Entries from February 12, 2012 - February 18, 2012
UK Q4 GDP fall may reflect workday effect
Does anyone seriously believe that the French economy expanded by 0.2% last quarter while the UK contracted by the same percentage, as claimed by the respective national statistics bodies?
Business surveys suggest the opposite experience: the average level of the PMI composite output index was above the breakeven 50 level in the UK last quarter but below it in France.
The guess here is that the GDP discrepancy is due to French statisticians, but not their UK counterparts, applying a working-day adjustment to the raw numbers. There were 63 working days in the UK last quarter, one fewer than in the prior four years, according to www.work-day.co.uk. The Office for National Statistics adjusts GDP data for seasonal factors but not working days.
Working-day adjustments applied by the French and other continental European national statistics bodies are not proportional but are derived from regression models. One cannot, in other words, estimate workday-adjusted growth for the UK last quarter by adding back 1 as a percentage of 63, or 1.6% – the actual effect will have been much smaller. It is likely, however, that a properly-calculated correction would wipe out the reported 0.2% GDP decline.
If this explanation is correct, first-quarter GDP figures will flatter the UK relative to France as the workday effect reverses.
Global real money suggesting spring growth peak
The current mini-upswing in global growth may top out in the spring. The extent of any subsequent slowdown will depend importantly on whether recent ECB policy easing succeeds in reviving Eurozone monetary expansion.
The first chart below shows six-month growth in global industrial output (i.e. a composite of the G7 and seven large emerging economies) together with the two key forecasting measures employed here – six-month real narrow money expansion and a leading indicator derived from the OECD’s country leading indices. The indicator signals turning points in output momentum about three months in advance while real money typically moves three months earlier (i.e. six months before output).
Faster real money growth from mid 2011 predicted recent economic acceleration, a forecast that was confirmed by an upturn in the leading indicator later last year. The indicator continued its pick-up in December (data released earlier this week), consistent with six-month output growth rising at least through March.
Six-month real narrow money expansion, however, appears to have peaked in November, falling back sharply in January, based on partial information. Allowing for the usual six-month lead, this suggests that output growth will top in May, a scenario that would be confirmed by the leading indicator peaking around February.
The second chart shows that the estimated January fall in global real money expansion mainly reflected weakness in China, where the reading was depressed by the early New Year holiday and should bounce back in February. US strength, however, has started to wane, possibly reflecting QE2 stimulus fading – “operation twist” has weaker monetary effects. Sustaining solid global real money growth, therefore, may depend on the ECB's interest rate cuts and liquidity injections reversing recent Eurozone weakness – January monetary figures will be released on 27 February.
The working hypothesis here – subject to revision in light of new monetary data – is that the ECB’s actions will prove at least partially effective and that global real narrow money will continue to expand at a respectable pace, consistent with a modest downshift in economic momentum from the spring rather than anything worse.
Another Inflation Report yawnathon
Today’s Inflation Report release and press conference followed the usual ritual, with the Bank listing all the reasons it does not know where growth and inflation are heading but signalling that it remains biased towards more easing anyway.
The policy signal in each Inflation Report is contained in a single statistic – the mean forecast for inflation in two years’ time assuming unchanged policy. This was 1.29% in November and seems to be 1.8% in the latest Report, based on eyeballing chart 5.13. (The Bank’s policy of delaying publication of its forecast numbers until a week after the Report is designed, presumably, to embarrass economists with inferior visual skills.) The message is that the Bank thinks that further easing will be required to hit the 2% target but is less dovish than a quarter ago – hardly a surprise.
The most interesting analysis in the Report is a box on pages 34 and 35 presenting evidence that consumer-facing companies’ profit margins remain far below their pre-recession level. The Bank’s forecast that the 12-month CPI increase will fall below 2% rests on a reduction in domestically-generated inflation as a pick-up in productivity growth puts downward pressure on unit labour costs. Firms, however, are more likely to use any slowdown in unit costs to rebuild margins, resulting in “core” inflation – stable above 2% in recent months – remaining elevated.
