A new chapter? - Economics Weekly

A new chapter? - Economics Weekly

It’s been a long haul but does normality finally beckon? The minutes of the recent Federal Open Market Committee meeting – the US equivalent of the Monetary Policy Committee – show its members edging close to raising the Fed Funds rate in December.

Economic Analysis

23 November 2015

A rate hike would be an indication that the long shadow cast by the financial crisis is waning.


On your marks

The US Fed has given its clearest sign yet that it will fire the starting pistol in December for a round of interest rate rises, the first since mid-2004. It reckons the economy is growing at a rate which, if unchecked, would start to push up inflation. With global growth slowing, a rate rise is not without risks. However, nasty surprises from Europe or emerging markets look like the only factors that could cause a further delay.



Concern about rising inflation seems a little odd given that prices rose just 0.2%y/y in October. The usual suspects – energy and food prices – continued to exert downward pressure on the headline rate. Without them, core inflation was 1.9%. That’s close to the Fed’s preferred rate but not especially high.


Still falling

UK inflation held at -0.1% last month, leaving prices fractionally lower than they were a year ago. The familiar culprits of lower food and energy costs helped drag prices down, with restaurants & hotels being the only major category showing any meaningful rise (1.6%). Inflation is expected to remain close to zero till the end of the year. As recently as May, however, the Bank of England expected it to be closer to 1% than zero. The Bank attributes much of this reduction to sterling's recent strength. With the pound now at 1.40 against the Euro, that effect will be with us well into 2016.


Something borrowed

Government borrowing last month was the highest in any October since 2009. While borrowing in the year-to-date is £6.6bn lower than last year, on current trends the Government is set to overshoot the Office for Budget Responsibility’s forecast. This makes it less likely that there will be room for many give-aways in the Autumn Statement. Indeed these numbers additional cuts may be required.


Going further

Retail sales growth continued in October. The quantity of goods bought was up by 3% compared with last year. But that doesn’t mean households are spending much more. In fact, spending in shops and online rose less than 1%. Two-thirds of the growth came from falling prices. That’s good news for consumers as the pound in their pocket goes further, but it points to a squeeze in margins for shopkeepers and keeps their revenue under pressure.



Britain got a proper pay rise in the year to April, for the first time since 2007-08. Adjusted to remove the effects of inflation, the wages of a full-time worker in the middle of the pay distribution rose by 1.7% to £528 per week or £27,600 per year. While growing real pay is very welcome, it follows six years in which the average annual fall was 1.5%. Before the crisis, real pay growth average more than 2%.


Rising again

UK house prices are on the up again, according to the latest figures from the Office for National Statistics. Average house prices increased by 6.1%y/y, the fastest pace since March. This is no surprise, given that the reliable RICS survey had been pointing to a pick up starting in Q3. So where next? RICS suggests we should see the pick-up continue into the first quarter of next year, after which house price growth will start to moderate again.



UK businesses spend about 1.1% of national income on research and development (R&D). That has pretty much been the magic number since records began in 1990. By contrast the United States and Germany spend about 2% of national income on R&D and Japan devotes 2.5%. Half of all UK spending is done in four sectors: pharmaceuticals – 19% of the total – computer programming, motor vehicles and aerospace. Over 40% of R&D is done by companies based in the South East and East of England. At just 10%, the Northern Powerhouse has a long way to go to catch up.



Japan entered into its second recession in the nearly three years of Abenomics. Last time, it was a rise in the sales tax rate that drove consumer spending down. This time, private investment and inventories were the drag on the economy. But it was not all bad news, as consumers, the government and net trade all made contributions to growth. The last was especially impressive considering the extent to which Japan's exporters are exposed to a slowing Asian economy.

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