The Monetary Situation Anthony J. Evans Associate Professor of Economics, ESCP Europe Director, Kaleidic Economics www.kaleidic.org October 14 th 2014
Aug 06, 2015
The Monetary Situation
Anthony J. Evans Associate Professor of Economics, ESCP Europe
Director, Kaleidic Economics
www.kaleidic.org
October 14th 2014
Contents
• Some background data – Money and financial markets 03 – Output and the labour market 22 – Costs and prices 38 – International economy 51
• Threats to global growth – EU 61 – China 65
2
Money and financial markets
3
No major changes on broad money growth or lending
4 Notes: YoY growth rates NSA Source: Bankstats Table A2.2.2 and A2.3 (for M3), Bank of England, September 2014
-8
-6
-4
-2
0
2
4
6
M4 M4 excluding intermediate OFCs M4 lending M4 lending excluding intermediate OFCs M3
M4 growth continues to be driven by private non-financial corporations and household sector
5
-20
-15
-10
-5
0
5
10
15
Other Private Household Other SA Private SA Household SA
YoY growth rates Bankstats Table A4.1, Bank of England, September 2014
M4 lending to households has grown consistently, with high consumer credit growth compensating for contractions in unincorporated business and non profits
6
-8
-6
-4
-2
0
2
4
6
8
household credit Unincorporated
YoY growth rates NSA Bankstats Table A4.1, Bank of England September 2014
0.6%
2.5%
Consumer credit increasingly driven by “other” (i.e. non credit card) sources
7
-6
-4
-2
0
2
4
6
8
10
card
other
YoY growth rates NSA Bankstats Table A4.1, Bank of England September 2014
Credit conditions look stable
• Demand for secured lending for house purchases fell in 2014 Q3 but is expected to pick up in Q4
• Availability of secured credit to households fell in the three months leading up to September 2014. However this follows eight consecutive quarters of expansion and is expected to increase over the next three months
• Demand for lending now expected to be driven by M&A, capital investment, and commercial real estate
8 Bank of England Credit Conditions Survey 2014 Q3, October 7th 2014
Narrower measures show robust growth
9 YoY growth rates Bankstats Table A1.1.1 and A6.1 (for Divisia, NSA), Bank of England, September 2014; and Kaleidic Economics for MA
0
2
4
6
8
10
12
14
16
2012 Oct
Nov Dec 2013 Jan
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 Jan
Feb Mar Apr May Jun Jul Aug Sep
Private non-financial Divisia MA Household Divisia Notes and coin
A note on MA
10
-15%
-10%
-5%
0%
5%
10%
15% Ja
n-01
M
ay-0
1 S
ep-0
1 Ja
n-02
M
ay-0
2 S
ep-0
2 Ja
n-03
M
ay-0
3 S
ep-0
3 Ja
n-04
M
ay-0
4 S
ep-0
4 Ja
n-05
M
ay-0
5 S
ep-0
5 Ja
n-06
M
ay-0
6 S
ep-0
6 Ja
n-07
M
ay-0
7 S
ep-0
7 Ja
n-08
M
ay-0
8 S
ep-0
8 Ja
n-09
M
ay-0
9 S
ep-0
9 Ja
n-10
M
ay-1
0 S
ep-1
0 Ja
n-11
M
ay-1
1 S
ep-1
1 Ja
n-12
M
ay-1
2 S
ep-1
2 Ja
n-13
M
ay-1
3 S
ep-1
3 Ja
n-14
M
ay-1
4
MA is defined as Currency + Demand Deposits This shows MA excluding MFI deposits, see http://www.kaleidic.org/news/2014/7/2/first-glance-at-m4ex.html)
Band of 8.7%-10.9% from Feb 2013-Oct
2014
Major currencies similar to pre crisis levels…
11
60
70
80
90
100
110
120
01-J
an-0
6 01
-Apr
-06
01-J
ul-0
6 01
-Oct
-06
01-J
an-0
7 01
-Apr
-07
01-J
ul-0
7 01
-Oct
-07
01-J
an-0
8 01
-Apr
-08
01-J
ul-0
8 01
-Oct
-08
01-J
an-0
9 01
-Apr
-09
01-J
ul-0
9 01
-Oct
-09
