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By HaleStewart August 22, 2014 3:24 pm
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International Week in Review: Spotlight on the UK, US and Australia

          This week the international economic news was light.  The biggest event was the central bankers Jackson Hole meeting where both Janet Yellen and Mario Draghi gave speeches.  But aside from that, there were no grand surprises in the data.  Three central banks, however, released their latest meeting minutes.  So, let’s take a look at how these banks view their respective domestic economies, starting with the UK.


          The BOE was satisfied with the overall rate of UK growth, noting that although 2H14 growth was expected to be a bit slower than that in the 1H14, the current projected rate was actually a bit higher than earlier estimates:

As expected, the ONS’s preliminary estimate of GDP growth for the second quarter had been 0.8%, the same rate as in the first quarter. Bank staff continued to expect estimates of growth in Q1 and Q2 to be revised up fractionally, to 0.9%, based on the strength of other surveys of business activity and the historical pattern of data revisions. Thereafter, growth was expected to ease somewhat. The latest survey data suggested that the slowing of growth in the second half of the year was likely to be less pronounced than expected at the time of the May Inflation Report.

The annual growth rate has been steadily increasing since the beginning of 2013 and currently stands a little above 3%:

On the inflation front, the BOE seemed a bit concerned with recent increases in retail prices, noting that they were increasing and that firms had a bit more pricing power.  However, this was in contrast to the latest inflation report from the ONS, which showed a 1.6% Y/Y increase, down from the previous reading of 1.9%.  And the overall Y/Y trend is clearly down, with prices now printing below 2% for all of 2014:

Producer prices are also showing a very tame picture:

          The housing market has been a point of concern for the BOE.  However, it appears that recent actions taken by the bank to limit mortgage approvals have had the desired impact. 

Following four consecutive monthly falls, the number of mortgage loan approvals for house purchase had increased by 5,000, to 67,000, in June. The number of applications for mortgages had also picked up a little. Together, these data supported intelligence gained from the major UK lenders that the immediate negative effect on lending activity associated with the implementation of the Mortgage Market Review was beginning to wane. Most lenders expected that its impact would continue to subside in July. Nevertheless, mortgage approvals had been weaker than expected at the time of the May Inflation Report, when they had been projected to rise to around 85,000 per month by the end of the year. The recent indicators suggested that a number around 75,000 per month on average in Q4 now seemed more likely.

Notice the decline that has occurred since the beginning of the year.  While the latest data shows in increase, we can consider that statistical noise.

          Finally, the employment picture is clearly improving:

The labour market data for May continued to underscore the strikingly opposing trends of strength in employment growth and weakness in wages. Employment had increased by just over ¼ million in the three months to May compared with the previous non-overlapping quarter. Unemployment had continued to fall, on the LFS measure to 6.5% from 7.2% at the end of 2013.

The overall rate of unemployment has been dropping sharply since the end of last year. 

However, this is not translating (as yet) into wage gains:


The conclusion to draw regarding the UK economy is that it’s one of the best performing developing economy right now.  Unemployment is dropping, inflation is controlled and the one area of potential trouble – housing – is being tamed.



          While the Beige Book has been using the word moderate on a regulate basis to describe the US economy, the Fed minutes avoided that word, while still saying the same thing: US growth is moderate:

The information reviewed for the July 29-30 meeting indicated that real gross domestic product (GDP) rebounded in the second quarter following its first-quarter decline, but it expanded at only a modest pace, on balance, over the first half of the year. Consumer price inflation rose somewhat in the second quarter, but futures prices for energy and agricultural commodities generally were trending down over the next couple of years and longer-run measures of inflation expectations remained stable. The Bureau of Economic Analysis (BEA) released its advance estimate for second-quarter real GDP, along with revised data for earlier periods, on the second day of the FOMC meeting. The staff's assessment of economic activity and inflation in the first half of 2014, based on information available before the meeting began, was broadly consistent with the new information from the BEA.

Overall, US growth has been printing annual GDP growth at a rate of between 2%-3% since 2011:

          The minutes also reveal the breadth of the labor market information the Fed will analyze. 

Measures of labor market conditions generally continued to improve during the intermeeting period. Total nonfarm payroll employment increased strongly in June, and the average monthly gain for the second quarter was the largest since the first quarter of 2012. The unemployment rate declined to 6.1 percent in June, the labor force participation rate was unchanged, and the employment-to-population ratio edged up. The rate of long-duration unemployment moved down, and the share of workers employed part time for economic reasons edged up; both measures remained elevated by historical standards. Initial claims for unemployment insurance declined further in recent weeks. The rate of job openings rose further in May, but the rate of hiring was unchanged and remained at a modest level.

