Larry Elliott

While jobs growth and output are rising fast in the construction industry, retail offers a more mixed picture of the UK economy. Forecasting groups have modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013…

 


Powered by Guardian.co.ukThis article titled “Construction and retail – contrasting perspectives on UK economic recovery” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 5th November 2013 00.01 UTC

Construction and retailing offer contrasting perspectives on Britain’s economic recovery. On the UK’s building sites, things are looking up . The monthly construction industry health check from CIPS/Markit showed jobs growth and output rising at their fastest for six years. Although that may be more a reflection of the deep hole the sector plunged into during the recession, sentiment has certainly improved. The Government’s Help to Buy scheme has boosted house building, but Monday’s report suggests demand for commercial property is also on the up.

Tuesday’s report from the British Retailers Consortium is more mixed. After a strong summer, spending growth in the high street has cooled in the last couple of months. That could be because sales of new winter fashions have been hit by unseasonally warm weather, or it could be that consumers are saving up for a big splurge at Christmas. It could be that individuals are finding it hard to make the sums add up during a prolonged period when prices have been rising more quickly than wages. In all probability, the cautious mood is a combination of all three.

Rising consumer spending is the reason economic activity picked up in the second and third quarters of the year. There was little boost from the other components of growth -– investment, exports and the state – so the expansion was the result of higher household spending. How is this possible when real earnings are falling? In part, spending has been encouraged by rising employment. In part, it has been aided by stronger consumer confidence, which has led to people running down the precautionary savings they built up when they were more pessimistic about the future.

Clearly, consumers will be unable to continue dipping into their savings to fund their spending for ever. That’s why forecasting groups such as the National Institute for Economic Research have only modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013. NIESR sees little prospect of stronger investment kicking in, and with the prospects for exporters decidedly mixed that means consumers will again bear the strain.

Even so, the NIESR forecast looks too low. There will be some recovery in investment in response to stronger consumer spending. More significantly, perhaps, the housing market now has real momentum and that will lead to some further drop in the savings ratio to compensate for squeezed incomes.

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USA 

Larry Elliott: It is hard to see how the Fed can start to scale back its quantitative easing program this year. Nobody is sure any longer what the Fed is really up to. What will it take for the Fed to start winding down the stimulus?…

 


Powered by Guardian.co.ukThis article titled “Federal Reserve tapering decision has baffled the markets” was written by Larry Elliott, economics editor, for The Guardian on Thursday 19th September 2013 17.19 UTC

The dust was still settling on Thursday after the Federal Reserve delivered one of the biggest surprises to financial markets in many a year. This was a return to the central banking practices of the past when policymakers liked to keep people guessing about their intentions. These days central bankers pride themselves on their transparency.

But nobody is sure any longer what the Fed is really up to. Clearly it got cold feet about announcing even the most modest reduction in the amount of stimulus provided to the US economy through its long-term asset purchase programme, but both the decision and the way it was announced raised more questions than they answered.

Why was there no warning to the markets that the Fed was worried about the slowdown in growth? Why, in the absence of such a warning, did it not go ahead with a tokenist reduction in the stimulus, of say $5bn (£3.17bn) a month, that would have made good the commitment to start tapering but had no material impact on growth? What will it now take for the Fed to start winding down the stimulus?

But although the Fed’s communications strategy now lies in tatters, some conclusions can be drawn from the postponement of the taper. Firstly, policy is going to remain loose for longer than the markets envisaged. It is hard to see how the Fed can start to scale back its quantitative easing programme this year, and the prospect of the process being completed in 2014 – as originally envisaged – is as good as dead.

Secondly, the Fed is even more doveish than the markets thought. When Ben Bernanke first floated the idea of the taper back in May, the notion was that the trigger for the taper would be falling unemployment. But despite a continued moderate improvement in the labour market, the Fed still feels the time is not ripe to act. It took fright when speculation about the taper led to rising bond yields, making mortgages more expensive. It looked askance when share prices fell. And it is worried about the possible consequences of the looming budget showdown between Democrats and Republicans in Washington. So when the time came to act, it blinked.

