tony's blog

Thursday, May 26, 2011

The 64 million dollar question

So interest rates are back on the agenda. The latest Organisation for Economic Cooperation and Development (OECD) Economic Outlook report suggests that interest rates will have to rise sooner rather than later. In fact the OECD expects the Bank to lift rates to 1% from 0.5% this year and to rise by a further 1.25% next year bringing it to 2.25% by the end of 2012.

How so? Well the OECD’s chief economist, Pier Carlo Padoan, says a rate rise is desirable as it will prevent ‘continued increases in inflation expectations’. He said: ‘We would be in trouble in the UK and elsewhere if, in a period of slow growth and fiscal contraction, you also have inflationary expectations getting out of control’.

And this thought is echoed by others. In a parting shot to his soon to be former colleagues at the Bank of England’s Monetary Policy Committee, arch hawk Andrew Sentence reiterated his call to raise interest rates. He said: ‘Continuing to accommodate inflation makes it more likely that a sharp policy correction will be needed’.

So it’s all up in the air again. But as echoed in previous blogs, I am not of this school of thought. Looking at the growth figures for the first quarter of this year, consumer spending fell by 0.6% during the period but more worryingly than this, there was a ghastly drop in business investment. A 7.1% fall during the quarter. I fear that raising rates on the back of this GDP data would do no good to the economy and in fact tip it back into a recession.

Sunday, May 22, 2011

Lies, Damned Lies and Statistics

So what’s to be made of the latest unemployment figures announced by the Office of National Statistics? On the face of it, it’s positive news. Unemployment fell, the number of people being made redundant dropped to its lowest level since the start of the recession, employment rose by 118,000 and the number of jobless 16 – 24 year olds did not break the politically sensitive 1 million level. So all good then?  Or is it?

The latest quarterly Labour Market Outlook from the Chartered Institute of Personnel and Development shows that 39 per cent of employers are planning to cut jobs – the highest level since the survey began in 2004. It also said a slight rise in private sector recruitment was being cancelled out by the cull in the public sector. Not looking so good now.

There is a view that unemployment is a lagging indicator of the economy and has yet to reflect the impact of the austerity measures – the slowdown in consumer spending and the pending cuts in the private sector. Plus closer analysis of the figures suggest that the bulk of the rise in employment came in January and since then numbers have fallen away, signalling a slowdown in job creation. That, coupled with the increase in claimant count to 12,000 in April could suggest that the job market is actually losing impetus.

How confusing for us mere mortals.  Sadly my belief is that we have some way to go before we can say we are on the road back to recovery. I agree with economist Howard Archer, and have stated thus in a previous blog, that unemployment will go up again later in the year as the private sector will be unable to fully compensate job losses in the public sector.

Watch this space.

Friday, May 6, 2011

Alone but confident!

Britain seems to be more and more isolated these days in its decision to leave interest rates at a low level. Just yesterday the MPC made the unsurprising call to leave rates at a record low level of 0.5%. And economists seem to now be suggesting that the earliest rates will go up will be November this year. Some even go so far as to say 2013 now.

Other countries seem to be going the other way. India, Russia, Australia, China Brazil and the eurozone have all been raising rates to counter inflationary pressures. Poland, Hungary and Denmark have also taken the plunge so why not us?

As I explained in my last blog economic circumstances in the UK do not make such a move favourable. There are more ways to combat inflation than putting up interest rates and we should remember we have had a significant level of fiscal tightening through increased taxation. Of course every country is unique and Britain has a disproportionately large banking sector. The economy remains extremely fragile, growth is weak and to raise rates now would almost seem an irresponsible act. Or to put it more strongly, in Roger Bootle’s words, ‘disastrous’.

Of course we are not completely isolated. The United States and Japan to name but a few are on side with Britain in keeping rates at low levels.

However it does seem more and more that we are out of kilter with the rest of the international markets.