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Financial markets focused on the more downbeat indicators of construction and industrial production that some say might be a sign that the UK economy may be losing steam along with its largest trading partner the eurozone…

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Powered by Guardian.co.ukThis article titled “Official data points to loss of momentum in UK economy” was written by Katie Allen, for The Guardian on Friday 9th January 2015 16.30 UTC

Further evidence of a slowing British economy came on Friday as official figures showed a surprise drop in construction in November and falling industrial output as oil and gas output declined sharply.

But the data showed a bounceback in factory output that buoyed hopes for the manufacturing sector and good news on exports suggested UK companies could weather troubles in their biggest trading partner, the eurozone.

Financial markets focused on the more downbeat indicators, taking them as the latest evidence the economy lost steam in the final months of 2014. The pound lost ground against the dollar as traders bet the Bank of England would be in no hurry to raise interest rates from their record low, given the mixed signals on the economy.

“Disappointing official data are adding to survey evidence which indicate that the rate of UK economic growth slowed towards the end of last year,” said Chris Williamson, chief economist at data analysts Markit.

“Looking at all of the official statistics and survey evidence currently available, the data collectively point to the economy growing 0.5% in the fourth quarter, down from 0.7% in the third quarter,” he added.

While economists said it was too soon to say whether the slowdown at the end of the year continued into 2015, the latest figures will be unwelcome to the Conservatives as they seek to convince voters that the recovery remains on track.

“On balance, there is further evidence that UK growth is slowing as we head towards the general election,” said Simon Wells, chief UK economist at HSBC.

Among the bright spots for the economy in a clutch of reports from the Office for National Statistics was the news that manufacturing output rose by 0.7% in November, reversing October’s fall and beating economists’ expectations for growth of just 0.3%. On the year, output was up 2.7%.

But the wider industrial sector which also includes utilities, mining and oil and gas production, fell 0.1%. That drop was driven largely by a 5.5% fall in oil and gas output. The ONS said the weakness was partly down to maintenance work at two North Sea oil fields.

Respected thinktank the National Institute of Economic and Social Research said following the latest industrial production numbers it estimated growth slowed to 0.6% in the final three months of last year, after 0.7% in the three months to November 2014.

Separate official figures from the construction sector showed output fell by 2.0% on the month in November, defying economists’ forecasts for growth and contrasting with surveys of the sector.

The news on trade was more encouraging, however, as the ONS reported the narrowest trade deficit since June 2013.

The manufacturing sector is still not back to its pre-crisis strength and exports have not grown as fast as the government would have hoped. Progress has been slow in the government’s push to rebalance the economy away from overdependence on domestic demand, but some economists are predicting a strong 2015 for manufacturing.

A drop in oil prices to their lowest level in more than five years has buoyed hopes for the sector. Maeve Johnston at the thinktank Capital Economics cautioned it was far from certain oil prices will remain so low, but the fall should help “reinvigorate the recovery”.

“Indeed, if low oil prices are sustained, it should greatly reduce costs for the manufacturing sector, providing some welcome support over 2015. And sustained low oil prices would also ensure that the improvement in the trade deficit proves to be more than a flash in the pan,” she said.

The trade numbers beat expectations as the ONS reported the goods trade gap narrowed by £1bn to £8.8bn in November, as exports edged down but imports fell faster. Economists had forecast a £9.4bn gap. The less erratic figures for the three months to November showed exports grew by £2bn and imports shrank by £0.5bn.

The details showed exporters continued to benefit from targeting markets beyond the deflation-hit eurozone. Exports to countries outside the European Union increased by £2.1bn, or 6.0%, in the three months to November from the previous three months. Exports to the EU decreased by £0.1bn, or 0.3%. At the same time, the UK recorded its largest ever deficit with Germany, reflecting a decrease in exports and a slight increase in imports.

The trade gap for goods and services taken together fell to its lowest since June 2013, at £1.4bn in November.

