Posts Tagged ‘cebr’

In the garden the weeds and the green shoots seem pretty evenly spaced.

Here is one green shoot. UK industrial production rose by the highest level in 25 years in July. Here is the weed: in August it fell back, and despite the previous month’s rise, year on year industrial production in August was 1.1 per cent below the level from the year before. So far then, the weeds seem to be strangling all those budding flowers.

The Centre of Economics and Business Research (CEBR) predicted that next year inflation will fall below the rate of increase in average wages, leading to us all feeling better off, and so the economy should expand. In a similar vein, the latest report from the Ernst and Young Item Club has forecast falling inflation and rising house prices. Here is its chief economist Peter Spencer: “Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival.” The Item Club reckons the economy will contract 0.2 per cent this year, grow by 1.2 per cent in 2013, and by 2014 in 2014. Yet, this leaves one question.  Why is it that ever since the UK fell into recession in 2008, economists have been predicting that the year after next will be better, and growth will be back to normal?

The National Institute of Economics and Social Research (NIESR) has been spotting weeds and green shoots. Last week it said that, according to its calculations, the UK expanded by 0.8 per cent in the three months to September. “The most robust rate of growth since the three months to July 2010,” it said.

But then it added: “Stripping out the effects of special events (the reversal of the negative effect from the additional bank holiday in June 2011 and the allocation of Olympics ticket sales from last year) suggest underlying growth is closer to 0.2 to 0.3 per cent per quarter.”

But back to greenery, the employment stats are good; 236,000 new jobs were created in the three months to July. Later this week we will see the data for the three months to August, but will this confirm green shoots, or point to weeds? Cynics say that in any case, much of the recent rise was down to a jump in the number of part-time workers.

And finally, there are the PMIs, or purchasing managers’ indices, as they are also called. The latest composite figures, combining manufacturing, construction and services fell in September to a level consistent with growth of just 0.1 per cent.

What is worrying, however, is that earlier this year the PMIs suggested mild growth, but the official data said recession. Since then the PMIs have got worse.

The PMI tracking employment fell to a ten month low in September.

Strictly speaking, of course, weeds grow from green shoots. But the fact is, right now evidence of a recovery seems to be based on optimistic projections rather than hard data.

©2012 Investment and Business News.

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The search for green shoots continues.

Last week we said that evidence of a UK recovery is mounting: industrial production saw its biggest jump in 25 years in July, numbers employed in the three months to July rose 236,000, the OECD predicted a pick-up for the UK next year, and the CEBR forecast that for the first time since 2009, wages will rise at a faster pace than inflation in 2013.

It is not hard to be cynical. Sure employment was up, but much of the rise was down to an increase in part-time workers. The industrial production surge may have been down to no more than making up for lost production the month before because of the Jubilee celebrations. As for what the forecasters say, never forget the words of JK Galbraith: “The only function of economic forecasting is to make astrology look respectable.”

But now Mervyn King has joined the bull set. In an interview on Channel Four, he said: “I think the next quarter will probably be up. I think we’re beginning to see a few signs now of a slow recovery, but it will be a slow recovery.”

So it’s parade of promising news. But what is that? Oh dear, it’s rain.

Not so long ago, many top economists laughed off the prospects of the UK falling into another recession, not because they were especially positive, but, they argued, because output was already so low that it seemed unlikely it could contract further.

The truth is that right now, the UK’s output is around 4 per cent below peak. This is the longest downturn ever recorded. It will surely be several years before the UK’s output is 4 per cent higher than present. We are now around four and half years into the downturn, perhaps a touch longer.  A lost decade looks like a real danger.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

This is no wind up. The last week or so has seen hints. The green shoots may not be big, peeking above the surface like scared mice, but they have been there all the same. So is this for real? Has the recovery begun?

Yesterday on the Andrew Marr Show former Prime Minister John Major said: “Recovery begins from the darkest moment. I’m not certain, but I think we have passed the darkest moment.”

So what’s the evidence?

Earlier this month, data from the ONS revealed another rise in employment – this time up 236,000 in the three months to July. Elsewhere, data on July’s industrial production indicated the biggest jump in this sector for 25 years. The OECD took a look at the G7 and the four big emerging economies (BRICs) and saved its most bullish words for the UK and Brazil, which were the only countries that it said were due to see a pick-up next year.

The round of good news was completed by the Centre of Economics and Business Research (CEBR), which has forecast that 2013 will see the first rise in real incomes for UK households since 2009.

Looking beyond the UK’s borders, markets were c*ck-a-whoop. Both the US Fed and the Euro regions’ central bank – the ECB – have announced QE (or in the case of the ECB QE ish), and at last they are saying central bankers are taking decisive action. A report from ‘Financial Times Deutschland’ suggested that unit labour costs have fallen by 15 per cent in Greece since 2010, with significant falls also seen in Spain and Ireland. Greece saw its current account deficit fall by 54 per cent between 2007 and 2011.

