Few signs of recovery

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Wednesday 14th January 2015 08:00 EST

Economists have forecast that unemployment will fall to 1.7m, falling back to the rate of 5.2% which has not been seen since before the recession. Average weekly earnings are also anticipated to grow by 2.5% potentially surpassing inflation for the whole of 2015.

Growth at U.K. service companies slowed more than economists forecast in December, adding to signs the economy lost momentum at the end of 2014. The Markit Purchasing Managers’ (PMI) Index fell to 55.8 from 58.6 in November. That’s the lowest since May 2013 and compared with the median estimate of economists for 58.5. While the measure of new business declined to a 20-month low, the growth remained well above trend according to the Markit Survey. It also said that companies’ cost pressures remain muted by historical standards.

U.K. manufacturing output also rose the most in seven months in November, as total industrial production suffered an unexpected decline due to maintenance at some North Sea oil fields. Factory production increased 0.7 percent from October, exceeding the 0.3 percent median forecast. However Industrial output fell 0.1 percent, with oil and gas extraction dropping 5.5 percent, the most since January.

In Europe, lower German inflation brought further pressures for the ECB to introduce QE. The decline in German inflation has increased expectations that the European Central Bank will start buying government bonds to support prices in the Eurozone and the consensus from various analysts suggests there is a good chance of further falls in inflation in the coming months, which again poses the chance for further Euro weakness.

The European Central Bank (ECB) is expected to come under more pressure to boost the supply of cheap credit (QE) to the Eurozone after figures showed a much-feared period of deflation started in December. This has been triggered by tumbling oil prices. A flash estimate of inflation found that a dramatic fall in fuel costs following the halving of oil prices dragged Inflation down by 0.2%.

Some officials have stressed that the dip in inflation could be a temporary feature as it stems from a short-term fall in oil prices which should benefit economic growth over the next year without the need for QE. Eurostat also said that core inflation, which excludes the volatile energy and unprocessed food prices, was stable at 0.7% year-on-year in December – the same level as in November and October. 

Late last week the  Euro hit a fresh nine-year low against the dollar, in part after a surprise decrease in German manufacturing. German factory orders fell by 2.4% in November compared with the previous month, worse than expected. Increased speculation about extra stimulus measures to combat Eurozone deflation also played a part in the Euro's decline.

If the European Central Bank moves to support the region's economy with quantitative easing, or buying government bonds, as the speculation suggests, this pushes a rate rise even further into the future, making the Eurozone less attractive for investors.

In the US Markit reported the US service sector PMI fell to a 10-month low last month, dropping to 53.3 in December. That still shows growth, but much more modest than in November. Businesses reported that new business, and output, both grew at a slower rate as 2014 ground to a halt.

Also the slide oil prices has helped America narrow its trade gap. The US trade deficit hit an 11-month low of $39bn in November, compared to estimates of $42bn. Petroleum imports fell to their lowest value in around 20 years, helping to cut overall imports by around 2.2%. Exports declined by 1.0%.

Job growth last month was highlighted by the biggest gain in construction employment in almost a year. Factories, health care providers and business services also kept adding workers in December. The combination of job growth and cheaper gasoline will probably help stretch workers’ pay checks and sustain consumer spending. Prices at the gas pump are at the lowest level since 2009.

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