01-J
an-1
0 01
-Apr
-10
01-J
ul-1
0 01
-Oct
-10
01-J
an-1
1 01
-Apr
-11
01-J
ul-1
1 01
-Oct
-11
01-J
an-1
2 01
-Apr
-12
01-J
ul-1
2 01
-Oct
-12
01-J
an-1
3 01
-Apr
-13
01-J
ul-1
3 01
-Oct
-13
01-J
an-1
4 01
-Apr
-14
01-J
ul-1
4
AUD
EUR
USD
Monthly average effective exchange rate (1990 average = 100), Bank of England, September 2014 Series codes: XUMAADG, XUMAERG and XUMAUSG
60
70
80
90
100
110
120
01-S
ep-1
2
01-O
ct-1
2
01-N
ov-1
2
01-D
ec-1
2
01-J
an-1
3
01-F
eb-1
3
01-M
ar-1
3
01-A
pr-1
3
01-M
ay-1
3
01-J
un-1
3
01-J
ul-1
3
01-A
ug-1
3
01-S
ep-1
3
01-O
ct-1
3
01-N
ov-1
3
01-D
ec-1
3
01-J
an-1
4
01-F
eb-1
4
01-M
ar-1
4
01-A
pr-1
4
01-M
ay-1
4
01-J
un-1
4
01-J
ul-1
4
01-A
ug-1
4
01-S
ep-1
4
AUD
EUR
USD
… albeit Euro falling and Dollar rising more recently
12 Monthly average effective exchange rate (1990 average = 100), Bank of England, September 2014 Series codes: XUMAADG, XUMAERG and XUMAUSG
Effective exchange rate of sterling
13
60
70
80
90
100
110
120
130 01
-Jan
-80
01-N
ov-8
0 01
-Sep
-81
01-J
ul-8
2 01
-May
-83
01-M
ar-8
4 01
-Jan
-85
01-N
ov-8
5 01
-Sep
-86
01-J
ul-8
7 01
-May
-88
01-M
ar-8
9 01
-Jan
-90
01-N
ov-9
0 01
-Sep
-91
01-J
ul-9
2 01
-May
-93
01-M
ar-9
4 01
-Jan
-95
01-N
ov-9
5 01
-Sep
-96
01-J
ul-9
7 01
-May
-98
01-M
ar-9
9 01
-Jan
-00
01-N
ov-0
0 01
-Sep
-01
01-J
ul-0
2 01
-May
-03
01-M
ar-0
4 01
-Jan
-05
01-N
ov-0
5 01
-Sep
-06
01-J
ul-0
7 01
-May
-08
01-M
ar-0
9 01
-Jan
-10
01-N
ov-1
0 01
-Sep
-11
01-J
ul-1
2 01
-May
-13
01-M
ar-1
4
Monthly average effective exchange rate (Jan 2005 = 100), Bank of England, September 2014 Series code: XUMABK67
Sterling continues to strengthen since mid 2013
14
70
72
74
76
78
80
82
84
86
88
90
Monthly average effective exchange rate (Jan 2005 = 100), Bank of England, September 2014 Series code: XUMABK67
Production and manufacturing rising…
15 Seasonally adjusted Index of Production August 2014, ONS, October 7th 2014 (Fig. 1)
92
94
96
98
100
102
104
2012MAY 2012SEP 2013JAN 2013MAY 2013SEP 2014JAN 2014MAY
Index of Production Index of Manufacturing
… but - unlike services - still catching up ground on pre crisis levels
16
90
95
100
105
110
115 20
03 Q
1 Q
2 Q
3 Q
4 20
04 Q
1 Q
2 Q
3 Q
4 20
05 Q
1 Q
2 Q
3 Q
4 20
06 Q
1 Q
2 Q
3 Q
4 20
07 Q
1 Q
2 Q
3 Q
4 20
08 Q
1 Q
2 Q
3 Q
4 20
09 Q
1 Q
2 Q
3 Q
4 20
10 Q
1 Q
2 Q
3 Q
4 20
11 Q
1 Q
2 Q
3 Q
4 20
12 Q
1 Q
2 Q
3 Q
4 20
13 Q
1 Q
2 Q
3 Q
4 20
14 Q
1 Q
2
Index of Production Index of Manufacturing
Seasonally adjusted Index of Production August 2014, ONS, October 7th 2014 (Fig. 2)
Gilt yields falling slightly since the summer
17
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5 01
-Jan
-10
01-M
ar-1
0
01-M
ay-1
0
01-J
ul-1
0
01-S
ep-1
0
01-N
ov-1
0
01-J
an-1
1
01-M
ar-1
1
01-M
ay-1
1
01-J
ul-1
1
01-S
ep-1
1
01-N
ov-1
1
01-J
an-1
2
01-M
ar-1
2
01-M
ay-1
2
01-J
ul-1
2
01-S
ep-1
2
01-N
ov-1
2
01-J
an-1
3
01-M
ar-1
3
01-M
ay-1
3
01-J
ul-1
3
01-S
ep-1
3
01-N
ov-1
3
01-J
an-1
4
01-M
ar-1
4
01-M
ay-1
4
01-J
ul-1
4
01-S
ep-1
4
20 yr
10 yr
5 yr
Monthly average yield from British Government Securities, October 1st 2014, Bank of England
Standard variable rates have been steadily rising
18
0
1
2
3
4
5
6
Tracker 5 year fix SVR
Series IUMBV24, IUMBV42 and IUMTLMV from Bank of England. 5 year fix is 75% LTV. Lifetime tracker. Updated October 10th 2014.
