eInsight, Economics Update Bulletin, April 2010_________________________
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Welcome__________...to the eInsight Economics Update for April 2010. As the long-awaited General Election draws closer, our experts summarise the key developments this month.For even more insight and debate, take a look at our blog, The Volterra Approach, featuring regular intelligent comment on the issues of the moment. |
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The price of commodities such as oil, gold and other metals have seen strong growth in the past year. Gold is around the $1,150 an ounce level and oil has passed $85 a barrel. Many of the mainstream metals such as aluminium and copper are at highs last seen in 2008.
Aluminium and copper, which are used as inputs into the manufacturing process, have reached 20-month highs on the back of increased global demand, much of it originating in China. The global economic recovery is also pushing up oil prices, although there is a certain amount of upward pressure from speculation getting out of step with fundamentals. Prices above $100 a barrel are widely expected for 2011, but this could lead to concerns about high oil prices stifling the recovery.
Gold prices are high due to a flight to safety. Considerable uncertainty in the currency markets means the precious metal is seen as an attractive store of value. The current weakness of the pound means that the price of gold in sterling, at £754 an ounce, is the highest ever. It must be questioned, however, how safe gold truly is when it stands at a price 170 per cent higher than it was just 5 years ago.
Oil and Gold Prices
Sovereign debt fears in Greece have pushed up yields on the country’s debt dramatically. The latest figures show Greek bond yields are over 7 per cent. Given that the base rate in the Euro area is just 1 per cent and German government bonds are yielding just over 3 per cent, this is a very significant spread.
Recent auctions of Greek debt have been oversubscribed however, and the yield has been fluctuating as investors decide to take a more or less bearish stance.
Fiscal problems in Greece have been bad for the Euro, which has been on a downward trend for the past 6 months.
Economic phenomena often display the characteristics of a contagion – as Volterra have previously shown for recessions. As such there are very real worries that the problems in Greece may spread. Spain, Portugal and Ireland have already experienced problems in auctioning government debt, and the UK debt position is under constant scrutiny. Debt problems seem to have well and truly spread from banks to governments.
International 10 year government bond yields
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UK mortgage approvals suggest further house price falls to come »
The number of new mortgage approvals for house purchases in the UK has fallen 20 per cent in the 3 months to February. The end of the stamp duty holiday which saw the threshold fall back from £175,000 to £125,000 is partly behind the drop. Many of the fundamentals of a recovery, such as employment growth, are also missing.
Mortgage approvals are generally a good leading indicator for movements in house prices 3-6 months ahead. As such the recent falls in mortgage approvals point to a fall in house prices in the middle of this year. Our analysis suggests that in July house prices will be 1 per cent lower than they were at the start of the year.
Monthly mortgage approvals
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UK GDP in the first quarter of 2010 grew 0.2 per cent. This low figure may disappoint many who were hoping that the large margin of spare capacity would drive strong growth out of the recession.
Volterra expects that over time new data releases will mean the 0.2 per cent estimate is revised upwards. This has been the trend for recent GDP figures, and is likely for the first quarter as stronger data for March is released.
The underlying sector breakdown is encouraging. Business services and finance grew 0.6 per cent, an increase over the previous quarter. The banking sector has been the driver of this growth.
Total production output grew 0.7 per cent, as did manufacturing output. This echoes strong results from the Manufacturing Purchasing Managers Index which is at a 15 year high. Increased global and domestic demand and the weakness of the pound are contributing to gains in UK manufacturing.
Output in the retail sector fell over the quarter. This result is likely to be due to the ongoing effects of the VAT increase.
Volterra’s short term GDP forecasts
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What are the sources of inflation in the UK? »
UK consumer price inflation reached 3.4 per cent in March, well above the 2 per cent target rate.
Breaking down the inflation figure by sectors, we find that the transport sector is the largest contributor to recent high inflation. Within the transport sector, the price of fuel has risen dramatically, driven by a doubling of the price of oil in the last year.
The deflationary effect from clothing and footwear has dropped off significantly over the past year. This has been driven by the weakening of sterling and the high level of importing for clothing and footwear.
Contributions to CPI inflation
