Archive for February, 2010
Friday, February 26th, 2010
Business investment in the last quarter of 2009 was 24.1% down on the same period of 2008. Not only has investment fallen by a quarter, but it is continuing to fall. The figures for the fourth quarter of last year were actually 5.8% down on the previous quarter.
The fall in business investment was evident across most industries, although there was a larger fall in manufacturing than non-manufacturing. Private sector manufacturing had the largest quarter-on-quarter fall, down by 8.4 per cent, whilst private sector non-manufacturing is down by 5.7 per cent and public corporations non-manufacturing is down by 2.3 per cent.
The recent trend can be seen in the graphic below.
 Source: ONS Compared with the fourth quarter of 2008, total business investment fell by 24.1 per cent. This fall was mainly from manufacturing investment being down 35.3 per cent. The reduced investment in private sector manufacturing, down 35.3 per cent, is mainly from industries classified within metals and metal goods, down by 50.0 per cent, solid and nuclear fuels, oil refining, down by 43.8 per cent, chemicals and man made fibres, down by 38.9 per cent, and engineering and vehicles, down by 38.8 per cent.
The planned closure of the Corus steelworks on Teesside is symptomatic of this downturn and yet given that we are supposed to be moving out of recession, we would expect investment to start turning back up again. As a component of aggregate demand, with total investment accounting for about 8% of the UK economy, these figures are yet another contributor to the pessimistic view that we may well move back into recession this year. Watch out for the revised GDP figures for the last quarter being issued today.
Tags: aggregate demand, business investment, economic growth, GDP, recession
Posted in GDP, Investment, Manufacturing, economic growth, recession | No Comments »
Thursday, February 25th, 2010
Paul Tucker, who is a member of the Monetary Policy Committee and Deputy Governor for Financial Stability, has just given a speech in which he discusses some of the current challenges facing monetary policy and issues relevant to the overall framework for preserving macroeconomic stability.
First, he discusses the effects of household and bank balance sheet repair on aggregate demand, which pose a downside risk to the outlook for activity.
Second, he considers how supply capacity has been affected by the recession.
Third, he notes the volatility of inflation and its impact on medium-term inflation expectations, which the MPC has to be sensitive about.
And, fourth, he discusses how the monetary effects of the MPC’s asset purchases may come through gradually, and how they may have assisted the process of de-leveraging by banks.
 What lessons can be learned from the recent crisis? He also looks at what lessons can be learned for maintaining macroeconomic stability, and discusses how the evolution of the financial system can alter the transmission mechanism of monetary policy and the sorts of data that need to be analysed when assessing it.
In conclusion, Paul Tucker states that: “…it is the credibility of our commitment to price stability that has enabled the Bank to cut interest rates and to inject money so aggressively in order to support nominal demand in the wake of the credit crisis… That underlines the risks of tinkering with central bankers’ inflation targets….” But another element of stability – in the financial system – needs to be addressed. He says, “…macroprudential instruments …could be used to lean against future credit booms and for making our financial system more resilient. If we could manage that, it might be the most significant extension in the overall international macro policy framework in a generation.”
To read his talk in full click here.
Tags: Bank of England, growth, Inflation, macroeconomic stability, quanititative easing
Posted in Bank of England, Inflation, Monetary Policy Committee, economic growth | No Comments »
Wednesday, February 24th, 2010
Global inflows of foreign direct investment (FDI) fell by 39% from US$1.7 trillion in 2008 to just over US$1.0 trillion in 2009, according to estimates by UNCTAD.
This decline was spread across all major groups of economies. Following a large fall in FDI inflows amongst developed countries in 2008, there was a further severe decline of 41% in 2009 as a result of the global recession. However, even in developing and transition economies which had both seen a rise in FDI in 2008, there were falls of 35% and 39% respectively.
This decrease in FDI flows was particularly notable in the flows of equity capital which are mainly generated by the long-term investment strategies of transnational corporations.
And, in terms of the mode of entry, cross-border mergers and acquisitions were the most affected in 2009, showing a 66% decrease in 2009 compared to the previous year. The recent trends in Global FDI can be seen in the graphic below.