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USA 

Financial policy committee ‘concerned about potential risks to financial stability’ from possible housing bubble. Bank of England policy makers agree to “closely monitor housing market indicators covering house price affordability and sustainability”…

 


Powered by Guardian.co.ukThis article titled “Bank of England committee flags up housing market concerns” was written by Jill Treanor, for theguardian.com on Tuesday 3rd December 2013 12.58 UTC

The Bank of England is continuing to closely monitor the affordability of mortgages and the lending policies of banks after taking steps last week to cool the housing market.

The record of the November meeting of the financial policy committee, set up inside Threadneedle Street to spot bubbles in the financial system, shows that concerns about the housing market had risen since their last meeting in June.

“Committee members had become more concerned about the potential risks to financial stability that might arise from developments in the UK housing market,” the record said.

After the meeting the Bank announced last week that the flagship Funding for Lending Scheme (FLS), which supplies cheaper money to banks and building societies, would end a year early for mortgages to focus on small businesses.

The record of the meeting shows that Bank of England governor Mark Carney informed the committee – made of Bank of officials and external members – that he and the Treasury had agreed to amend the FLS to focus on business lending.

“The governor informed the committee that HM Treasury and the Bank agreed that an amendment to the FLS to remove the incentive for new lending to households would be sensible … committee members welcomed this,” the record states.

The FPC, a key element of the coalition’s regulatory changes to avert another financial crisis, also discussed other options to dampen the mortgage market by forcing banks to hold more capital. This could be done “to specific types of mortgage lending, just to new lending or to the entire portfolio of loans”.

It could also take action if it was concerned about the affordability of mortgages by limiting the loan-to-value or loan-to-income ratios for mortgages.

“The committee agreed that it would closely monitor housing market indicators covering house price affordability and sustainability, indicators of indebtedness, underwriting stands, exposures of lenders to highly indebted households and the reliance of lenders on short-term wholesale funding,” the record said.

It also noted that borrowers might start to switch to fixed rate mortgages which, while helping households when interest rates rise, could cause problems for banks.

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Upbeat mood in Britain contrasts with pessimistic eurozone surveys. Fears of recession in France grow. Eurozone composite PMI remains in expansion territory above the 50 mark at 51.5, but declines from October’s level of 51.9…

 


Powered by Guardian.co.ukThis article titled “UK manufacturing expands at fastest rate since 1995″ was written by Heather Stewart, for theguardian.com on Thursday 21st November 2013 13.32 UTC

Britain’s manufacturing sector is expanding at its fastest pace for 18 years as new orders pour in, according to a new survey, rekindling hopes for a rebalancing of the economy.

The Confederation of British Industry’s monthly industrial trends survey shows manufacturing orders and output both at their highest level since 1995.

The CBI said that 36% of firms reported their order books were above normal, with 25% saying they were below normal. The resulting balance of +11% was the strongest since March 1995. Similarly, the positive balance for firms’ level of output, at +29%, was the strongest since January 1995.

Stephen Gifford, the CBI’s director of economics, said: “This new evidence shows encouraging signs of a broadening and deepening recovery in the manufacturing sector. Manufacturers finally seem to be feeling the benefit of growing confidence and spending within the UK and globally.”

The coalition will be encouraged to see signs of a revival in British industry, after fears that the economic recovery has so far been too reliant on consumer spending and an upturn in the housing market.

The chancellor of the exchequer, George Osborne, has said he would like to see a “march of the makers”, helping to double exports by the end of the decade, so that Britain can “pay its way in the world”.

Business surveys have been pointing to a revival in manufacturing for some time, but it has only recently begun to be reflected in official figures, which showed a 0.9% increase in output from the sector in the third quarter of 2013, driven primarily by the success of carmakers. However, output from manufacturing remains more than 8% below its peak before the financial crisis.

News of the upbeat mood among manufacturers in the UK contrasts with more pessimistic surveys from the eurozone where the so-called “flash PMIs” suggest that the economic recovery is petering out in several countries, including France.

While the composite PMI for the eurozone remains above the 50 mark at 51.5, this is a decline from October’s level of 51.9, suggesting that while the eurozone economy as a whole has not slipped back into recession, the pace of growth appears to have slowed.

