Aurelia Butler

The writer is the author of ‘Two Hundred Years of Muddling Through: The Surprising Story of the British Economy’It is becoming worryingly easy to use the dread phrase “the 1970s” when discussing Britain’s economy. Inflation has been persistently high, industrial unrest continues to dominate the news agenda and all against a backdrop of an energy price surge and a government that seems to be stumbling from crisis to crisis. The presence of adverts for an ABBA concert, admittedly in holographic form, across the tube network adds to the sense that the UK has stepped back five decades to a time that has become a byword for economic failure.The comparison though, whilst superficially attractive, is often overdone. Britain certainly has an inflation problem. Headline inflation was still above 10 per cent in the UK in March compared to 7.8 per cent in Germany or 6.6 per cent in France. For two months in a row the headline rate has stubbornly refused to fall as much as analysts expected. More alarmingly core inflation, excluding volatile components such as food and energy prices, remains above 6 per cent as does service price inflation, which is often seen as the best gauge of domestically driven price pressure. All of that will be enough to ensure the Bank of England feels the need to press on with its tightening of monetary policy.But the story has shifted from being one of inflation soaring ever higher to one of it failing to come down as quickly as expected. That is far from a comfortable place to be, but it at least shows some signs of progress. Few doubt that headline inflation should drop sharply in the months ahead as the impact of the 2021-22 energy price surge begins to fade out of the numbers. What will happen with core inflation is less clear. There has been much talk of a 1970s-style wage-price spiral. The fear was that workers would bid up their pay in an attempt to protect their incomes but, by doing so, force firms to engage in a further round of price rises. Annual wage growth did rise as lockdowns eased in 2021 and reopening firms struggled to fill vacancies. In recent months though, as growth has slowed and the number of vacancies has fallen, wage growth has decelerated. The result has been wage pressure strong enough to add to business costs and core inflation but nowhere near strong enough to protect real household incomes, which have undergone a sharp squeeze. The problem with the easy 1970s story is that the labour market of the 2020s is not the labour market of that decade. Trade unions are weaker by an order of magnitude — around one in five British workers are members today compared to over half at their peak. The legislation of the 1980s and 1990s created a much more liberal jobs market. The bargaining power of labour is structurally lower than it once was.The sad truth is that there is no simple answer to the question, “What is afflicting Britain’s economy?” Instead, a multitude of interrelated crises is playing out at the same time. The global energy price spike and all the disruptions wrought by the pandemic are of course immediate factors and the UK has been hit especially hard by both. In the aftermath of Covid-19, NHS waiting lists for appointments and routine operations have risen to about 7mn — a 75 per cent increase on 2019. That has become a macroeconomic problem, with 6 per cent of working-age people now reporting themselves too sick to work. The strikes across transport and the public sector, in response to falling real pay, have also taken on macroeconomic significance with the annual number of working days lost hitting its highest levels since the 1990s.Then there is Brexit. Following the 2016 referendum, many firms either cancelled or postponed capital spending plans whilst they awaited clarity on what Britain’s new trading arrangements would look like. That uncertainty led to a shortfall in business investment. The new trading arrangements themselves represent frictions in a previously frictionless trade border, weakening productivity and economic growth over the long run and adding to price pressures now at the margin.But the problems predate 2016, too. Productivity growth, the ultimate driver of both economic growth and living standards, has been abysmal since 2008. It is this underlying crisis that has left real expected household incomes no higher in the mid-2020s than a decade and a half earlier.On one important level, the 1970s analogy contains important truths. Then, as now, the government was forced to deal with concurrent crises that called for different, and often incompatible, policy responses. British governments in that decade were overwhelmed not just by the oil price spike and a wage-price spiral but by a half dozen other problems too, from the breakdown of Bretton Woods to a housing market boom and bust. The current government now risks being equally overwhelmed by managing the continuing economic fallout from the pandemic at the same time as an energy price crisis, alongside Brexit, against a backdrop of 15 years of weak growth and with the challenge of the net zero transition ahead. The real 1970s feeling for policymakers is one of almost constant firefighting. More