 Source: UNCTAD
UNCTAD notes that even with this background of decline most countries have not introduced protectionist measures but, by contrast, have taken measures to make FDI inflows easier. However, increasing protectionism as far as direct trade is concerned is exerting an impact on FDI and the global operations of transnational corporations.
But, UNCTAD remains bullish that a range of positive macroeconomic indicators such as the International Monetary Fund’s recent forecast of a 3.1% growth in world gross domestic product this year, will see a revival of FDI inflows in 2010 – albeit a modest increase.
Tags: FDI, Foreign Direct Investment
Posted in Foreign Direct Investment | No Comments »
Tuesday, February 23rd, 2010
In the last quarter of 2009 visits abroad by UK residents fell by 6% on a seasonally adjusted basis, whilst visits to the UK by overseas residents remained broadly constant, compared to the previous quarter according to the Office for National Statistics.
When we look at the whole of 2009 the number of visits by overseas residents to the UK were down by 7% on the previous year, from 31.9 million to 29.6 million. Of this total, holiday visits actually grew by 3%, but business visits fell by 20% and visits to friends or relatives were down by 10%.
The recent trend can be seen in the graphic below.
 Source: ONS When we look at visits abroad last year from the UK the figures are more extreme. There was an overall decrease in visits of 15%, from 69.0 million to 58.5 million, a staggering fall of 10.5 million trips abroad. Not surprisingly there was a 22% fall in business trips. The credit crunch has meant a cut back by business on all but the most vital expenditure, and there will have been a big reduction in trips to conferences and exhibitions. On top of this, there will have been an increase in conference and video calling to replace expensive flights and hotels for face-to-face meetings.
However, there was also a fall in overseas holidays of 16% and a reduction in visits to friends and relatives of 7%. There was a decrease in travel to North America of 21% from 4.6 million to 3.6 million, and a reduction to Europe of 15%, from 54.4 million to 46.0 million. Europe is obviously a much bigger market for British holidaymakers but last year saw the appreciation of the euro against the pound really starting to bite. With the euro just about reaching parity with the pound UK, after the pound saw a reduction in value approaching 25% last year, many holidaymakers decided to forego their trips to the Costas and Tuscany and holiday at Skegness and Margate instead. At least it didn’t snow during the summer.
Tags: Travel and Tourism
Posted in Travel and Tourism | No Comments »
Monday, February 22nd, 2010
Retail sales volume fell by 1.8% between December 2009 and January 2010. This represents the largest decrease in a single month since June 2008 when it was 2.5%. Stores which predominantly sell food showed a fall of 2.4%, whilst predominantly non-food stores showed zero growth. Within this latter category, there was an increase in textile, clothing and footwear stores of 4.7%. By contrast, household goods stores saw a fall of 13.4%.
When the January figures are compared with the same month last year, retail sales were actually 0.9% higher. The recent trend can be seen in the graphic below.
 Source: ONS Why did sales fall in January? There were some extenuating circumstances. Firstly, there were fewer visits to the supermarket as a result of the snow and icy conditions which covered much of the country, and consumers probably relied on running down what they already had in the pantry and the freezer. Secondly, VAT was put back up to 17.5% in January which may have caused some cut back in purchases, or more probably larger purchases had already been made at the back end of last year.
Consumer spending accounts for over two-thirds of GDP in the UK so this fall is not going to help economic growth. Given the increasing deficit on our trade account as well, it is difficult to see where growth is going to come from. The prospects of moving back into recession are probably growing.
Richard Hyman, strategic retail adviser to Deloitte was quoted as saying that the signals for consumer spending were less encouraging for this year. He said: “Income taxes and national insurance will rise and following the general election, the next government will have the task of tackling public debt. This is likely to include a mix of spending cuts and increased taxes and it is difficult to imagine the consumer not being hit in some way or other.”
Tags: Consumer Expenditure, economic growth, recession, retail sales
Posted in Consumer Expenditure, Retailing, economic growth, recession | No Comments »
Friday, February 19th, 2010
Public sector net borrowing was £4.34bn in January compared with a repayment of £5.3bn in the same month last year. A poll of City analysts taken by Reuters had forecast a repayment in January of £2.8bn. In reality, we ended up with the worst figure for any January since such records began in 1993.