Chris Williamson, of data provider Markit, which compiles the survey, said: “The fall in the PMI for a second successive month suggests that the European Central Bank was correct to cut interest rates to a record low at its last meeting, and the further loss of growth momentum will raise calls for policy makers to do more to prevent the eurozone from slipping back into another recession.”

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Minutes of latest monetary policy committee meeting signal interest rates could rise sooner than 2016. Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring…

 


Powered by Guardian.co.ukThis article titled “Growing evidence of ‘robust recovery’ in UK economy, says Bank of England” was written by Heather Stewart, for theguardian.com on Wednesday 23rd October 2013 10.34 UTC

Bank of England policymakers have been surprised at how rapidly growth has picked up and unemployment has fallen since the spring, raising the prospect of an earlier-than-expected rise in interest rates.

The Bank’s nine-member monetary policy committee voted unanimously to leave policy unchanged earlier this month; but minutes of their meeting showed that a strong increase in employment, and upbeat readings from business surveys, had prompted them to upgrade their expectations for growth.

Discussing the upbeat jobs data released this month, the minutes said: “It now therefore seemed probable that unemployment would be lower, and output growth faster, in the second half of 2013 than expected at the time of the August Inflation Report.”

They described the latest news as pointing to a “robust recovery in activity” in the UK – though they also warn about the lack of the kind of rebalancing in the economy, towards trade and away from consumer spending, that the coalition was hoping for. “There is a risk that the recovery in the United Kingdom might be less well balanced between exports and domestic consumption than was ultimately needed.”

One of the Bank’s first decisions after its governor, Mark Carney, joined in July was to issue “forward guidance”, promising to keep interest rates unchanged until the unemployment rate falls to 7%, barring a surge in inflation.

When the policy was unveiled in August, Carney said he expected unemployment to remain above 7% at least until 2016; but a slew of data, including a fall in the unemployment rate to 7.7% in the three months to July, had raised doubts in markets about whether the Bank would wait so long before deciding to act. Wednesday’s minutes suggest the MPC may be coming round to the idea that the 7% threshold could be reached sooner, though the committee stressed that “it was too early to draw a strong inference about future prospects from the latest data”.

Simon Wells, UK economist at HSBC, said: “We expect the MPC to bring forward the timing of unemployment hitting the 7% threshold by around two quarters when it revises its forecasts in November.”

Discussions among MPC members also highlighted the growing strength of Britain’s housing market, which they expect to boost the economy. “Overall, indicators pointed to continued house price rises. This would increase the collateral available to both households and small businesses, which could provide some further support to activity,” the minutes say.

In the latest indication of a revival in the property market, the British Bankers Association announced on Wednesday that the number of mortgages approved by UK banks to fund house purchases reached 42,990 in September, its highest level in almost four years and well above the previous six-month average of 42,990.

The BBA data, which covers the run-up to the launch of Help to Buy mortgage guarantee scheme, shows that activity in the housing market continued to gain momentum over the summer, with house purchase loans showing the biggest increase month-on-month.

The BBA said its members approved new loans worth a total of £10.5bn in September, up from £9.9bn in August and above the six-month average of £9bn. Of this, £6.7bn was for house purchases and £3.5bn for remortgages. The remainder was other secured borrowing.

The BBA statistics director, David Dooks, said: “September’s figures build on the growing picture of improved consumer confidence, with stronger gross mortgage lending, rising house purchase approvals and increased consumer credit.”

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Greece ‘backsliding in democracy’ in face of joblessness, social unrest, corruption and disillusion with politicians, says thinktank. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc…

 


Powered by Guardian.co.ukThis article titled “Greece’s democracy in danger, warns Demos, as Greek reservists call for coup” was written by Helena Smith in Athens, for The Guardian on Thursday 26th September 2013 19.27 UTC

No country has displayed more of a “backslide in democracy” than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country’s slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by an elite reservist group linked to Greece’s armed forces calling for a coup d’etat, the study singled out Greece and Hungary for being “the most significant democratic backsliders” in the EU.

“Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment,” it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. “It must worry us,” said a government spokesman, Simos Kedikoglou. “The overwhelming majority in the armed forces are devoted to our democracy,” he said. “The few who are not will face the consequences.”