LONDON (Reuters) – The dollar headed for its first weekly gain in nearly two months on Friday as investors raised their bets that the Federal Reserve will increase rates in May, while a surprising recovery in the euro zone economy in April underpinned the euro.The dollar index, which measures the performance of the U.S. currency against six others, rose 0.1% on the day and headed for a weekly gain of 0.4%, its first since late February.The recovery in the euro zone unexpectedly gathered pace this month, thanks to a boom in services sector demand compensating for a deepening decline in manufacturing.Preliminary surveys showed that same dynamic in Germany and France, the region’s two largest economies. The euro was last flat against the dollar $1.0973, but recovered from a session low of $1.0938. Against sterling, it rose 0.5% to 88.86 pence.But the story this week has been one of dollar dominance. Fed officials have been at pains to point out that inflation remains uncomfortably high and rates must keep rising.Money markets show traders believe there will be a quarter-point U.S. rate hike next month, which in theory is supportive of the dollar, but this will be quickly followed by a series of rate cuts, as the economy slows, which kept the U.S. currency’s gains in check.”The rhetoric from the Fed is quite clear, but the market is still forging its own path of these rate cuts by the end of the year,” City Index strategist Fiona Cincotta said.”At some point, there is going to be a reconciliation here – either the Fed gives some clues of a dovish pivot, or the market needs to reassess what’s going to be actually happening over the rest of the year,” she said. Data on Thursday added to those concerns about recession, as the number of new claims for unemployment benefits rose, while factory activity in the mid-Atlantic manufacturing heartland hit a three-year low this month.”The U.S. economy is heading to recession,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (OTC:CMWAY) (CBA).”But the problem for the Fed is that inflation is still sticky at a higher rate, so we still think the Fed is going to increase interest rates at least once more.”Flash U.S. business activity surveys are due later and could offer a fuller picture of global economic health.The pound took a knock from a drop in UK retail sales in March, as bad weather and high inflation kept British consumers away from the shops.Paul Dales, chief UK economist at consultancy Capital Economics, said the survey by polling firm GfK suggested a brighter picture than the rain-affected March sales data.”That said, even though the worst of the declines in retail sales are in the past, higher interest rates will restrain spending this year,” he said.Sterling was last down 0.5% at $1.2385, having dropped by as much as 0.54% earlier on.The yen was one of the stronger performers, edging higher against the dollar after data showed Japanese consumer inflation held steady above the central bank’s target in March, putting pressure on the Bank of Japan (BOJ) to ditch its ultra-loose monetary policy stance.Incoming Governor Kazuo Ueda chairs his first BOJ policy meeting next week.”I don’t think Ueda is going to change policy at his first meeting next week,” said CBA’s Capurso. “But there have been a few hints about a policy review, so that suggests to me that … they’ll move in the next few months.”The yen was last up 0.3% against the dollar at 133.84 yen and up 0.3% against the euro at 133.84 yen. More

LONDON (Reuters) – Investors cut their cash holdings for the first time in eight weeks in the week to Wednesday, while shedding equities and gold, according to a report from BofA Global Research on Friday.Market focus has shifted to inflation and the outlook for monetary tightening in recent weeks as fears around banking stocks receded and a market measure of volatility fell to its lowest level since November 2021. Cash funds saw outflows of $65.3 billion, BofA said, citing EPFR data. Bond funds recorded inflows of $4.6 billion, while investors sold $2.6 billion of global stocks and pulled $70 million out of gold funds.Last week data showed U.S. consumer prices rising in March, while data this week showed signs of the labor market cooling. “Core inflation in big economies remains stubbornly high,” the BofA analysts said, adding that inflation is being aided by structurally low unemployment rates.Almost all central banks are on hold or close to the end of the rate hike cycle, thus “locking in” high inflation, they said, “as is (the) trajectory of government spending, deficits and debt”.Emerging market debt funds saw their first weekly inflow in 10 weeks, of $600 million. Investors put $2.3 billion into emerging markets equities, the biggest inflow in four weeks.BofA said its bull and bear indicator – a measure of market sentiment that runs from 1 to 10, with a higher reading more bullish – jumped from 2.3 to 2.8 on “stronger bond inflows, EM stock inflows, (and) improving credit technicals”. More

