We have learnt a lot this week about the appetite of households for spending. And, it appears that they are not particularly hungry. On Monday, the Quarterly National Accounts for Q1 revealed that, in real terms, household sector spending fell by 0.1% in the quarter despite disposable income growing by 2.1%. Today, we have learnt that households have continued to increase the amount of equity in their homes. The Housing Equity Withdrawal (HEW) figures for Q1 show that households increased their stake in housing by some £3.2 billion.
Housing Equity Withdrawal occurs when lending secured on dwellings increases by more than the investment in the housing stock. Housing investment relates largely to the purchase of brand new homes and to major home improvements, but also includes housing moving costs such as legal fees. What the Bank of England does is to compare these levels of housing investment with the amount of additional secured lending. If the Bank of England finds that additional secured lending is equal to the amount of housing investment then HEW is zero. If it is positive, then additional secured lending is greater than the levels of housing investment. This would show that the household sector was extracting equity from the housing stock and using mortgage lending to fund consumption, to purchase financial assets or to pay off unsecured debts, like credit cards.
But, the point here is that HEW is actually negative and has been so since the second quarter of 2008. Negative HEW means that housing investment levels are greater than the levels of new secured borrowing. In other words, household are increasing their housing equity. But, there is a cost to this choice because by doing so households are using money that could otherwise be assigned for spending or purchasing financial assets. One way of measuring the potential extent of foregone consumption is to note that the Bank estimates that the level of equity injected into housing in Q1 was equivalent to 1.3% of disposable income. Since Q2 2008 households have injected equity into housing to the tune of £38.34 billion, which is equivalent to 1.97% of disposable income, some of which might have otherwise been used to fund spending.
The negativity of HEW is not that surprising. In difficult economic times many of us might be tempted, if we can, to reduce our exposure to debt. Low interest rates may also be inducing households to pay off debt either because the interest rates on saving products are low and unattractive or because the size of mortgage payments for those on now lower variable rate mortgages gives them income with which to pay debt off. The bottom line is that after many years happily spending, households appear to be dining off a different menu.
Articles
Homeowners raise stakes in homes, says Bank of England BBC News (15/7/10)
Mortgage debt drops £3.2 billion Independent, Nicky Burridge (15/7/10)
Drop in outstanding mortgage debt UK Press Association (15/7/10)
Equity withdrawal still negative Financial Times, Cara Waters (15/7/10)
Saving may cause a double-dip recession Telegraph, Harry Wallop (13/7/10)
Data
Housing equity withdrawal (HEW) statistical releases Bank of England
Quarterly National Accounts, 1st Quarter 2010 ONS
Questions
- What do you understand by the term ‘housing equity withdrawal’?
- Compare the possible implications for consumer spending of positive HEW and negative HEW.
- What factors do you think lie behind the eight consecutive quarters of negative HEW?
- Why might a low interest rate environment affect the incentive to withdrawal housing equity? What other variables might also affect levels of HEW?
- How does HEW affect the net worth of households?
UK unemployment now stands at 2.47 million, which is a fall of 34,000 people in the three months to May. Meanwhile, the claimant count, which measures the number of individuals claiming Jobseeker’s Allowance, fell by 20,800 between May and June to stand at 1.46 million.
The total number in employment increased by some 160,000 in the three months to May to reach 28.98 million. The increase in the number of individuals in work is largely due to an increase in the number of part-time workers, which now stands at some 27%. The development of the flexible firm has played a huge role in creating more and more part-time jobs.
Although declining unemployment is good news, and the jobless rate of 7.8% is now comparable with the EU and the US, there are suggestions that it may rise again next year. Indeed, unemployment is expected to peak at nearly 3 million in 2012 (10%) and an employer’s group has said that the UK may face serious job deficits for the next decade. As more and more jobs are lost in the public sector, estimates suggest that the economy must grow by 2.5% per year from now until 2015, in order to compensate these losses with extra jobs in the private sector.
As John Philpott, the Chief Economic Adviser at the CIPD said:
“A slightly milder growth outcome – which many would consider a decent recovery in output given the various strong headwinds at present facing the economy – is easily as imaginable as the OBR’s central forecast and would leave unemployment still close to 2.5 million by 2015, meaning Britain faces at least half a decade of serious prolonged jobs deficit.”