Deposit rates are falling
19
0
0.5
1
1.5
2
2.5
3
3.5
4
2 yr bond Instant access (include bonuses) Instant access (excl bonuses)
Series IUMB6RH , IUMB6VJ and IUMB6VK from Bank of England. All NSA. Monthly interest rates (excl. central bank). Updated October 10th 2014.
FTSE 100 has fallen since September but similar levels to Spring 2007
20 Yahoo! Finance, October 10th 2014
FTSE all-share index shows continued growth
21 Yahoo! Finance, October 10th 2014
Output and the labour market
22
Good employment data relative to last year
23
Employment (aged 16 and over)
Unemployment (aged 16 and over) Inactivity (aged 16 to 64) Inactivity (aged 65+)
Changes 774 -468 -31 167
-600
-400
-200
0
200
400
600
800
1000
Thousands, seasonally adjusted UK Labour Market, ONS, September 2014
Unemployment continues to fall, reaching 6.2% (May-Jul 2014)
24 UK Labour Market, ONS, September 2014
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan-Mar 1997
May-Jul 1998
Sep-Nov 1999
Jan-Mar 2001
May-Jul 2002
Sep-Nov 2003
Jan-Mar 2005
May-Jul 2006
Sep-Nov 2007
Jan-Mar 2009
May-Jul 2010
Sep-Nov 2011
Jan-Mar 2013
May-Jul 2014
7% threshold for Forward Guidance was reached in Feb
2014
Continue to see low pay growth – only 0.7% higher than last year
25
-4
-2
0
2
4
6
8 Ja
n 07
M
ar 0
7 M
ay 0
7 Ju
l 07
Sep
07
Nov
07
Jan
08
Mar
08
May
08
Jul 0
8 S
ep 0
8 N
ov 0
8 Ja
n 09
M
ar 0
9 M
ay 0
9 Ju
l 09
Sep
09
Nov
09
Jan
10
Mar
10
May
10
Jul 1
0 S
ep 1
0 N
ov 1
0 Ja
n 11
M
ar 1
1 M
ay 1
1 Ju
l 11
Sep
11
Nov
11
Jan
12
Mar
12
May
12
Jul 1
2 S
ep 1
2 N
ov 1
2 Ja
n 13
M
ar 1
3 M
ay 1
3 Ju
l 13
Sep
13
Nov
13
Jan
14
Mar
14
May
14
Jul 1
4
Private sector Public sector
% change year on year, 3 month average UK Labour Market, September 2014, ONS, September 17th 2014
Some big revisions should reaffirm skepticism towards the National Accounts
• The peak to trough fall of the economic downturn in 2008/2009 is now estimated to be 6.0%. Previously this was estimated to be 7.2%.
• 2012 GDP was 6.2pc larger than we previously thought* • In Q2 2014, GDP was estimated to have been 2.7% higher
than the pre-economic downturn peak of Q1 2008, having first exceeded this peak in Q3 2013.
