversation, a little less action? The minutes to Mark Carney's debut Monetary Policy Committee (MPC) meeting were eagerly anticipated. They didn't disappoint. The big surprise was that nobody voted to increase quantitative easing (QE) in July; three members had been voting to do so each month since February.
Has the printing press been turned off for good? Not necessarily. But QE will take a back-seat to other measures with the most obvious being “forward guidance”. For those who fear we can’t talk our way to recovery, fear not. The minutes also made a teasing reference to "other options" which could mean purchases of other assets like corporate bonds, or something else altogether. But the message is clear: QE is not the only show in town.
UK labour market making history
The UK unemployment rate remained steady at 7.8% in the three months to May. With the labour market taking a pause it’s a nice opportunity to reflect on the current situation facing workers compared to the past. Inflation has outpaced average earnings almost uninterrupted for the past five years, eroding consumers’ spending power. The last time this happened for more than three years was 1875-1878, just as England and Australia were first jousting in cricket test matches.
Bargains becoming a little less of a bargain
UK retail sales in June rose 0.2%m/m and were 2.2% higher on June last year. Department stores saw strong sales as consumers hunted for bargains amongst promotion and clearance items. While we like bargains, price inflation is making them a little less common. CPI inflation rose to 2.9%y/y in June – the highest rate in more than a year, but not quite high enough to trigger Mark Carney's first ‘Dear George’ letter.
The main culprits were clothing & footwear, transport and miscellaneous goods & services (e.g. jewellery, insurance). With average earnings growth continuing to be outpaced by inflation, a strong consumer-led recovery still looks like a tough ask.
UK budget deficit increases in June
Despite tax receipts rising 12.5%y/y in June as the economic recovery gains a little momentum, higher public spending (+1.8%y/y) left the government borrowing £12.4bn in June, half a billion pounds more than a year earlier. Borrowing continues to put pressure on public debt which now stands at just under 75% of national income, up from 71.6% a year ago. The Chancellor will be hoping the latest signs of recovery continue if he is to meet his budget deficit target of 7.5% of GDP for this year.
Eurozone price growth quickened in June
UK consumers aren’t the only ones feeling more pressure on their wallets. Inflation rose from 1.4% in May to 1.6% in June across the Eurozone as energy costs increased after two months of decline. Given the overall weakness in the Eurozone economy, the European Central Bank expects inflation to remain below its 2% target over the course of the year.
Talk about tapering
In what is expected to be his final testimony to Congress, US Federal Reserve Chairman Ben Bernanke reiterated the expectation that the Fed will begin to slow, or taper, its QE programme later this year. That is, as long as the economy continues to improve.
However, June showed that improvement is not always easy. Retail sales rose 0.4%m/m, less than expected as spending in restaurants and bars dropped by just over 1%. Nevertheless, Q2 sales were 4.6% higher than a year ago. Similarly for construction, housing starts were down 10%m/m, but up on 2012.
China struggles to stay on target
China's growth slowed to 7.5%y/y in Q2, from 7.7% in Q1. Although still impressive, a lot of people are worried. The upside to slower growth was meant to be progress on rebalancing - moving away from investment- to consumer-led growth. But evidence of this remains in short supply.
The contribution to GDP growth from consumption has trended down since early 2012 and though June’s retail sales growth was robust, it was behind last year. It’s a similar story for disposable income growth. With recent efforts to cool credit growth, a further, possibly sharp slowdown is a distinct possibility, leaving the economy struggling to meet the government's growth target of 7.5%.
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But as Chris Froome demonstrated in winning the Tour, it takes a lot of hard work to achieve your goals. And last week’s data showed there’s still a lot of hard work ahead for the UK economy.