Friday, August 14, 2009
Three bits of news - one big surprise
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Catching up with developments this week, the three key events as far as the UK economy is concerned were the Bank of England's inflation report, the labour market statistics and eurozone second quarter GDP data. The first two were more or less in line with predictions, the third contained the really big surprise.

The Bank's inflation report, here, was notable for a robust defence of the decision to extend quantitative easing by 50 billion to 175 billion, but also for being less dovish than the markets had expected. Certainly reports beforehand that the Bank was scared stiff of deflation were wide of the mark. It expects growth to start from here but, unsurprisingly, for that growth to be weak (though it revised up its forecast for next year). If rates remain as low as now and QE is confined to 175 billion, inflation will gradually rise to the 2% target.

Given that this prospect is not too bad, why the downbeat tone from Mervyn King? He is still smarting, I think, from being accused of missing the recession entirely this time last year. Once bitten, twice shy.

The unemployment figures, meanwhile, were pretty much in line with my expectations; a 220,000 rise to 7.8% of the workforce (2.44 million) in the Labour Force Survey measure of unemployment and a 24,900 increase to 1.58 million in the claimant count in July. Though there is a gap in levels of unemployment between the two series (because many are ineligible for benefit), the trends are similar. The key is that the LFS measures average unemployment over a thre-month period, while the claimant count is a spot measure. If recent patterns persists, the next LFS increase should be under 200,000. More here.

The big surprise, as noted, was in Europe, with both France and Germany reporting 0.3% growth in the second quarter (as did Portugal and Greece) and the eurozone as a whole a decline of only 0.1%. This is in direct contradiction to the purchasing managers' surveys, which have suggested the UK is pulling out of recession sooner than the rest of Europe. Maybe the Office for National Statistics should be set to work on the European numbers. The Eurostat release is here.