Economics news – for a further week, the good news keeps on coming ... falling inflation, a fall in unemployment plus a boost to retail sales in July ...
Inflation figures were reported on Tuesday. The CPI inflation index fell to 2.8% in July from 2.9% in the prior month. By the end of the year we expect inflation to fall below the 2.5% threshold but the 2% target will be elusive for many months if not years ahead. In October the hefty tuition fees will fall out of the index providing a drop of 20 - 30 basis points. The 2% target will be a challenge - goods inflation averaged 2.4% and service sector inflation averaged 3.1%.
Bad news for rail travelers, the rail fares will be indexed to RPI plus 1%. A 4.1% increase in fares is in prospect for 2014, placing additional pressure on retail prices and disposable incomes.
The unemployment picture continues to improve, for those who can find work at least. The claimant count fell by 29,000, to a rate of 4.3% in July. The wider LFS data suggests a more modest fall in the three months to June. The rate of unemployment at 7.8% was unchanged, still way above the 7% threshold that may signal a change in monetary policy.
Retail sales volumes increased by 3% in July as sunshine and consumer confidence provoked a spending rush, stimulated by sunny weather, a Murray win at Wimbledon and the Royal baby allegedly. Sunny weather boosted sales across a range of products including food, alcohol, clothing and outdoor items. By value retail sales increased by almost 5%. After a slow start to the year, the retail outlook has improved in the summer months.
Will this continue? Why not! Employment is increasing and earnings are improving. A further 400,000 are in work compared to this time last year and earnings increased by 2% in the three months to June. We expect the retail rally to continue, though perhaps not at the 3% rate for the rest of the year.
Housing - The big story continues to be the housing market. Prices are rising, mortgage activity is increasing, the help to buy scheme is providing a boost to first time buyers. New home build is set to increase by almost 30% this year. The housing market is on the move, time to lock up your fixed rates, as prices rise, the real cost of borrowing is zero, capital appreciation - the bonus.
So what does this mean for the year? Our forecast is for growth of around 1.2% plus, rising to 2% in 2014. The economy has turned, the real risk - monetary policy is behind the curve. It is difficult to believe rates will be kept on hold until 2016, watch the US and add six months the best guide as always. Markets were equally sceptical, gilts and treasury yields are rising - gold is beginning to glitter again.
What happened to sterling?
Sterling responded to the economics news, moving higher. The pound closed at $1.5633, from $1.5505 against the dollar and at €1.1713 from €1.1617 against the euro. The dollar up against the yen closing at ¥97.5 from ¥96.24
Oil Price Brent Crude closed up at $110.40 from $108.22. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter.
Markets, were troubled - The Dow fell to 15,081 from 15,425. The FTSE closed down at 6.499.99 from 6,583. It’s a chance for market makers to clean out the bear pit. A good time to make a move. We still think the FTSE will clear 7000 within ten weeks.
UK Ten year gilt yields closed at 2.72 from 2.45, US Treasury yields closed up at 2.83 from 2.58. Yields are moving higher, despite the wishes of central bankers. The name is Carney not Canute after all.
Gold closed up at $1,377 from $1,315. Still waiting for the next big move but which way? Last week we said, the arguments are building for the bulls. It looks like they have made a decision.
That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.
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John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.