Broker-introduced asset finance and consumer new car finance are now running ahead of the levels seen in early 2008, and commercial vehicle finance is not far behind.
We now account for 27% of the UK economy’s annual fixed capital investment, excluding buildings and own-account software.
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The start of May saw sterling hit a seven month high against the dollar and a three and a half year high against the euro.
While an appreciation of sterling isn't helpful to exporters, it should take the edge of import prices and inflation. And anything that helps the Bank of England deal with the dilemma of sticky inflation will no doubt be welcomed.
Download and read the May Interest & Exchange Rate Forecast!
]]>The ongoing crisis hits the Eurozone exchange rate. Turbulence in the Eurozone has unsettled the currency markets too. The Euro/Sterling exchange rate dropped to its lowest since November 2008, making £1 now worth €1.24 (or €1= 80p). Sterling has been boosted by a cautious monetary policy and a bit of safe haven status as nervous investors looked for noneuro homes for their cash. And it looks like the euro may fall further. The European Commission’s spring forecasts predict output in the euro area will shrink by 0.3% in 2012 before returning to growth of 1%, in 2013. But even this is across the whole region. Greece, Portugal and Spain are expected to contract in 2012 and Spain is forecast to remain in recession in 2013. The only good news is that the weaker currency will help Eurozone exports and provide some boost to growth.
UK industrial production continues to decline. Overall industrial production continued to sag in March. A 2.6%y/y decline in the month marks the 13th consecutive fall. Energy and mining and quarrying were the culprits, but manufacturing declined 0.9%y/y despite a broadly based 0.9%m/m growth in March. This won’t be helped by a stronger pound. Sterling has appreciated by 12% against a basket of trade weighted currencies since its trough in 2009. UK holidaymakers making their way to the continent will be happy, but exporters won’t be. It will fuel the critics who say that the UK’s problem is that it no longer produces anything. But this argument has flaws. Click here for some more analysis.
UK policy rates are stuck fast. The Monetary Policy Committee (MPC) left rates unchanged again in May. And they are likely to stay there until well into 2015. The Committee has to take into account the risk that weak Q1 GDP numbers and turbulence in the Eurozone will be catalysts for below target inflation in future. With so much changing the MPC is waiting to see how things settle. The balance may swing back towards looser policy, but we'll have to wait for the whole story in this week's Inflation Report.
Low UK policy rates help UK arrears and possessions improve. The Council of Mortgage Lenders reported that UK possessions are still low given economic conditions. Low interest rates have helped, but nothing is without risk. While the total number of arrears cases fell in Q1, there was an increase in the number of serious cases. Deterioration in the labour market could easily push these into possession.
Chinese authorities move to support its economy after a wave of disappointing data. The most recent batch of Chinese economic data suggests sluggish growth by Chinese standards. Industrial production grew by 'only' 9.3% y/y in April, the slowest pace since the depths of the financial crisis in early 2009. Retail sales were also disappointing and inflation fell from 3.6% in March to 3.4% in April. The Chinese authorities responded by loosening monetary policy by cutting the reserve requirement ratio at the weekend. But it’s unlikely to be the end of measures to stimulate the economy.
Eurozone retail sales increased modestly in March. Retail sales grew by 0.3%m/m in March, which was enough to deliver a positive outturn for Q1 as a whole. But that's about as far as the good news goes. Sales are still down 0.5%y/y and are 4% below their 2008 peak. Performance varies widely by country. In France, sales are quite robust. But in Spain sales have fallen again and are now 22% below their peak. A weak consumer sector is just one of the many problems facing the Spanish economy right now.
Eurozone private sector activity contracted again. The composite Purchasing Managers Index (PMI), a key survey of activity across manufacturers and service providers, dropped even more sharply than expected in April. Lower volumes of new orders in both manufacturing and services causes the drop in output which in turn hit confidence about the future.
European Central Bank (ECB) leaves rates unchanged in May. It was no surprise that the ECB left rates unchanged at 1%. Even though economic conditions are weakening in the Eurozone (12 out of 17 countries are now in recession) the ECB is reluctant to add more stimulus until the impact of its €1 trillion loan to the banking sector becomes clear. On top of this, inflation is above its 2% target. The flash estimate fell back to 2.6%y/y in April from 2.7% in March.
