International Economic Statistics

Europe chose to resolve the financial crisis in 2008 with a programme of austerity for the peripheral and weakest economies while the US and UK chose to recharge their economies with quantitative easing.  Both also increased controls over the banks and brought interest rates down to an historically low level.

So how has the different approaches affected the current economic performances of the countries involved? 

In Europe the result has been to improve the performance of the peripheral economies and to regain investor confidence in the robustness of the European monetary system.  This approach has been successful but has resulted in lower anticipated growth in the next couple of years from the two main northern countries with German and French GDP growth forecast by the IMF to be 1.7% and 1.0% respectively in 2014 with 1.6% and 1.5% forecast for 2015.  Italian GDP on the other hand is forecast as 0.6% in 2014 and 1.1% in 2015 following the austerity measures forced upon it in order for it to qualify for financial support.  

In the UK comparable figures from the IMF are for GDP growth of 2.9% and 2.5% for 2014 and 2015 respectively.  In the US they are forecasting 2.7% and 3.0%.

In Japan forecasts for GDP growth in 2014 and 2015 are for 1.3% and 1.0%.

Japan went through a similar financial crisis in the early nineties and has suffered stagnation since then with falling prices and increasing government borrowing.  They have responded recently under Mr Abe with a quantitative easing programme of their own which, coupled with an austerity programme of fiscal reform and talk of fundamental reform was to develop their own recovery from this period of stagnation.  It is early days to judge the result but some growth is forecast in GDP which is a positive sign and a determination to extricate themselves is clear.  Although the fundamental reforms are proving hard to achieve, inflation is forecast to be 2.8% this year as it has been given a boost by the introduction of a sales tax last month of 15%.  An inflation figure of 1.3% forecast for 2015 is progress.

The fear is that, in the absence of a monetary stimulus programme on the lines of that followed in the US, Europe will go down the same route as that followed by Japan in the nineties and experience low growth and deflation.  The forecast for inflation in 2014 is 0.8% followed by 1.2% in 2015 which, if achieved, will avoid deflation, but is regarded by many independent economists as too optimistic. Talk of a stimulus programme by Mario Draghi to combat this risk is thought to be his attempt to talk down the currency (a high currency leads to lower import prices and lower inflation) without actually introducing the stimulus.  The Germans remain very opposed to any such action as it is regarded as a way to avoid the reforms needed in the Southern economies and, perhaps, France and that it could lead to unacceptably high inflation in the future.

The UK and US have followed very similar paths from an early date with major programmes of quantitative easing, low interest rates and a programme of cutting government expenditure.  The result has been faster economic growth but without any adverse reaction detectable in the inflation figures which are forecast to be 1.9% in 2014 and 2015 in the UK and 1.4% and 1.6% in the US.

The result of these responses to the financial crisis can be seen in recent statistics with demand for housing and retail products rising sharply in the UK and US while consumer confidence in Europe remains low.  

In the UK house prices rose 8.9% on average across the country according to Rightmove.  Inflation was marginally higher than anticipated at 1.8% aided by the strength of Sterling over the last year which was up nearly 10%. This strength has dampened hopes for strong UK export growth as seen in the latest figures which revealed a fall of 1.0% over the last quarter.  On the other hand imports fell by 1.1% with the dampening effect of higher Sterling on import prices contributing to the slowdown. An increase in consumer confidence is reflected in higher house prices as is the strong retail sales figures which rose 6.9% on the year aided by improving weather and wages which rose in line with inflation. The Bank of England revealed the minutes of the MPC which reflected unanimity for retaining low interest rates.  The Governor reiterated their determination to retain interest rates at a low level until well into next year and to tackle any threat from rapidly rising house prices by using ‘other tools’ such as a reduction in the ‘Help to buy’ programme and tighter criteria for lending. The CBI’s survey on industrial trends revealed a disappointingly flat trend, however, the UK seems to be growing faster than forecast, as GDP came in at 3.1% aided by a continued strong performance from the services sector up 0.9% in the March quarter and a recovering trend for capital investment which was up 8.7% over the year. Government borrowing came in lower for the year ended April 2014 and in line with plans.

There was a similar story from the US where the minutes of the FOMC meeting were published and followed by speeches from various Federal Reserve officials including Janet Yellen who reiterated their continued dedication to low interest rates and to ‘tapering’ the rate at which they pump money into the US economy.  Their fear is that the recovery in the housing market will stall should interest rates rise as a result of them ‘tapering’.  Existing home sales, however, remained at healthy levels with a rise of 1.3% in April over the previous month and new home sales rose 6.4% over the same period.

In Europe manufacturing in Germany maintained some growth with a figure of 52.9 (above 50 is growth) but this was lower than the previous month’s 54.9. In France, on the other hand, they continue to be in the doldrums with a figure of 49.2 after a higher figure in the previous month of 51.2.  European consumer confidence remains low with a fall of 7.2 in May but was a slight improvement on the fall of 8.6 in April.  In Italy industrial orders returned to growth with an increase of 2.8% over the last year.

Short term the Anglo Saxon countries are performing best but without much more success improving the fiscal balances as a percentage of GDP the long term result may be totally different.

Darren Winters