News on the UK and World Economy Week 4 October 2011

Oct 28th, 2011No Comments

News on the UK Economy and Overseas

Inflation and the Eurozone

Despite UK inflation reaching it’s highest rate since the early 1990s, the Monetary Policy Committee was unanimous in its decision to increase its asset purchase scheme (QE) by £75bn. This is a clear demonstration that the MPC is deeply concerned about the effects of the Eurozone crisis on the UK economy. European leaders are struggling to agree a lasting solution to the Eurozone crisis. The failure of French and German policymakers to find common ground increases the risk that they lose what little control of events they still have. High stakes indeed, and not just for Europe but the world economy.

Quantitative Easing

‘All aboard!’ the Bank of England united in the need for “quick and decisive action”. The Monetary Policy Committee voted unanimously to increase its asset purchase plan by £75bn and hold rates unchanged at 0.5% at its October meeting. They concluded that a second round of Quantitative Easing (QE) was necessary due to the deterioration in global growth and renewed tensions in financial markets. The tone of the minutes suggests that we could well see more QE if the economy deteriorates further, with some members suggesting a larger round of QE was necessary in October.

High Inflation

With CPI inflation reaching its joint highest-ever rate, the decision to undertake further monetary stimulus has raised some eyebrows. UK inflation hit 5.2%y/y in September, up from 4.5% in August. The main drivers – higher gas and electricity prices – will not have surprised many as they were already ‘baked in the cake’. Judged in old money, RPI inflation rose to 5.6%y/y in September – the highest since June 1991. At that time, the Bank of England base rate was 11.5%. That they remain at 0.5% today shows the fragility of the UK recovery. The Bank, however, remains confident that inflation will slow markedly in 2012, as temporary drivers such as the rise in VAT and energy prices fade.

Growth in Non-High Street Retail

Strong growth in retail sales bypasses the high street. The volume of retail sales increased by 0.6%m/m in September, yet all of the growth came from ‘non-store’ (i.e., internet) and fuel. This offset declining sales at clothing & footwear stores and, to a lesser extent, food stores. Compared to this time last year, sales are basically flat (up 0.6% y/y), with small stores seemingly doing better than large stores. If retailers are looking for some good news, perhaps they can console themselves that demand seems to be firmer than in most parts of consumer spending and that growth is probably about as good as it can be, given the wider pressures on household spending.

Stalemate in Europe

Necessity may be the mother of invention, yet European policymakers are struggling to find a solution to the debt crisis. French and German policymakers were unable to reach agreement on a plan to shore up the Eurozone during this weekend’s summit. Instead, they will meet again on Wednesday in an attempt to engineer a solution to the crisis. Issues that need to be resolved include a reduction in the Greek debt burden, support for the European banking system and the prevention of further contagion to other member states. The point of stalemate is how to maximise the EUR440bn European Financial Stability Fund’s firepower. French proposals include turning the fund into a bank, which could borrow from the ECB. This way increases the level of direct support the French Government can provide without jeopardising the credibility of its own public finances.

US Inflation Rises

The US inflation rate rose to a three-year high in September, but there are signs it is moderating. The US CPI rose 3.9%y/y in September, up from 3.8% in August. However, monthly comparisons suggest that price pressures may be fading, as inflation climbed at its slowest m/m rate in three months. Furthermore, lower costs for second hand autos, rents and the biggest m/m drop in clothing prices caused core price pressures to moderate between August and September.

Growth Slows In China – Still Solid

China’s economy facing harder times but there’s no sign of a hard landing. China’s GDP slowed from 9.5%y/y in Q2 to 9.1%y/y in Q3. China’s growth will continue to slow in the coming quarters due to weaker exports and the lagged effect of higher interest rates. However, domestic growth remains very solid. This should keep growth above the 8% mark in the near-term. As evidence of this, retail sales grew almost 18%y/y in September, while industrial production grew 14%.

Source: National Westminister Real Estate