The UK manufacturing and service sectors slowed in April. The UK manufacturing PMI survey showed the sector is still expanding, but at a slower rate as weaker global demand hit new export orders. It was similar story in the services sector. New business was strong, but strong competition hit margins. The construction PMI also fell back in April, but it still suggests remarkably strong growth. This is a real puzzle for policymakers as it conflicts so sharply with the official GDP data which recorded a 3.6% contraction in construction in Q1.
UK house prices fell again. It’s no surprise that Nationwide and Halifax both reported falling house prices in April as the end of the stamp duty holiday in March took away the little boost to demand there was. However, remortgage approvals rose by 5%m/m in March. This could be the effect of higher funding costs feeding into mortgage rates and encouraging existing homeowners to lock into new fixed rate loans.
The US job market goes a bit European. The US payrolls survey showed employment increased by 115,000 in April, about half the rate of growth of the preceding three months. Public sector employment fell by 15,000 but the 130,000 growth in private sector jobs was strong enough to offset it. The US unemployment rate fell to 8.1% in April but only because more people left the labour force. Showing worryingly European characteristics, the teenage unemployment rate in the US is now 25% and more than 40% of unemployed people have been out of work for over six months.
Chinese manufacturing and services sectors improve a little. Both the official and HSBC PMIs showed an improvement in manufacturing and services in April. The service sector is clearly expanding, but manufacturing is lagging behind, seemingly pulled back by a struggling SME sector. Nevertheless, the improvement in both surveys should calm the nerves of policymakers worried by the slowing economy.
Government borrowing on track so far - but there’s harder work to come. Public sector net borrowing was £126bn in the 2011/12 fiscal year, 8% lower than 2010/11. Borrowing forecasts set out in the last two budgets have been very close to the mark – unusual for public sector finance statistics. But it didn’t all go to plan; receipts in 2011/12 were £16bn lower than expected. The numbers show that Government borrowing is falling, but targets will be more difficult to achieve in future. So far most of the improvement has been driven by tax increases (VAT). 90% of spending cuts are still to come. With the UK now in recession Mr Osborne is going to have tougher political challenges ahead too.
UK consumer confidence picked up in March. After a slump in February, Nationwide’s consumer confidence index rose to a nine month high in March, although at 53 it’s still well below the long run average of 76.The breakdown shows that consumers have become more optimistic about the future - especially the economic situation. This is puzzling given the latest GDP figures, but a welcome improvement in sentiment all the same.
Eurozone private sector activity continues to worsen. The composite Purchasing Managers’ Index (PMI) fell for the third consecutive month in March and at 47.4 remains firmly in the sub-50 contraction territory. The manufacturing index fell significantly too following a worryingly sharp decline in new orders across the whole euro area. The service also sector declined sharply, from 49.2 in March to 47.9 in April. Firms reported reduced headcount and low levels of business confidence for the coming year - quite understandable, especially as the Eurozone economy is expected to shrink in 2012.
The Fed expects US growth to continue to pick up, albeit gradually. The latest Federal Open Market Committee (FOMC) meeting left US monetary policy unchanged, but did note the pick up in inflation and disappointing labour market conditions. The commitment to keeping US rates close to zero until 2014 still stands, but with a little less support and no hint of any further monetary easing. Overall the FOMC thinks that the US recovery will continue and revised up its growth forecasts modestly. GDP is now expected to grow by c2.5% in 2012 and by c3% and c3.5% in the following two years. But just like the rest of the world, the US recovery depends on stability in global financial markets, and this is still at risk from the Eurozone, especially with growing tensions in Spain.
US house prices fell 3.5%y/y in February. US house prices are still falling, but a glimmer of hope is that they are falling less quickly than they were. Prices fell by 0.8% in the month, less than the 1% fall the previous month. But prices are still around a third lower than at their peak and it’s likely to be some time yet before price growth returns. Foreclosures are still high and even though new home starts are falling, there is a huge pool of supply which needs to be mopped up before things can begin to get better. It’s the opposite case in the UK where a lack of supply, from both possessions and new building, is preventing prices from falling faster.
US leasing trade body, the Equipment Leasing and Finance Association (ELFA), which has championed this approach, said feedback consistently supported a straight line cost pattern for operating leases to reflect better a lease’s economic effects in lessee financial statements.