January is usually a bumper month for the tax man, as much corporation tax is paid and a lot of self-assessment payments are made before the deadline of 31 January. So what went wrong this year? Basically total receipts fell by 9% compared to last year. The yield from income tax was down 20% and corporation tax fell by 6%. However, VAT did rise a bit as a result of the increase back to 17.5% at the beginning of January. These tax receipts are based on the 2008-2009 tax year and the last two quarters of this period covered the worst part of the recession. There was also an increase in public spending in January reflecting the higher costs of increased unemployment compared to the previous year and also the interest payments which have to be made in servicing the public debt.
 January's borrowing figure is particularly poor, but the government should still be on target to meet its forecast. Overall, the government has forecast that public sector borrowing will reach £178bn for this current tax year which finishes at the end of March. This will be equivalent to 12.6% of GDP, which is very similar to the figure in Greece. Does this mean that we could see the UK plunged into the same sort of crisis? Probably not as our debt is longer term than that of Greece and thus easier to refinance. Also, our total national debt is around 60% of GDP currently, compared to over 100% in countries such as Greece and Italy.
Having said that, markets did react badly to the news. The pound fell against the dollar and the euro, and government bond prices also declined. But, on the whole, most economists in the City believe that the government is on track to meet its borrowing target. In fact, the Institute of Fiscal Studies is predicting that the deficit will be £169bn. I nearly said ‘only’ £169bn, but stopped myself in time.
There are calls for the UK government to take stringent measures to reduce the debt but many economists believe that to be too hazardous and could push our fragile economy back into recession. I will leave you with Professor Paul Krugman’s words which he posted yesterday:
“The crucial thing to understand is that fiscal contraction of an additional one or two percent of GDP in the near future has essentially no significance for the sustainability of government finances, either in Britain or here. The only reason to do it is to impress markets — to convince them of your willingness to bear pain. And absent structural reform — which is the real need — how much good does that do?
So let’s not impose useless punishment, there or here.”
Tags: government borrowing, government spending, Public Finances, sterling, taxation
Posted in Public Finances, government borrowing, government spending, sterling | No Comments »
Thursday, February 18th, 2010
In the three months to December, unemployment fell by 3,000 on the previous three months, to total 2.46 million. This gave an unchanged unemployment rate of 7.8%. There was also good news on the vacancies front, as these rose by 49,000 to 479,000. At the same time redundancies fell in the final quarter of 2009 by 36,000 on the previous quarter to total 168,000.
However, Yvette Cooper, the secretary of state for Work and Pensions said: “…we know things are going to be tough for a while and we expect further increases in unemployment before the summer.”
In fact, there was a surprising increase in the claimant count unemployment figures with the number claiming Jobseeker’s Allowance rising by 23,500 to 1.64 million in January 2010. Many commentators had anticipated a fall of about 10,000 in this figure rather than what turned out to be the biggest increase since July 2009. The treacherous weather in January may have had some impact on this total.
However, there are a number of unwelcome trends underlying the overall figures. For example, more people are taking on part-time or temporary work rather than applying for unemployment benefit – assuming they are eligible to receive it. According to the ONS the number of people in full-time employment fell by 37,000 on the quarter to reach 21.22 million, the smallest quarterly fall since the three months to July 2008. The number of people in part-time employment increased by 25,000 on the quarter to reach 7.67 million. There were 1.04 million employees and self-employed people working part-time because they could not find a full-time job. This is the highest figure since records for this series began in 1992 and it is up 37,000 on the quarter.
 Nearly 1 million young people under the age of 25 are unemployed in the UK. On top of this there is a great deal of ‘underemployment’ in the economy. In fact, the ONS estimates that there are 2.8 million people working fewer hours than they would wish to. So, although there is much less unemployment than we might have expected at this stage of the recession – some commentators had expected to see total unemployment reach 3.0 million when the recession began – the overall figures do mask an underlying problem with millions of workers on temporary contracts, taking on part time jobs and working fewer hours than they would have chosen.
