Draghi poised - Economics Weekly

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Draghi poised - Economics Weekly

Seven years on from the crisis and still central banks are dealing with the aftermath. In the eurozone, growth remains weak and the European Central Bank stands ready to act again. In the US, the Federal Open Market Committee meets this week with rates having been on hold since December 2008.

Economic Analysis

26 October 2015

European Central Bank (ECB) President Mario Draghi's concern is that the emerging market slowdown might derail the eurozone’s fragile recovery.


Big hint.

European Central Bank (ECB) President Mario Draghi last week gave his biggest hint yet that he stands ready to expand the Bank’s quantitative easing programme.The programme, currently focused on purchasing government debt and due to expire in September next year, will be “re-examined” at the December ECB meeting. President Draghi’s concern is that the emerging market slowdown derails the eurozone’s fragile recovery. So while ‘lower for longer’ interest rates are possible for the UK and US, for the eurozone it looks to be a case of ‘buying for longer’.



The evidence so far is that the emerging market slowdown is capping, rather than crashing, eurozone growth. The region’s composite PMI, covering both manufacturing and services, edged up to 54.0 in October from 53.6 (above 50 indicates expansion) and has held steady since the Spring. That’s okay but the eurozone needs stronger growth to help the region’s legions of unemployed and lift inflation back toward 2%. The case for more easing from the ECB remains strong.


Pass the baton.

Since 2008, credit growth across developed economies has been almost stagnant as they dealt with the debt overhang from the pre-crisis period. In the post-crisis years emerging markets, primarily China, grabbed the credit baton so the global economy had a source of borrowing. But now that’s slowing too, with outstanding credit growth in emerging markets having fallen to the level it reached during the financial crisis. Is the global economy gradually reaching debt saturation or is there another source of borrowing waiting in the wings and ready to be the ‘borrower of last resort’?


Half time report.

In the six months since April the Government borrowed £46.3bn, £7.5bn less than it during the same period last year. The plan for this year is to borrow £69.5bn, which is £20.6bn less than last year, so at this mid-way stage there is some ground to make up. But the trends are more positive than they have been in previous years. So far income tax and national insurance receipts are up 4% and corporation tax up almost 8%. Next month the Chancellor will set out the Spending Review which will focus on where the savings will come from for the next five years. In the meantime he’ll be hoping tax revenues keep on growing to push the deficit down by April.


Everything must go.

It's official, when prices go down, we buy more at the shops. UK retail sales volumes surged again in September, up by a whopping 6.5%y/y. All the while average shop prices have been falling for a year and a quarter. The latest fall - 3.6%y/y. The figures also showed that we continue to shop more and more online, with the value of online sales up 15.2%y/y. The proportion of sales done online was 12.8%, up from 11.5% in September last year. The strength of sales in Q3 raises some hope that the GDP figures at the end of the month will be stronger than the rather gloomy manufacturing and construction figures we have seen of late would suggest.



Data emerging from the US have been decidedly mixed in recent months. It was encouraging, then, to see the flash Purchasing Managers’ Index rise 0.9 to 54.0, the sharpest improvement in business conditions since May of this year. New business flows and jobs both increased and there was an especially encouraging rise in exports, which have been under pressure from the strong dollar and weak demand. Firms continue to report next-to-no inflationary pressure.


Very encouraging.

Ted Heath was Prime Minister. Slade reached Number 1 with “Merry Xmas Everybody”. Leeds United was on its way to becoming England’s champion club. That’s how long it is since the number of people registering as unemployed in the US was as low as it is today. Over the four weeks to 17 October, the number of new claims averaged 259,000, the lowest since December 1973. This bodes well for the October payroll numbers.


Small areas.

Where's the cheapest place to buy a house in England and Wales? The latest figures from the ONS say its in the area around the University of Bradford, where average house prices are 2.06 times average incomes after tax. The most expensive? Knightsbridge and Belgravia in London. There average house prices are a mere 78.8 times average local UK-resident after tax incomes. Small wonder, then, that home ownership rates are falling faster in parts of London than anywhere else.

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