Previously the two standards bodies were debating three lessee accounting methods: interest-based amortisation approach, the underlying asset approach and the right of use approach.
However, with the boards yet to reach an agreement on a preferred method, meetings to gather feedback with preparers and users due to run until the end of the month are now considering the fourth option.
ELFA welcomed the development and a spokesman expressed hope that the presentation of this new method will be favourably received at the outreach meetings and lead to a successful resolution of a major issue impeding the successful resolution of the Leases Project.
ELFA recommended the whole life approach because the organisation believes it reflects the appropriate values of the right of use asset and lease liability on the balance sheet that arise from the lease contract.
It also reflects the cost as a level rent expense which is what lessees perceive to be their lease cost benefit for each month. The lease payment would be reported as an operating cash outflow reflecting the true nature of the payment.
The four methods that are now being discussed at the outreach meetings are:
UK inflation rose for the first time in six months in March. Consumer prices rose by 3.5%y/y in March. It was only 0.1 percentage points above expectations but the news was taken badly. The culprits were food, clothing and recreation and culture. The rising costs of essentials put extra pressure on household budgets. But on the positive side downward pressure from electricity, gas and other fuels and transport took some of the heat off.
Real earnings growth fell – again. UK average earnings grew just 1.1% in the three months to February, but with inflation at 3.5% real earnings fell. A 6.2%y/y fall in bonus pay dragged down the overall earnings growth number. This is now the 22nd successive month that earnings growth has failed to keep pace with the cost of living. Average earnings in wholesaling and retailing grew fastest at 3.1%, but the finance and business services sectors saw no growth at all. Regional differences also abound. Since the start of 2008 the North East and Wales saw the largest gains in money wages, while Scotland, the West Midlands, Northern Ireland and the South East lagged behind.
UK retail sales surge in March. After a couple of sluggish months, retail sales rounded off Q1 in style, growing by an impressive 1.8%m/m in value terms. Even excluding the "jerry can" effect, ex-fuel sales were up a healthy 1.5%m/m, with strong growth in clothing & footwear. All told, this means that retail sales will have made a decent contribution to GDP growth in Q1. But retail sales don't tell the whole story. Consumer spending away from the high street has been lacklustre and this will drag on consumers’ input to GDP.
UK unemployment fell unexpectedly in February. UK unemployment fell by 35,000 in the three months to February, bringing the rate down from 8.4% to 8.3%. This was the first fall since May 2011 and brought the number of people unemployed down to 2.65 million. The good news was also shared by the young. The rate of youth unemployment (excl. full time education) fell by 0.2 percentage points to 20.5%. But looking behind the data shows that all of the fall in overall unemployment was due to an increase in employment of part-time workers. The number of people settling for part-time work because they can't find full-time jobs rose to 1.4 million, its highest level since records began in 1992.
US retail sales buoyant in March. Just like their UK cousins, US retailers were also happy. The strong start to the year continued with sales growth of 0.8%m/m in March, which lifts the annual growth rate to 6.5%. It’s encouraging that this performance is consistent with an economic recovery which is steadily building momentum. But let's not get carried away. Again, like the UK, other areas of consumer spending are feeling the pinch. And it's worth bearing in mind that after a similarly buoyant start last year, sales quickly lost pace. As Ben Bernanke, Chairman of the Fed, has already warned, the labour market will need to keep improving if the US economic recovery is to stay on its upward path.
The same five asset classes also experienced year-on-year growth in the 12 months to February, with the most significant increase in commercial vehicles – up 21% on the previous year.
The big ticket assets of aircraft, rolling stock and shipping more than doubled year-on-year in February to £63m.
FLA members generated £1.6bn in total business over the month, a 10% increase on the previous year.
The data also showed asset finance provided £21.2bn for businesses which invested in equipment in the last 12 months - and during 2011, asset finance helped fund 27% of all fixed-capital investment in the UK. Geraldine Kilkelly, chief economist and head of research at the FLA, said: “For some businesses asset finance helps them to replace ageing equipment, while for others it helps them to expand and grow. Whatever the reasons, asset finance plays an important role in funding business investment and in contributing to the economic recovery.”
The report by ELFF, the research arm of the Equipment Leasing and Finance Association (ELFA), identified high oil prices, uncertainty surrounding the eurozone debt crisis, and a slowdown in China and other emerging markets as three impediments to wider economic growth which have dragged down expectations.
