MacroScope

The UK economy – what a difference a year makes

This time last year, an imminent sovereign credit rating downgrade and a 1-in-3 chance of a new recession dominated talk on Britain’s economy.

To say 2013 turned out better than expected - at least by the simple yardsticks of economic growth and unemployment - would be an understatement, then, even if tepid wage growth, weak productivity and a rising cost of living still dog the economy.

None of the 63 forecasters polled by Reuters in Jan last year predicted that growth for the 2013 as a whole would hit 1.9 percent, as official data showed on Tuesday.

Back then, the consensus showed the economy would only grow around 1.0 percent, and many flagged some big downside risks even to that outlook.

That pessimism was summed up in the sub-header in the story for that’s month’s poll: “Bumping along the bottom”.

Crunch day for Turkey, and Ukraine

Hard to look beyond Turkey today. The central bank will issue its quarterly inflation report and has called an emergency policy meeting thereafter and will deliver a verdict at midnight local time. All very cloak and dagger.

The central bank, under heavy political pressure, has so far not raised interest rates but is instead burning through its reserves to defend the tumbling lira with only limited success.

It has floated the idea of “additional tightening days” when it will fund the interbank market at a higher rate, which is essentially monetary tightening by the back door. But in the throes of a full-on emerging market selloff it’s hard to see that doing the trick.

Why are US corporate profits so high? Because wages are so low

U.S. businesses have never had it so good.

Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.

The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.

Coincidence?

Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

What is France to do?

It’s euro zone third quarter GDP day and Germany and France are already out of the traps with the latter’s economy contracting by 0.1 percent, snuffing out a 0.5 percent rebound in the second quarter. Growth of 0.1 percent was forecast, not just by bank economists but by the Bank of France too.

Germany failed to match its strong 0.7 percent growth in the second quarter, but expanding by 0.3 percent – in line with forecasts – it is clearly in much better shape.

The Bank of France has estimated stronger growth of 0.4 percent in the final three months of the year but the euro zone’s second largest economy is a growing cause for concern. An OECD report on French competitiveness, released overnight, said it is falling behind southern European countries that have bitten the reform bullet.

Italy versus Spain

Italy will auction up to 6 billion euros of five- and 10-year bonds after two earlier sales this week saw two-year and six-month yields drop to the lowest level in six months. Don’t be lulled into thinking all is well.

After Silvio Berlusconi’s failure to pull down the government, Prime Minister Enrico Letta has some time to push through economic reforms, cut taxes and spending. But already the politics look difficult and the central bank said yesterday that government forecasts for 1.1 percent growth next year and falling borrowing costs were overly optimistic.

Bank of Italy Governor Ignazio Visco and Economy Minister Fabrizio Saccomanni will speak during the day.

Romer, taking aim at Fed, advocates ‘regime change’ and a shift to nominal GDP

By Alister Bull

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Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.

Romer, sometimes touted as a potential candidate to fill one of the 3 vacancies on the Fed’s Board in Washington, or maybe run a regional branch (Cleveland has an opening), also discussed deliberately aiming for 3 or 4 percent inflation, as well as targeting nominal GDP.

One key observation from her remarks was central banks must tackle financial instability head-on. The Greenspan-era disdain for using monetary policy to burst asset bubbles has become a luxury which the post-crisis world can no longer afford:

UK recovery, can you feel it?

Third quarter UK GDP data are likely to show robust growth – 0.8 percent or more, following 0.7 percent in Q2 – more kudos to a resurgent finance minister George Osborne who only a year ago was buried in brickbats.

We can argue about the austerity versus growth debate ‘til the cows come home – there is still a strong case that if the government hadn’t cut so sharply, growth would have returned earlier and debt would have fallen faster. But the fact that the economy is ticking along nicely 18 months before the next election means Osborne has won the argument politically.

And yet, and yet. The opposition Labour party has been nimble in switching its criticism from the government’s debt-cutting strategy to the fact that the economy might be recovering but the vast majority of Britons aren’t feeling it.

If at first you don’t succeed… Fed’s Evans sticks to strong forecast despite misses

It’s nice to know Federal Reserve officials have a sense of humor about their own forecasting errors. Chicago Fed President Charles Evans was certainly humble enough to admit to some recent misses in a speech on Friday .

Still, he’s sticking to his guns, arguing that U.S. economic growth will finally break above 3 percent next year, allowing the Fed to gradually pull back on its bond-buying stimulus.

In 2009, I predicted that growth would pick up. I did the same in 2010, 2011 and 2012. And I was not alone – most FOMC participants and many outside analysts shared this overly optimistic view. Undaunted, I make my intrepid forecast: I anticipate growth to average about 2-1/2 percent in the second half of the year and to be in the neighborhood of 3 percent next year. I expect the unemployment rate to be somewhat below 7 percent by the end of 2014.

History suggests rocketing British growth won’t last long

Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.

Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managers’ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.