THE BLOG

Eurozone Dodges Deflation, US Rates Rest Easy - But the UK?

09/04/2015 15:35 BST | Updated 08/06/2015 10:59 BST

Various pieces of economic data and pronouncements from central bankers have led to a less clear picture as to where the US economy is going and a slightly more positive message coming out of Europe. As a consequence, the dollar weakened further against the euro this week. Having neared parity a few weeks ago, the US Dollar finished last week at 1.101 against the euro.

Europe has benefited from the extreme weakness of the euro

There had been fears that the European Central Bank would lose its nerve on its programme of quantitative easing, but Mario Draghi, the President of the ECB, reasserted that purchases of 60 billion euros per month of bonds would continue. He predicted that the Eurozone would grow by 1.5 per cent in 2015 and 1.9 per cent in 2016, which was more optimistic than previous forecasts. Undoubtedly, Europe has benefited from the extreme weakness of the euro. Draghi also predicted that inflation would be zero in 2015, but would rise to 1.5 per cent in 2016 and 1.8 per cent in 2017. There seems to be a general consensus that the Eurozone will avoid deflation.

Meanwhile, the US announced disappointing employment figures for March and revised down the figures for January and February. Economists were forecasting that the monthly increase in non-farm payrolls would be 245,000 for March, but the figure came in at 126,000, the lowest monthly figure since the end of 2013. The downward revision to the January and February figures was 69,000. This put further pressure on the dollar and was another factor behind its fall against the euro. Many economists believe that the disappointing figures for the first quarter of 2015 overall are due to the extreme weather conditions experienced on the east coast and the general feeling is that the figures will rebound in the second quarter.

Most forecasters now believe that rates will not rise before September

In the short term, the main effect of the weak employment figures has been to push out the expected rise in interest rates in the US. It had been thought that rates might rise from zero to 0.25 per cent as early as this month, but most forecasters now believe that rates will not rise before September.

Meanwhile, in the UK the impending election and the uncertainty surrounding the likely outcome has put pressure on the pound, which fell by 4.4 per cent against the dollar during March and has fallen by 2.8 per cent against the euro since mid-March. Figures relating to the construction sector were published last week and showed that there was growth in the housing sector and commercial construction but that civil engineering projects had suffered. It is thought that many companies and government bodies have delayed decisions ahead of knowing the final outcome of the election on 7th May.

In the second part of this blog I shall examine the reasons for the unusual sluggishness of the UK economy as it comes out of recession (normally there's more of an uptick), and offer my view of what will happen next.