Thirdly, the Fed has provided a respite – albeit probably temporary – to emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

Finally, the muted second day reaction to the decision was the reaction to one final unanswered question: does the Fed have the remotest idea how to unwind the stimulus? As Stephen Lewis of Monument Securities put it: Bernanke has given the “impression of being astride a tiger he dare not dismount.”

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It is time for the European Central Bank to show its independence and act in the interests of all eurozone citizens– not just Angela Merkel’s, writes The Guardian’s economics editor Larry Elliott.  A different approach is needed to save the eurozone…

 


Powered by Guardian.co.ukThis article titled “European Central Bank must heed eurozone warning signs” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 30th April 2013 12.57 UTC

The warning signs are flashing red for the eurozone. Inflation is plunging, unemployment is rising and activity is weakening across the board. Unless Europe wants to become the next Japan, mired in permanent deflation and depression, action is needed now.

Stage one of the process should be a cut in interest rates from the European Central Bank (ECB) when it meets in Bratislava on Thursday. The latest inflation figures show the annual increase in the cost of living across the 17-nation single-currency area fell from 1.7% to 1.2%, its lowest in three years and well below the ECB's 2% ceiling. Even Jens Weidmann, the ultra-hawkish president of Germany's Bundesbank, would be hard pressed to say there is a threat to price stability.

It's not hard to see why inflationary pressure is abating: the eurozone economy has been flat on its back for the past 18 months. Unemployment rose by 62,000 in March, taking the eurozone jobless rate to yet another record high of 12.1%. Spain and Greece remain the weak spots, but even in Germany labour market conditions are becoming more difficult. Across the eurozone, almost one in four young people are out of work.

Why is unemployment rising? Again, you don't have to be John Maynard Keynes to figure it out. Europe's banking system is bust, there is a shortage of credit, real incomes are under pressure and the deficiency of demand is being exacerbated by austerity overkill. Retail sales figures from Greece show that in February spending was more than 14% lower than a year earlier.

The malaise is spreading from the eurozone's periphery to its core. It will be mid-May before the official growth data for the first quarter of 2013 is published, but the early evidence from Spain, where GDP fell by 0.5%, is not encouraging. Judging by the grim forward-looking surveys of business and consumer confidence, the second quarter will suffer more of the same.

Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.

In itself, a quarter-point cut in interest rates to 0.5% would do little to revive demand, ease the credit crunch or create jobs. Instead, it should be part of a three-pronged approach to boost growth. The cut in rates should be accompanied by an ECB announcement that it is willing to embrace the unconventional methods deployed by the Federal Reserve, the Bank of England and Japan to underpin activity. It should also be the catalyst for a less aggressive approach to cutting budget deficits, with countries given more time to bring their deficits below the eurozone ceiling of 3% of GDP.

For the past three years, macroeconomic policy in the eurozone has been run on sadomasochistic principles: that only regular doses of pain will ensure countries stick to strict reform programmes.

The upshot of this policy is clear for all to see. Businesses that are starved of credit are mothballing investment and cutting their workforce. Weaker growth means higher-than-expected budget deficits. Permanent austerity has bred social dislocation and political extremism. A different approach is needed to save the eurozone from catastrophe – starting on Thursday.

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Ultra-low interest rates and purchases of government bonds may be shifting instability from banks to other parts of economy, according to the IMF. The Washington-based organization said risks would increase the longer the stimulus was kept in place…

 


Powered by Guardian.co.ukThis article titled “IMF warns over rock-bottom interest rates” was written by Larry Elliott, economics editor, for The Guardian on Thursday 11th April 2013 17.40 UTC

The International Monetary Fund has warned central banks to be alert to the potentially damaging side-effects of ultra-low interest rates and "unconventional" measures to boost growth after the deep slump of 2008-09.

While backing the use of exceptional action to prevent the collapse of the financial system, the IMF said the risks would grow the longer the stimulus was kept in place.