So, although the fall in the jobless rate is undoubtedly good news, the uncertain future for unemployment in the UK, will put a slight dampener on this news.
Articles
UK unemployment declines to 2.47m BBC News (14/7/10)
Economy Tracker BBC News (14/7/10)
Unemployment to peak at 3m by 2012 Telegraph (14/7/10)
Labour market report to show outlook for jobs worse than OBR projections Guardian, Katie Allen (14/7/10)
Part-time work boosts UK employment rate Sky News, Hazel Tyldesley (14/7/10)
Unemployment figures: what the experts say Guardian, Katie Allen (14/7/10)
Data
Labour market statistics latest: Employment ONS
Labour Market Statistical Bulletin – July 2010 ONS
Labour market statistics: portal page ONS
Questions
- How is unemployment measured in the UK? Which is the most accurate method?
- What is the flexible firm and how has it allowed more part-time jobs to be created?
- Why is unemployment expected to rise again in the next few years?
- The ONS has reported that wage growth has eased sharply. How will this, along with falling unemployment rates, affect household incomes and consumption? Will one effect offset the other?
- Brendan Barber in the Guardian article, ‘Unemployment figures – what the experts say’, wrote that unemployment lags behind the rest of the economy. Why is this?
- What type of unemployment are we experiencing in the UK? Illustrate this on a diagram.
- Consider the government’s plans in terms of spending cuts. How are they likely to affect the rate of unemployment in the UK?
The sun may have been shining of late across the UK, but there are increasing signs that economic sentiment is deteriorating, more especially amongst consumers. The EU’s economic sentiment index for the UK fell for the first time since November of last year and is now just a little below its long-run average.
The EU’s economic sentiment index is a composite indicator of confidence in that it captures confidence levels amongst both consumers and businesses. While overall sentiment actually increased in each month from December of last year through to this May, the decline in consumer confidence in the UK is now well established having fallen each month since March.
We might expect the falls in consumer confidence to be reflecting the prevailing economic environment and, in particular, the increasing number of people unemployed. However, since the sentiment survey contains forward-looking questions too, it may be that declining consumer sentiment reflects concerns amongst households about the impact of fiscal consolidation measures. These consumer expectations could be important in affecting consumer behaviour today. It could be very important to track consumer confidence in the coming months, especially in light of the measures announced in the Budget of 22 June (which occurred after June’s polling of consumers) and subsequent announcements too.
Interestingly, declining levels of consumer confidence in the UK had until June been offset by rising confidence amongst businesses. However, confidence across most sectors of industry deteriorated in June. In particular, confidence amongst manufacturers fell back very sharply. Bucking the trend were businesses in the service sector who reported feeling more confident than at any time since March 2008. However, given waning sentiment elsewhere, one would expect this to be relatively short-lived.
The profile of the average economic sentiment indicator across all 27 member states of the EU is broadly similar to that for the UK. It exhibits a sharp and continuous rise from the historic lows of the indicator recorded in March 2009, but fell back, although very slightly, in June. The improvement in sentiment amongst business has been especially marked. Sentiment too had been improving amongst consumers, but recent evidence points to consumer confidence easing, although not quite to the extent seen here in the UK.
There are, of course, some notable national trends in sentiment across EU countries. It will come as little surprise to know that in Greece the economic sentiment indicator has, in recent months, been at historic lows. If you are looking for countries where sentiment is above average, then perhaps try, amongst others, Austria, Denmark, Finland and Germany!
Articles
Euro economic sentiment near-static RTE (29/6/10)
Eurozone confidence unchanged Bloomberg Business Week, Associated Press (29/6/10)
Eurozone economic sentiment picks up Financial Times, Stanley Pignal (29/6/10)
FTSE loses more than 3% as Wall Street slides on confidence data Guardian (Market Forces Blog) (29/6/10)
How long can the housing market avoid a crash? Independent, Sean O’Grady (30/6/10) (Article stresses link between confidence and the housing market)
Data
Business and Consumer Surveys The Directorate General for Economics and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Think about your confidence in your own financial situation. Draw up a list of those factors that might affect this confidence. How might this list change if you were thinking about the level of confidence across all consumers?
