Saturday morning and a great chance to catch up on UK economics news this week with the Economist App and The Saturday Economist 21st January 2012
The Economist as much about current affairs and politics as it is about Economics and leads this week with – The rise of State Capitalism – oops.
I know Nick Clegg called for a John Lewis Economy but is this not going a little bit too far. Thought we were in trouble on Thursday when Paxman interviewed noted Markist historian Eric Hobsbawm for perspectives on alternative economic models. Thankfully (or perhaps not) The Economist was referring to developments in emergent economies, not the west. Irresponsible capitalism lives on.
In the UK there was lots of economics new this week :
Interest Rates on hold until 2016
The Centre for Economics and Business Research (CEBR) leads with the story – base rates will be kept on hold until the first quarter of 2016. Capital Economics thinks rates will first rise in Q1 2015 and the Ernst & Young Item club, consider rates may rise early next year. The majority of economists think that rates will be held beyond the end of the year with just one or two thinking rates may rise by the end of the year.
How can we really know and can we really predict rate rises six years ahead?
Well the obvious answer is no. The best guide can be drawn from the “Taylor rule” which assumes base rates are set as a function of inflation and output. The model assumes rates should rise if inflation is above target but rates should fall if output is below trend. Assuming inflation is at or around target for the next six years and low growth ensures the output gap is maintained or increases, a low interest rate regime could well follow.
Can we be so sure about all of these things over a six year horizon, not really. Doug McWilliams head of CEBR is an old friend but occasionally likes to grab the headlines with those “Aliens ate my spreadsheet” stories from time to time, this sounds like one of those. On the other hand his forecasting record for 2011 looks pretty good. Check the PDF.
Inflation falls in December
Inflation CPI basis fell to 4.2% in December from 4.8% in November. Further good news is expected in January as the VAT increase [January 2011] drops out of the series. The headline CPI rate could fall to 3.5% this month. With further unwinds of energy costs in the second quarter, inflation should fall towards target by the end of the year. There is still lots of inflation within the system with energy and utility costs up by 16%. The 2% target could be a challenge.
Earnings
1.9% was the latest figure for whole economy earnings growth in the three months to November. Inflation CPI over the same period was 5% generating negative real earnings growth of -3.1%. (RPI based the negative earnings figure is worse at 3.5%).
Assuming earnings growth of 2% into 2012, real earnings growth adjusted for inflation will be zero. This is the good news!
Unemployment rises in December
The unemployment rate increased to 8.4 per cent in the three months to November, up 0.3 on the quarter. There were 2.68 million unemployed up 118,00 – the highest for seventeen years.
The claimant count in December increased by 1200 to just under 1.6 million. The November figures actually were revised down slightly. The figures suggest the unemployment wave is easing towards the end of the year.
Retail sales in December
Retail sales in December were much better than expected with sales values and volumes up by 6.2% and 2.6% compared to December last year. Clothing and footwear sales increased by 6%, food stores up by a modest 1.2% but household goods sales were hammered down by almost 4%. Internet sales were up by 10% accounting for 11% of all retail sales in the month.
The World Bank casts gloomy over view
The World Bank added to the gloom suggesting the world economy has entered a dangerous period with turmoil in Europe spreading to developing countries.
Slower growth in the RICs within the BRICs suggest the global economy will expand by just 2.5% in 2012 compared to the earlier 3.6% forecast. In the event of a major crisis high-income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as in 2008/09, the Bank warns. China reported GDP growth in the final quarter of 2011 of 8.9%. Down but far from out.
The Chancellor warns of bad news to come.
Speaking in Bolton the Chancellor warned the Q4 GDP estimate due next week would be disappointing with negative growth expected. This is surprising since NIESR preliminary estimates suggests growth increased by 1% year on year. Bear in mind in the final quarter of the year there was little snow, no Tsunami and no Royal Wedding. The NIESR forecasts will be correct. Results will not be so as bad as the Chancellor warns.
What does the year hold?
Latest forecasts from the HMT poll of forecasters (18th January) suggest growth will be just 0.4% in the year, with inflation falling to 2.1% CPI basis. Average earnings will increase by 2.4% and the oil price will average $106. Claimant count unemployment is expected to increase to 1.8 million and the borrowing forecast (PSNB) will hit £118 billion just £2 billion below the OBR forecast in November.
Round up of the Week
That’s it – a round up on the economics news from the Saturday Economist. More news and updates next week.
Details of the current forecasts : The UK in Black and White Forecasts for the UK Economy 2012 – 2015 can be found on this web site and on slideshare or on the web site.