Solid but not spectacular - Economics weekly


Solid but not spectacular - Economics weekly

After all the hype, Mark Carney's first speech as Governor was a relatively low-key affair. His economic assessment was of a "solid but not stellar" recovery that could use a helping hand.

Economic Analysis

30 August 2013

 

Taking forward guidance to the people

Mark Carney used his inaugural speech to reiterate his promise not to raise interest rates at least until unemployment is below 7%. Carney stressed that the purpose of this was to give businesses and households the certainty they need to plan for the future and invest. The new Governor expects unemployment to fall slowly, meaning the 7% threshold won’t be passed until 2016.

Markets beg to differ and are currently betting on interest rates going up in early 2015. The biggest surprise of the day was that Carney seems happy with that difference of opinion. This cements the idea that forward guidance is aimed at the “man on the street” rather than markets.

A step in the right direction

Lending to the UK corporate sector increased 0.8%m/m in July – the first rise since January and the largest since June 2008. While this is good news, lending still remains 5.6% lower than a year ago. The Bank of England will hope its guidance will encourage a more sustained recovery in investment and lending going forward. This will however also depend on how convinced the corporate sector is that the economy is on the right track.

Were statisticians put on earth to make economic forecasters look good?

US growth in the second quarter was revised up from 1.7% to 2.5% as new information painted a more encouraging picture of performance. Growth was broad based, with consumption, investment and trade chipping in. Government spending was the only drag as fiscal austerity continued.

It is now 7% below its peak in 2010. These revised numbers strengthen the hand of Fed members who favour tapering quantitative easing purchases as soon as next month's meeting.

America’s housing recovery to slow?

US house prices rose 7.1%q/q in Q2, according to the Case-Shiller Index, and were up 10.1% over the year. However, the recent rise in market interest rates is dampening activity. At the start of the year, a 30-year fixed rate mortgage carried an interest rate of 3.7%. Today it’s 4.9%. Not surprisingly, refinancing activity has fallen sharply and applications for mortgages for new purchases are down 10% since May.

More stimulus in Europe?

The Eurozone is out of recession and a growing body of data suggests conditions are improving - slowly. Nonetheless, the unemployment rate in the monetary block remains at a record 12.1%. Worse, youth unemployment hit 24% in July. Inflation meanwhile dropped to 1.3% across the euro area in August helped by falling energy prices. This may encourage the European Central Bank to cut rates to support the recovery across the channel.

Japan's economy continues to improve, for now at least

Japanese industrial production rose 1.6%y/y in July – its first jump in a year. Meanwhile unemployment fell to 3.8% - the lowest level since late 2008. There is however a sense that these improvements will run out of steam without action to address Japan's deep structural problems. Headline inflation may be rising but once energy and food costs are stripped out prices continue to fall. Deflation will be hard to get rid of.

Emerging markets in the firing line

Talk of the US Fed reducing its quantitative easing programme has roiled financial markets. Emerging markets in particular have felt the brunt as investor cash floods out, causing a sharp fall in their currencies. In response, Brazil and Indonesia have raised interest rates this week to support their exchange rates. It's far from a crisis for emerging markets. But it's going to be a little painful for some and growth will inevitably slow.

A team of Maradonas

There are rumours that Real Madrid are set to buy Gareth Bale for £87m - a world record transfer fee. However, if we take into account inflation is this still the case? Ronaldo moved to Real Madrid in 2009 for a fee of £80m. That translates into around £90m in 2013 prices, making the Portuguese the world’s most expensive player in real terms.

Generally however values have been rising. Indeed in 1984 Maradona cost £5m, which equals around £15m in today’s market. You could therefore buy six Maradona’s for the price of Gareth Bale - a scary thought for England fans.

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He reiterated his pledge that rates will probably remain on hold for another three years. The emphasis is firmly on getting his message across to UK households and businesses in the clearest possible way. In an attempt to show his common touch, Governor Carney even threw in a reference to Jake Bugg (a pop star, I'm reliably informed). The hope is that this more direct message will boost investment and spending in the economy.

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