The Washington-based body used a chapter in its latest global financial stability report to note that rock-bottom interest rates and purchases of government bonds might be shifting instability from banks to other parts of the financial system or other parts of the global economy. It added that care would have to be taken when central banks decided the time was right to remove the stimulus.

"Interest rate and unconventional policies conducted by the central banks of four major regions – the euro area, Japan, the UK and the US – appear indeed to have lessened vulnerabilities in the domestic banking sector and contributed to financial stability in the short term," the IMF said.

"Policymakers should be alert to the possibility, however, that financial stability risks may be shifting to other parts of the financial system, such as shadow banks, pension funds and insurance companies. The central bank policy actions also carry the risk that their effects will spill over to other economies."

Finance ministers and central bank governors will discuss the results of what the report called their "unprecedented intervention" when they gather in Washington next week for the IMF spring meeting. The discussions will be given added spice by Japan's recent decision to use ultra-loose monetary policy to lift the economy out of deflation.

US federal reserve building
The US Federal Reserve is considering slowing quantitative-easing measures. Photograph: Karen Bleier/AFP/Getty Images

After the collapse of Lehman Brothers in September 2008, central banks cut interest rates and also created electronic money in an attempt to compensate for the drying up of credit from hamstrung commercial banks. Although the measures were intended to be temporary, borrowing costs have not been raised and quantitative-easing (QE) programmes have not been reversed.

Minutes of the latest meeting of the US Federal Reserve's policymaking committee revealed that a debate was under way over whether the pace of QE should be slowed, and this approach was backed by the IMF in its report.

In the UK, the Fund noted that the impact of the Bank of England cutting its key interest rate to 0.5% – the lowest in its 319-year history – and £375bn of quantitative easing could be encouraging lenders to "evergreen loans rather than recognise them as non-performing". There was a possibility, the IMF said, that non-viable firms were being kept alive, and that this explained the low level of corporate insolvencies in Britain.

"Despite their positive short-term effects for banks, these central bank policies are associated with risks that are likely to increase the longer the policies are maintained. The current environment shows signs of delaying balance sheet repair in banks and could raise credit risk over the medium term. Markets may be alert to these medium-term risks, as central bank policy announcements have been associated with declines in some bank stocks and increases in yield spreads between bank bonds and government bonds," the report said.

"Central banks also face challenges in eventually exiting markets in which they have intervened heavily, including the interbank market; policy missteps during an exit could affect participants' expectations and market functioning, possibly leading to sharp price changes."

The IMF said monetary policy – measures affecting the money supply, interest rates and exchange rates – should remain stimulative until recovery was well established but added that policymakers needed to exercise "vigilant supervision to assess the existence of potential and emerging financial stability threats".

It suggested tougher capital and liquidity standards, coupled with the need to make provisions against future losses, adding: "The crisis has shown that corrective policies enacted after the risks materialise may be too late to contain damage to financial stability."

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Europe could have dealt with Cyprus cheaply and painlessly with a pan-European body able to recapitalize the country’s banks. Next could be Malta and Slovenia where the government is already making contingency plans for coping with bank losses…

 


Powered by Guardian.co.ukThis article titled “Eurozone crisis demands one banking policy, one fiscal policy – and one voice” was written by Larry Elliott, economics editor, for The Guardian on Monday 1st April 2013 13.24 UTC

It had all started to look quite promising. The US was picking up, China had avoided a hard landing and in Japan the early signs from the new government's anti-deflation approach were encouraging. Even in Britain, the first couple of months of 2013 provided some tentative hope – from the housing market and consumer spending, mainly – that the economy might escape another year of stagnation.

Then Cyprus came along. The last two weeks of March brought the crisis in the eurozone back into the spotlight, and by the end of the month the story was no longer rising share prices on Wall Street on the back of strong corporate profitability or the better prospects for Japanese growth. It was, simply, which country in the eurozone would be the next to require a bailout.

The past few days has seen what Nick Parsons, head of strategy at National Australia Bank, has called the "reverse Spartacus" effect after the scene at the end of Stanley Kubrick's epic in which captured slaves are offered clemency if they identify the rebel leader. All refuse.

