Winds of change - Economics weekly

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Winds of change - Economics weekly

Economic Analysis

01 July 2013

The axe falls on government department’s budgets again

George Osborne, Chancellor of the Exchequer, wielded the axe on government departments’ day-to-day budgets for 2015/16. Savings of £11.5bn will help meet an overall spending target of £745bn for that year. In terms of real budget cuts, Culture, Media and Sport, Communities and Local Government and the Foreign and Commonwealth Office all fared poorly.

Energy and Climate Change, Transport, and Business, Innovation and Skills came out relatively well thanks to a boost in capital expenditure. This is the latest step to eliminate the deficit and reduce public debt, but if the forecasts used by the government are correct, more pain is likely.

Boost for transport infrastructure

As part of its 2013 Spending Round the government reaffirmed its commitment to recycle £3bn of budget savings into infrastructure investment. It also set out plans for £100bn in capital investment to 2020. Transport receives the lion’s share with £70bn, while schools are set for a £21bn capital boost. £3.3bn is set aside for 165k new affordable homes.

New Governor at the Old Lady

The 1st of July marks Mark Carney’s first day as Governor of the Bank of England (BoE). There is much speculation that he will try to persuade his colleagues on the Monetary Policy Committee to adopt a policy of ‘forward guidance’ – providing more information on future policy moves by the BoE – as an alternative to quantitative easing.

See ‘Forward guidance’ - a new tool for the Bank of England? (PDF 74KB) for a closer look at what it means. Dr Carney will also oversee the Bank’s new mandate to spot and mitigate risks to the UK financial system. Highlighting the sharp rise in global interest rates as a key risk, the BoE has launched an investigation into the vulnerability of borrowers and lenders to higher interest rates.

A change in history

Revisions by government statisticians have changed UK economic history. First, the double-dip recession has been erased from the history books. Second, the recession was deeper than originally thought. The peak to trough decline in national income is now estimated to have been 7.2%, almost a whole 1% larger.

Taken together, the latest estimates mean that more hard work is required to get back to pre-crisis income levels. One number that wasn't changed was Q1 growth - still estimated at 0.3%q/q. The Chancellor will be hoping this improves in Q2.

UK house prices up in June

Home owners will be feeling a little better as house prices rose 1.9%y/y in June, the fastest rate since September 2010, according to Nationwide. The average UK house price is now £168,941. London continues to streak ahead of the rest of the country, but fully 10 of the 13 nations and regions saw prices rise.

UK shale gas estimates increased

New estimates by the British Geological Survey suggest that there could be 1,300 trillion cubic feet of shale gas in the north of England. Though the proportion of gas that could be extracted is unknown, some suggest it could provide reserves sufficient to meet 40 years of demand. It’s early days, but shale gas could be a valuable resource, providing both enhanced energy security and an economic boost through lower energy costs for households and businesses.

Juggling act for US policy makers

The interest rate on 30 year US mortgages increased to 4.5% last week, up 50bps, reflecting a wider rise in rates. Spooked investors sold government bonds in reaction to the clumsy communication by the Federal Reserve of its plan to slow the pace of quantitative easing. A succession of Fed leaders tried to right the ship, highlighting that policy will tighten only when it is clear that the recovery is strong and secure.

A large downward revision to Q1 GDP growth from 2.4%q/q (annualised) to 1.8% won’t have brought tightening any closer. But US house prices continue to strengthen - up 2.5%m/m and 12.1%y/y in April - illustrating that a recovery is underway and why some people are concerned about loose monetary policy inflating asset price bubbles.



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In an announcement he was hoping he wouldn’t have to make, the Chancellor, George Osborne, set out where 2015/16 government spending cuts will fall. Though statisticians erased the UK’s double dip recession from history, they also said the downturn of 2008-09 was much worse, leaving a greater hill to climb. With Mark Carney taking the helm at the Bank of England today, the Chancellor will be hoping these winds of change can help make that climb a bit faster. Europe is changing too as Croatia becomes the European Union’s 28th member.

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