Monetary policy, inflation in The Monday Briefing
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After a dreadful end to the year global equity markets got off to a flying start in 2019. The US S&P 500 index is up by 10% so far this year, having fallen by 16% in the first three weeks of December.
The switch from gloom to cheer reflects a major policy shift by the US Federal Reserve (the Fed).
Last autumn markets were braced for the Fed to carry on raising rates through 2019, even though rates had already risen from 0.25% to 2.5% since late 2015. The Fed was in hawkish mode and way ahead of other central banks in tightening monetary policy.
The financial crisis of 2008-09 pitched Western economies on to a lower growth path. In recent years growth across the industrialised world has run well below the rates seen in the years before the financial crisis.
The latest Deloitte survey of UK Chief Financial Officers released today shows that uncertainty over Brexit is driving a marked shift towards defensive strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring. Cost reduction is the top priority for CFOs who are placing a greater emphasis on it now than at any time in the last nine years.
A boom in low quality mortgage lending in America triggered the Global Financial Crisis. It was a crisis of indebtedness which, courtesy of low interest rates, quantitative easing, government spending and bank bailouts, was resolved by the accumulation of even more debt.
Amid the legion of uncertainties surrounding Brexit is there much that can be said with some degree of confidence? Economic forecasts are hardly renowned for their accuracy, but they provide a starting point for thinking about the potential economic effects of Brexit.
Depending on how Brexit goes 2019 could see UK growth accelerate or almost grind to a halt. So, say two forecasting groups which have modelled the economic effects of the UK’s exit from the EU.
In time, breakneck growth in the early stages of industrialisation gives way to slower growth. All industrialised nations experience this change as a manufacturing boom fuelled by cheap labour runs its course.
The UK is running out of workers. At 4.0% the unemployment rate is at the lowest level since the early 1970s. This is below the rate in historically low-unemployment countries including Sweden, Denmark and Canada. A record 832,000 jobs are unfilled in the UK (two of them in the economics team). The attrition rate, the rate at which people change jobs, has shot up to its highest level since records began in 2001.
In May we wrote that geopolitical factors posed an upside risk to oil prices. Those risks have materialised. Last week the oil price reached $82 a barrel, up 40% over the last 12 months and the highest level in almost four years. Some analysts are warning of a spike above $100.