Overview of the week commencing 31 July

Blog  |     |   by Graham Cross

Graham Cross, CEO

Graham Cross, CEO

As we hit the holiday season, this week we look at a slowing UK Gross Domestic Product and Japanese prices remaining subdued.

The Office for National Statistics estimates output growth in the second quarter to be in the region of 0.3 percent; slightly higher than the 0.2 percent increase in the opening quarter of the year. On a year-on-year basis the British economy is growing at 1.7 percent, down from 2.0 percent previously. That’s more or less in line with expectations.

The manufacturing and construction subsectors contracted by 0.5 percent and 0.9 percent respectively, leaving services, which increased 0.5 percent, to do all of the heavy lifting during the quarter. Rather than build things or make things, us Brits went shopping. So much for a rebalanced economy – thus far, it is hard to find any evidence to suggest that sterling’s decline has had much of a positive impact on the structure of our economy.

Now, as it happens, the preliminary estimate is subject to some uncertainty. In fact only around half of the data needed is available at this early stage. As more comes in, we think there’s a good chance that growth will be revised downward a little – but not so much as to change the bigger picture. And that bigger picture is one of a slowing economy. In turn, that is why the Bank of England will keep rates low.

In Japan, the year-on-year rate of increase in the Consumer Price Index stands at 0.3 percent. Core inflation (inflation excluding the volatile effects of food and energy costs) stands at 0.0 percent.

0.3 percent is some way off the 2.0 percent target that governor Haruhiko Kuroda is keen to attain – so keen, in fact that the Bank of Japan (BoJ) is hoovering up bonds, ETF and REITs worth ¥80 trillion annually.

Back in early 2013, when he was first appointed by Prime Minister Shinzo Abe, the governor announced his intention to hit the 2.0 percent target by 2015. The week before last, the BoJ admitted it is unlikely to achieve that goal until sometime in 2019. By our reckoning that’s the sixth time they’ve moved the target date back.

Actually, given a whole series of trends that are working in opposition to the BoJ, we think the governor and his team are doing a reasonably good job. They are, after all, keeping outright deflation at bay. Those trends include a falling demographic (the most recent census records a drop of close to 0.3 percent or 1 million people compared with the census 5 years earlier), relatively low oil prices and a more general global environment of low inflation.


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