A particularly strong 2011 has also contributed to the expected comparative contraction in 2012, according to the report.
“Equipment investment continued to grow at a strong pace, and ended the year up 10.4% from 2010. The latest data suggests that the expiration of tax credits for bonus depreciation and expense allowances drew forward some capital spending into the fourth quarter that may have otherwise taken place in 2012.
“As a result, while we expect healthy year-year growth in equipment investment to continue, the annualized growth rate from Q4 2011 to Q1 2012 may look surprisingly weak,” the report said.
The report predicted the most significant growth, while still revised down, will continue to be in the construction and transport sectors.
Investment in the software and computer equipment sector, which averaged
11% in 2011, has been contracted to between 5% and 10%, slightly lower than forecasted in December.
William Sutton, president of both ELFF and ELFA, said, the while the recent monthly business and confidence indexes showed an increase in growth confidence, the steady but slower growth rate reported in this latest research reflected the impact external factors have on equipment investment over a broader stretch of time.
“We remain cautiously optimistic,” he added.
Looking further ahead to the second of the year, the report speculated, notwithstanding an external shock, the US is poised for faster growth driven by pent-up demand in the consumer and business sectors.
The report, which will be updated quarterly throughout the year, forecast real GDP growth of 2.3%, down from 2.4% in December and inflation is forecast to average 2.4% for the year.
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UK house prices fell in March. It wasn't a surprise that Nationwide reported a 1%m/m fall in prices in March. Previous months had been buoyed by the race to buy before the end of the stamp duty holiday. UK house prices are now 0.9% lower than a year ago. This is the first annual fall in prices in six months. Price falls in the quarter were broadly based across the UK. Only Scotland and the North of England saw price rises, while Wales took over from Northern Ireland as the area where prices fell fastest. London prices fell 0.7%q/q, but this follows a 2.1%q/q increase in Q4 2011.
Mortgage approvals fell to their lowest since June 2011 in February. There aren’t any signs that demand for housing is getting any better. The number of approvals for house purchase fell to 49k in February, from 58K the previous month and is the lowest level of approvals since June 2011. The Bank of England Credit Conditions Survey can shed some light on this. It shows that more approvals were failing credit scoring in Q4, and that this was expected to get worse in Q1. But the end of the stamp duty holiday will also have played a part. There may be a small bounce back in coming months, but it will be a long time before we get back to the 100,000 per month we were used to before the financial crisis.
In contrast, US house prices may be stabilising at last. The Case Shiller US 20 City house price index was unchanged in January after an average fall of 0.6%m/m in each of the previous five months. The annual fall was 3.8%, broadly similar to the previous five months. It could be that an improvement in the labour market and confidence in a US recovery is beginning to feed through into the housing market. But it’s too early to be sure that things are getting back to normal yet.
Eurozone boosts its emergency cash pile. Eurozone finance ministers took a step forward by expanding their bailout fund from EUR 500 billion to 700 billion. This gives the Eurozone an extra buffer against countries falling into financial trouble. The fund was enlarged with the specific intention of offering more protection to the larger economies of Spain and Italy. Although welcome, even this very large sum does not fully protect these large economies, particularly if both were to enter into trouble. And the warning lights on Spain are beginning to flash. The country’s borrowing costs have been rising again despite enforcing harsh austerity measures to meet budget deficit targets mandated by Brussels.
Oil is becoming a bigger worry. With oil prices hovering above $120 per barrel, national authorities have been seriously considering releasing some of their strategic reserves to ease price pressures. Speculation about such a move appears to have had the desired effect, although it’s not clear whether it will be enough to keep them down. Markets really have the jitters. And its no wonder. Unrest in the Middle East (again) is the source of the problem as sanctions on the purchase of Iranian crude and Iran's threats to close the Strait of Hormuz threaten future supplies. And this is despite increased output from Saudi Arabia. Rising oil prices have the capacity to undermine economic growth. One concern is the US. Although the world’s largest economy has been improving, US households and firms could be hit by rising pump prices.
