Deloitte Monday Briefing: Assessing the Outlook for Growth
* A London taxi driver told me last week that in his ten hours
of ferrying people around London the previous day his average speed
had been 8.4mph. This is slower than a horse or a bicycle and even
slower than the 9mph average speed recorded by TfL in Central
London at the start of this year. The cabbie blamed increasing
levels of traffic, a rash of new building projects and Crossrail
for the slowdown.
* We love obscure economic indicators and this one suggests that,
in London, at least, activity is picking up. But on a less
parochial level, what are the prospects for recovery?
* Things certainly have changed in the last six months.
Financial markets now believe that a gathering recovery will force
the Bank of England, the European Central Bank and the Federal
Reserve to raise interest rates in 2013, much earlier than had been
expected at the start of this year. The previously moribund UK
housing market has strengthened so much that Vince Cable and the
Royal Institution of Chartered Surveyors are worrying aloud about
the risks of a housing bubble. It is a sign of the times that last
week the Financial Times ran an editorial entitled, "Osborne
wins the debate on austerity" which argued that a run of
strong economic data had vindicated the Chancellor's deficit
reduction programme and confounded his Keynsian detractors.
* After years of downside shocks the developed world is
looking brighter. GDP forecasts for the industrialised world for
2014 have nudged higher, led by rising forecasts for Japan and the
UK. GDP forecasts for the euro area as a whole have stabilised and,
in Greece and Spain, are rising. Fears of a breakup of the euro
have diminished, so much so that US investors have, this year,
invested more money in European equities than at any time since
1977.
* The near universal assumption is that growth in the
industrialised world will bounce back in 2014 led by accelerating
growth in North America and Europe.
* As the West has started to recover worries about the
performance of emerging market economies have mounted.
* Expectations of rising US interest rates have led investors
to withdraw capital from emerging markets in expectation of higher
returns elsewhere. This has hit many emerging market currencies,
particularly the Indian rupee which has fallen 25% against the US
dollar in the last two years. In a reversal of the trend of recent
years, equities in Europe and the US have outperformed those in
developing markets in the last year.
* We need to see this in perspective. Growth in most emerging
market economies is running faster than in the West and is expected
to accelerate. But the momentum of global activity seems to be
edging away from the developing to the developed world.
* We can see this in the rash of downgrades to growth
forecasts for Brazil, Russia, India and China that have come
through since the start of the year.
* Risks in the global economy have diminished. The global
financial system is on a gradually improving path. Fears that the
euro would break up have eased and reform in the periphery of the
euro area is delivering improvements in competitiveness. The US
recovery is eroding America's vast budget deficit. Markets are
worrying less about economic weakness and more about the risk of
early interest rate rises.
* In May, the Chairman of the US Federal Reserve, Ben
Bernanke, sent a chill through markets with a warning that the Fed
was likely to slow the pace of its programme of Quantitative Easing
in September and would end it by the middle of 2014. Yields on
government bonds and market expectations for interest rates in the
US and Europe have jumped since then, prompting fears that higher
market interest rates could choke off the recovery.
* In early August, the new Governor of the Bank of England,
Mark Carney, sought to counter this involuntary tightening of
policy by signalling that UK rates are likely to stay on hold for
three more years. Markets were not convinced. UK base rates stand
at 0.5% and financial markets are betting on this rising closer to
the 1.0% mark by late 2014, to 1.5% by the end of 2015 and to 2.5%
by the end of 2016.
* Cheap money and the absence of big external shocks are
working their magic. In the last few months surveys indicators of
activity and confidence have picked up in much of the
industrialised world. But for the recovery to gain legs it needs a
virtuous cycle of stronger investment and consumer spending driving
output which, in turns, fuels consumer incomes.
* We are still waiting for this process to kick off. Consumer
spending power is under pressure from high inflation and subdued
growth in pay. Corporates may be cash rich, but 2013 has been a
poor year for business investment.
* We think this will start to change in the coming months.
Barring further shocks, we expect to see growing evidence of a
recovery in consumer and business activity.
* This is unlikely to be the perfectly-balanced recovery so
fervently hoped for by policymakers. Some of the hallmarks of
previous lopsided recoveries are already starting to emerge - lower
consumer savings, rising credit growth and higher house
prices.
* The reality is that the control policymakers exercise over
the economy is very limited and imperfect. As a result policymakers
will doubtless take the view that while balanced growth is better
than unbalanced growth, either are far better than no growth.
MARKETS & NEWS
UK's FTSE 100 ended the week up 0.6%.