Eurozone business activity expanded faster than expected in April, driven by buoyant demand, easing price pressures and rapid employment growth that economists said would push the European Central Bank to raise interest rates next month.The HCOB flash eurozone composite purchasing managers’ index, a measure of activity in manufacturing and services, rose for the sixth consecutive month to an 11-month high of 54.4 in April, up from 53.7 last month. The result was above the flat reading forecast by economists polled by Reuters, and indicated that last month’s turmoil in the banking sector failed to halt the economic rebound in the bloc from 2022’s energy shock. The survey compiled by S&P Global also pointed to a rising divergence between a downturn in the manufacturing sector — particularly in strike-hit France — and a solid resurgence in the bigger services sector.Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said beyond the overall “very friendly picture” of business activity, growth was “very unevenly distributed” between “partly booming” services and a “weakening manufacturing sector”.New orders expanded at the fastest rate for a year in services but declined at the steepest rate for four months in manufacturing. Job growth in the services sector accelerated to the fastest rate for 15 years, while manufacturing employment rose at the slowest rate for 27 months.While companies continued to raise their prices, the pace of increase is becoming more modest. An index for “selling prices” fell to its lowest level in two years. Services companies, boosted by strong demand, were able to report “especially strong” increases in the prices they charged, in contrast to more modest rises from manufacturers.“Continued fast price increases, a still-resilient labour market and signs the economy is weathering interest rate hikes and tightening lending standards well, raise the chances that the ECB will tighten more than we expect,” said Melanie Debono, an economist at research group Pantheon Macroeconomics.

Germany’s two-year borrowing costs, which are sensitive to interest rate expectations, rose after the PMI survey was published and the euro recouped some losses against the US dollar.Investors are pricing in a rise in the ECB’s deposit rate from 3 per cent to above 3.75 per cent in the coming months. Several ECB rate-setters have said the decision on whether it continues raising rates by half a percentage point or slows to a quarter point rise next month will depend on data, including the central bank’s survey of lenders and April’s inflation — both due early next month.Official figures to be published next Friday are expected to show the eurozone economy returned to positive quarter-on-quarter growth with a 0.2 per cent expansion in the first three months of the year, compared with a flat end to last year.Rory Fennessy, an economist at research group Oxford Economics, said: “The April flash PMIs pose further upside risks to our near-term GDP forecasts across the region.” But rising borrowing costs still pointed to a “weaker outlook” in the second half of the year, he said. More

BUDAPEST (Reuters) – The National Bank of Hungary is expected to leave its base rate steady at 13% at next Tuesday’s policy meeting, where the bank has flagged a cut in the top of its interest rate corridor, citing a reduction in market risks.With many economists saying inflation in central Europe has peaked, Deputy Governor Barnabas Virag’s flagging of the narrowing of the interest rate corridor used by Hungarian policymakers could set the stage for what would be the region’s first rate cut since 2021.Virag said a cut in the bank’s 25% top collateralised loan rate next week would be part of a “multi-step process” towards policy normalisation.All 14 economists in an April 17-21 Reuters poll said the NBH would leave the European Union’s highest base rate unchanged at 13% next week, pencilling in cuts worth 200 basis points by the end of the year.Last October, the bank also launched a one-day deposit with an 18% interest rate, which over the past half-year has helped lift the forint from all-time lows of around 430 to the euro.”We expect that the (Monetary Council) may lower the upper edge closer to the 18% effective rate,” Citigroup (NYSE:C) economist Eszter Gargyan said.”Changes in the o/n deposit rate may only follow in May, at the earliest. Markets will be eyeing any hints about the timing of the first cut in the MPC statement and subsequent briefing.”The forint traded at around 377-378 per euro on Friday, off one-year-highs hit on Tuesday and some 2% weaker since the central bank’s surprise announcement.The NBH has said the latest inflation data – showing a headline rate above 25% – was in line with expectations. ING economists said the size of next week’s cut in the top of the bank’s rate corridor would depend on moves in the forint. “Should we see stability in the currency after the sell-off ignited by the dovish remarks, we might see a bold move of a 700bp cut,” ING said.”With that, the overnight repo rate would match the 18% effective rate, suggesting that from now on, the only way is down for effective rates.” More