Archive for January, 2012
This week saw the publication of “advance estimate” (first stab) UK GDP data for the final quarter of last year. As expected it showed a setback, with output down 0.2%.
This was inevitably reported to be a disaster. Her Majesty’s loyal opposition blamed the government’s not-terribly-drastic austerity programme; the Chancellor blamed goings on in the eurozone.
The real culprits are more likely to have included a stronger pound, with trade weighted sterling over 4% stronger over the second half of 2011, and the continued squeeze on real incomes arising from Britain’s unusually high rate of inflation. (The latter effect in particular goes a long way to explaining why the recovery in our GDP since the bottom of the recession in 2009 has not only lagged that of the US but also that of Japan and the eurozone.)
Be that as it may: if the eurozone is not yet finished, neither are we. Last year began in similar circumstances with a -0.5% fall in GDP reported for Q4 2010. It proved to be transitory. And other data released over the last few days also suggest an economy which is experiencing a bump in the road to recovery rather than a fall over the cliff into serious recession: retail sales growth of 2.6% in the year to December was stronger than expected, BBA data on mortgage lending continued to post a modest improvement and industrial orders data for January saw a welcome bounce.
Most importantly, data on government borrowing – specifically the figure for public sector net borrowing excluding financial interventions, “PSNB ex” – was stronger than expected despite the weak outturn for GDP. According to the Office for Budget Responsibility, the UK may now even be on track to outperform its debt target for the current fiscal year.
None of this is to suggest that a contraction in GDP, however slight, is good news. Apart from anything else the data could well trigger another cavalier display of pointlessness from the Bank of England in the form of more “quantitative easing“. Nor does it alter the fact that the UK’s debt burden is an ugly one and that we have been lucky so far in that bond markets have given us the benefit of the doubt. But there is a world of difference – here and elsewhere – between standstill and collapse. Markets are beginning to bet more on the first than the second of those alternatives. This week’s data from the UK suggests that they might be right.
Yesterday, the ECB announced that it was keeping eurozone interest rates on hold at 1%. ECB President Mario Draghi made the remark at the following press conference that “there are tentative signs of stabilization of economic activity at low levels”.
The language was cautious, and Draghi also noted that the economy continued to face serious risks from the debt crisis. But there were another two bright spots of news this morning to suggest that his heavily guarded optimism is justified.
Firstly, Italy sold €4.75bn worth of government bonds, the maximum required, on top of the €12bn of one year financing she raised in the money markets yesterday. The bulk of this – €3bn – came from a reopening of the 6% 2014 at a yield of 4.83%, down from the 5.62% paid on the same bond in December and much lower than the 7.89% paid on issue the month before. This blog has long highlighted the importance of the question of whether or not bond and money markets remain open to Italy (and others). That they are open at levels which have become significantly more affordable is a bonus.
The ECB may be able to take some credit for this. Its programme of 3-year lending to banks, which saw almost half a trillion euros of interest when it began just before Christmas, has given them the incentive and the firepower to increase their bond market exposure substantially.
Be that as it may, it can certainly take credit for today’s second bright spot: the 3.9% increase in eurozone exports which saw November’s seasonally-adjusted trade surplus for the region jump to €6.1bn, a 7½ year high. Eurozone interest rates may only have fallen by 0.5% over the last two months but the 4% fall in the value of the trade weighted euro this brought with it is proving to be as welcome as might have been hoped.
As ever, we should note that there are reasons to be gloomy. After Germany reported a small contraction in output for the fourth quarter, it is certain that European growth stalled into the end of the year and further weakness this quarter could see the eurozone experience a technical recession. Agreement on restructuring Greek debt has yet to be reached, and the ratings companies have already warned of further sovereign downgrades to come. Outside of Europe too, the economic picture remains mixed and markets morose amid a slew of finance sector profit warnings and redundancies.
Nonetheless, predictions of out and out disaster for the eurozone are looking increasingly stretched. It is far from being in the best of health, but reports of its death are an exaggeration.
One of the major themes of American politics in recent years has been the “jobless recovery”. In a nutshell, while real US GDP was reckoned to have recovered its 2007 peak during the third quarter of last year, the unemployment rate – which ended ’07 at 4.8% – stood at 9.1% in September. This represented a reduction of a mere 1% since the jobless rate peaked a full two years previously. It also represented a headache for the President and a gift for his opponents in the runup to an election year.
It has been easy to miss amid the misery of the European crisis, but this all changed over the last three months.
Unemployment is a textbook example of a “lagging indicator”: one which takes time to catch up with economic activity in both falling and rising environments for GDP. To expect the labour market to recover its pre-recessionary state of health after only a year or two was always unrealistic. Nonetheless, it was worrying that for the middle two quarters of last year, the rate of job creation slowed and the unemployment rate seemed stuck on an unpleasantly high plateau.
The number of those claiming unemployment insurance, a measure which had declined significantly into the beginning of 2011, also stalled over this period. And then, from the middle of October, it suddenly started to fall.
As we now know, this presaged strong payroll gains and a fall in the unemployment rate to 8.5% – not the stuff that dreams are made of exactly, but progress.
This progress has already had an impact on confidence. It will also assist recovery in the real estate market, and by extension the mortgage market and the banking system.
If last year taught us anything it is that we should be wary of getting ahead of ourselves in the current climate. But it is undeniably comforting that Uncle Sam is entering 2012 with a little more of a spring in his step.