A customer loads her shopping back in to her cart after paying at a checkout counter... Read More
The U.K. economy is about to get a dose of “joyflation.”
That’s the term coined by Oxford Economics Ltd. to describe the combination of the oil-driven slowdown in inflation and accelerating economic growth. It’s enough to force the Misery Index -- a measure of an economy’s health generated by adding the rates of unemployment and inflation -- to its lowest since at least 1989 when consumer-price data became available.
For Prime Minister David Cameron, that's good news as he seeks re-election in May arguing that the squeeze on living standards since the 2008 financial crisis is coming to an end. It may also give Bank of England Governor Mark Carney room to leave interest rates at record lows to cement the recovery.
“It’s an uplift that counters some of the pessimism from the end of last year,” said Scott Livermore, managing director of macro forecasting at Oxford Economics, which advises companies and governments. “From a U.K. perspective, the fall in oil comes at a very good time.”
The prospect of inflation dipping further below the BOE’s 2 percent target has
led investors to all-but rule out a rate increase this year and driven down gilt yields. Policy makers kept the benchmark at 0.5 percent last week.
A report tomorrow will show consumer prices rose just 0.7 percent in December from a year earlier, the least since 2002, as gasoline and food costs tumbled, the median forecast in a Bloomberg News survey shows.
While that risks setting off alarm bells, Livermore says it will be a form of “good deflation” because cheaper energy boosts the spending power of consumers and companies. “Bad deflation” is caused by depressed demand and high unemployment, and tends to become endemic.
“It’s like we’ve had a big tax cut, but one paid for by the oil-producing nations overseas rather than by the Treasury,” he said.
That leaves him predicting economic growth of more than 3 percent by the middle of the year and an unemployment rate of 5.2 percent by year-end, which would be the least since 2008 and below the current 6 percent.
Now Cameron will be able to point to a falling “Misery Index,” invented in the U.S. in the 1970s by economist Arthur Okun.
Oxford’s forecasts would push the index to 5.6 percent in the third quarter compared with about 13 in 2011. At Jefferies International Ltd., economist David Owen’s version, which uses a different measure of unemployment and dates back to 1885, has fallen to its lowest level since the 1960s.
“This is clearly very welcome news for the prime minister,” said Livermore.
Goldman Sachs Group Inc. economist Kevin Daly forecast last week the Conservatives will win more parliamentary seats than Labour, though not enough to govern without the support of other parties. He cited relatively strong growth and an improvement in household disposable income.
While a healthier economy might suggest a need for higher interest rates, Livermore said it would be “politically toxic and potentially economically harmful” to raise rates with inflation around zero. He predicts BOE officials will maintain emergency settings until the first quarter of next year.
Investors are pricing in just 13 basis points of policy tightening this year, Sonia forward contracts show. Gilts, which gained the most since 2011 last year, have added 1.2 percent this month, outpacing German and U.S. debt. The two-year yield fell to a 15-month low last week.
Oxford also points out that less economic misery does not always translate into electoral gains for the government. For example, a halving of the misery index between 1992 and 1997 was not enough to keep the Conservatives under John Major in power, it noted.
“It is probably going to take a long time for the benefits of lower inflation and lower unemployment to feed through and make a lot of people feel better, but clearly the trend is in the right direction,” said Owen.
That’s the term coined by Oxford Economics Ltd. to describe the combination of the oil-driven slowdown in inflation and accelerating economic growth. It’s enough to force the Misery Index -- a measure of an economy’s health generated by adding the rates of unemployment and inflation -- to its lowest since at least 1989 when consumer-price data became available.
For Prime Minister David Cameron, that's good news as he seeks re-election in May arguing that the squeeze on living standards since the 2008 financial crisis is coming to an end. It may also give Bank of England Governor Mark Carney room to leave interest rates at record lows to cement the recovery.
“It’s an uplift that counters some of the pessimism from the end of last year,” said Scott Livermore, managing director of macro forecasting at Oxford Economics, which advises companies and governments. “From a U.K. perspective, the fall in oil comes at a very good time.”
The prospect of inflation dipping further below the BOE’s 2 percent target has
led investors to all-but rule out a rate increase this year and driven down gilt yields. Policy makers kept the benchmark at 0.5 percent last week.
A report tomorrow will show consumer prices rose just 0.7 percent in December from a year earlier, the least since 2002, as gasoline and food costs tumbled, the median forecast in a Bloomberg News survey shows.
‘Good Deflation’
With oil falling below $50 a barrel last week for the first time since 2009, Livermore estimates inflation will turn negative for several months at some point between February and April with prices posting their first annual declines on record.While that risks setting off alarm bells, Livermore says it will be a form of “good deflation” because cheaper energy boosts the spending power of consumers and companies. “Bad deflation” is caused by depressed demand and high unemployment, and tends to become endemic.
“It’s like we’ve had a big tax cut, but one paid for by the oil-producing nations overseas rather than by the Treasury,” he said.
That leaves him predicting economic growth of more than 3 percent by the middle of the year and an unemployment rate of 5.2 percent by year-end, which would be the least since 2008 and below the current 6 percent.
Misery Index
Just late last year Cameron was saying “red warning lights” were flashing in the global economy. With a general election four months away, his Conservatives are struggling to overtake the Labour opposition, which is campaigning on what it calls the “cost of living crisis” after six years of declining real incomes.Now Cameron will be able to point to a falling “Misery Index,” invented in the U.S. in the 1970s by economist Arthur Okun.
Oxford’s forecasts would push the index to 5.6 percent in the third quarter compared with about 13 in 2011. At Jefferies International Ltd., economist David Owen’s version, which uses a different measure of unemployment and dates back to 1885, has fallen to its lowest level since the 1960s.
“This is clearly very welcome news for the prime minister,” said Livermore.
Goldman Sachs Group Inc. economist Kevin Daly forecast last week the Conservatives will win more parliamentary seats than Labour, though not enough to govern without the support of other parties. He cited relatively strong growth and an improvement in household disposable income.
John Major
Not all will feel joyous. Wages have only just begun to outpace inflation -- Britain saw real income growth for the first time since 2009 in October -- and unemployment remains higher than before the financial crisis, with the young especially finding it hard to get work.While a healthier economy might suggest a need for higher interest rates, Livermore said it would be “politically toxic and potentially economically harmful” to raise rates with inflation around zero. He predicts BOE officials will maintain emergency settings until the first quarter of next year.
Investors are pricing in just 13 basis points of policy tightening this year, Sonia forward contracts show. Gilts, which gained the most since 2011 last year, have added 1.2 percent this month, outpacing German and U.S. debt. The two-year yield fell to a 15-month low last week.
Oxford also points out that less economic misery does not always translate into electoral gains for the government. For example, a halving of the misery index between 1992 and 1997 was not enough to keep the Conservatives under John Major in power, it noted.
“It is probably going to take a long time for the benefits of lower inflation and lower unemployment to feed through and make a lot of people feel better, but clearly the trend is in the right direction,” said Owen.
No comments:
Post a Comment