In addition, the number of those out of work for more than a year, the definition of long-term unemployment, continues to rise. This figure was up 37,000 on the last quarter to total 663,000 which is the highest figure since 1997. Of even greater concern is the fact that nearly 1 million young people are out of work. This includes 198,000 16-17 year olds, and 725,000 18-24 year olds. Worse still is the fact that 190,000 young people have been out of work for a year or more. In fact, many have never started work, either since leaving school or university, and anecdotal evidence suggests that there are even more unregistered unemployed youngsters who are thinking of going back into the education process or have given up altogether.
As Yvette Cooper was quoted above, we know that the worst is not over yet. Almost without doubt, there will be further cuts after the election as public sector and private sector belts have to be tightened further. A lot of jobs are likely to be lost directly in the public sector and subsequent multiplier falls in demand could well impact the private sector as well. This means that a double-dip recession could still be on the cards.
Tags: part-time work, recession, redundancies, underemployment, unemployment, vacancies, youth unemployment
Posted in labour markets, unemployment | No Comments »
Wednesday, February 17th, 2010
The Consumer Prices Index (CPI) rose to 3.5% in January from 2.9% in December. According to the Office of National Statistics (ONS) this is the second largest ever increase in the annual inflation rate between two months. It follows on from the record increase of 1.0% in the annual inflation rate between November and December.
The reason for the increase was due to the restoration of the VAT rate in January to 17.5% and the increase in the price of petrol. This time last year petrol was 86.3p a litre and has now risen to 110.9p per litre. There was also an increase in some food prices with cauliflowers rising in price by 59.7%.
Because the CPI deviated more than 1% from its official target rate of 2.0%, the governor of the Bank of England was forced to write a letter of explanation to the Chancellor. In this, Mervyn King wrote that the committee saw this as a “temporary deviation”. He said: “Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.”
The RPI measure of inflation, which is often quoted in wage negotiations, rose from 2.4% in December to 3.7% in January. The largest upward contribution to this change came from housing. This is because mortgage interest payments rose this year but had fallen significantly a year ago, when the majority of lenders passed on the decline in Bank rate which fell from 3.0% to 2.0%. This is the highest RPI figure since October 2008 and is the first time that RPI has exceeded the CPI figure since August 2008.
 Source: ONS The RPIX measure, which excludes mortgage interest payments, rose from 3.8% in December to 4.6% in January. And, what is particularly of interest, is that underlying inflation which excludes more volatile elements such as food and fuel, rose from 2.8% to 3.1%. This suggests that there are underlying pressures on prices, which could partly be due to the weakness of sterling, which is pushing up import prices.
UK inflation can be very difficult to budge and when looking at the December figures the UK CPI inflation rate stood at 2.9% compared to only 1.4% in the EU as a whole.
There are big implications of this jump in inflation for savers. Moneyfacts, who are experts in personal finance, suggest that with a typical savings account offering instant withdrawal only offering 0.73% in interest, basic rate taxpayers are losing the equivalent of 2.92% a year, and higher rate taxpayers are losing 3.06%.
Although the Bank feels that inflation will be back below target in the coming months, this could be upset by attempts to rectify the budget deficit after the election. Many City economists now believe that VAT will be raised to 20%, which will have a large inflationary impact if it comes to pass.
Tags: Bank of England, CPI, Inflation, MPC, RPI, RPIX, savings, sterling, underlying inflation, VAT
Posted in Bank of England, Consumer Price Index, Inflation, Monetary Policy Committee, savings, sterling | No Comments »
Monday, February 15th, 2010
It looks as though jobs are going to be lost from the public sector faster than they are going to grow in the private sector. So says the latest Labour Market Survey produced by the Chartered Institute of Personnel and Development (CIPD) together with KPMG.
In a survey of over 700 employers it appears that those employers who plan to make redundancies expect to cut their workforce by 6.2% on average this quarter, compared with 3.8% in the previous quarter. This is against a background of an overall fall in unemployment in the three months to November, with unemployment currently standing at 2.46 million or 7.8% of the workforce.