Finally maybe policy makers are learning lessons. Vince Cable is agreeing to relax labour laws in the UK. David Cameron wants to cut down on red tape, and make it easier to gain planning permission. He wants to see an end to dithering.

Then there is the funding for lending scheme.  This is an idea that really seems to have struck a chord across the world, so much so that some economists in the US are now urging the Fed to announce a similar idea.

And finally, the World Economic Forum has released its latest league table showing the world’s most competitive countries. And guess which country moved from number ten on the chart to number eight? Yes, that’s right the UK. The usual suspects did better: Switzerland, Singapore, Finland, Sweden and the Netherlands. But of the G7 only Germany in sixth spot and the US in seventh scored higher.

Recessions are bad, of course they are, but they can have a cleansing effect. They can correct bad habits, get rid of bad ideas, and create economies that are more focused on ideas that work. The UK has had a torrid few years, but maybe it is now set to benefit from the correction.

Well is it? Read on…

Whether you believe the UK downturn is slowly ending does to an extent depend on what you believe caused its problems in the first place.

Let’s look at the data, the theories, and the policies and ask: do they stack up?

First there’s data on employment. It has improved and that’s good, of course it is. But the quarter also saw a 24,000 rise in the number of part time workers. There are now 1.42 million people working part-time in the UK, which is the highest number ever recorded – and records go back to 1992. So maybe the improvement in employment is not quite as impressive as it seems.

The jump in industrial production in July, the highest in 25 years, is to be celebrated, but to an extent this occurred as producers made up for lost production in the previous month due to the Jubilee celebrations.

What about forecasts that real wages are set to rise in the UK? Here the news is more encouraging but it hinges on an ‘if’.

The CEBR reckons average real disposable income for households will rise by 0.5 per cent in 2013. If it is right, then it will be the first such rise since 2009. Incidentally, average wages in the year to June increased by 1.5 per cent, according to stats out last week. In the year to June, inflation – as measured by the retail price index – was 3.2 per cent. So during the 12 months to the end of June the average worker became a lot worse off.

The CEBR also forecast that the households who will benefit the most from rises in real disposable income will be those on lower incomes. It reckons households whose disposable income is less than £26,000 will see their income rise by 1.5 per cent next year, after inflation. Middle income earning households will see real disposable income rise by 1 per cent. And those receiving more than £50,000 are expected to see a rise of 0.7 per cent.

So what assumption did the CEBR make to draw these predictions? Firstly, the improvement for lower incomes is down to falls in bonuses. (In the year to June bonus pay fell by 4.7 per cent.) Secondly, the CEBR assumed that inflation is set to fall. It may be right about that, but the question mark here relates to the price of food. Droughts in Russia and the US are hitting crop yields. At the same time, too much arable land is being used to grow bio-fuels, a policy that seems pretty mad. As for the euro area, ECB President Mario Draghi said he will do whatever it takes to save the euro, and now he has delivered – or tried to anyway. The ECB is engaging in its own form of quantitative easing. It is not outright QE, it is not creating new money; rather it is taking deposits from commercial banks to match its bond buying. See: It’s QE Jim, but not as we know it.

But Mario’s scheme is complicated. It is really aimed at Italy and Spain, but for either of these countries to take part, they must first ask the European Stability Mechanism for help. And they must sign a memorandum of understanding, relating to the austerity cuts they must make. In other words, in order to avail themselves of ECB money, Italy and Spain must agree to cuts.

“Don’t do it,” says Nobel Laureate Joseph Stiglitz. In an interview with a Spanish paper he said that for Spain to sign on the dotted line, to ask the ESM for help and agree to Germany’s insistence on austerity, would be tantamount to economic suicide.

As for the US, something pretty interesting is happening across the pond. While some of the Christian fundamentalists that seem to be gaining more sway over the US political scene seem hell bent on enacting policies designed to pretty much terrify the rest of the world, amongst economists the QE debate has reached a new level. Professor Michael Woodford is a big cheese at Columbia University. He also happens to be the most respected academic on monetary economics in the world.

He reckons that when the Fed sets its monetary policy, it should take into account what’s called nominal US GDP – that is to say GDP measured in dollars, not adjusted for inflation. He is also a big fan of the Bank of England’s big idea: funding for lending, in which the central bank lends to banks if they agree to lend this money on to businesses and for mortgages.

But what all this really means is that the thinking at the Fed and among its advisors is slowly coming round to the view that that a little bit of inflation may be a good thing. Let’s face it, when you are in debt and inflation is quite high, and your income is rising with inflation, then the value of your debt relative to income is falling.

So that’s just a hint that the Fed is relaxing its inflation intentions. Bear in mind that the CEBR’s forecast for the UK economy is based on the assumption that inflation will fall, you can see how the whole thing is based on contradictory ideas.

But this still leaves the questions: is the UK on the mend?

Markets have overreacted to the latest news on QE. The UK has plenty of problems and challenges ahead, but yes, the outlook right now is more positive than a week ago.

The real snag is that neither central bankers nor indeed many governments are fixing the underlying problem. And to find out about that, read on.