With tension running high after a crackdown on the neo-Nazi Golden Dawn party, a supreme court public prosecutor demanded an immediate inquiry into who may have written the post, which called for an interim government under “the guarantee of the armed forces”.

The special forces reservist unit who issued the social media call – whose members appeared in uniform to protest against a visit to Athens by the German chancellor, Angela Merkel – said Greece should renege on the conditions attached to an international bailout and set up special courts to prosecute those responsible for its worst financial crisis in modern times. Assets belonging to German companies, individuals or the state should be seized to pay off war reparations amassed during the Nazi occupation.

Underscoring the social upheaval that has followed economic meltdown, the blog post argued that the government had violated the constitution by failing to provide adequate health, education, justice and security.

Insiders said the mysterious post once again highlighted the infiltration of the armed forces by the extreme right. This week revelations emerged of Golden Dawn hit squads being trained by special forces commandos.

Fears are growing that instead of reining in the extremist organisation, the crackdown on the group may ultimately create a backlash. The party, whose leaders publicly admire Adolf Hitler and have adopted an emblem resembling the swastika, have held their ground in opinion polls despite a wave of public outrage over the murder of a Greek rap musician, Pavlos Fyssas, by one of its members. Golden Dawn, which won nearly 7% of the vote in elections last year and has 18 MPs in Athens’ 300-member parliament, has capitalised more than any other political force on Greece’s economic crisis. “Much will depend on how well it will withstand the pressure and they are tough guys who seem to be withstanding it well,” said Giorgos Kyrtos, a political commentator.

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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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After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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New governor tells MPs his pledge to keep interest rates at record lows for up to three years has reinforced recovery. Carney points out that he is the only serving central bank governor among the G7 countries to have increased rates while heading the Bank of Canada…

 


Powered by Guardian.co.ukThis article titled “Bank of England governor Mark Carney rattled as he defends forward guidance” was written by Heather Stewart, for theguardian.com on Thursday 12th September 2013 11.17 UTC

The Bank of England governor, Mark Carney, has launched a staunch defence of his pledge to keep interest rates at record lows for up to three years, claiming that it has “reinforced recovery”.

Carney faced tough questioning from the cross-party Treasury select committee of MPs about the likely consequences of the monetary policy committee’s new “forward guidance” strategy.

But he insisted: “Overall, my view is that the announcement has reinforced recovery. It’s made policy more effective, and more effective policy is stimulative at the margin.”

The new governor also stressed that despite the MPC’s expectation that rates will remain on hold for up to three years, he would be ready to push up borrowing costs if necessary.

“I’m not afraid to raise interest rates,” he said, pointing out that he is the only serving central bank governor among the G7 countries to have increased rates – in his previous post, in Canada.

City investors have pushed up long-term borrowing costs in financial markets sharply since the MPC announced its new pledge to leave borrowing costs unchanged at 0.5%, at least until unemployment falls to 7%.

But Carney, who was handpicked by George Osborne to kickstart recovery and took over in Threadneedle Street at the start of July, at times appeared rattled. He said the recent increase in long-term rates, which sent 10-year government bond yields through 3% last week for the first time in more than two years, was “benign”.

He also repeatedly refused to be drawn on whether the new approach represented a loosening of policy – equivalent to a reduction in interest rates – in itself.

Carney denied that the new framework, involving “knockouts” if inflation appears to be getting out of control, is too complex. But Andrew Tyrie, the committee’s Tory chairman, complained that Carney’s account of the Bank’s new approach would be difficult to explain “down the Dog and Duck”.

Asked about the plight of savers, whose savings are being eroded by inflation with interest rates at rock bottom, the governor said he had “great sympathy”, but the best thing the Bank could do to help was to generate a sustainable economic recovery.

“Our job is to make sure that that’s not another false dawn, and ensure that this economy reaches, as soon as possible, a speed of escape velocity, so that it can sustain higher interest rates.”

