Bull and bear: Economists warn of something, they just don’t know what - The Share Centre Blog

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Michael Baxter

Bull and bear: Economists warn of something, they just don’t know what

Written by: Michael Baxter on April 18th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Economists warn of something, they just don’t know what. Oil falls again: will it last this time?.  Growth in real wages falls to lowest level in a year. King outvoted again UK retail sales dip as weather descends

Economists warn of something, they just don’t know what

If in doubt, warn. The economy is on a stronger footing, banks are looking stronger, or as the IMF puts it: “The global financial system is far more stable than it was six months ago,” but…just to be safe let’s say we are worried.

The media didn’t quite know how to react to the latest IMF report. The IMF said: “Policy actions have improved global financial stability, reduced acute near-term risks.” The ‘Guardian’ said: “IMF warns world economy risks chronic new phase of financial crisis.” The ‘FT’ said: “Central bankers say they are flying blind.”

The IMF warned that the “unwinding of prolonged monetary easing in the United States could expose these vulnerabilities and destabilize credit markets.” Well, err yes. Rates have been at record lows for half a decade. If they were to suddenly rise, the economy wouldn’t like it.

The economy wouldn’t like it if the sun didn’t rise tomorrow either.

The ‘FT’ quoted Lorenzo Bini Smaghi, a former member of the European Central Bank’s executive board, who said:  “We don’t fully understand what is happening in advanced economies.”

José Viñals, head of financial stability at the IMF, said: “Put simply, we are in uncharted territory.”

So there you have it. If in doubt, cry alarm.

Still it is better for it to be this way round than the complacency of the noughties.

Or maybe that is the problem. We are so obsessed with not repeating the errors of the boom years that we end up talking ourselves into stagnation years.

Returning to the IMF, it raised alarm on several fronts:

Bank lending: Small and medium-sized companies, which are the backbone of employment, are particularly affected by the increased cost and limited supply of bank credit.

Periphery corporate sector:  The IMF identifies a weak tail of listed companies on the periphery that need to reduce their debt over time.

Eurozone:  Many banks in the euro area peripheral countries still need to make further progress in strengthening their balance sheets.

Debt underwriting standards: The IMF said: “US corporate fundamentals are strong, and leverage is in line with typical historical patterns. But corporate debt underwriting standards are weakening rapidly.”

Money flows to emerging markets: The IMF said:Money in advanced economies is spilling over to emerging markets. Borrowing on international markets by emerging market corporates has been growing at a record pace, exposing them to foreign currency risks and rising leverage. This makes emerging markets more sensitive to volatile capital flows.”

Oil falls again: will it last this time?

Sometimes it feels as if the oil market just does it to annoy us. The black stuff falls, and it looks as if at last oil will fall back to the kind of levels we need for the economy to recover, only for it to bounce back up.

Bears on the economy are among those who expect oil to fall in price. But the realistic bearish ones reckon that the fundamentals of oil supply are such that, even if the economy descends into another recession, oil will not fall back that far.

Brent Crude fell below $98 yesterday for the first time since last July.

US Sweet crude dropped below $87. But we have been here before. It last fell below $87 last November, but that was about it… the falls then stopped, and within two and half months it was back to $98.

It is good that oil is down. Are the falls because of shale gas in the US, or because of supplies from other sources – tar sands perhaps, because China is moving form investment to consumer led, because demand is falling as the global economy struggles to gain momentum, or is it simply that oil goes up and down, and is as predictable as the weather? If US Sweet crude falls below $80 or rises above $100 it will be significant.

 Growth in real wages falls to lowest level in a year

The recovery, we were told, would occur when average wages started to rise faster than inflation. At the end of 2011 we were told that this would happen in 2012.

Why anyone thought these things is a mystery.

Okay, we all know that predictions about inflation were too optimistic. Let’s not go over that again.

But the performance of wages has been such that even if inflation had fallen as the Bank of England predicted it would, real wages would still be falling, and indeed falling quite heavily.

In the three months to February, average wages with bonuses rose by just 0.8 per cent (and by 1.0 per cent without bonuses).  CP inflation was 2.8 per cent in February.

The last time wages rose faster than inflation was in April 2010. But the gap between the measures is showing no sign of closing.

King outvoted again

Once looks unfortunate, twice looks like carelessness, so what does three times look like?

Back in February, when Mervyn King, along with resident dove David Miles and Paul Fisher, voted for more QE many assumed it would be just another month or so before the rest of the MPC voted with them.

Back in March, when Mervyn King, along with resident dove David Miles and Paul Fisher, voted for more QE many said they won’t be in the minority again next month will they?

Never before has Dr King voted with the minority two months in a row.

Well, another month on, and it is just as it was last month and the month before.

Maybe it is because Dr King doesn’t have long left in his job, and he feels free to vote as he wishes. Or maybe the rest of the MPC thinks it can ignore Mervyn, and start focusing on Mark Carney.

Vicky Redwood, Chief UK Economist at Capital Economics, said: “More QE in May is still possible, especially if the Q1 GDP figure is worse than expected. But it may be that we have to wait until Mr Carney arrives before the Committee will take more action. Note, though, that even those voting against QE this month still seem open to further action to boost bank lending, with the Committee seeing merit in possible extensions to the Funding for Lending Scheme.”

UK retail sales dip as weather descends

Well, since we are British let’s talk about the weather.

It has been cold of late, has it not? Apparently it was the coldest March in the UK since 1892.

UK retail sales fell 0.7 per cent month on month, with clothing sales down 3.1 per cent.

Martin Beck, UK Economist at Capital Economics, said: “Today’s retail news still doesn’t rule out the possibility that the ONS will announce that the economy is once again back in recession when GDP data for Q1 is released next Thursday.”

Then again, sales were down in March, but they rose by 2.1 per cent in February. Over the first three months of this year they jumped 0.4 per cent.

Year on year, sales were off 0.5 per cent.

Given that wages are still falling, see above, it is hard to see from where the impetus will come for a significant improvement in the retail environment.

Except that is the UK housing market.

Earlier in the week, the Ernst and Young Item Club said: “The inflationary headwinds have now eased, with employment also picking up and the Budget measures in housing and personal tax set to feed through to disposable incomes. The stage is set for last year’s modest recovery in consumer spending to continue, accelerating to 2.2 per cent in 2015.”

The key phrase in that paragraph was surely ‘budget measures in housing’. Can the UK really see retail sales grow on the back of leverage? And if it does, will that be good or bad?

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Debt underwriting standards, IMF global economy, Money flows to emerging markets, MPC voting, price of oil, UK retail sales, wages versus inflation

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