A SPECTRE IS HAUNTING EUROPE ...

A spectre is haunting Europe …” It is the spectre of economic stagnation” … the opening words of Mark Carney, Governor of the Bank of England at the press conference for the November Inflation Report this week.

Official figures from Eurostat …
Official Q3 figures from Eurostat, on Friday, suggest the spectre could yet be something of a phantom. Greece breaks out of recession after six years! the headline in The Times, as the Greek economy grew by 1.4%.

In the Euro area as a whole, growth increased by 0.8%. Latvia, Lithuania and Luxembourg lead the growth charts (up by over 2%). The German economy grew by 1.2%. France, up by 0.4%, avoided a set back. The Italians not quite so fortunate, the economy experienced a further quarter of negative growth (-0.4%).

Forecasts for the year remain subdued. Lessons from history … Trade wars damage export growth! Is QE the solution … “Never confuse movement with action” the best advice.

Back to the Inflation Report …
Back to the Inflation Report … any prospect of a rate rise in the UK, is off the agenda until the second quarter or even Autumn of next year according to the latest comments from the Bank of England.

Don’t mention forward guidance! Well the Governor didn’t as Ed Conway of Sky News pointed out in a testy question and answer exchange. Alas poor Yorick we knew him well … a man of infinite jest. QE was something of a joke said Ed! Ouch! The Governor, having previously been asked if he was a Loon (the Canadian bird) in the MPC aviary, wasn’t laughing.

The Prospects for Oil Prices …
Oil prices closed below $80 Brent Crude basis this week. The EIA, (US Energy Information Administration) revised their forecasts for oil prices into 2015 as a result.

Despite any significant change in the fundamentals, oil prices (according to the EIA) are now expected to average $83 dollars per barrel in 2015 compared to the forecast of $103 dollars per barrel just a few weeks ago.

Can we really expect oil prices to remain subdued, if the recovery in world growth continues?

Oil is subject to short term trader action. Let's not forget, the strong price move to $150 per barrel in 2008 reflected the “Speculative Bubble Map” rather than a fundamental supply and demand push. The price reaction towards $40 in 2009 was a reflection of position clearance rather than real market value movements. It is too early to make the call for $80 dollar oil into 2015, though prices may yet be tested if the bears continue to squeeze.

Oil and the impact on world growth …
According to research released by Credit Suisse, the price drop will increase GDP, across the world, by an average 1% over the next three years with a particularly significant impact on growth in the US and Canada of almost 2%.

Russia will be most disadvantaged by the price move, with a drop in growth in the first year of over 2%. OPEC Middle East economies will suffer but with a much smaller shock over the first four quarters.

The impact on the UK …
According to the NIESR model, the impact of the price drop on UK growth will be less than 1% over a period of three years. [Earnings from North Sea Oil will take a hit].

The impact on UK price levels may be more significant. Inflation CPI basis is expected to fall below the 1% level over the next few months. The Governor may have to write a letter to the Chancellor of the Exchequer, explaining why the MPC has failed in a remit to maintain prices at or around the 2% CPI level. $80 oil and the Governor will have to write faster!

So what of UK unemployment …?
ONS data this week confirmed, Unemployment (claimant count basis) fell by a further 20,000 in October to 931 thousand and a rate of 2.7%. This is the lowest level since August 2008 and lower than the average level achieved in the whole of 2006.

Is this significant? Of course. Spare capacity in the labour market is evaporating. Recruitment pressures are increasing. Earnings increased by 1.4% in September, compared to the single figure growth in the prior month. Private sector pay is increasing at a faster rate (2.3%) boosted by growth in manufacturing and construction.  

400,000 have left the jobs register over the past year. On current trends, Job centres will be closing in the Summer of 2017, there will be no one looking for work!

Despite the strong trends in the labour market, the headline CPI inflation outlook remains subdued, flattered by slow world trade growth, weak world trade prices, low commodity costs and a short term collapse in the oil price.

A spectre is now haunting the MPC. It is the spectre of high economic growth and low inflation. Not so bad really! The Governor may have to write a letter to the Chancellor of the Exchequer as inflation slips below 1% in a pre Christmas lull!

So what happened to sterling this week?
Sterling moved down against the Dollar to $1.567 from $1.585 and also moved down against the Euro at 1.251 from 1.275. The Euro closed up against the dollar at 1.252 (1.243).

Oil Price Brent Crude closed down at $79.41 from $83.67. The average price in November last year was $107.79.

Markets, moved up. The Dow closed at 17,635 from 17,563 and the FTSE closed up at 6,654 from 6,567.

UK Ten year gilt yields moved down to 2.11 on updates from the Inflation Report and US Treasury yields were largely unchanged at 2.32. (2.34) Gold moved to $1,187 from $1,166.

That’s all for this week. We are in London for the weekend. Mary and I went with the prof to the Opera last night and we are off to the ATP semis later today.

In the meantime, join the mailing list for The Saturday Economist or why not forward to a friend.

John
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