The net balance of employers in the private sector between those expecting to recruit and those expecting to cut staff is currently negative at -5%. On the other hand, things are much bleaker in the public sector. Here the net balance was -31%, with the public administration and defence sector recording a figure of -62%.
 It looks like workers in the public sector will be bearing the brunt of job losses in the months ahead. According to John Philpott, Chief Economic Adviser at the CIPD: “The UK jobs market is still on the ropes, with a public sector fall in employment now a reality as it feels the impact of the longest recession in modern times.
“Unfortunately, there are more punishing rounds ahead. The private sector will be dealing with ongoing concerns about productivity, wage costs and inflation alongside the spectre of deep public spending cuts. With many private sector companies looking to move jobs abroad in an attempt to find the right balance between skills, quality and cost reduction, the jobs market needs all the continued support and protection it is getting from the government.”
In fact, the Survey shows that outsourcing of jobs is a growing concern. Ten per cent of private sector companies plan to outsource jobs abroad in 2010. Of these, over 50% plan to relocate UK jobs to India, while 37% plan to move jobs to Eastern Europe.
One positive point for inflation and input costs is that pay prospects are extremely subdued. In recent times public sector pay has been rising faster than that in the private sector, but currently the private sector is predicting a rise of 2% compared with 0.9% for the public sector at the next pay award.
Tags: Earnings, private sector, public sector, unemployment
Posted in Earnings, unemployment | No Comments »
Friday, February 12th, 2010
The euro zone is in crisis. It seems that not only does Greece have the largest budget deficit in the EU in proportion to the size of its economy, but previous Greek governments have been ‘economical with the truth’ when presenting official statistics. The Greek budget deficit is around 13% of GDP, and the country has agreed to reduce this by four percentage points next year and bring it down to 3% by 2012.
In fact, the original Maastricht rules require member government’s budget deficits to be limited to 3% of GDP and national debt to be no more than 60% of GDP. However, all this was agreed before the biggest worldwide recession since the 1930s. The current problem is that Greece has to borrow large amounts of money to finance its debts at the same time as it is putting an austerity programme into place. Given that the reliability of Greek debt has been severely downgraded in the market, this means that they can only borrow at very high interest rates.
On top of this, if the EU does not come to their aid and the country defaults on its debts, the contagion will spread to the rest of the ‘PIGS’, as they have been dubbed. That is Portugal, Ireland and Spain as well as Greece.
How did the PIGS get into the mess they are currently in? Basically these countries went full throttle in recent years sustaining a boom based on credit, itself based on the low interest rates set by the European Central Bank. This fuelled large increases in wages in these countries at a time when there were low levels of inflation recorded in France and Germany. These high wages are also now damaging these countries’ export potential. There has been, therefore, a lack of balance in the economies of eurozone members. The subsequent ‘crash’ has now brought the chickens home to roost.
Why should the other EU members help out Greece? Well, actually Greece hasn’t asked for any help. Technically it would be illegal under EU rules for Germany or France to dip their hand into their pockets to bail out another country. This is why yesterday the EU’s Heads of Government promised that states within the eurozone will take “coordinated action, if needed, to safeguard financial stability in the euro area as a whole.” At the same time pointing out that: “The Greek government has not requested any financial support.”
So, far all they have given is a promise but when the Finance Ministers meet next week, more substance may be added to it. Already, there has been strong reaction in Germany. The Bild newspaper carried the headline yesterday: “No money for the bankrupt Greeks.” Other commentators were calling for the Mark to be brought back to replace the euro. The Germans are particularly concerned given that the latest figures show that the German economy showed zero growth in the last quarter of 2009, following a growth of 0.7% in the previous quarter.
Given their current economic situation the Germans will not be happy contributing to a bailout. On the other hand, could this crisis result in the break up of the eurozone. Experience tends to suggest that the two things the EU is good at are talking and compromising. Something will doubtless be worked out. One good thing is that with the UK being outside the eurozone, we will probably not be involved in any bailout.
Tags: ECB, European Union, eurozone
Posted in European Union, eurozone | No Comments »
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