Not only will they consider the actual rate (U3), they’ll also look at temporary workers, length of unemployment, employees marginally attached to the labor force and job openings.  This tells us that smaller data points contained within the monthly employment situation report are now just as important as the overall unemployment rate.  Given the weakness of this broader data, it’s more likely the Fed will keep rates lower longer.

          Auto sales and auto production are also important.  Auto production is a good indicator of the US Midwest economy.  Auto sales also indicate the health of the US consumer: car sales increase when the consumer is more confident and better able to commit to a 3-5 year expense.  That’s why the current level – which is near those seen in the previous expansion are so important:


          The Fed looks at both the Y/Y percentage change in CPI and PCEs to measure inflation.  Both of these measures are under 2% and have been for the last few years:

          The conclusion to draw from the Fed’s description of the US economy is that it’s growing moderately with little inflationary pressure. 


          The Australian economy is in a very tricky place.  On one hand, they are trying to rebalance the economy from one centered almost exclusively on raw material exports (largely to China) to one more evenly balanced.  To accomplish this, they’ve kept rates at 2.5% since 2012.  But, they are also dealing with a potential housing bubble, increasing unemployment and fairly high inflation.  Let’s start with the RBAs statement on prices:

Members noted that the inflation outcome for the June quarter had been a little higher than expected. Underlying inflation was around ¾ per cent in the quarter and 2¾ per cent over the year, while year-ended CPI inflation was a little higher, at 3 per cent. Much of the increase in CPI inflation over the past year reflected a pick-up in tradables inflation, which was consistent with pass-through of the earlier depreciation of the exchange rate. This was comparable to that in previous episodes. Prices of consumer durables had declined less rapidly over the past year than in recent years, which was consistent with the effects of the earlier depreciation of the exchange rate.

These rates are some of the highest in developed world and would probably lead to the conclusion that the RBA needs to raise rates. 

Adding to that pressure is the housing market:

Members observed that residential dwelling approvals had declined somewhat in recent months, but remained at a high level and, in combination with the substantial amount of residential work yet to be done, suggested that dwelling investment was likely to remain strong in the period ahead. Conditions in the established housing market also remained strong and while house price inflation across the country in 2014 had not been as rapid as over the second half of 2013, it had remained robust. Auction clearance rates in Sydney had eased from their high levels in late 2013, although they had increased in Melbourne more recently. Factors influencing the demand for and supply of housing at present were also noted.

While some markets are hotter than others, the overall home price situation is one of a potential bubble:

At the same time, employment is weakening:

A number of labour market indicators had improved a little since the beginning of 2014. Employment growth had broadly matched population growth and the unemployment and participation rates both remained steady in trend terms. Forward-looking indicators of labour demand had generally improved, but pointed to only modest employment growth in the near term. A notable degree of spare capacity in the labour market was suggested by the relatively high unemployment rate and the participation rate being close to its lowest rate in almost a decade

This meeting occurred before the latest Australian employment report, which showed an uptick in unemployment to 6.4%:

At the same time, the employment to population ratio and participation rates have been decreasing:

All of the above numbers point to employment market slack that is becoming more pronounced.

And the weak domestic demand situation is leading to a weak business investment environment:

Measures of business conditions had remained at around average levels. Survey measures of investment intentions had also been around average, after picking up from the lower levels seen in 2013. Members noted that information from liaison continued to indicate that firms were reluctant to undertake significant investment projects until they experienced a sustained period of strong demand. While non-residential building approvals had declined in trend terms since early 2014, the stock of work yet to be done was expected to support the current level of non-residential construction in coming quarters.

Business investment as a percent of nominal GDP has dropped over the last few readings:

The real issue for Australia is the mining/non-mining situation.  As Chinese demand increased, Australian companies increased their investment in physical plant.  But these types of projects are very large, taking several years to develop.  As Chinese demand has decreased, raw material companies have cut their investment plans, while other companies have not filled the void.

          Australia is starting to be a bit concerning.  The recent uptick in unemployment indicates increasing economic slack.  This leads to a decrease in demand, which is the fundamental reason for the drop in capital expenditures.  But the central bank is hemmed in from higher-than-desired inflation and a potential housing bubble.  They may be forced to sit on their hands as a result.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 





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