The Saturday Economist 20th April – Fitch ratings, IMF doubts, inflation, retail sales and jobs

The Saturday Economist 20th April

Economics news – Fitch ratings, IMF doubts, inflation, retail sales and jobs news

Fitch ratings agency downgrade – Tough week for the Chancellor as ratings agency Fitch downgraded the UK’s IDR (Issuer Default rating) from AAA to AA+. Fitch follows Moody with a negative move for the Blue Chip economy, the headline. The downgrade reflects a weaker economic – fiscal outlook and an upward revision to the medium-term projections for government deficits and debt.

Fitch now forecasts that gross debt will peak at 101% of GDP in 2015-16 compared to a previous peak projection of 97%. Despite the loss of its ‘AAA’ status, the UK retains an extremely strong credit profile and a “Stable Outlook” says the agency. Consolation of sorts for the “back from the brink of bankruptcy” team.

IMF casts a shadow on policy– The world is creating a three speed recovery with Europe and the UK in the slow lane of economic progress said Christine Lagarde in a meeting of the IMF – World Bank Spring series this week. The world will continue to grow at a rate of over 3% in 2013 led by the emerging economies of China, Brazil, Mexico, India, Russia and Asia. The US leads the second speed group, having dodged the fiscal cliff, growth is expected at a rate of 2% in the year with Canada tottering behind at 1.5%.

Europe remains in the doldrums despite modest growth in Germany of 0.6% the IMF expect a negative -0.3% GDP action for the Euro area overall. The UK is amongst the best of the third speed bunch with growth expected of 0.7%

Questioned about United Kingdom’s fiscal consolidation, Christine Lagarde said “Over the years what we have done at the IMF is really try to observe as closely as possible what the outcome of the policy was, and we clearly support the policy. However, we have also repeatedly said in the last couple of years—and I would not prejudge what we’ll do with the next Article IV—that should growth abate, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace [of fiscal austerity].” Excellent!

What does that mean? “Now even Christine Lagarde is wobbling on UK austerity”, the verdict of Jeremy Warner in the Telegraph this week. Thanks for the translation Jeremy. Warner must once have been a synchronized swimmer, just like the leader of the IMF.

Why wobble? In economic news this week, Inflation CPI basis was unchanged in March at 2.8%. The disparity between goods and services inflation continues with goods inflation at a modest 2% but service sector inflation up to 3.9%. The 2% target will be elusive with 2.5% a more realistic planning guideline given the obstinacy of service sector price inflation. Prices may well have peaked for this year. Why?

Manufacturing prices in March were more subdued with output prices and input costs heading in the right direction. Output prices increased by just 2% compared to 2.3% in February and input costs increased by just 0.4% with crude oil prices a large contributor to the fall in costs.

The average price oil price in March (Brent Crude) was $108 per barrel compared to $125 last year. The deflationary impact will continue into April with a further fall in relative prices. Consumer prices may well have peaked but the 2% target will be best forgotten.

Retail Sales
Retail sales fell in March by 0.5% year on year after a heady increase of 2.5% in February.  Clothing, footwear and household goods sales slumped as on line sales continued to flourish. March a short month with lots of cold weather, rain and an early Easter, too soon to press the panic button but a possible marker for a further slow down for the rest of the year.

The claimant count fell slightly in March by 7,000 to 1.531 million and a rate of 4.6%. Vacancies also increased slightly but not enough to suggest much change to our overall outlook for the year in vacancies, employment or growth. The headline rise in unemployment, LFS basis, a distraction from the underlying static trend.

What happened to Sterling.
Sterling slipped this week from 1.1715 to 1.1656 against the euro but was fell against the dollar at 1.5229 from 1.5338. The dollar closed against the euro at 1.3053 from 1.31. What is it about the Euro? – the action is the attraction – not the fundamentals.

Oil Price Brent Crude, closed at $99.65 down from $103.11 last week.

Markets, The Dow closed down at 14,547 and the FTSE closed at 6,287 from 6,384. UK Ten year gilt yields fell to 1.67 and US gilt yields closed at 1.70 from 1.72. Nuts!

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. 
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