- Why might confidence amongst UK consumers have been falling well before that amongst businesses? Do you think such divergences can persist for any length of time?
- What factors do you think might be particularly important in affecting the sentiment amongst consumers and businesses in the weeks and months ahead?
- Imagine that you are given a choice of plotting a chart over time of the economic sentiment indicator and either the level of real GDP or the rate of growth in real GDP. Which plot would you go for and why?
- Perhaps the key question of all! Do you think economists can learn anything from tracking the patterns in economic sentiment?
What’s going to happen to stock market prices? If we knew that, we could be very rich! Nevertheless, financial analysts constantly try to predict the movements of shares in order to decide when to buy and when to sell. One thing they do is to look at charts of price movements and look for patterns. These ‘chartists’, as they are sometimes called, refer to something known as the ‘death cross’ or ‘dark cross’.
So what is the death cross? Imagine a chart of the movements of share prices, such as the FTSE 100 in the UK or the Dow Jones Industrial Average and S&P 500 in the USA. These movements can be shown as a moving average. In other words, for each day you plot the average of the past so many days. Typically, 200-day (sometimes 100-day) and 50-day moving averages are plotted. The 200-day (or 100-day) is taken as the long-term moving average and the 50-day as the short-term moving average. In a falling market, if the short-term moving average crosses below the long-term moving average, this is called the ‘death cross‘ as it signifies growing downward pressure in the market. The fall in the long-term average in these circumstances will indeed lag behind the fall in the short-term moving average.
Markets around the world are experiencing the death cross. So should be be worried? Or is this like looking for patterns in tea leaves, or the stars, and using them to make bogus predictions? So: science or mumbo jumbo?
First the science: the death cross indicates a fall in confidence. And at present, there is much for investors to worry about. Burgeoning debts, austerity measures and fears of a double-dip recession are spooking markets.
Now the mumbo jumbo. Just because markets are falling at the moment, this does not prove that they will go on falling. Markets are often spooked, only to recover when ‘sanity’ returns. People may soon start to believe that a second credit crunch will not return, given all the regulatory and support measures put in place, the huge amount of liquidity waiting to be invested and the support packages from the ECB and IMF for Greece and, potentially, for other eurozone countries having difficulties servicing their debts. In other words, patterns may repeat themselves, but not necessarily. It depends on circumstances.
Articles
Market’s Swoon Prompts Fears Of the Dreaded ‘Death Cross’ CNBC, Jeff Cox (1/7/10)
Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis Bloomberg Businessweek, Alexis Xydias (30/6/10)
Are the markets about to encounter the”Death Cross”? BBC News, Jamie Robertson (1/7/10)
MarketBeat Q&A: Debunking the ‘Death Cross’ Wall Street Journal blogs, Matt Phillips (30/6/10)
Technical analysis and market data
Moving Average Crossovers TradingDay.com, Alan Farley
Death Cross Investopedia
FTSE 100 historical prices Yahoo Finance
S&P 500 historical prices Yahoo Finance
Dow Jones historical prices Yahoo Finance
Questions
- Explain what is meant by the death cross and use a diagram to illustrate it. What is menat by the golden cross. Again, use a diagram to illustrate it.
- Under what circumstances would speculation against stock market price movements be (a) stabilising and (b) destabilising?
- What is the implication for stock market prices of a ‘wall of money’?
- How much faith should be put in chartist explanations of stock market prices? Do criticisms of chartism apply to all time-series analysis that is used for forecasting?
- Look back at newspaper articles from a year ago and see what they were predicting about stock market prices. Have their preductions been borne out? If so, why? If not, why not?