• Largely due to reclassifications of Research and Development spending and inclusion of sex and drug industries
26 Quarterly National Accounts, Q2, 2014 (published September 30th 2014) * Allister Heath, http://www.telegraph.co.uk/finance/economics/11073744/Everything-we-thought-we-knew-about-the-economy-was-wrong.html
GDP growth looks strong
27
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
97
98
99
100
101
102
103
104
105
106
2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2
QoQ growth 2011=100
Chained volume measure Quarterly National Accounts, Q2, 2014 (published September 30th 2014)
Revised up by 1% since Second
estimate
Driven by service growth but all expanding since 2013 Q1
28
80
85
90
95
100
105
110
Services
Manufacturing
Construction
Production
Chained volume measure Quarterly National Accounts, Q2, 2014 (published September 30th 2014)
Increasingly driven by investment rather than household consumer spending
29
0
2
4
6
8
10
12
2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2
National household final consumption expenditure Gross fixed capital formation Gross domestic product at market prices
Chained volume measure, quarter on same quarter of previous year growth Quarterly National Accounts, Q2, 2014 (published September 30th 2014
Business investment has risen above 10% annual growth
30
-20
-15
-10
-5
0
5
10
15
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
Quarter on same quarter of previous year growth Quarterly National Accounts, Q2, 2014 (published September 30th 2014 (Table F)
Real disposable income rose last quarter
31
-1.1
0.6
-0.3 -0.2
1
-1.2
-2.1
0.9
0.4
-1.2
-0.1
3.1
0.1
-1.1
-1.8
2.2
0.4
-0.8 -0.6
2.2
-3
-2
-1
0
1
2
3
4
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
Chained volume measure, quarter-on-quarter growth Quarterly National Accounts, Q2, 2014 (published September 30th 2014).
Consensus forecast for 2014 is 3.1% growth (and 2.6% in 2015)
32 Source: Forecasts for the UK Economy, HM Treasury, No. 329, September 2014
Composite leading indicators suggest this won’t be permanent
33
97.5
98
98.5
99
99.5
100
100.5
101
101.5
United Kingdom United States Euro area (18 countries) China (People s Republic of)
Source: OECD
Strong rates of expansion were persistent in US and UK according to Markit’s PMI survey, albeit falling
34 See http://www.bbc.co.uk/news/business-29503366 and http://www.markit.com/Commentary/PrintCommentary/09102014-Economics-Markit-economic-overview
58.8 September (60.5 August)
Subdued exports due to weak Eurozone growth and strong sterling
35
-6
-4
-2
0
2
4
6
8
10
12
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
Exports Imports
Chained volume measure, quarter-on-quarter of previous year growth. Series codes KH2W and KGW7 Quarterly National Accounts, Q2, 2014 (published September 30th 2014 * http://www.thisismoney.co.uk/money/news/article-2787955/decline-exports-fall-construction-output-threaten-uk-growth.html
Trade deficit fell to £1.9bn in Aug (down from £3.1bn in Jul) Due to imports falling (mainly aircraft, fuels and chemicals)* by more than exports See UK Trade, August 2914, ONS, 10th October 2014
NGDP growth has returned to normal
36 Yoy growth rates (SA) where: NGDP=IHYO RGDP=IHYR GDP DEFLATOR=IHYU Quarterly National Accounts, Q2, 2014 (published September 30th 2014) 5.3% is the median NGDP growth rate from 1997-2007
-8
-6
-4
-2
0
2
4
6
8
10
P+Y Y P 4 6 5.3
What’s the optimal level target?
