Before I move on from the excitement over Greece I would just like to point out that her ten-year government bond yields closed last night at 6.18% which is 3.06% over that of Germany’s equivalent bund. Considering the drama of the announcement from EU ministers and the fact that Standard and Poors took Greece off a long-term credit watch negative one might have expected more. However I dealt with the non-event which was the EU plan yesterday and the Standard and Poors statement was an odd kettle of fish as what it said rather contradicted what it did! One part of their statement was entirely as readers of my articles would expect as it was responding to Greece’s new austerity plan in other words it was acting reactively not proactively. You know my views on ratings agencies and their usefulness. However I will quote a sentence from the report as an illustration of it.
In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece’s leaders will demonstrate the political will necessary to achieve fiscal consolidation
Hardly a ringing endorsement….
Whilst Greece has been dominating much of the news there have been developments in the UK economic situation which have implications for us going forwards. Some of it has been outright news and some of it has been analysis which is frankly rather disturbing.
The National Institute for Economic and Social Research published last week it estimate for growth for the quarter ending in February 2010 which was 0.3%. However tucked away in the report were some further significant details. For example growth has been estimated to be 0.7% of GDP since the trough of the recession in September 2009. I have written many times about conventional economics failing us and here is another example as I remember many economists predicting that the severe recession we have been through would mean that the recovery would be very strong. However looking at past recessions there is a further clue because for example at this time into them (24 months) we started to see GDP growth pick up in 1979/83,1973/76 and 1990/93. The one exception to this was 1930/34 and I do not need to tell you what happened there but will just make one point the double-dip which was evident in the 30s depression started now.
The recent disappointing balance of payments numbers for January will not help our growth figures but one months figures for this measure are unreliable (albeit they are part of a disappointing trend). Poor industrial and manufacturing figures fit into this picture too.
Our most recent Producer Price inflation figures were disappointing as they showed signs of further inflation in our economic system. Just as a reminder the output price index rose by 4.1% in February compared with 3.8% in January 2010 and the input price index rose by 6.9% in February which compares with 7.7% in January 2010. Our exchange rate has continued its decline on a trade weighted basis although there have been occasional daily rallies like yesterday but the trend is still down which leads to the danger of “imported inflation”
An example of this has been the recent AA report that fuel prices at the pump are predicted to soon hit £1.20 per litre. This is partly due to imported inflation (wholesale fuel costs have risen by 17% over the last month) and partly due to the institutionalisation of inflation in the UK where there will be a 3 pence rise in fuel duty on the 1st April. As a comparison the AA figures show that diesel was approximately £1 per litre and petrol approximately 92 pence per litre a year ago.
Bank of England Monetary Policy
Tucked away in a report by the Financial Services Authority last week were some interesting numbers of which Deutsche Bank thinks
It also confirms our concerns around the UK’s increasing gearing to floating interest rates and potential under-reserving for fragile borrowers given how cheaply existing mortgages can be serviced while interest rates are this low. Households are currently benefiting from ~£100bn p.a. reduction in mortgage servicing costs (so why is deposit growth so low?), but with the economy becoming increasingly geared to low-interest rates as the proportion of floating rate debt continues to dramatically increase.
There are two clear implications of this.
1. One would expect rises in interest rates to act very strongly on the UK economy as the proportion of variable rate mortgage debt is rising. I am sure the Monetary Policy Committee is looking at this and there are clear implications for when and how they will raise rates.
2. Whilst there has been an enormous benefit from the cuts in interest rates particularly to holders of variable-rate mortgages those in potential trouble do not seem to have used to opportunity to pay down debt.
In other words a rise in interest rates in the UK is likely to have a strong effect because of the prevalence of variable rate mortgages and the size of household debt.
There is a fascinating asymmetry here. We had large cuts in interest rates of the order of 5% which hopefully helped our economic situation but now we may be very nervous of small rises. The impact one way appears much larger than the other which is a disturbing indication of the mess we are in. Savers may well reasonably feel hard done by as the clear implication is that interest rates did not need to be reduced so far and should have been combined with other measures as well as being made more calmly (in case you are wondering I did argue for this at the time).
Here is a measure which has performed better than expected throughout this recession and as it hits individuals hard this is nice to be able to say. Indeed today’s numbers appear on the face of them to be really rather good. The Office for National Statistics said the number of people claiming jobless benefit fell by 32,300 in February, as opposed to analysts predictions of a small rise. January’s rise, previously reported at 23,500, was reduced to 5,300. The claimant count rate eased to 4.9 percent, the lowest since August 2009. The unemployment rate has fallen by 0.1% to 7.8%.
Rather more disturbingly employment has fallen too. Again according to the Office for National Statistics the employment rate fell to 72.2% in the 3 months to January 2010 and has not been lower since November 1996. The number of people in employment fell by 54,000 on the quarter to 28.86 million. This was down 482,000 on a year earlier.
For those considering the impact of the recession on the public-sector they may be intrigued by the fact that employment there is up by 7,000 on the quarter.
It would appear that our recovery from recession will be slower than past recessions might indicate and shows signs of being accompanied by higher inflation. The prevalence of variable rate mortgages compared to our international peers and the fact that the FSA found little evidence of those in potential financial difficulties paying down debt will make the Monetary Policy Committee likely to be even more cautious in raising interest rates. As there appears to be a clear asymmetry here compared with the knee-jerk savage cuts made by the MPC savers are right to wonder if this policy was misconceived.
In the topsy-turvy world of this recession comes falling unemployment combined with falling employment, which sounds like something you might have found in one of George Orwell’s books. I am pleased for those who have come off the claimant count but am worried by the implications of the trend for people to withdraw from the workforce and the fact that working hours have been falling as this is if you think about it a better measure of economic performance. In fact it would appear that employment is falling faster than unemployment and this is worrying.
I am intrigued by the estimate of the benefit of the cuts in interest rates to mortgage borrowers (£100 billion) and the fact that there does not appear to be a lot of evidence of this being used to repay debt. When you consider this and think of where we are now in terms of economic recovery my smile at the unemployment figures is in danger of turning into a frown.