Economy slowing down ... or is it?

The Bank of England had warned the UK was heading for difficult times and it would act to rein in inflation. The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". (View video of speech) The following day a record level of retail spending in May provided a respite from gloomy economic predictions, but it also fanned fears of higher interest rates. Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. (Details here)

Mervyn King made it clear that inflation was set to rise whilst house prices would fall. He said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May. However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. People would have to accept that their pay rises would have to be limited which would affect real take home pay and make life difficult for some.

Inflation 'likely to rise further'

Both official measures of UK inflation rose in May. CPI was up to 3.3% from 3% and RPI to 4.3% form 4.2%. Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. This month's rise meant that he has had to write the dreaded letter to the Chancellor explaining what measures are being taken to bring inflation under control. In it he says "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%... (but) there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices." British households must learn to live with higher prices and without increased wages, Mervyn King warned. (Link to BBC News) (Link to The Guardian article)

UK households have become increasingly aware of inflation over the past year, and expect it to rise over the coming 12 months, new research suggests ... energy, petrol and food price rises have increased inflation awareness. Inflationary expectations have proved to be significant in accelerating the rate of inflation in the past. (Link to BBC News)

The Bank of England’s Monetary Policy Committee voted eight against one to hold interest rates at 5 per cent this month, but some members were ready to consider an immediate rate rise to contain inflation, minutes of the meeting showed on Wednesday. “If there were a serious threat to medium term inflation expectations then a pre-emptive rise in rates would be appropriate. Delay would only increase the eventual costs of bringing inflation back to target,” the minutes said.

Further evidence of economic slowdown

Numerous reports overthe past few days have confirmed a significant economic slowdown. The Chancellor, Alistair Darling, has said that there is "no doubt" the UK economy is slowing and has warned it will be a "difficult year" ahead. He warned of the dangers of allowing inflation to increase, calling for pay restraint to prevent the development of a wage-price sprial, so familiar to economics students of my generation. He pointed out that fuel and food price increases were hitting consumers. (Link to details)
This follows the warning from the CBI that 'the economy will grow at its slowest pace for 17 years.' The CBI's quarterly economic outlook shows that the employers' body has lowered its forecast for GDP growth in 2009 by 0.4% to 1.3%. The slowdown in consumer spending is set to intensify, says the report, pushing consumption growth down to 0.7% in 2009, the lowest level since 1992. (Link to details of the survey)

An indicator of the economic situation, contruction, was also under the spotlight with the news that the number of new houses being built had slipped to its lowest level since 1945. The biggest reason for this appears to be the inability of potential buyers to obtain mortgages. (Link to article)

Investment and growth

The Economist reports that the biggest investment boom in history is under way. Over half of the world's infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat. Such investment will help support economic growth this year as America's economy stalls—and for many years to come.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. The infrastructure boom has global implications. Increased investment means more imports of capital equipment, which will help to slim current-account surpluses in China and elsewhere, and so reduce global imbalances. Rising demand for building materials will keep commodity prices high. Last, but not least, will be the negative impact on the environment. An expected 75% increase in emerging economies' electricity demand over the next decade will worsen air pollution and global warming. (Read full article here)

IEA says world needs energy ‘revolution’

The world needs to spend $45,000bn on green technologies in the next 40 years, or 1.1 per cent of annual global economic output, to halve greenhouse gas emissions by 2050, the International Energy Agency said. The investment – much of it needed to accelerate development of new technologies such as hydrogen fuel cells and carbon storage – is roughly equivalent to the gross domestic product of Italy, though the IEA said it represented “a re-direction of economic activity and employment, and not necessarily a reduction of GDP”. (FT article)

Watch video here.

OECD highlights inflation worries

The Organisation for Economic Co-operation and Development (OECD) has said inflation remains a danger, as oil prices have shown a sharp increase. "Ministers were concerned about inflationary pressures and indications inflationary expectations may be drifting upwards," the OECD said. They also said attention should be paid to fiscal balances, especially where inflationary pressures remained high. It also believes that the British economy is entering a period of "significant down-swing" that will see it grow even more slowly in 2009 than this year and house prices will fall further.
In its half-yearly economic outlook, the OECD was particularly downbeat about Britain, predicting that the economy would only expand by 1.8% this year. That rate will drop to 1.4% in 2009 - the lowest since 1992, when Britain was in a deep recession, and half the pace of 2007. (Details - click here)

House prices ... the fall continues

Many good articles about the housing market in the past few days. Further evidence of falling prices from the Halifax (Click here for details). It said the annual fall in prices was the biggest it had seen since 1993. If prices continue falling at the rate seen since the start of the year then they will fall by 16% over the course of 2008.

'Negative equity hits 250,000 - and there is worse to come' was the chilling headline from The Observer. (Click for the article) Larry Elliott is not surprised that prices are falling - A crash was inevitable and - despite the wailing and the gnashing of teeth - ultimately desirable as well). Also, he questions some of the myths of the housing market and suggests that interest rates are only one factor that influence housebuyers. (Click here for article)