Monetary policy, inflation in The Monday Briefing
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This Wednesday marks the anniversary of Donald Trump’s election victory, one of the most surprising and unexpected in US history. A year on we reflect on what effect the new president has had on the US economy and financial markets.
The Monday Briefing reached its tenth birthday over the summer. This week’s Briefing offers some thoughts on the lessons we’ve learned and the errors and successes we’ve made along the way.
Perhaps the most obvious lesson is that the economy depends on a stable financial system. In getting this right before the crisis, and emphasising it in the Briefing, I can’t claim great prescience. The devastating effect of the bursting of Japan’s banking and asset bubble in the early 1990s provided me, and others of my generation, with a graphic illustration of the effects of a financial collapse.
A personal view from Ian Stewart, Deloitte's Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/
The latest Deloitte survey of UK Chief Financial Officers, released this morning, shows a rebound in optimism after the sharp decline in the wake of June's General Election. Perceptions of uncertainty have declined and are running at almost half the levels prevailing after last year’s EU referendum.
In four weeks’ time the Bank of England is likely to raise UK interest rates for the first time in ten years. The Bank’s Governor, Mark Carney, has gone out of his way to signal that a rate rise is on the cards. Financial markets and economists are betting that the Bank’s Monetary Policy Committee will hike by 25 basis points at their 2nd November meeting, taking UK interest rates up to 0.5%.
Other central banks are also edging away from ultra-easy monetary policy, with America leading the way.
The financial crisis seemed to mark a step change towards higher levels of uncertainty and slower growth rates. A less certain world meant less risk taking and fewer big purchases. Companies and households battened down hatches, focusing on reducing their costs and building up savings.
Ten years on from the crisis we have become more accustomed, though not immune, to uncertainty. The cliché is that the only certainty is uncertainty.
Earlier this month I was on a panel with a former banker and an academic in Austria discussing the lessons of the financial crisis.
At one level the crisis was mind-boggingly complex, with obscure, linked financial structures blowing up, spreading risk through the system. At another level it was pretty simple.
Economists disagree on lots of things, but on one thing at least there is a consensus. Productivity, or the efficiency of production, is the main driver of human welfare. The data bear this out. Consider that growth in living standards in the UK since the late nineteenth century has been driven entirely by rising productivity. It is not surprising that improving productivity is the Holy Grail of economic policy.
With the return to work underway here’s our summary of the key developments in the global economy and in politics over the summer.
On the economic front the mood has been fairly positive, with activity nudging higher led by the euro area, Japan and emerging markets. Unemployment has fallen in Europe, North America and Japan since June. The VIX index, a gauge of financial market uncertainty, is close to a 25 year low. In the last three months global equity prices have risen by 5% and the euro by 4%. The dollar and the pound have continued to soften. Copper and oil prices rose over the summer, the later buoyed by Hurricane Harvey.
UK house prices have recovered from the slump that followed the financial crisis. According to the Office of National Statistics UK house prices have risen 45% since their trough in March 2009.
Over the same period earnings have risen by just 16% making life tougher for first-time buyers and those trading up in the housing market.
Some believe older people, and the state, have virtually rigged the system for their benefit. The titles of a recent an influential book by David Willetts, a former Conservative Minister, sums up the mood: “The Pinch: How the Baby Boomers Took Their Children's Future - And Why They Should Give It Back”.