Snow clouds gather - Economics Weekly

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Snow clouds gather - Economics Weekly

The economic backdrop to the annual World Economic Forum last week was peppered with dissapointing data. China is slowing and there is little sign of a pick-up in growth in the Eurozone. The one silver lining was the UK labour market, with employment hitting a record high. No sign of Davos’ job-stealing robots there, then.

Economic Analysis

25 January 2016



There have been doubts over China's GDP figures for years. They are currently bigger than ever. The Chinese government estimated that the economy grew by 6.8%y/y in Q4 2015, a marginal cooling from the 7.2% pace in the same quarter in 2014. The problem is that other data, including electricity production and real estate investment, point to a more substantial slowdown. GDP growth is more likely around 3%y/y. A questionable official figure can’t mask China’s problems.



It seems that everyone apart from the IMF believes that China is slowing faster than official figures suggest. The Fund left its growth forecasts unchanged for this year and next, at 6.3% and 6.0% respectively. But it downgraded its prediction for global growth for the 16th time in its last 21 economic outlook reports. And despite the "cocktail of risks" the UK economy is expected to grow by 2.2% this year, the second fastest forecast rate of growth among the G7 countries.

A long way off.

Mark Carney, Governor of the Bank of England, spent much of last year explaining that the UK's interest rate decision would "come into sharper relief" at the turn of the year. Last week he said that now is not the time for Bank Rate to rise. Instead, he laid out three tests for the economy to pass for a rate rise: faster than trend GDP growth, rising cost pressures through wages, and inflation heading back to 2.0% within two years. On his own assessment the UK economy doesn't meet any of these tests. Markets agree. A Bank Rate hike isn't fully priced in until late 2017.


Softer, worse, slower, weaker.

Sounds daft, but the UK's love affair with shopping may be waning. The total volume of goods bought fell by 1.1% in December, a pretty key month for retailers. Longer term, smaller shops are struggling. Based on value, sales fell by 1% over the year, whereas larger retailers saw sales rise by 1.8%. So it's no surprise then that shop prices fell once again, down by 3.2% on the year. But the power of lower prices have in attracting shoppers may be fading.


Everything but the cash.

There were jobs aplenty in the three months leading to November last year. A quarter of a million more people were in work, the employment rate hit a new high of 74% and unemployment ticked down to 5.1%, the same as its average between 2000 and 2007. But pre-crisis unemployment doesn't mean pre-crisis pay growth, which fell to just 2.0%. So despite all the tightening, there's no sign of inflationary pressure.


The borrowers.

UK Government borrowing fell by £11bn in the fiscal year to December compared with FY 2014/15. This will come as good news to the Chancellor, although there is still plenty of work to do to hit the OBR’s forecast for this year. Tax receipts were up across the board, with the all important income and VAT receipts up by 4.6% and 3.7% respectively. 


Gave us a clue.

While the Fed debates more rate rises, the European Central Bank (ECB) considers more monetary policy easing. ECB President Mario Draghi said the Bank would “review and possibly reconsider” its stance at its next meeting. That means a possible expansion, extension or both, of the Bank’s quantitative easing programme. The markets rallied on the announcement. But low inflation and sluggish growth suggest the ECB should already be providing more stimulus.


To dream a dream.

A tragi-comic moment in 1980s film Clockwise sees John Cleese's character proclaim, "I can take the despair. It's the hope I can't stand". So, too, the state of the Eurozone economy. Growth may have slowed after a few months of half-decent growth. The region's Purchasing Managers' Index - a timely gauge of business activity - shed 0.8ppts to 53.5 in January, an eleven-month low. And growth seems to have stalled altogether in France.



Inflation in the US remains weak. Consumer prices rose by 0.7%y/y in December, well below the rate the Fed considers normal. When food and energy are removed from the figures, underlying inflation was a healthier 2.1%. However, wage pressures remain muted: hourly pay rose by 1.8%y/y after inflation. With oil prices having fallen further and a strong dollar pushing down import costs, there's little on the inflation front to encourage near-term interest rate rises.

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