In the aftermath of Cyprus, it has been a case of "I'm not Spartacus". Four members of the eurozone felt the need to issue statements explaining why they were different from the troubled island in the eastern Med. We now know that Portugal is not Spartacus, Greece is not Spartacus, Malta is not Spartacus and Luxembourg, which has the highest ratio of bank deposits to GDP in the eurozone, is not Spartacus. As Parsons noted wryly, Italy was unable to say it was not Spartacus because it still doesn't have a government to speak on its behalf. Otherwise it would probably have done so.

Few of the independent voices in the financial markets take such attempts at reassurance seriously. Another crisis in the eurozone could be avoided, but only if those in charge (sic) act more speedily and effectively than they have in the past. As things stand, another outbreak of trouble looks inevitable.

Cyprus has enough money to get by for a couple of months, but by then will be feeling the impact of a slow-motion bank run as depositors remove their money at the rate of €300 (£250) a day. The economy has been crippled by the terms of the bailout, a Carthaginian peace if ever there was one, and the country's debt ratio is bound to explode.

Investors are already casting a wary eye over Malta, which appears to have been the short-term beneficiary of capital flight from Cyprus, but the bookies favourite for the next country to need a bailout is Slovenia, where the government is already making contingency plans for coping with bank losses.

By focusing on the eurozone's minnows, the markets are in danger of overlooking a much bigger potential problem. If attempts to put together a new government in Rome fail, Italy will be facing a second general election and in such a scenario opinion polls currently put Silvio Berlusconi ahead.

It is not hard to sketch out a sequence of events in which Berlusconi completes a political comeback, the markets take fright, Italian bond yields go through the roof, the European Central Bank (ECB) under Mario Draghi says it will only buy Italian debt if Berlusconi agrees to a package of austerity and structural reforms, the new government refuses and then calls a referendum on Italy's membership of the single currency. Italy has already had six consecutive quarters of falling GDP and is on course for a seventh, making the recession the longest since modern records began in 1960. So when Berlusconi says he cannot let the country fall into a "recessive spiral without end", he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it. The assumptions seem to be that Cyprus is exceptional, that the ECB will ride to the rescue if it proves not to be, and that Europe will be dragged out of the danger zone by the pick-up in the rest of the global economy.

This is the height of foolishness. The factors causing the crisis in Cyprus are replicated in many other member states. The ECB's "big bazooka" – buying the bonds of struggling governments without limit – has yet to be tested, and because Europe is the world's biggest market, the likelihood is that the re-emergence of the sovereign debt crisis will seriously impair growth prospects in North America and Asia.

Economists at Fathom Consulting draw a comparison between the eurozone today and the UK at the very start of the financial crisis. Mistakes were made with the handling of Northern Rock because of fears that a bailout would create problems of moral hazard – in other words helping a bank that had got itself into trouble through its own stupidity would encourage bad behaviour by others. The systemic risks were not recognised, with disastrous consequences.

Similarly, the eurozone has not understood the systemic potential of the current crisis, Fathom argues, not least the "doom loop" between fragile banks and indebted governments. Austerity is making matters worse because cuts to public spending and higher taxes hit economic activity by more than they reduce government deficits. Public debt as a share of national incomes goes up, not down.

Austerity can work, but conditions have to be right for it. It helps if a country's trading partners are growing robustly, because then the squeeze on domestic demand can be offset by rising exports. It helps if the central bank can compensate for tighter fiscal policy by easing monetary policy, either through lower interest rates or through unconventional measures such as quantitative easing (QE). And it helps if the exchange rate can fall. Not one of these conditions applies in the eurozone, which is why the fiscal multipliers – the impact of tax and spending policies on growth – are so high. Put bluntly, removing one euro of demand through austerity leads to the loss of more than one euro in GDP.