For some, thoughts will have turned to events on football pitches in South Africa. Perhaps though we should spare a thought for the Governor of the Bank of England, Mervyn King, who is likely to be concerned by his own team’s recent performance in missing the inflation rate target! Mervyn’s resulting ‘yellow card’ involves writing a letter to the Chancellor of the Exchequer every time the annual rate of CPI (Consumer Price Index) inflation deviates by more than one percentage point from the government’s central target of 2%. Unfortunately for the Governor, since the turn of the year, only in February has the annual rate of CPI inflation failed to exceed 3%. And, even that was within in a whisker of missing the goal since the rate of inflation squeaked in at 3%. Perhaps February was more a case of hitting the post!
As all sports fans know, a run of disappointing results can lead to dissent amongst players and supporters alike. We can see from the minutes of June’s meeting of the Monetary Policy Committee the extent of the debate over the persistence of inflation. The debate included discussions concerning the impact of the expected fiscal consolidation measures (the MPC met before the Budget), the public’s higher inflation rate expectations, the price of oil and other commodities and the margin of spare capacity in the economy (the output gap). The minutes reveal that one member of the MPC, Andrew Sentance, voted for an increase in interest rates believing that inflation had been particularly resilient in the aftermath of the recession.
We now have new forecaster in town: The Office of Budget Responsibility. In our blog article Who’d be a forecaster? A taxing time for the new OBR we looked at the growth forecasts produced by the Office of Budget Responsibility taking into account the Budget Measures of 22 June. The June 2010 OBR Budget forecasts also contain predictions for CPI inflation. So what do the OBR say?
The OBR predicts that the annual rate of CPI inflation will stay around 3% in the near term. It is now slightly more pessimistic about the prospects for inflation beyond the near term than it was in its pre-Budget forecasts. More specifically, it says that CPI inflation will ‘decline more gradually’ than first thought because of the rise in the standard rate of VAT to 20% in January 2001 and its belief that oil prices will be higher than originally envisaged. The OBR is forecasting the average price of a barrel of oil in 2010/11 to be $78 rising to $82 in 2011/12.
Going further ahead, the OBR expects the rate of inflation to fall back to ‘a little under 2 per cent in early 2012’. It argues that this will reflect the unwinding of the VAT effect, and, significantly, the downward pressure on prices from the larger negative output gap that will result from the fiscal consolidation measures in the Budget. In other words, the expectation is that there will be greater slack or spare capacity in the economy which will help to subdue price pressures.
If the OBR is right, the Governor may have more letter-writing to do in the near term and perhaps well into 2011. But, the fiscal consolidation measures should, once the impact of the VAT rise on the inflation figures ‘drops out’, see the rate of inflation fall back. Perhaps then, the final whistle can be blown on the Governor’s inflation troubles. In the mean time it will be interesting to see how MPC members take on board, in their deliberations over interest rates, the Budget measures and the OBR’s own thoughts on inflation. Could interest rates be rising shortly despite fiscal consolidation? Let Mervyn and his team play on!
OBR Forecasts
Budget Forecast June 2010 OBR (22/6/10)
Pre-Budget Forecast June 2010 OBR (14/6/10)
Monetary Policy Committee
Overview of the Monetary Policy Committee
Monetary Policy Committee Minutes
Inflation Data
Latest on inflation Office for National Statistics (15/6/10)
Consumer Price Indices, Statistical Bulletin, May 2010 Office for National Statistics (15/6/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Articles
MPC minutes reveal Bank split on inflation risk Financial Times, Daniel Pimlott (23/6/10)
Bank of England minutes reveal surprise split on interest rates Guardian, Katie Allen (23/6/10)
Instant view: Bank split 7-1 on June vote Reuters UK (23/6/10)
Now even the Bank isn’t sure it can bring down inflation Independent, Sean O’Grady (24/6/10)
An inflation hawk hovers over the Bank of England Guardian, Nils Pratley (24/6/10)
Questions
- Explain why an output gap – the amount of spare capacity in the economy – might impact on price pressures.
- What impact would you expect the rise in the standard rate of VAT next January to have on the CPI (price level) and on the CPI inflation rate? What about the following year?
- Some economists believe that by being more aggressive in cutting the fiscal deficit, interest rates will be lower than they otherwise would have been. Evaluate this argument.
- Now for your turn to be a member of the MPC and to decide on interest rates! How would you vote next month? Are you a ‘dove’ or a ‘hawk’?