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SPECIAL FEATURE: Eurovision market commentary

Forget 2014. Back then, the UK and US were the fastest-growing G7 economies. Now the UK has slipped into deflation and US growth appears to be stalling. In contrast, the eurozone’s surpassing expectations, with support from the ‘Hero’s’ at the European Central Bank. Europe’s not just become an arena for staging an annual high-camp pop-fest you know. Congratulations to Sweden.

Nocturne

UK consumer prices fell by 0.1% in April compared to the same month last year. But this is unlikely to herald the start of a long night of deflation, à la Japan. For now it’s more of an economic boon as falling prices helpfully boost household incomes. Food, fuel bills and petrol pump prices are all lower than they were this time last year. And inflationary pressures are undoubtedly muted. Core inflation, which strips out both energy and food prices, fell to 0.8% year-on-year in April, the lowest since 2001. The Bank of England can afford to be patient.

All kinds of everything

UK retail sales growth is robust. Sales volumes are up by about 5% year-on-year, double the 2.5% year-on-year average since 1997. Although all the major sectors are benefiting, the pick of the bunch is household good stores (up 11% year-on-year), while supermarkets are propping up the table (up 1.6% year-on-year). These are solid figures and a strong hint that wider consumption improved in April. Yet without equally robust income growth, it’s hard to see how it can be sustained.

Fairytale

The UK public sector borrowed £87.7bn last financial year, a full £2.5bn less than the Office for Budget Responsibility expected at the time of the last Budget. Income tax revenues are growing again, which is a good thing, as it suggests that we can expect some sort of pick-up in average earnings growth in the near term. This will all come as very happy news to the Treasury as we head towards the next Budget announcement on 8th July.

Boom Bang-a-Bang

National house price growth was 8.5% year-on-year in Q1, still far faster than income growth. And the number of houses built in England over the last year increased to 97k, up from 90k in the previous financial year. Also, there’s little sign that the Bank of England’s will have to step in to rein-in risky mortgage borrowing. In brief, it’s business as usual in the short-term for the UK housing market, even if the longer term housing challenges have not gone away.

Save all your kisses for me

We already knew that the typical worker’s weekly pay rose 0.1% in 2014. Last week, ONS explained why people who had held the same job for over a year saw pay rise 4.1%. People starting jobs are younger and less skilled than those leaving them. Employees staying in a job tend to benefit from rises during the year. And the bargaining power of some people looking for work is limited by the fact that they are unemployed. So, while the difference between stickers and twisters is large, it’s perfectly normal.

Rise Like a Phoenix

Eurozone annual inflation was 0% in April, up from -0.1% in March. So the single currency region has escaped from the lake of deflation, even if it’s not quite reached the familiar shore of inflation either. Although the slow journey out of deflation echoes the relative improvement in general economic activity across the eurozone, the main cause lies more with the weakening downward pull of falling energy prices. So it’s best to keep a sense of perspective. The European Central Bank aims to keep annual price rises near to but below 2%. That’s a long way away. Don’t expect a let-up in its bond-buying programme soon.

I Wanna

Although business activity in eurozone slowed a little in May, firms want to increase staff. The eurozone composite Purchasing Managers’ Index slipped to 53.4 in May, from the slightly higher 53.9 in April, still nicely above the neutral 50-mark. The region’s makers are reporting stronger business, while the services sector slowed. But the most welcome news was that firms are hiring staff at the fastest pace in three years. What’s often overlooked is that while productivity is important, what really matters in the short-term, especially for the eurozone, is jobs dear boy, jobs.

Hold me now

The last time the Fed raised interest rates George W Bush was a first term President and Greece was winning Europe’s football championship. Neither of these is likely to happen again and we’ll wait a while yet before the Fed hikes. The minutes of its April meeting showed members concerned about the recent weakening performance. They put that down mainly to one-off factors but niggles remained that something more troubling is at work. With inflation still quiescent markets believe rates will remain on hold until December.


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