Never a dull moment - Economics Weekly

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Never a dull moment - Economics Weekly

A former Bank of England Governor once said of central banking that “boring is best”. Last week though, central bankers were once again hogging the limelight. First off, the US Federal Reserve, which having raised rates must now work out whether the economy can support them. Second the Bank of Japan, which joined the negative rate club. And with all eyes on the Bank of England this week, “boring” seems a distant memory.

Economic Analysis

01 February 2016


Out with a bang.

The UK economy rounded off 2015 in decent shape, expanding by 0.5% in the final quarter. That takes full year growth to 2.2%, which admittedly looks sluggish compared with a feisty 2.9% rise in 2014, but isn't too far short of the 2.6% post-war average. The clear stand-out sector was UK services, which ended the year with an impressive 0.7% rise. That was strong enough to offset a quarterly fall in both industrial production (by 0.2%) and construction (by 0.1%). Dreams of a rebalanced economy may not only be misplaced but also mistaken.



UK house price growth slowed to 4.4%y/y in January according to Nationwide. This brings the average price of a house to £197k. Meanwhile, the major high street banks approved 44k mortgages in December, around 600 fewer than in November. Despite this, the total value of mortgage balances grew by 2.2%y/y, the fastest rate since 2011. But before getting too excited, this is well below the long term average of 6.0%y/y. The mortgage market is ticking, not surging.


A whimper.

The UK ended 2015 on a strong note. The US was more of a whimper. Growth was just 0.7% annualised in Q4 2015, down from 2.0% in the previous quarter. The biggest contribution came from the consumer, although the 2.2% growth rate was cooler than the Q3 figure. Investment fell as energy companies enacted cuts on the back of lower oil prices. Meanwhile the stronger dollar hurt exports. The world continues to wait on the US economy moving up through the gears.


A grumble.

The start of 2016 has not been a roaring one for the US. The PMI index of business activity said that the economy grew in January, albeit at a slower pace than in December. House prices grew by a respectable 5.8%y/y, par for the course since mid-2014. Consumer confidence held steady and inflation expectations remained stable at 2.5%-3%. The first quarter of the year is traditionally quite a weak one for the US economy. Let’s hope that this year it can do better.


On target?

Having hiked rates in December, the Fed last week kept them on hold, saying the US economy continues to grow, albeit more slowly. It is keeping a close eye on global economic and financial developments but said no more than that for fear of frightening the horses. In an irony-free announcement, it confirmed its long-term policy is to keep inflation close to 2%, saying it would be concerned if the rate were consistently above or below that number. Inflation last saw 2% nearly four years ago.


In da club.

Japan joined the negative interest rate club (a fellowship including Sweden, Denmark, Switzerland and the European Central Bank) by cutting one of its key interest rates to -0.1%. The central bank is hoping it will dissuade lenders from parking cash with it and use it to lend to businesses and individuals instead. As to why, the Bank of Japan is a bit more concerned about global developments, much like the Fed. But it's also struggling to push inflation up to its target of 2% and banish the deflation that afflicted the economy for years.


Confidence wanes.

They say start the year the way you mean to go on. Last year German firms began the year in upbeat mood with confidence rising as the year progressed. But sentiment now seems to be on the turn. The IFO survey’s business climate index fell to an 11-month low in January. While current business conditions remain favourable, German firms in all sectors, bar retailing, expect the situation to deteriorate in 2016. Manufacturers are particularly gloomy. This isn’t surprising. After all, the sector is very exposed to the slowdown in emerging markets.

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