In UK Economics news this week, base rates remain on hold, the latest forecasts from NIESR suggest UK GDP will fall by 0.5% in 2012 and the Chancellor will miss the borrowing target by a considerable margin. House prices fell by 2.6% year on year and in a series of Markit/CIPS PMI® releases for July the outlook for manufacturing, services and construction is updated.
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UK GDP is set to fall by 0.5% in 2012 according to NIESR. The estimates reflect the disappointing GDP results in the first half of the year. More worrying is the forecast for debt. The economics think tank expects government borrowing to be £138 billion in the current financial year up by by some £10 billion on last year. Plan A is off balance.
Jonathan Portes, CEO of NIESR calls for a delay in further spending cuts and an acceleration of infrastructure projects. NIESR argues, the level of output has effectively been flat over the past two years, domestic factors [and policy], not international factors to blame.
In Europe, last week Mario Draghi offered to do whatever it takes to save the Euro, then did remarkably little on Thursday. Euro rates stayed on hold at 75 basis points with little else on offer. Mariano Rajoy cheered markets on Friday suggesting Spain would seek a formal bail out request to resolve the sovereign funding crisis. Spanish ten year gilts fell to 6.85%, just below the critical 7% ceiling.
The gloom in the housing market continues, house prices fell 2.6% year on year according to Nationwide. Despite access to cheaper funds, lower LTV ratios will deprive the market of first time buyers in search of elusive deposits. House price to earnings ratios still look expensive.
In a series of Markit / CIPS PMI® releases, service sector output continues to grow albeit at a slower rate, manufacturing output fell at the fastest rate since 2009 and construction output rallied slightly, concerns about new orders will inhibit construction output this year.
What to make of all of this? Plan A is in serious trouble as the rally in export growth, manufacturing and investment failed to materialise. Domestic demand, household incomes and real earnings remain under pressure. Hopes that inflation will fall to a level where earnings growth of 2% will seem bounteous are prevalent but international price trends in energy and commodities may yet thwart this ideal.
The economy is flat lining at best, trends in housing, construction, manufacturing, lending and broad money suggest the NIESR forecasts for the year could be optimistic.
The announcements of policies to encourage lending are helpful. The Funding for Lending scheme and the National Loan Guarantee Scheme are all welcome but the real problem is the level of domestic demand and confidence about the short term futures. Who can lend or borrow with a repayment plan modeled on an implausible economics outlook?
The news a bit grim this week! But have a great week-end! Don’t miss the Sunday Times and Croissants, out tomorrow.
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