So what should be done? Clearly, the self-defeating nature of current policy needs to be recognised. Countries need to be given more time to put their public finances in order. The emphasis should be shifted from headline budget deficits to structural deficits so that some account is taken of the state of the economic cycle, and the ECB needs to be ready with its own version of QE.

Simultaneously, work needs to speed up on creating a banking and fiscal union. Europe could have dealt with Cyprus cheaply and painlessly had there been a pan-European body capable of recapitalising the country's banks. Delay in setting up such a body threatens to be costly.

Finally, the eurozone needs to start talking with one voice. A bit of "I'm Spartacus" would not go amiss.

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GDP across 34 Organisation for Economic Co-operation and Development members fell 0.2% in final quarter of last year. All major economies of the OECD – the US, Japan, Germany, France, Italy and the UK – have reported falls in output at the end of last year…



Powered by Guardian.co.ukThis article titled “OECD economies shrank at end of 2012″ was written by Larry Elliott, economics editor, for guardian.co.uk on Tuesday 19th February 2013 11.25 UTC

The world’s richest countries saw their economies contract for the first time in almost four years during the final three months of 2012, the Organisation for Economic Co-operation and Development said.

The Paris-based thinktank said gross domestic product across its 34 member states fell by 0.2% – breaking a period of rising activity stretching back to a 2.3% slump in output in the first quarter of 2009.

All the major economies of the OECD – the US, Japan, Germany, France, Italy and the UK – have already reported falls in output at the end of 2012, with the thinktank noting that the steepest declines had been seen in the European Union, where GDP fell by 0.5%. Canada is the only member of the G7 currently on course to register an increase in national output.

The 0.2% decrease followed a 0.3% expansion in the third quarter, and resulted in a slowdown in the annual rate of growth in the developed world. GDP growth in the OECD was 0.7% higher in the fourth quarter of 2012 than it was a year earlier, down from the 1.2% annual pace of expansion in the year to the third quarter of 2012.

Among the major seven economies, the US showed the fastest annual growth, expanding by 1.5% between the fourth quarter of 2011 and the fourth quarter of 2012. Italy was the weakest performer, contracting by 2.7% over the same period.

For 2012 as a whole, GDP growth in the OECD stood at 1.3%, down from 1.9% in 2011.

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Demand for Britain’s manufactured goods is being choked off by the prolonged and deepening slump in the eurozone. Events overseas – the US fiscal cliff, China’s slowdown, and the travails of the eurozone casting a shadow over UK manufacturing…



Powered by Guardian.co.ukThis article titled “Europe to blame for UK manufacturing downturn” was written by Larry Elliott, economics editor, for guardian.co.uk on Thursday 1st November 2012 12.03 UTC

There’s a one-word explanation for the disappointingly weak survey of manufacturing out on Thursday: Europe.

Despite some modest success recently in diversifying into the faster growing markets of the globe, Britain’s nearest neighbours represent by far the biggest destination for goods sold overseas. Demand for those goods is being choked off by the prolonged and deepening slump in the eurozone.

What’s worse, the uncertainty caused by whether Greece will get a new bailout and whether Spain will have to seek financial help from the European Central Bank is depressing business confidence and causing investment projects to be mothballed. November’s health check on industry from CIPS/Markit showed that demand for capital goods remains weak, and that is wholly consistent with a corporate sector unwilling to spend money until the uncertainty is lifted.

The one bright spot in an otherwise gloomy report was that demand for consumer goods was up. That chimed with recent evidence that spending in the high street is on the up, although the fact that orders for exported consumer goods also rose is something of a puzzle.

As the CBI noted on Thursday, events overseas – the US fiscal cliff and China’s slowdown in addition to the travails of the eurozone – are casting a long shadow over the UK manufacturing sector. There are hopes that China has bottomed out, that the Americans will step away from the fiscal cliff and that Europe is finally getting its act together.

For now though, Thursday’s figures suggest that recovery will remain weak, that rebalancing is a pipedream. At this stage, the City is betting against further stimulus from the Bank of England next week but if the surveys for construction and services are as weak as those for manufacturing there may be a crash re-think.