UK inflation stuck to the script in February. The Monetary Policy Committee will have been relieved to see that UK consumer price inflation fell to 3.4% in February - its lowest rate for 15 months. The largest downward pressures came from gas and electricity bills, air fares and a dramatic decline in the price of digital cameras. But on the other side of the coin, alcohol prices moved up. So far, inflation is sticking to the script, but it is still well above its 2% target and the rate of growth of earnings. As long as this remains the case, consumers will continue to feel the squeeze.
A reality check on the UK high street. The effect of the strain on consumers’ purses was brought home clearly in retail sales figures. Retail sales fell sharply in February and January’s data was revised down too. Sales fell by 0.4%m/m in value terms in February, or by 0.8%m/m in volume terms. The decline was broad-based; even non-store sales, e.g. markets, mail order and the internet, edged down. Things are still much better than last year though. Retail sales grew 4.5%y/y in value terms and 1.7%y/y in volume terms.
Ireland goes back into recession. The Irish economy is struggling under the weight of austerity. It is also being held back by the overhang of the financial crisis and the taint of having been bailed out. This is now showing up in its growth figures. In Q4 2011 Gross National Product (GNP) fell 2.2%q/q, after a drop of almost 2%q/q in the previous quarter. After two consecutive quarters of contraction, Ireland has officially re-entered recession.
US housing sector is still in the doldrums. The number of new homes started in the US in February was down 1.1% on the previous month. There has been a very slight improvement in the trend since the autumn, but new building is still at only half of its long run average. Housing sales are also struggling with monthly declines recorded in both January and February. The housing market has long been a drag on the post-crisis recovery in the US and this seems unlikely to change just yet.
Eurozone private sector activity points towards a recession. The composite Purchasing Managers Index (PMI), a key survey of activity across manufacturers and service providers, fell again in March. The index fell from 49.3 in February to 48.7 in March, remaining firmly in the sub-50 contraction territory. Both the manufacturing and the services sectors were slow and the weakness is apparent across the whole region – even in Germany. These numbers point to a second quarter of contraction, which would qualify as a technical recession. The European Central Bank’s liquidity operations may have stabilised markets, but they now need to deliver a boost to economic growth.
China’s struggling manufacturing sector points toward more monetary easing. The flash HSBC manufacturing PMI was disappointing. The March index fell to 48.1 from 49.7 in February which makes it five consecutive months that it’s been below 50. Bank lending is lower than expected and the property sector is struggling under the weight of government efforts to take the heat out of it. With this background more monetary easing from the authorities is probably not too far away.
But turning to business, the major new announcement was the reduction in the main rate of corporation tax from 1 April this year by 2% to 24%, rather than the previously announced (and legislated) 25%. And the Government will stick with its previous intention of further 1% cuts in each of the next 2 years. Alongside this there was a strong hint of a longer term aim of reducing this rate to 20%, the same as the small companies and basic income tax rates (and also VAT, but we have not yet heard whether a formal “flat-tax” policy is being pursued). But for banks, the effect is offset by an increase in the bank levy. Whilst the lower tax rate is to be welcomed generally, it does nothing to improve the competitive position of leasing, apart from in the short term. As with last year, the technical detail of how this is implemented will affect the impact on companies’ reported after tax profits and deferred tax positions over the next few months.
Unsurprisingly there was no mention of the reduction in the annual investment allowance, which reduces from £100,000 to £25,000 in April, although the transitional provisions already reduce the effective limit in many cases, a fact which anecdotal evidence suggests a number of HP customers had missed.
On vehicles the news is very mixed. First the good news that VED on cars is increasing by inflation and is frozen on HGVs, and that the 3% BIK surcharge on diesels is to be removed in 2016. But then cuts from April 2013 in the emission levels at which the capital allowance rates change, so that 100% FYA will only be available for up to 95g/km (currently 110g/km) with the 20% WDA limit reducing from 160 to 130g/km. Alongside this is the announcement of the 100% FYA being removed from leased cars from April 2013, which will come as a major blow to the industry and no doubt prompt some serious dialogue with Government. And the BIK scale rates will again be increased in 2014-16, with the most significant effect being seen on sub75g/km cars and the top rate rising from 35% to 37%.
