The economy had a ‘win’ last week as the IMF upgraded its 2013 UK growth forecast. But the recent series of upbeat economic news was given a gentle reminder of the challenges ahead as manufacturing output fell in May. It’s no time to take the eye off the ball.
Change of heart
Having downgraded the 2013 outlook for the UK economy in April, the International Monetary Fund (IMF) has had a change of heart. In its July economic outlook, the IMF now expects growth of 0.9% this year, up from 0.7% forecast in April.
But this upward revision is hardly anything to cheer about as the reality of the weak economic recovery remains. More concerning, not only has the IMF lowered its forecast for global growth, it expects a more protracted Eurozone recession and slower growth in emerging and developing economies. The task of rebalancing the economy towards exports might have just have become a little harder.
Recent weeks have seen a number of reasonably positive economic data points. But flat industrial production in May and a second consecutive monthly fall in manufacturing output provided a reality check that we shouldn’t get too excited just yet about state of the economy.
The pharmaceutical, metal products, and computer, electronic and optical products sub-sectors fared worst. Between March and May, both overall industrial production and manufacturing output has fallen -1.9%y/y. A timely reminder that we still have a long way to go to before the recovery is entrenched.
Mind the gap
There was a small increase in the UK's trade deficit in May, up to £2.4bn from £2.1bn in April. The big picture story is that both imports and exports have remained flat since mid-2011, leaving the trade deficit at around 2% of UK GDP. But there's more to the balance of payments than just trade.
Another key component is the investment income position, which has swung from surplus to deficit over the past year as the UK is paying out more and taking in less. This has helped push the current account position deeper into the red (3.6% of GDP in Q1 2013). It's too early to push the panic button, but it is an unwelcome trend for the UK as it is a form of borrowing.
The gini is out of the bottle
The UK is near the top of international league tables for income inequality. Yet on its broadest measure, the gini coefficient, inequality declined a little between tax years 2011 and 2012. A number of forces are at play, including: a small fall in income of the top 10%; an increased tax-free allowance; and more tax credits.
A little known, but significant change in the past decade has been a shift in middle income households from being net contributors to public finances, to net beneficiaries. In 2001, the middle paid c53% of their income in taxes and received c30% in benefits. In 2012, they paid c38% of income in taxes, but received 42% in benefits. Is this an alternative explanation of the UK's deficit?
Eurozone industrial production disappoints
After a few decent months of expansion, industrial production fell by 0.3% between April and May and was 1.3% lower than it was in May last year. Weakness was wide-spread but the main culprits were a 2.3%m/m contraction in durable consumer goods (e.g. fridges) and a 1.5%m/m decline in capital goods.
And it wasn’t just peripheral economies that felt the pain as output also declined in France and Germany. With such weakness, it is not surprising that the ECB expects interest rates to remain at present or lower levels for an “extended period” of time.
US Federal Reserve explains itself once again
The Fed is worried that markets are getting ahead of themselves and not understanding its message. In the minutes of its latest monetary policy setting meeting, the Fed is clear that it is discussing a long phased reduction of its quantitative easing purchases rather than imminent interest rate hikes.
Fed Chairman, Ben Bernanke, expects to cease QE in roughly a year's time, if the economy grows as expected. Yet yields on 10-year US Treasuries are 1% higher than they were at the start of May. It’s markets, not the Fed, who are doing the tightening now.
Abenomics still doing the business in Japan
Japan's policy revolution - a mix of aggressive monetary easing and fiscal stimulus - continues to drive economic improvement. Machinery orders (a leading indicator of investment) rose sharply in May, suggesting firms feel positive enough to expand capacity.
The country's central bank is also confident - its latest assessment of the economy was the most upbeat in more than two years. But a lot of work remains, particularly structural reform. Abenomics may have passed its GCSEs with flying colours, but the challenge of its A-levels awaits.
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