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Organization for Economic Co-operation and Development gives vote of confidence in the United Kingdom’s economy, revising growth forecast from 0.8% to 1.5% after a “string of positive indicators from the UK”…

 


Powered by Guardian.co.ukThis article titled “UK economy upgraded by OECD” was written by Heather Stewart, for theguardian.com on Tuesday 3rd September 2013 09.52 UTC

Paris-based thinktank the Organisation for Economic Co-operation and Development has lifted its forecast for UK growth in 2013, in the latest vote of confidence for the fledgling recovery.

In May, when it last released projections for the world’s major economies, the OECD was expecting 0.8% growth in the UK for 2013. On Tuesday, it said recent survey evidence suggested GDP would expand by 1.5%, grouping the UK with the US and Japan as economies where, “activity is expanding at encouraging rates”.

The upgrade from the OECD comes after a string of positive indicators for the UK, including stronger-than-expected growth of 0.7% in the second quarter, falling unemployment, and survey evidence suggesting the strongest growth in manufacturing output for almost two decades.

Alongside revising up its forecast for the UK, the OECD used its interim economic assessment to warn that while a moderate recovery is underway in many major economies, global growth remains sluggish, and there are still risks to the upturn.

The OECD’s economists single out the impact of the Federal Reserve’s plans to phase out its massive programme of quantitative easing as creating particular problems for some economies.

“In many emerging economies, loss of domestic activity momentum together with the shift in expectations about the course of monetary policy in the United States and the ensuing rise in global bond yields have led to significant market instability, rising financing costs, capital outflows and currency depreciations,” it said.

Countries including India, Indonesia, Brazil and Turkey have been battling to control a potentially destabilising decline in their currencies since the Fed chairman, Ben Bernanke, announced his plans to “taper” QE in May.

The OECD’s experts warn that the slowdown in emerging economies – which have been major drivers of world growth in recent years – would offset the improvement in advanced economies, so that the global recovery would continue to be, “sluggish”.

In the US, the OECD expects growth to be 1.7% in 2013, slightly down on its May estimate of 1.9%. It also warns that the crisis in the eurozone is far from over, saying: “The euro area remains vulnerable to renewed financial, banking and sovereign debt tensions. Many euro area banks are insufficiently capitalised and weighed down by bad loans.”

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During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to stay the course. Interest rates are to remain low, but what does that say about economic recovery, inflation and house prices?..

 


Powered by Guardian.co.ukThis article titled “Five things we learned from the Bank of England inflation report” was written by Phillip Inman, for theguardian.com on Wednesday 7th August 2013 14.37 UTC


1. Interest rates are going to stay low for a very long time

Current predictions say the Bank will only consider raising rates in 2016, but it could be 2017 or 2018 before the economy is considered strong enough to cope with higher rates. It will not consider raising rates until unemployment declines to 7% (from 7.8%), and its own forecast puts unemployment above 7% in 2016.

2. The current economic recovery is fragile

The UK might have seen a 0.9% jump in GDP in the first six months of the year, but the Bank of England is concerned that growth remains weak. The level of GDP is below where it was in 2008 and well below where it would be if the crash hadn’t happened. High unemployment shows there is slack in the economy that can be deployed without causing inflation.

3. Fears of a house price bubble are misplaced

Governor Mark Carney argued that the level of transactions are well below the peak (about a third lower) and house prices are still below the highest point in 2008, so a bubble is a long way off. And anyway, he said, the central bank now monitors the big lenders for dodgy or risky practices, so a repeat of the crazy lending in the first half of the last decade is unlikely.

4. Inflation is not a worry

This is not something the Bank of England has explicitly declared in its quarterly inflation report. It says monetary policy committee is still watching for any signs of inflation. However, there is little pressure from rising wages and it blames the current 2.9% rate (well above the 2% target) on the rising cost of train fares and regulated monopoly suppliers such as those related to water rates and gas prices.

5. More quantitative easing could be on the way

During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to “maintain the current highly stimulative stance of monetary policy” and could even extend it. The Bank is unlikely to cut rates further, but could boost QE. It has pumped £375bn into the financial system to promote lending to little avail (it might have been even worse without it, said Carney’s predecessor Lord King). Some analysts argue it should rise to £425bn.

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