It seems almost routine that we get new anti-avoidance measures aimed at leasing. This year we have a specific provision “to ensure that the total amount of capital allowances received by lessees under long funding leases for the period of the lease will equal their net “capital” expenditure under that lease” whilst another extends the “sale of lessors” legislation to lessors moving into the tonnage tax regime and also tightens the loss carry back restrictions. The announcement regarding the extension of the capital allowance anti-avoidance provisions and the removal of the “manufacturers and dealers” exemption to those is a replacement of the announcement made in December and suggests that the legislation to be included in the Finance Bill will be slightly different to that previously published in draft.
The provisions follow from a consultation launched in May 2011, but where the immediate withdrawal of the “manufacturers and dealers” exemption was announced in August before the end of the consultation period. Following responses to the consultation and other representations, the Government’s announcements in December (a) extended the anti-avoidance provisions, but using wording which should generally leave leases outside its scope and (b) effectively reinstated the “manufacturers and dealers” exemption for normal captive lessor business, but only with effect from April 2012. Thus some captive lessors were left with reduced capital allowances for business undertaken from August 2011 to March 2012. It appears that the Government is now responding on this latter issue.
Meanwhile the Government is to adopt the proposal for a general anti-avoidance rule and will consult on the detail over the next 12 months. In addition, whilst enhanced capital allowances are to be extended to more enterprise zones, there is no indication that the exclusion of leasing is to be lifted.
The overall message and reaction is definitely upbeat and we must hope that this confidence is justified, but there is still a definite message about leasing retaining its tax avoidance tag, at least with HMRC.
Moving away from leasing and asset finance, the headlines in advance had concentrated on the demise of the 50% income tax rate (the “top rate”, if you ignore the 60% effective rate that applies at just over £100,000 of income), tax relief on pension contributions, stamp duty at the higher end and a well known avoidance scheme, the cliff-edge and anomalies in the proposed withdrawal of child benefit from higher earners and clamping down on tax avoidance (including the GAAR). Meanwhile the reality of economic growth being lower than hoped, albeit with the risk of a double dip recession in the UK now generally considered to be very low (unlike certain other western European countries), public sector borrowings climbing above forecasts in February and a threatened downgrade of the UK’s AAA rating would have to constrain the Budget calculations.
So it is not a surprise to have a fiscally neutral budget, with some measures to stimulate growth, including the extension of the Finance Partnership and Enterprise Finance Guarantee schemes. But unlike recent Budget statements, this had more good news – projected growth figures revised upwards and rising rapidly towards 3%, projected borrowings reduced and deficits falling. All of which contributes to an immediate positive feeling, as do the proposals to look at reductions in red tape in areas such planning, simplified tax calculations for small businesses, aligning income tax and NI administration and the carbon reduction commitment.
While the Chancellor’s instincts may be to remove the top rate of income tax, the political ammunition this would provide to opponents (and even other coalition members) meant that an immediate removal was not realistic. His solution, a reduction to 45% (the rate originally proposed by the Labour Government) from April next year, supported by a forecast from HMRC that this reduced rate would actually increase the tax yield. Similarly each of the other predicted headlines translated into action, apart from pension tax relief.
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UK average earnings growth falls to 1.4% in January. Annual average earnings growth slowed 0.5 percentage points from 1.9% in the previous quarter. Earnings growth has now slowed in every month since July 2011 and is at its lowest rate since July 2010. The slowdown in financial services was particularly sharp, driven by a -6.2% y/y decline in bonuses. The need for households to maintain living standards probably explains the increase in females seeking employment.
Despite higher exports, the UK trade deficit widens in January. The UK's overall trade deficit increased to £1.8bn in January, up from £1.2bn in December, despite higher UK exports. Despite a £0.5bn increase in exports, this was overshadowed by a £0.8bn increase in imports. UK services sector exports also disappointed in January, falling to its smallest surplus since November 2010. Exporters to Europe are finding it tough, but non-EU exports hit a record high.
Eurozone inflation is stickier than expected. Eurozone consumer inflation (CPI) reached 2.7% in February, having increased for three consecutive months. A 9.5%y/y rise in energy prices was the main culprit, but increases were spread across the board. Even though inflation is down from last year’s 3% peak, it's a disappointing result. Especially as euro area households are already hurting with the unemployment rate at a record high of 10.7%.