37 YBHA: GDP at market prices, £ million (SA) Quarterly National Accounts, Q2, 2014 (published September 30th 2014) 5.3% is the extrapolation from 2007 Q1
0
100 000
200 000
300 000
400 000
500 000
600 000
5.3
NGDP
4.0
Costs and prices
38
Oil prices continue their fall
39 * Wall Street Journal, see http://online.wsj.com/articles/oil-prices-fall-as-production-mounts-1412920881 ** Brad Plumer, see http://www.vox.com/2014/10/7/6934819/oil-prices-falling-russia-OPEC-shale-boom-gasoline-prices
Increased production by US (due to production improvements), Libya, Iraq (OPEC output highest since January 2013)
+ Reduced demand from China, Europe
= Prices have dropped 20% since June*
**
Input prices (i.e. raw materials) continue to fall
40
- 7.2% Aug - 7.5% Jul
-10
-5
0
5
10
15
20
Jan-
11
Feb-
11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1 A
ug-1
1 S
ep-1
1 O
ct-1
1 N
ov-1
1 D
ec-1
1 Ja
n-12
Fe
b-12
M
ar-1
2 A
pr-1
2 M
ay-1
2 Ju
n-12
Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3 A
ug-1
3 S
ep-1
3 O
ct-1
3 N
ov-1
3 D
ec-1
3 Ja
n-14
Fe
b-14
M
ar-1
4 A
pr-1
4 M
ay-1
4 Ju
n-14
Ju
l-14
Aug
-14
Materials & fuels purchased Excluding food, beverages, tobacco & petroleum industries
12 month percentage growth, NSA Producer Price Inflation, August 2014, ONS, released September 16th 2014
Output prices (factor gate) for all manufactured goods remains negative
41
-1
0
1
2
3
4
5
6
- 0.3% Aug - 0.1% Jul
Driven by Petroleum products, which are down 7.1% compared to this time last year
12 month percentage growth, NSA Producer Price Inflation, August 2014, ONS, released September 16th 2014
CPI is 1.5%, RPI is muted
42 Consumer Price Inflation, ONS, August 2014
-3
-2
-1
0
1
2
3
4
5
6 Ja
n 20
06
Mar
M
ay
Jul
Sep
N
ov
Jan
2007
M
ar
May
Ju
l S
ep
Nov
Ja
n 20
08
Mar
M
ay
Jul
Sep
N
ov
Jan
2009
M
ar
May
Ju
l S
ep
Nov
Ja
n 20
10
Mar
M
ay
Jul
Sep
N
ov
Jan
2011
M
ar
May
Ju
l S
ep
Nov
Ja
n 20
12
Mar
M
ay
Jul
Sep
N
ov
Jan
2013
M
ar
May
Ju
l S
ep
Nov
Ja
n 20
14
Mar
M
ay
Jul
CPI RPI1 RPIJ 2.0
Update due Oct 14th!!!
Driven by food and non-alcoholic beverages (down 0.08pp)
43
-0.10 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06
Food and non-alcoholic beverages
Alcohol and tobacco
Clothing and footwear
Housing and household services
Furniture and household goods
Health
Transport
Communication
Recreation and culture
Education
Restaurants and hotels
Miscellaneous goods and services
Contributions to the change in the CPI 12-month rate Consumer Price Inflation, ONS, August 2014
• “in Europe, inflation expectations remain well anchored
despite the current low inflation environment”**
Surveys suggest inflation expectations are well anchored
44
BofE/GfK Inflation Attitudes Survey*
August 2014 May 2014
M&G/ YouGov Inflation Expectations Survey**
September 2014 May 2014
Inflation over the coming year
2.8% 2.6%
2.2% 2.3%
12 months after that 2.8% 2.5%
5 years time 3.4% 2.9%
3.0% 3.0%
*Survey of 2016 people aged 16+ in 175 random areas weighted to match UK demographic profile. Conducted 7th – 15th August 2014 ** Survey of 2,090 people
Range of expert forecasts of CPI (Q4) in 2015 show no cause for alarm
45 Forecasts made in the last 3 months Source: Forecasts for the UK Economy, HM Treasury, No. 329, September 2014
1.7%
2.0%
3.3%
Lowest Median Highest
House price inflation is high but may have peaked
46
11.7% July (10.2% June)
ONS: Year on year growth rates Halifax: Measured over 3 months compared to same 3 months of previous year Nationwide: Year on year growth rates
9.6% Sep (10.2% July)
9.4% Sep (11.0% Aug)
Ratio of gross house prices to first time buyers earnings still above historic average
47 Source: Nationwide Median = 3.1%
0
1
2
3
4
5
6 19
83 Q
1 19
83 Q
4 19
84 Q
3 19
85 Q
2 19
86 Q
1 19
87 Q
4 19
87 Q
3 19
88 Q
2 19
89 Q
1 19
89 Q
4 19
90 Q
3 19
91 Q
2 19
92 Q
1 19
92 Q
4 19
93 Q
3 19
94 Q
2 19
95 Q
1 19
95 Q
4 19
96 Q
3 19
97 Q
2 19
98 Q
1 19
98 Q
4 19
99 Q
3 20
00 Q
2 20
01 Q
1 20
01 Q
4 20
02 Q
3 20
03 Q
2 20
04 Q
1 20
04 Q
4 20
05 Q
3 20
06 Q
2 20
07 Q
1 20
07 Q
4 20
08 Q
3 20
09 Q
2 20
10 Q
1 20
10 Q
4 20
11 Q
3 20
12 Q
2 20
13 Q
1 20
13 Q
4 20
14 Q
3
But not for all house buyers
48
3.00
3.50
4.00
4.50
5.00
5.50
6.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Price earnings ratio Halifax House Price Index, September 2014
House price growth driven by London but wide spread
49
12
5
10
5
7
19
12
0
5
10
15
20
25
UK Northern Ireland
North East Yorks & The Humber
West Midlands London South East
Selected regions, Source: Regulated Mortgage Agency See House Price Index, ONS, July 2014
Although house prices have only reach 2007 peak in nominal terms
50 Left: Nationwide House Price Index, September 2014 Right: Halifax House Price Index, September 2014 (Jan 1983)
40,000
45,000
50,000
55,000
60,000
65,000
70,000
75,000
80,000
85,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Real average house price
International economy
51
The IMF anticipate a global recovery
3.4 3.3 3.3
3.8
2
2.5
3
3.5
4
2012 2013 2014 2015
52 Percent change in World Output World Economic Outlook, October 7th 2014
A pensive outlook for global growth
• IMF forecast global growth of 3.3% in 2014 (down from a forecast of 3.7% made in April). They think it will reach 3.8% in 2015 (down from 3.9% in April).
