G20 take centre stage!

In recent days the actions of the G20 leading economies have dominated the news agenda. One aspect of this has been the various statements made by some of the key players on the need to clamp down on the level of bankers' bonuses and the activities of hedge funds in an attempt to avoid some of the causes of the credit crisis. There has, however, been a clear divide between those leaders representing continental Europe (Angela Merkel and Nicolas Sarkozy) and the those representing the Anglo-US axis (Brown and Obama). The former advocate much tougher financial regulation including explicit measures to limit bankers' pay in the future while the latter favour lighter regulation on financial institutions. There is little doubt that both Brown and Obama are facing stiff opposition from the city of London and Wall Street to any attempt to come down too harshly against the banks. This will be a debate that will continue for some time....

The problems in measuring unemployment in the UK

The UK Government is somewhat confused by the latest unemployment data. The problem is caused by the two different measures of unemployment that they publish. The first is based on the number of people claiming job seekers allowance (JSA). This indicates that unemployment is rising but at a relatively modest rate of around 120000 in the latest three months. In contrast the alternative measure is based on a survey conducted by the International Labour Organisation's (ILO) count. This focuses on those people looking for work. The ILO's latest data shows an increase of some 400000 people unemployed over the same period. The Government has announced an urgent enquiry to try to find out the reasons for the large difference. One very likely explanation is that a number of those people currently becoming unemployed were second earners and they are not bothering to sign on for unemployment benefits. They are living off their partner's income. In addition it seems likely that many migrant workers are registering as unemployed on the ILO survey but they are not entitled to receive JSA. Hopefully in a few months we will get to the full truth behind the UK unemployment data!

Chinese Inflation falls again...

In Article 18 in the book I looked at the reasons behind the sharp rise in inflation that China experienced last Spring (2008). A year on and it is such a very different picture. The latest data for their consumer price inflation showed a fall for the fourth successive month. Once again the key factor was the sharp declines in non-food items although the price of China's most key meat, pork, also fell by a third compared to a year ago. The main reason for the decline in China's inflation rate is mainly the impact of the World recession which has led to much less demand for their exports to overseas markets. So China's producers and retailers must cut their prices to compete overseas and also to sell more at home.

Leading indicators...

The recent recovery in stock markets across the World suggests that investors are starting to think that we can now start to look forward to some kind of economic recovery later this year. With this in mind all eyes will be on the Leading Indicators series which is published by the Conference Board in the US. The aim of this particular release is to predict the state of economic conditions in the near future. It has an excellent track record going all the way back to the 1950s. When this data is published you actually get three different economic series:

1) The Conference Board Leading Economic Index - this is the most important as it tries to predict the future.

2) The Conference Board Coincident Economic Index - this is the next in line as it says what is going on now.

3) The Conference Board Lagging Economic Index - this is the least important as it tells us where we have been in the past.

For investors all eyes should be on the first series - leading indicators.

The data series is based on some of the following economic/financial information:

•Average workweek in manufacturing.
•Average weekly initial U/E claims.
•Manufacturers’ new orders for consumer goods
•The S and P 500 stock market index.
•M2 money supply data.
•Housing permits.
•Consumer expectations.
•Manufacturers’ new orders for non-defense capital goods.
•Spread between 10-year Treasury bonds and Fed Funds Rate etc.

The last set of data showed a contiuned decline with the Conference Board Leading Economic Index decreasing by 0.3 percent in March. The next set of data for April will come out later this month.

You can access it via this link:
http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

Back to the 1970s

The latest UK unemployment data was published yesterday just as the Chancellor was getting ready to deliver his 2009 budget speech. It showed the current dire state of the UK labour market. The headline unemployment rate increased to 6.7% . The even more accurate claimant count (this is explained on page 103 of the book) rose by 74,000 in March. There is no doubt, however, that the most worrying figures were those that showed that we now have 820,000 aged under 25 who are unemployed and that there was a big increase in the number of long-term unemployed. If we put these two things together the data showed that we now have 100,000 people aged from 18-24 who have been unemployed for at least a year. This is very bad news for them and for us all eventually as the impact of being unemployed for a long time is very serious. It ca have a long-lasting impact on those involved. This issue is explored on page 101 of the book ("Reading and Understanding Economics").

"Unemployment causes great suffering to those involved particularly when a severe economic downturn results in a sharp rise in those people out of work. The misery inflicted is particularly severe because the incidence of unemployment among individuals and households is very unequal. While some people will go through their entire working life without ever suffering a spell unemployed others will have to endure regular periods of economic inactivity. The longer someone is unemployed the worse it gets. They are likely to suffer a loss of self-esteem and maybe find themselves eventually cut-off from the labour market for ever".

All the evidence shows that a period of long-term unemployment is especially harmful to the young. It is essential that the Government acts swiftly to reverse this trend before those affected suffer irreversible damage. The Chancellor did announce some new initiatives to offer training or education to the young people involved. These are reminiscent of schemes like the 1970s Youth Opportunity Programme (YOP) that offered the young unemployed chances to sweep leaves or clean the streets. The problem is that the young unemployed need far more than this work experience can offer. They need the opportunity for real work that is properly paid. If this is not forthcoming we could end up with a generation that will be permanently blighted by having endured this early period of unemployment. We need the Government to show real leadership in this area and this must be done quickly.

A time of austerity in Ireland now and coming to the UK vey soon

The credit crunch has had a serious impact on public finances right across the globe. In response to their deteriorating budget position the Irish Finance Minister Brian Lenihan unveiled a series of tough measures designed to bring the Country's budget deficit back under some kind of control. The fiscal moves included sharply higher income taxes, higher rates of Capital Gains Tax and Capital Acquisitions Tax, rises in excise duties on cigarettes and size able cuts in unemployment benefit. In terms of the economy he had a gloomy forecast with output expected to contract by 8% this year. What is happening in Ireland now could soon move onto the UK in a year or so. The UK's fiscal position has also deteriorated badly in the wake of falling revenue (due to lower incomes and profits) and rising expenditure (the bailouts and higher benefits). So it is likely that just as the UK is coming out of recession in 2010 there will be the need to raise taxes and slash government spending. This could act to halt any recovery that is starting to show at that time. No wonder that the stock market remains very nervous. If investors expect 2010 to be the start of another period of rising economic activity with higher corporate profits and dividends they might well be disappointed.

Deflation gets closer...

In the opening section of Article 16 I explain the various measures of inflation used in the UK. It might be useful to illustrate the main two definitions with reference to the latest inflation data which was published today. The headlines will be dominated by the Retail Price Index (RPI) which fell to 0% in February on an annual basis compared to 0.1% in January. This is a wide measure of inflation that includes housing costs. The sharp fall in mortgage rates in the last year has driven this measure of inflation to the lowest level in nearly 50 years. However, the annual rate did not turn negative as many commentators had predicted.

The Government's preferred measure is the Consumer Prices Index (CPI) and this actually rose unexpectedly from 3% to 3.2%. As a result the Bank of England's head Mervyn King will have to write again to the Chancellor (Alistair Darling) explaining why inflation is more than one percentage point above the government's own 2% target.

Against this background the FT-SE 100 index has fallen back slightly this morning which is not that surprising as we have seen a strong rebound in the UK equity market in the last few days.