Eurozone industrial production improves in January, but only just. Overall industrial production increased by 0.2%m/m in January. This was lower than the 0.7% expected, but far better than the 1.1%m/m fall in December. While welcome, this may not be enough to prevent a technical recession in the Eurozone, particularly after a disappointing performance recorded in manufacturing surveys. But it does add to the signs of stabilisation mentioned by ECB’s President Mario Draghi.
The Fed takes a breather. After a flurry of policy announcements at its January meeting, the Federal Open Markets Committee left everything alone last week. So, interest rates stay at practically zero. While there have been some improvements in the economy, particularly in the labour market, we will have to wait for the minutes to see if this was enough to convince any committee members that interest rates should rise before mid 2015.
US retail sales pick up speed. The 1.1%m/m growth in retail sales in February added to the run of positive US economic data. Lower unemployment means that sales have increased for nine months in a row, lifting the annual growth rate to 6.5%.
Ireland and Iceland welcome the possible end to their economic winter. Ireland and Iceland encapsulated the precrisis boom and suffered the heavy blows of the subsequent crash. Yet both are showing signs of lasting recovery. Ireland's trade surplus hit a record high in 2011. This is hugely important for the export-dependant economy. Iceland, on the other hand, has repaid, ahead of schedule, around one-fifth of its IMF debt (or about $443 million). What’s interesting is that both countries opted to solve their economic woes in different ways. Iceland defaulted, while Ireland decided to wear the hair shirt of austerity. Either way, compared with some other Eurozone economies, Ireland and Iceland are the poster-children of recovery. As in the 1930’s, it helps to acknowledge early that your economy’s in trouble. In other words, Portugal, Spain and others are likely to find recovery harder to create and sustain.
]]>Policy makers continue to fight fires with a second Greek bailout finally agreed and the ECB injecting more liquidity. In this environment, policy rates are now expected to remain on hold until 2015.
Download and read the March 2012 Interest & Exchange Rate Forecast!
]]>UK housing market data were stronger, but won’t be for long. The price of a typical house in the UK increased by 0.6%m/m in February, which brought the annual rate of growth up to 0.9%. This may seem at odds with the current difficult economic conditions, but it does chime with other recent data. Mortgage approvals for house purchase reached their highest level in more than two years in January, up a whopping 36%y/y. Some of this is due to particularly weak levels in January 2011, but the improvement in prices and approvals is more likely due to activity brought forward to beat the end of the stamp duty concession later this month.
The US economy ended 2011 in better shape than first thought. The second estimate for Q4 US GDP confirmed that growth gathered pace in the final three months of the year. The number was revised up from 2.8% to 3.0%y/y (annualised), but the overall 2011 growth rate was a lacklustre 1.7%y/y. The revision was due to higher inventory investment, lower imports and higher personal consumption. Indeed US consumer confidence increased to its highest level in 12 months in February. But US Federal Reserve Chairman Bernanke noted that fundamentals supporting consumption are still weak and, notwithstanding recent data, the economy needs to be stronger for the labour market to improve.
US house prices fell 4%y/y in 2011. US house prices have fallen in three quarters of the months since May 2006, and after the 0.4%m/m fall in December prices are now at 2002 levels. More distressed sales are expected in 2012 which will add to the drag on the market from existing foreclosures.
Eurozone banks were eager to take up the ECB’s second dose of long-term funding. 800 banks took advantage of the ECB’s liquidity operation, compared with 523 in December, as collateral rules were loosened. The move has reduced tensions on bond yields in the most vulnerable countries, which is good news. But it’s unlikely ECB Chairman Mario Draghi will offer another dose. He is keen that banks don’t become addicted to the ECB’s medicine and to begin to operate ‘normally’ again by borrowing from each other. But jitters about bank solvencies in the face of the sovereign debt problems are preventing this happening at the moment.
Inflation increased and Eurozone unemployment reached a record high. Eurozone unemployment rose to a record high of 10.7% in January. Spain is suffering most with an unemployment rate of 22.3% and a youth unemployment rate just under 50%. And if this wasn’t gloomy enough, inflation rose to 2.7% in February up from 2.6% in January. Oil is the culprit as prices rise because of increased political tensions in the Middle East. As I said last week, this is another threat to economic recovery, not just in the Euro area but everywhere else too.
China reduces its growth target. After economic growth of 9.2% in 2011, China has brought down its target for 2012 to 7.5%y/y. This is the first time the target has been moved from 8% for eight years.