In a discussion on page 11 of the reasons for the weakness of broad money in the fourth quarter, the Bank seems to acknowledge that it has overpaid for gilts because of market players front-running its purchases, stating that “some financial institutions in the non-bank private sector may have borrowed money from banks to buy gilts in Q3 in anticipation of further asset purchases being announced by the MPC. That would have boosted money growth in Q3 and reduced it in Q4 when the gilts were sold and the loans were repaid.” Cue more populist headlines about QE fuelling City bonuses?
UK labour market statistics confirm economic resilience
Labour market statistics released today were slightly better than expected, showing employment recovering and unemployment stabilising. Resilience had been suggested by recent strength in online job postings, as measured by the Monster employment index – see previous post.
The Labour Force Survey (LFS) employees measure – a three-month moving average – bottomed in October, rising 86,000 by December. This increase mainly reflects part-time jobs and the measure remains 79,000 below its level a year earlier. The Monster index, however, suggests further gains in early 2012 – see first chart.
LFS unemployment edged down by 14,000 in December though was up by 49,000 from September (three-month averages again). The LFS measure lags the claimant-count, which is still edging higher, implying that employment growth remains insufficient to offset labour force expansion – second chart.
The official vacancies series moved up further in January (three-month average), confirming the message from the more timely and leading Monster index. This reflects private sector strength, with vacancies outside public administration, education and health at a post-recession high – third chart.
The labour market remains weak but these statistics are not consistent with a “double dip”.
UK inflation fall hoopla ignores stubborn core trends
UK annual inflation rates fell sharply in January as the bulk of the impact of last year’s VAT hike washed out of the figures. Core price trends, however, remain sticky, casting strong doubt on forecasts that CPI inflation will return to the 2% target or below this year.
The chart shows six-month annualised changes in smoothed core CPI and RPI measures. The former strips out energy and fresh food and attempts to adjust for VAT changes and seasonal factors while the RPI measure additionally excludes mortgage interest costs and housing depreciation. CPI core momentum has been persistently above 2% in recent years, standing at 2.7% in January, with the RPI measure higher at 3.5%.
The central scenario here, based on stable core momentum and a modest firming of commodity prices during 2012, is that CPI inflation will bottom at about 2.5% in the autumn and edge higher into year-end, implying a seventh consecutive December overshoot. RPI inflation is expected to follow a similar profile, with an autumn trough of about 3.25%.
Looking further ahead, inflation may rise in 2013, reflecting global pressures and the lagged impact of QE2. A pick-up in global inflation is suggested by a revival in monetary growth in 2010-11, based on the Friedmanite rule that money leads prices by about two years. Meanwhile, “monetarist” estimates of the impact of QE1 in a recent Bank working paper imply that planned total QE2 buying of £125 billion by May 2012 could add about 0.6 percentage points to inflation by mid 2014, with the bulk of the effect occurring during 2013.
Chinese downside risks rising again
Recent Chinese news has been downbeat, suggesting that the authorities need to accelerate policy easing to keep a “hard landing” at bay.
Chinese economic prospects seemed to improve in late 2011 as real money expansion revived in response to policy easing and a slowdown in inflation. January monetary numbers, however, were disappointing, with the six-month rise in real M2 falling back and real M1 showing a rare contraction – see first chart. The earlier-than-usual New Year holiday had a depressing effect but is unlikely to be the whole story, judging from a comparison with previous years when the timing was similar.
Downside risk is also suggested by a forecasting indicator derived from the OECD’s Chinese leading index – a composite of seven forward-looking economic and financial variables. The December reading of the indicator was the weakest since October 2008, signalling a further slowdown in industrial output in early 2012, a prospect that may be reflected in renewed weakness in business surveys – second and third charts.
Timely policy loosening in late 2011 warranted optimism that the authorities would successfully manage a necessary economic slowdown but their failure to deliver further stimulus so far in 2012 – probably reflecting brighter global news and lingering inflation concern – has been a mistake. The latest data, hopefully, will act as a wake-up call and catalyse another policy shift.