The U.K. Consumer: An Important Barometer

In most developed economies, the sector that hurt the most during the financial crisis and ensuing recession tended to be the consumer sector. Ironically, in the lead up to the crisis, it was the excesses of this sector that helped create the conditions that led to the crisis. But while the recession was largely a structural phenomenon, and has led many to call for a rebalancing of developed economies away from such a consumer-centric model, the fact remains that the consumer sector still matters.

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Top 5 Graphs of the Week - 20 February 2010

This week we look at Japanese GDP figures which show an improving situation, poor performance in UK retail sales, a lift in UK inflation, a pause in US inflation, and the start of the US Federal Reserve testing the exit strategy waters in policy normalisation. So thematically I suppose we've got a bit of a growth and inflation slant this time.

Thus we've got what were for a time the 3 main financial centers in this article, where the growth situation is mixed; the UK really just struggling along, Japan benefiting from global trends in stimulus and presently largely artificial pick ups in demand, while the US is still in economic limbo - what happens when the stimulus is gone?

Meanwhile on the inflation front things are currently also largely mixed, the UK is probably the leader of the three on current inflation, while the US is a close second, and Japan is still in deflation. The risks to accelerating inflation are similar in the US and the UK, but as we'll see in the US the Fed has been making some promising moves towards preventing sowing the seeds of more powerful inflationary pressure in the years to come.

1. Japan GDP - thank you exports, thank you stimulus
Last week Japan released its GDP figures for Q4 2009; q/q it was up 1.1%, and above the expected 1%. However you need to be careful with that figure as they ended up revising down Q3 from about 1% to 0%... so the growth was shuffled forward I guess. Year on year the decreases reduced to a mere -0.90%, but overall GDP was down 5% for 2009 vs 2008. The main drivers of growth were private consumption (spurred on by stimulus measures), and a revival in net exports (helped by Chinese demand - in part stimulus related, and global demand from inventory restocking). The Japanese economy still remains firmly export oriented, and is set to gain from any improvement in international trade.


2. UK Retail Sales - another rainy day
UK retail sales disappointed in January with -1.8% month on month (against expected -0.5%), and up 0.9% year on year (against expected +1.1%). Now, much of the negative performance was related to bad weather (the index now includes fuel - so bad weather = less driving, less fuel consumption), but it would be hard to say that the result was completely weather driven. Overall this data point adds to the picture of an ailing UK economy, on a GDP basis, they've very barely left the recession with a minuscule +0.1% quarterly growth figure in Q4 2009, paired with the next chart, and my previous article on The Future of Public Debt (which shows the UK in an increasingly vulnerable position, things do not look good there indeed.


3. UK CPI - stagflation anyone?
UK CPI fell -0.2% on a monthly basis against expected 0%, on an annual basis it accelerated as expected to 3.5% vs 2.9% in December; core CPI also rose to a record 3.1% as expected. Much of the pressure is coming from the return of the VAT rate to 17.5% from 15%, a recovery in fuel prices, and a weak exchange rate. However, as with the temporary impact on retail sales above, it would be hard to argue that there isn't inflationary pressure working away here somewhere. Indeed the conditions e.g. quantitative easing, can only be facilitative of increasing inflation, for now at least, the situation is high inflation (and even though the factors can be explained - prices are still rising), and low growth...


4. US CPI - fuel up shelter down
Over in the US, the CPI figures came in slightly weaker - allowing the deflation hawks some ammunition. Headline CPI rose 0.2% against expected 0.3% month on month, and up 2.7% year on year. Core CPI actually fell -0.1% vs consensus +0.1% on a monthly basis, and eased back to 1.5% on an annual basis. Upward pressure is still coming through from fuel prices, but these were slightly offset by a drop in shelter costs (helped by hotels and resorts dropping prices to try and drum up some business - makes sense given the large stock of hotels coming through the pipeline that were started back before the crisis). Overall the outlook for inflation in the US is probably for reasonably stable for an extended period - but with risks to the upside dominating.


5. US Federal Reserve - Testing the exit strategy waters...
The US surprised markets, and me, when it made it's Thursday after-market-close announcement that it had decided to increase the primary credit rate (discount rate) by 25bps to 0.75%, and that it would also increase the minimum bid rate on TAF auctions to 0.5% (though it also highlighted that final the TAF auction will be on March 8, 2010). As you can see in the chart below it marks an increase from record low levels, it also brings the spread between the discount rate and the fed funds rate back up slightly (but still below where it usually is). Most commentators pitched it as a normalisation of the rate at which banks borrow money from the Fed. My spin is that this is the first steps in testing the exit strategy waters - at some point they will need to exit the stimulus measures and return to neutral (otherwise the CPI chart above will start to look a bit scary), so in that respect this is a positive move.


Summary
To sum up, there's a tentative economic recovery underway in Japan that will only be helped by any further improvements in international trade. While in the UK signs are that the very weak economic recovery there may stall; in any case the growth situation is weak at best, and inflation is picking up; leaving you with stagflation. In the US, inflation has continued to show signs of picking up, but has taken somewhat of a breather this time, and while inflation risks are low, they are weighted to the upside.

