Thursday, 29 March 2012

Queen. UK. EU M3. US jobs.

Pity the poor elderly. Even the British Queen Elizabeth II cannot celebrate her 60 years of ribbon-cutting, crowd-weaving, and banqueting, without having bad conscience that the celebrations will “push the UK economy back into recession”. The press has eagerly sunk their teeth into the story.

The warning words come from another elder, Sir Merwyn King of BoE. His point is simple. By giving the entire country a(n extra) day off, UK will miss one day of economic output in Q2. One day out of 65 working days is about 1.5%. So if the UK lose 1.5% of output in Q2, for sure it would turn out a negative quarter, given the sluggishness of the UK economy. My advice to the worried central banker is to invite UK consumers to buy as many flags, mugs, hats, memorial medallions and what not to give the retail trade a boost.

UK growth
GDP growth for Q4 in the UK came out negative and we have a hard time being really surprised. UK consumers have been among the most leveraged in Europe, the housing bubble have been among the biggest, and the impacts on the public finances of the faltering banking sector among the largest in Europe.

Looking at the underlying data, it is clear that the UK consumers continue to consolidate. In combination with continued spending reactions in the public sector, it will take a long time to get the growth going again. For some food for thought, about house prices, look at this little study by a couple of economists from the Swiss National Bank.

I continue to be worried about the growth of the Eurozone money stock (M3). The headline number came out positive (+2.8% yoy), but dig a little, and you will find out that banks’ lending is still slowing and grew only by 0.3% in February. Bank lending to the public sector grew by 0.6%.

Does this prove that the huge amount of 3-year loans given to the banks “does not work” as in particular the UK financial press have been trumpeting?

No, The LTRO loans were not even intended for that. Their purpose was a) to avoid a major liquidity squeeze in the European inter-bank market, and b) to allow the banks to receive a colossal subsidy by using the money to buy government bonds. In that respect the LTRO loans work just fine.

But it does prove that when banks are reluctant to lend and borrowers are reluctant to borrow, the limits of monetary policy have simply been reached.

US Jobs
There is no doubt, the US economy has created more jobs than expected due to “unseasonably warm weather” – the methods used for seasonal adjustment of the employment data all but guarantee this result.

But is this enough that we should call off the optimism about the recovery in the US labour market. I think not. In fact, if one sums up all the micro data, it is surprising that the unemployment rate is not falling any faster than is the case. We may see a sharp drop in the months leading up to the presidential elections.

Given that the Republicans seem bent on choosing an unelectable candidate, falling unemployment would all but guarantee Obama’s re-election. My pious hope is that he would use a second mandate more constructive than the first. 

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