Recap 8-28-13




  • BoE’s Carney:
  1. It may seem that unemployment doesn’t have far to fall, from the current 7.8% to the 7% threshold. The MPC’s central view, though, is that this could take some time –
  1. The MPC’s current forecast is for growth to average around 2½% per year over the next three years, just below its historical average rate of 2¾%. That suggests spare capacity will be used up only gradually.
  2. Second, a great many jobs need to be created to bring unemployment down. A fall in unemployment from its current level to 7% over three years would mean well over three quarters of a million new jobs created – and given the shrinkage in the public sector, over a million new jobs in the private sector.
  3. Third, a recovery in growth does not necessarily mean faster job creation and lower unemployment. More than half of the increase in employment since the recession has been in part-time jobs. Many part-timers would prefer to work full time. If the recovery were fuelled by involuntary part-time jobs becoming full time, nearly half a million fewer new jobs would be created.
  4. Moreover, there is certainly scope for the economy to grow through an increase in output per hour worked rather than new job creation. Productivity growth has been anaemic and – remarkably – the UK is no more productive than it was back in 2005. The MPC’s central view is that productivity growth is likely to pick up only slowly in the early phase of recovery, but that there is potential for growth to accelerate as the recovery takes hold. The slow pickup in productivity means unemployment could initially fall quite rapidly, but fall short of 7%. Over the next three years productivity is expected to grow at around 1.8% per year, below its pre-crisis trend of 2.2%. While even that modest productivity recovery is not assured, it is hardly an aggressive forecast. It implies that productivity reaches its 2008 level only in 2015. And it means that productivity doesn’t catch up any of its current 15% shortfall relative to its pre-crisis trend. Were any productivity catch-up to happen, unemployment could take even longer than three years to reach the threshold.

CPI inflation is currently be ing pushed up by rises in utility prices and tuition fees that do not reflect the underlying pressure of demand on supply, along with the effect of past increases in import prices. Underlying domestic inflationary pressure is subdued, with wages growing at only around 1% per year.

Market interest rates at terms of 2-5 years have also risen recently. The date at which the markets expect the first increase in Bank Rate has moved in from the end of 2015 to mid-2015. One possible explanation is that markets think that unemployment will come down to 7% more quickly than we do. Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope, but on expectation. And we estimate there is only a 1 in 3 chance of unemployment coming down that quickly.

The upward move in market expectations of where Bank Rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy. The MPC will be watching those conditions closely. If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further. Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more.

for major banks and building societies meeting the minimum 7% capital threshold, the Bank of England will reduce the level of required liquid asset holdings. The effect will be to lower total required holdings by £90 billion, once all eight major banks and building societies meet the capital threshold Germany GfK Consumer Confidence declined to 6.9 vs 7.1 exp and 7.0 prev

US Pending Home Sales declined -1.3% MoM vs 0% exp and -0.4% prev

South Korea Mfg Survey improved to 77 in Sept vs 73 prev

Toyota’s CEO warns that the consumption tax hike would be a “lethal blow” to the domestic auto industry unless present auto taxes were changed also.

RBA board member Edwards told the WSJ that the AUD “is still a bit too strong to help, to the extent it could, in the transition we need to make.” He said that tapering “is highly likely to be associated with a strengthening of the USD and a weakening of our dollar, which will be good for us.”

Upcoming Data:

  • Thu: Australia Private CapEx, Italy Consumer Confidence, US Jobless Claims, Japan Mfg PMI, Jobless Rate, CPI, IP, Australia Private Sector Credit
  • Fri: Month End, Japan Housing Starts, UK Nationwide House Prices, Italy Unemployment, EU Unemployment, CPI
  • Mon: US holiday, China Mfg PMI, AU Mfg PMI, AU Building Approvals, EU PMI, China Non-Mfg PMI, Australia Current Acct, Retail Sales
  • Tue: RBA, US ISM, AU GDP

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