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Mario Draghi expected to announce plan to buy unlimited quantities of government debt from troubled eurozone members. German Chancellor Angela Merkel tells lawmakers she opposes unlimited European Central Bank bond purchases…



Powered by Guardian.co.ukThis article titled “Euro rises on report of ECB plan to buy unlimited debt” was written by Larry Elliott, economics editor, for guardian.co.uk on Wednesday 5th September 2012 14.19 UTC

The euro rose on the foreign exchanges on Wednesday after the Bloomberg financial news service reported that the European Central Bank was preparing to announce plans to buy unlimited quantities of government debt from troubled members of the single currency.

Quoting central bank officials, the agency said the ECB was ready to take action to bring down the interest rates on borrowing paid by countries such as Italy and Spain. Full details of the blueprint are likely to be disclosed by Mario Draghi, the ECB president, on Thursday after a meeting of the central bank’s governing council.

According to the Bloomberg, the ECB plans to “sterilise” its bond-buying by removing money from elsewhere in the eurozone economy such as by selling bonds or restricting the money supply. This could ease fears that action to help the weaker members of the 17-nation bloc will lead to an explosion in the money supply.

The ECB is likely to concentrate on buying short-term debt – bonds that mature within three years – in the hope that it will provide breathing space until longer-term measures are in place.

Germany has been critical of Draghi’s plan to “do whatever it takes” to prevent a breakup of the single currency, but Bloomberg said the ECB expected the proposals to be adopted despite the misgivings of Angela Merkel and the president of the Bundesbank, Jens Weidmann.

Some analysts have been expecting Draghi to set a target level for bond yields of eurozone countries, but this is not thought to form part of the proposal.

The euro rose by half a cent after the apparent leak of the Draghi plan, although some analysts remained cautious. “I think the market saw the word ‘unlimited’ and jumped before realising that the ECB would not expand its balance sheet as it would sterilise all its purchases and thus this was not the kind of aggressive monetary expansion that FX traders were looking for,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

“Net takeaway is that if this is sterilised it will probably not be enough to keep the bond vigilantes at bay. Furthermore, the backing away from any specific yield targets is exactly the lack of clarity that the FX market will not like.”

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Bank of England cut its growth projections for the UK economy and opened the door to more quantitative easing, Sir Mervyn King warns there is still some way to go before economy recovers as Bank predicts growth will flat-line this year…

 


Powered by Guardian.co.ukThis article titled “Bank of England cuts UK growth forecast” was written by Larry Elliott and Simon Goodley, for guardian.co.uk on Wednesday 8th August 2012 10.29 UTC

Sir Mervyn King, the Bank of England governor, hinted at further action to boost the ailing UK economy on Wednesday after Threadneedle Street slashed its 2012 growth forecast to zero and said inflation was back under control.

King said there was no urgent need for fresh stimulus, but signalled more money creation through the Bank’s quantitative easing (QE) programme in response to an economic performance that has “continually disappointed expectations of a recovery”.

Against a backdrop of a worsening crisis in the eurozone and tighter lending conditions imposed by UK banks, the Bank’s quarterly inflation report cut its growth forecast for 2012 from the 1.25% pencilled in three months ago and believes the bounce-back in 2013 will be weaker than previously anticipated.

King said: “The overall outlook for growth is weaker than in May, reflecting downside news in the near term and, in the medium term the possibility that the weakness in output and productivity growth that we have seen since the financial crisis persists. GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.”

The governor said it would not be until 2014 that activity returned to its pre-recession peak in 2008 and used an Olympic analogy to underline that recovery would be long and hard.

“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing. Many of the conditions necessary for a recovery are in place, and the monetary policy committee [MPC] will continue to do all it can to bring about that recovery. As I have said many times, the recovery and rebalancing of our economy will be a long, slow process. It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead.”

King said it would take a “bit of time” to assess the impact of the Bank’s new funding for lending scheme (FLS), which came into force last week and is designed to encourage banks to lend more at lower interest rates. Last month Threadneedle Street announced a £50bn increase in its QE programme to £375bn by November, and the governor said further purchases of government gilts to create money was an option.