Sources:
1. OECD http://stats.oecd.org/index.aspx
2. UK Office for National Statistics www.statistics.gov.uk
3. UK Office for National Statistics www.statistics.gov.uk
4. US Bureau of Labor Statistics http://www.bls.gov
5. US Federal Reserve http://www.federalreserve.gov/

Article Source: http://econgrapher.site1.net.nz/top5graphs20feb.html
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Top 5 Graphs of the Week - 23 January 2010

The past week was reasonably quiet on the economic data front outside of China's big statistics release. As such this week's issue is less power packed than usual, but still contains a few gems. First up we look at how US PPI figures point to inflation, UK consumer spending's gradual recovery, UK inflation risks, New Zealand consumer spending trends, and the inflation outlook for New Zealand. If there were two main themes it would be that inflation is ticking along but not yet significantly, and that consumer spending is slowly recovering but well below trend.

1. US Inflation - Producer Price Index
US headline PPI came in at 4.7% year on year (2.7% in November), Core was also up but less so at a 0.9% annual increase. On a monthly basis it was slightly above consensus at 0.2%, and core was unchanged. Much of the increase was driven by food prices, and of course the high year on year % change being boosted by a lower comparison figure. All up the message is that prices have been tracking up, and it's unsurprising to see producer prices rise in the context of the level that the prices index of the ISM PMI has been at. This adds to the overall inflation picture for the US that says inflationary pressures are slowly simmering under the surface, but have yet to truly boil over...



2. UK Consumer Spending
The UK saw a monthly increase in retail sales for December of 0.3%, below an expected 1.1%. On an annual basis for December retail sales were up 2.1%. The biggest contributor to the gains were sales in "predominantly food" stores. The UK will be the first G7 country to announce its Q4 GDP result on the 26th of January. With retail sales figures for the December quarter up vs the September quarter consumer spending is likely to contribute. Consensus is for about 0.4% quarter on quarter growth.



3. UK Inflation
Keeping with the UK, the inflation story unfolding there had a some easily misleading additions in December. The annual rate of inflation measure by CPI was 2.9% (vs 1.9% in November). The biggest driver of this was the reduction of the VAT tax in 2008 to 15% from 17.5%. It was also boosted by a sharp fall in oil prices around December 2008, and Christmas sales pushing down prices. Overall the situation is inflationary in the UK, there are elements in the system like quantitative easing, that bar a severe downturn, will likely trickle through into higher real inflation. This will particularly be the case should activity in the UK begin to pick up further, as the recovery unfolds in the UK, the Bank of England will indeed face a dilemma and a challenge.



4. New Zealand Consumer Spending
New Zealand recorded a 4th month of monthly growth in retail sales in November with 0.8%, and 0.8% for core (less autos). On an annual basis headline was up 1.7%, and core was up 3.6%. As can be seen in the chart below core retail sales have been tracking up and have not been too significantly impacted by the recession, however headline retail sales are clearly growing below trend. Overall it is a positive figure and suggests the positive (albeit small) GDP growth figures recorded in Q2 and Q3 may be developing momentum. December quarter retail sales are due out next week and will give a fuller picture as to how the consumption component of GDP is tracking, likewise international trade figures are also due for December next week.



5. New Zealand Inflation
New Zealand also released its inflation figures last week, revealing reasonably subdued inflation. The figure came in at 2% year on year (-0.2% on a quarterly basis) for Q4 (vs 1.7% in Q3); in the middle of the 1-3% inflation target band of the RBNZ (New Zealand's central bank). On components, transport prices were a contributor, while food prices (esp. vegetables) fell the most. Non-tradeables (core) continued to decelerate with 2.3% vs 3% in Q3. The outlook is for reasonably stable inflation over the medium term, but with potential to pick up as house prices recover and the economy picks up pace. The RBNZ is likely to hike rates from 2.5% (having lowered from 8.5%) sometime around the middle of this year.



Summary
The main takeaways from this article are that inflation is present in the US, but it is still largely bubbling away below the surface - so the growth-inflation trade off is set to become increasingly important in the US. On the UK, inflation seems to be a bigger risk than in the US, particularly given that consumer spending; while not growing rapidly by any means, is beginning a slow recovery - against the backdrop of quantitative easing and broadly loose fiscal and monetary policy conditions. While in New Zealand consumer spending is tracking upwards, yet below trend, and tentatively indicating a pick up in momentum of the recovery there. At the same time New Zealand isn't facing any significant inflationary pressure just yet, and while Australia has started tightening monetary policy; New Zealand probably wont until at least the middle of this year.

Sources:
1. US Bureau of Labour and Statistics http://www.bls.gov
2. UK Office for National Statistics http://www.statistics.gov.uk
3. UK Office for National Statistics http://www.statistics.gov.uk
4. Statistics New Zealand http://stats.govt.nz
5. Statistics New Zealand http://stats.govt.nz

Article Source: http://econgrapher.site1.net.nz/top5graphs23jan.html