Economy favours multi-nationals
Encouraging signs are afoot in the UK economy. Sterling is strengthening, employment enjoyed an upturn in the second quarter, industrial production has bounced back after June’s fall and consumer spending has proved resilient.
There is talk of a resurgence in consumer spending, driven by declining inflation, improving employment, rising wages and changes in tax thresholds in April 2013. It helps, however, to put these factors in context. Consumer spending in July may not have fallen, but growth in credit card lending, which slowed in 2011, re-accelerated in 2012. In effect, resilience in spending is being supported by accelerating debt, not rising disposable incomes. Changes in tax thresholds in 2013 will mean those earning more than £9,000 will have £4 a week more in their pockets. Those on more than £35,000 will see £1.50 a week.
Four pounds a week more to spend is always nicer than £4 a week less – but, when consumers are already borrowing more in order to stand still, it hardly augurs for a surge in spending. In the meantime, a decline in consumer price inflation does not mean that prices will fall – simply that they will rise less rapidly. Wage growth has slowed from roughly 3 per cent to roughly 1.5 per cent and, with high domestic unemployment and weak global demand, seems unlikely to re-accelerate.
Elsewhere, however, economic news appears more robust. Markets have reacted powerfully to the European Central Bank’s (ECB) announcement of its Outright Monetary Transactions (OMT) initiative – its latest programme of bond purchases in troubled eurozone markets – as well as its commitment to ensuring the euro is “irreversible”. China has approved huge infrastructure development projects, along with an accelerated release of building land that should help deflate its property bubble.
The ECB’s OMT will not reduce the indebtedness of sovereign states but should ease the burden of servicing those debts and relieve pressure on banks holding them.
There is talk about slowing economic growth in China, yet even the gloomiest pundit speaks of growth above 6 per cent a year. In a country with a population expansion lower than any other economy, this implies powerful growth in employment and consumer spending. China’s five-year plan remains committed to expanding domestic consumption through accelerated increases in minimum wages and extension of social health and welfare programmes.
In the US, in spite of high unemployment, weak manufacturing data, worries over the ‘fiscal cliff’ and the negative rhetoric of a presidential election, there are some encouraging signs. The auto industry has grown strongly this year, while elsewhere there is some evidence of production “reshoring” from overseas to the US. Low-cost shale gas is providing US industry with a cost advantage and may ultimately contribute to a stronger US dollar. Consumer spending is recovering, while both the number of credit cards and the debt owed on them have fallen 23 per cent from their peak in 2008, laying the foundation for sustainable future growth. House prices (excluding repossessions) are on an encouraging uptrend, which should help reinforce consumer confidence.