Daily Archives: October 28, 2010

James Politi

One of the key debates within the Federal Reserve and US economic policy circles in recent months has been whether the high unemployment rate is mainly due to structural or cyclical factors.

In the end, the prevailing view is that although there are some mismatches in skills and geography in the US labour market, the main problem is a broad-based lack of demand, which will hopefully be aided by even lower borrowing costs – hence next week’s likely move towards a second round of quantitative easing.

But a survey out today by Challenger Gray & Christmas, may, on the margins, challenge that certainty. A quarterly poll by the Chicago-based employment group found that the “relocation rate” of American workers – or the percentage of job seekers who found a new position and moved to a different region as a result – hit a record low of 6.9 per cent  in the third quarter (the survey started in the 1980s).

To be sure, US labour market mobility – traditionally one of the strengths of America’s economic structure – has been on the decline. The annual average relocation rate in 1990 was 30.5 per cent, sliding to 22.9 per cent in 2000 and 13.3 per cent in 2009. But it has taken a plunge this year, with the average for 2010 now at 7.3 per cent. 

For the first time in two years, banks are reporting a net positive balance of credit demand from businesses. The net balance of demand rose by 13 percentage points for both large and small firms, though demand remains weaker for large firms that can use market financing as a substitute, according to the ECB Bank Lending Survey. Driving the rise was an increased need to finance inventory and working capital, as the chart shows, below; plus the negative contribution from fixed investment became less pronounced. 

UK house prices are going down very quickly, up very quickly, or mostly static (using Halifax, Rightmove and Nationwide indices respectively). But we should not discard indices when they diverge: the apparent confusion masks something useful. Below is a handy guide to interpreting UK house price indices.

Each index tells us something, and the differences between them tell us even more. Asking prices are rising (Rightmove, non-adjusted) while mortgage approval prices are falling, particularly at the lower end of the market (Halifax and Nationwide). The Rightmove index could suggest prices are about to start rising again, but is more likely accounted for by seasonal effects as Rightmove itself points out. 

Thai central bankers have a double cause for celebration today: projected Thai exports have been revised up for the rest of 2010 and ratings agency Moody’s has removed its negative outlook on the country’s Baa1 credit rating.

Today’s inflation report from the Bank of Thailand suggests an enviable track record, with “strong growth” in the second quarter “mainly driven by merchandise exports and private spending”. Thailand is not impervious to the global economy, however: the Bank speaks of weakening external demand and forecasts exports to fall back to trend in 2011. 

The central bank of New Zealand is in good company: it started raising rates in the middle of the year and is now adopting a wait-and-see approach. In doing so the Kiwis join Australia, Brazil, Canada, Malaysia, Norway, South Korea, Thailand and, arguably, Sweden. These large economies all followed the same pattern: large cuts in rates during the crisis; a period of flat rates; rate rises; and now flat rates again, at a slightly higher level than the last time, but not back to levels considered normal over the past ten years.

The world’s central banks are forming distinct groups in this regard. Chile, India, Israel and Taiwan are still raising rates; Iceland and South Africa are still cutting. Other large economies – such as the US, Europe and the UK – have neither raised nor cut their rates since the crisis. Arguably there are two groups to watch for further signs of global economic stress: one, with Japan and Mexico in it, contains central banks that have started cutting rates again after a pause. The other group doesn’t exist yet among major economies: that of rate-raisers who go on to cut 

The Bank of Japan has unveiled details of a Y5,000bn ($61.4bn) asset-buying programme that marks its return to an unconventional “quantitative easing” policy, while keeping rates on hold and lowering its economic forecast.

The details of the scheme approved by the central bank’s policy board on Thursday were in line with initial plans it announced earlier this month that have been welcomed by Tokyo policymakers keen to see stronger monetary action to support Japan’s fragile economic recovery and combat entrenched deflation.