• Unchanged forecasts of UK growth of 3.2% in 2014 and 2.7% in 2015 • Emerging market and developing economies projected to rise from 4.4% in
2014 to 5.0% in 2015 (down from 4.5% and 5.2% respectively) • The IMF’s advocacy of public infrastructure to “help raise potential output
in the medium term” and “structural reforms to strengthen potential growth” is revealing… – Generous view: depressed aggregate demand has now created a
reduction in potential GDP growth – Alternative view: finally realising that a lot of pre 2008 growth was over
capacity, and negative supply shocks since then mean that we have a predominantly supply side problem
• WTO forecast global trade of 3.1% in 2014 (down from previous forecast of 4.7%)*
53 World Economic Outlook, October 7th 2014 * “Oil and trouble”, The Economist, Oct 4th 2014
Equity markets rising
54 h/t J P Leschly Neergaard, Danske Bank
Volatility low
55 h/t J P Leschly Neergaard, Danske Bank
5
6
7
8
9
10
11
12
EU
UK
US
US, UK doing better than EU on unemployment
56 UK Labour Market, ONS, September 2014
UK manufacturing output above 2011 levels and rising
57
70
75
80
85
90
95
100
105
110
115
US
UK
Germany
France
2011=100. SA. Source: OECD. See Index of Production August 2014, ONS, October 7th 2014 (Fig. 3)
UK quarterly GDP growth rate is consistent and stronger than others
58
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
Eurozone Japan United Kingdom United States of America
Chained volume measure, quarter-on-quarter growth Quarterly National Accounts, Q2, 2014 (published September 30th 2014)
Not out of the woods, but going in the right direction (at last)
59
80
85
90
95
100
105
110
US
UK
Japan
EU
Chained volume measure, quarter-on-quarter growth Quarterly National Accounts, Q2, 2014 (published September 30th 2014)
Threats to global growth
• Possibility of triple dip recession in EU and/or deflation • Chinese pondering their future • Geopolitical tensions in Russia/Ukraine and Middle East • Financial market excess (underpriced risk as a result of
search for yield) • Ebola outbreak
60 Some of these were specified by the IMF in their World Economic Outlook, October 7th 2014 See also “Oil and trouble”, The Economist, Oct 4th 2014
The Eurozone is skirting with a triple-dip recession
61 ECB Statistical Data Warehouse, October 2014
German economy is a concern
• European investment in manufacturing equipment down from €192bn in 2013 Q1 to €184bn in 2014 Q1* – €66bn of which comes from German SMEs*
• Total planned capital investment in Germany down 18% in 2014 Q1 compared to 2013 Q1*
• Car sales down 0.4% in August 2014**
62 *European CapEx Barometer, GE Capital, Q1 2014 ** See http://uk.reuters.com/article/2014/09/17/uk-vehicleregistrations-europe-august-idUKKBN0HC0DA20140917
The ECB is to blame
• ECB have been more effective at fending off imminent danger than creating a sound platform for economic growth
• They have successfully bought time for governments to resolve public finance concerns and improve competitiveness – But much of that debt problem is due to a collapse in
nominal incomes • Significant supply side problems, and the political
constraints under which the ECB operate hinder their ability to act – i.e. “setting monetary policy for countries that retain
fiscal sovereignty”* • But ultimately the ECB is failing in their primary duty of
hitting their inflation target, and this is due to monetary timidity
63 * “The Exceptional Central Bank” The Economist, August 2nd 2014
• Since “whatever it takes” (July 2012)* – Monetary base is down 30% – 1 year real interest rate is 70bp higher
