News on the UK And World Economy Week 2 November 2011

Nov 9th, 2011No Comments

News on the UK Economy and Overseas

Continuing Eurozone Problems

Problems in the Eurozone are still dominating the global economic landscape and hijacked the G20 agenda in Cannes. Political shenanigans over a referendum on austerity measures in Greece threatened to bring down the bailout agreement, while worries about Berlusconi’s ability to deliver debt reduction sent Italian bond yields to new record highs. The effects of the ongoing uncertainty are being felt all over the world as equity markets sink and policymakers search for ways to stimulate some growth. The incoming president of the European Central Bank, Mario Draghi, opted to reduce rates at his first meeting. In the US, the Fed held fire for now, but left the door open for future monetary stimulus. It looks like political events are dominating sentiment for now – and both are changing day by day.

The Eurozone debt crisis dominated the G20 agenda – again. Worsening economic and political conditions in Greece and Italy overtook the G20 discussions. The G20 did not commit to more funding of a financial safety net, effectively deciding that Europe should sort out its own problems. But it did agree to keep a beady eye on Italy’s progress on promised reforms. The markets will need to see some progress on this soon though. Italian bond yields reached record, and close to unmanageable, highs. With Greece’s economic and political situation still on a knife edge too, European policymakers will be keeping their fingers, and everything else, crossed for a bit of stability soon.

Stronger UK Economy Growth

The UK economy grew strongly this summer, but there’s a sting in the tail. The preliminary estimate of UK GDP showed that the economy grew by 0.5%q/q in Q3, a welcome five-fold increase on the 0.1% rise in Q2. But the underlying picture is less rosy. The UK economy is only 0.5% larger than it was in the summer of 2010 and no bigger than it was in 2006. More worryingly, the October reading for the UK’s manufacturing Purchasing Managers Index was surprisingly weak.  The index fell to 47.7, unambiguously in contraction zone as new orders and employment intentions also fell. The service sector may dominate in the UK economy, but such a weak assessment from manufacturers raises the risk that the economy will shrink in the final quarter of the year.

UK Housing Still In Doldrums

The UK’s housing market is still in the doldrums. Nationwide reported a 0.3%m/m increase in UK house prices in October which brought the annual change back into positive territory for the first time since March. But the less volatile three monthly change, a better indicator of the underlying trend, fell to -0.6%. Land Registry data confirms that London is still surging ahead, particularly in the most exclusive areas. Things don’t look that much better ahead either. Consumers still expect prices to fall, which will keep a lid on demand and may already be affecting activity. Mortgage approvals for house purchase fell for the first time in five months in September.

Interest Rates Cut in Eurozone

More gloom in the Eurozone leads to an interest rates cut. Mario Draghi, the new President of the European Central Bank (ECB), made a splash at his first meeting. Eurozone inflation climbed to 3%y/y in October, but in spite of this he announced a surprise 25bps cut in interest rates to 1.25%. Looser monetary policy was justified by recent economic indicators which suggest a sharp economic slowdown in the euro area and the expectation that inflation pressures will ease as the economy cools. The ECB also warned that its Eurozone growth forecast is likely to be revised down, possibly as far as a mild recession.

Unchanged Interest Rate in US

Steady as she goes at the Fed. The Federal Open Market Committee (FOMC) left interest rates and the quantitative easing programme unchanged at its November meeting. Even though there was a rebound in the economy during Q3, the outlook is still weak, with ‘significant’ downside risks. As a result the FOMC reduced its growth forecasts by 1% for this year and next. It raised its inflation forecast, but is still committed to keep interest rates steady until the second half of 2013. With an eye on the weakening economic climate Chairman Bernanke raised the possibility of additional stimulus via more purchases of mortgage backed securities, depending on how economic conditions unfold.

Unemployment Down, but Wages Growth Anaemic

US Payrolls fall short of expectations. The US economy added 80,000 jobs in October, less than the 95,000 expected. Unemployment edged down from 9.1% to 9%, but wage growth was anaemic at 1.8% y/y. Revisions to previous data provided some better news with 100,000 jobs added to the figures for August and September. While employment growth is welcome, it’s only at trend level, at best, and far below the rate we would expect from experience of past recoveries.