Here are some recent news stories that caught our eye as reflecting key economic themes:
KEY THEMES
* The UK pound rose to an 8-month high in response to a fall in
the unemployment rate from 7.8% to 7.7%
* The Royal Institution of Chartered Surveyors (RICS) suggested
that the Bank of England should impose a 5% cap on annual house
price inflation to prevent another housing bubble
* Lord Wolfson, the chief executive of retailer Next, claimed that
the UK has "seen the end of the credit crunch", although
not yet a sustainable recovery
* DIY retailer Kingfisher said it was too early to call "a
sustained economic recovery" in the UK
* As a whole the world was 0.5% happier between 2010-12 compared
to 2005-07, according to the UN's World Happiness Report. The
UK ranked 22nd, with Denmark ranked as the happiest country,
followed by Norway and Switzerland
* Spanish government 10-year borrowing costs fell below those of
Italy for the first time in over a year, with Spain now reportedly
considering issuing ultra-long 50-year bonds
* China's "Yong Sheng" will become the first
container ship to travel through the Bering Strait, travelling
along Russia's northern coast to the Netherlands in 35 days
– nearly 2 weeks shorter than it would normally take –
with the historically treacherous route now passable between July
and November due to melting Arctic ice
* A confidential EU Council Legal Service paper seen by the FT
revealed that a top legal advisor to the EU believes the financial
transaction tax sought by 11 eurozone states "infringes"
on EU treaties
* China said it would raise Rmb8.5bn (£878m) through a
private placement of shares to buy facilities and equipment for the
Chinese navy, as the start of a push to use capital markets to fund
China's defence industry
* The OECD said that the Irish economy is on the verge of becoming
the first euro area country to successfully exit its rescue
programme
* A former European Central Bank economist, Lorenzo Bini-Smaghi,
claimed in a new book that Silvio Berlusconi had formally discussed
Italian withdrawal from the euro in private meetings with other
euro area governments in 2011
* Toyota announced that hybrid cars will account for at least a
quarter of all the cars the company sells in the EU this year
* Jörg Asmussen, a German member of the ECB executive board,
warned that the dangers of the US Federal Reserve reducing its
stimulus programme might exceed those of Fed tightening that
occurred in 1994, which led to a crash in global bond markets
* The European Commission is set to scrap plans to move
supervision of the Libor lending rate away from London to the
European Securities and Markets Authority in France, according to
documents seen by the FT
* Influential think-tank the Policy Exchange advised the British
government to change its policy on town centres and to allow
boarded-up high streets to be converted in to housing
* The UN Conference on Trade and Development downgraded its
forecast for global trade growth in 2013 to 2.5% from 3.3%,
claiming global trade is likely to remain sluggish for many years
to come
* The UK's top 100 law firms saw a 10.5% increase in revenue
in Q1 2013, the fastest rise since April 2008, driven by stronger
M&A activity and increased demand for commercial services,
according to data from Deloitte
* The FT reports that Japanese prime minister Shinzo Abe has
agreed in principal to allow Japan's consumption tax to rise
from 5% to 8% next April, with additional stimulus spending planned
to soften the impact
* French president François Hollande unveiled a 10-year
"French pragmatic" industrial policy, which includes
strong sector support plans
* US pension funds and other large investors invested $65bn into
European equities in the first 6 months of 2013, the highest in 36
years over that period, according to data from Goldman Sachs
* Truman's beer – which disappeared from London streets
almost 25 years ago – will return after the opening of a new
£1m brewery in Hackney, with brewers using yeast that the
original brewer had cryogenically frozen in 1958
* Coca-Cola Hellenic Bottling Company is set to complete its move
from Greece to the FTSE 100 in the coming weeks, hoping to escape a
"Greek discount" on its valuation
* Average wages in the UK's oil and gas sector are set to rise
by 15% this year, with record investment and staff shortages
pushing average wages above the $100,000-a-year level
* British supercar manufacturer McLaren opened its first showroom
in China and announced its intention to have a third of sales from
Asia in future
* The Bank of England announced that it is consulting on whether
to print new bank notes on polymer plastic rather than paper, with
polymer notes more environmentally friendly, durable and harder to
counterfeit
* A special weeklong promotion ran by Groupon India, offering 1
kilogram of onions at 9 rupees (about 10 pence) for 3,000 buyers
each day, led to the site's highest ever traffic and crashed
servers, with the price of onions having risen fivefold in recent
months due to crop shortages – that's shallot!
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