In the UK economics news was light on the ground, the GDP figures were unchanged, the migration figures confirm things are bad, the Poles have stopped coming to the UK. Martin Weale, new man on the MPC has called for a further round of QE just as Bernanke eschews a further round in the USA. Actually the Bank of England prefers the term asset purchases to QE. What does it achieve? Asset purchases inject liquidity into the banking system, forcing up asset prices and pushing yields down. But what else?
David Smith explains why we are all so glum. It is the old misery index, the sum of inflation and unemployment ratios. Inflation CPI basis hit 4.4% and the unemployment rate hit 8%. Hence a misery index of over 12 compared to most of the years 2000 when the index was between 6 and 8. Are we all glum? Not me because I had two days off last week and played tennis.
Why place so much hope in an ill equipped manufacturing sector in trend decline long before Gandhi promoted homespun? The renaissance just will not happen. Play to your strengths may sound facile in terms of strategy but it should be something even donkeys can grasp.
The challenge for the growing China economy is to secure resource. It is acquiring and developing the technology. It already has the market, the export growth model abandoned post 2008 in favour of domestic expansion. Europe and the West may yet pay for the occupation of Peking. The price is lower growth and higher inflation as demand for resources grows in the East at the expense of the West.
CPI service sector inflation has averaged 3.6% for the last sixteen years and the 2% target rate has only been achieved by an extremely flattering 1% rate of goods inflation. This of itself a function of a relatively high sterling exchange rate, an undervalued Renminbi and cheap products from the Asian block. Such facts are unhelpful in our model understanding of the way the world really works.
The claimant count gives cause for greater alarm. The unemployment measure provides a valuable signal as a coincident indicator to trends in GDP. As the chart demonstrates, inverting the claimant count and lagging by one quarter provides a high correlation and signal of trend. If the claimant count increases at a similar rate over the third quarter, the message is clear, growth is off track, the recovery is slipping away and the UK is heading back into recession.
Since launching the first survey of Management Tools & Trends in 1993, Bain and Company have tracked executive attitudes and behaviors through a wide range of economic cycles. In the current cycle, there is a profound fear the world has deteriorated forever. Executives are concerned the consumer spending levels won’t bounce back to pre recession levels anytime soon and revenue growth is the main challenge given the low growth economic environment.
According to a recent paper from the Centre for Economic Policy Research, periods of austerity and budget cuts go hand in hand with social instability and violence. Thatcher knew this. One of the first acts of the Conservative administration was to increase the resources and pay of senior officers in the police force and the army. Ominous but at least there appeared to be a plan.
Thursday, the markets crashed as fears of a double dip recession, US debt and prospects for the Southern states of Europe returned to top of mind. You know things are bad when Robert Peston appears on Newsnight. The day job, an end is nigh, sandwich board in Threadneedle street, cast aside for the evening.
Markets crashed, S & P down graded the US debt below that of Guernsey and the Isle of Man. Vince Cable and the Chancellor crowed about safe havens as ten year gilts fell below 3%. Safe haven maybe but capital flows are not reflected in an undervalued currency and the exit of US funds from the UK banking sector.