• Need to find a way to implement scalable QE tied to clearly communicated nominal objectives
64
0.3% Sep’14
ECB Statistical Data Warehouse, October 2014 * h/t J P Leschly Neergaard, Danske Bank
CPI is collapsing False start to M3 growth
Chinese tightening potentially damaging
• China is currently attempting to stem credit growth, and rebalance away from commodity intensive investment in infrastructure
• The problem is a combination of China’s increased economic importance and a potential economic slowdown
• Plausible argument that a standard monetarist story explains what’s going on:
65 h/t Lars Christensen, Danske Bank http://marketmonetarist.com/2012/10/14/my-favourite-chinese-monetary-graph/
M + V = P + Y 16 – 2 ≈ 4 + 10
China’s monetary growth is undershooting their implicit target
66
0
100
200
300
400
500
600
700
800
900 20
00-0
1-01
20
00-0
5-01
20
00-0
9-01
20
01-0
1-01
20
01-0
5-01
20
01-0
9-01
20
02-0
1-01
20
02-0
5-01
20
02-0
9-01
20
03-0
1-01
20
03-0
5-01
20
03-0
9-01
20
04-0
1-01
20
04-0
5-01
20
04-0
9-01
20
05-0
1-01
20
05-0
5-01
20
05-0
9-01
20
06-0
1-01
20
06-0
5-01
20
06-0
9-01
20
07-0
1-01
20
07-0
5-01
20
07-0
9-01
20
08-0
1-01
20
08-0
5-01
20
08-0
9-01
20
09-0
1-01
20
09-0
5-01
20
09-0
9-01
20
10-0
1-01
20
10-0
5-01
20
10-0
9-01
20
11-0
1-01
20
11-0
5-01
20
11-0
9-01
20
12-0
1-01
20
12-0
5-01
20
12-0
9-01
20
13-0
1-01
20
13-0
5-01
20
13-0
9-01
20
14-0
1-01
20
14-0
5-01
M1
15%
16%
Recent reductions in growth forecasts support this view
67
2012 2013 2014 2015 2016
IMF World Economic Outlook, Oct 7th 2014
7.7 7.7 7.4 7.1
World Bank East Asia & Pacific Update, Oct 2014 (April 2014)
7.4 (7.6)
7.2 (7.5)
7.1 (7.5)
China GDP forecasts
An Austrian view is even more concerning
• Problems relating to: – Excessive nominal growth path – Mis-allocated capital (i.e. credit fuelled housing
bubble) – Validity of national statistics
• Perhaps monetary tightening and lower growth prospects are inevitable
68
China’s role as a monetary superpower
• Important channels through which a Chinese slow down could spread:* – Exports – China is an important export market for many countries – Commodity prices – China is a major source of demand for commodities – Financial flow – China has large foreign currency reserves and is a major
source of global demand for emerging market bonds and equities • Even if other countries aren’t pegged to CN¥, they can still “import” PBoC
monetary tightening • Although it’s voluntary:
– Brazil – Chinese tightening reduces Brazilian exports, this leads to higher domestic inflation (higher important prices) which Brazilian central bank responded to by raising interest rates (up 3.75% since April 2013)**
• They’re responding to the negative supply shock rather than negative demand shock
– Australia have been easing over the last few years (reduced rates to 2.5%) and unconcerned by inflation at 3% (July 2014). Happier to let AUD float
69 * http://marketmonetarist.com/2013/07/24/china-as-a-monetary-superpower-the-sino-monetary-transmission-mechanism/ ** http://marketmonetarist.com/2013/07/11/the-pbocs-monetary-supremacy-over-brazil-but-dont-blame-the-chinese/
Summary
• Key question: Does the current situation require emergency monetary policy?
• Relatively strong domestic demand conditions continue to provide an opportunity to begin normalization – Should start to act when growth returns to normal, not
when it picks up sharply – Serious macroeconomic disturbances can occur under a
stable/low inflation rate
70