On the foreign exchanges, the pound rose slightly after King expressed strong reservations about cutting the bank rate from its historic low of 0.5%. The governor said there was a risk that such a move could prove counterproductive by making life more difficult for some banks and building societies.

Vicky Redwood, UK analyst at Capital Economics, said it would not take much to tip the nine-strong MPC towards further action. “We expect another £50bn [of QE] to be announced in November when the current purchases are completed.”

The governor strongly defended the Bank’s forecasting record against accusations that it had persistently been over-optimistic about the outlook for growth, pointing to a euro crisis that “goes on and on and on” as the reason for the latest downgrade as it pushes up costs for domestic borrowers.

King said tumbling inflation would eventually boost consumer spending by raising real incomes, while the FLS was “bigger and bolder than any initiative so far tried to get the banks lending again”.

Labour seized on the admission in the inflation report that banks might use the FLS to inflate their profits rather than lowering interest rates, and said it was time for a Plan B.

Rachel Reeves MP, Labour’s shadow chief secretary to the Treasury, said: “With growth forecasts slashed yet again, not just this year but in future years too, it is clear that we cannot go on with the same failing plan from this government. The chancellor’s policies aren’t only causing short-term pain, but long-term damage to our economy too. And despite the crisis in the eurozone, Britain is just one of two G20 countries in a double-dip recession.”

King said the Bank found it difficult to explain why the jobs market had been so resilient at a time when official figures have shown the economy deep in a double-dip recession. Threadneedle Street has lowered its longer-term growth projections for the economy in the belief that there has been permanent damage caused by the deepest and longest downturn since the second world war.

John Hawksworth, chief economist at PricewaterhouseCoopers, said: “It seems likely that we have entered a ‘new normal’ period where growth will be relatively subdued by historic standards for some years to come as the banking system remains impaired and global commodity prices remain relatively high and volatile.”

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The U.S. economy added 163,000 jobs in July but the unemployment rate remained stubbornly above 8% for another month with an increase to 8.3%; Rebalancing of US economy is underway but retail sales and factory orders data point to weaker jobs growth in months ahead…



Powered by Guardian.co.ukThis article titled “US jobs data less rosy than they seem” was written by Larry Elliott, economics editor, for guardian.co.uk on Friday 3rd August 2012 14.47 UTC

There are three months to go until the US presidential election so the America jobs report will cheer Barack Obama after recent signs that the world’s biggest economy was coming off the boil. But the figures were not unalloyed good news for the president.

On the upside, the increase of 163,000 in non-farm payrolls was a lot better than the 100,000 rise Wall Street had been expecting. What’s more, the detail was encouraging, with a hefty jump in private-sector employment and a 25,000 increase in manufacturing jobs. A modest and long overdue, but welcome, rebalancing of the US economy is underway.

That said, the expansion of the labour market is no great shakes more than three years into a recovery, and extremely poor by US standards – America was once the envy of the world for its ability to create jobs in the upswings after recessions.

The payrolls numbers were accompanied by a household survey of unemployment which showed the jobless rate climbing from 8.2% to 8.3%, 0.4 points higher than when Obama became president.

The U6 rate, which includes people who are working fewer hours than they would like, rose to 15%. Throw in a labour participation rate lower than it was four years ago, and tepid wages growth, and the picture is of jobs data good enough to rule out for the time being any fresh steps from the Federal Reserve to boost activity but not good enough to prove conclusively that the economy is emerging from its soft patch.

Obama would no doubt like a helping hand from the Fed, but if Ben Bernanke and his colleagues were not prepared to do more quantitative easing when jobs growth slowed between April and June, they are unlikely to do so now.

As in Britain, the labour market seems to be in slightly better shape than the economy as a whole. As Chris Williamson of Markit noted, the recent data for retail sales and for factory orders has been weak, suggesting that the economy has lost momentum since the turn of the year. That points to weaker jobs growth in the months ahead.

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