Top 5 Graphs of the Week: Stagflation and Double Dip in the U.K.?

by: Econ Grapher

In this edition of the top 5 graphs of the week we review some of the GDP numbers coming out of the U.K. and Germany. Then we look at the consumer sentiment figures from the U.S., and take a look at the course of the U.S. housing market. Finally, we check out what's been going on in monetary policy, with a focus on the running theme of emerging market inflation.

1. U.K. GDP
The U.K. slipped into negative growth in Q4 2010, recording a q/q change in GDP of -0.6%, compared to 0.7% in the previous quarter. That put year on year growth at 1.5% from 2.5%, making the U.K. economic recovery seem somewhat short-lived. The results are not encouraging, especially in the backdrop of fiscal austerity measures and plans to fix the U.K. government financials. It brings to mind two ugly terms: stagflation and double-dip, stagflation is pretty much confirmed, but as for the double-dip, it remains to be seen. Speculation that a Bank of England rate hike may come has already been pushed out, so it remains a long hard road to economic recovery.

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2. German GDP
Over in Germany, growth slowed down a little, but the EU economic powerhouse continued to surge along at about a 4% pace. Germany saw 0.4% growth q/q in Q4, compared to 0.7% in Q3, with the year on year growth rate at 4% in the past two quarters (3.9% in Q2). So it's clear where the strength is in the EU, which interestingly creates a bit of a tension: On the one hand you have the strong German economy, and on the other you have basket cases like the "PIGS". This remains a risk, but also a source of strength, for the course of the Euro and the EU over the coming year.

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3. U.S. Consumer Sentiment
In another positive sign for the U.S. economy, the UoM Consumer Sentiment index continued to rise in February, at 77.5 vs 74.2 in January; with much of the rise coming from current conditions (86.9 vs 81.8 in January), but with expectations also rising (71.6 vs 69.3 in January). Also of interest though is the point that much of the jump in confidence was seen in the higher income households (driven by improving job prospects on the upper end of the socio-economic totem pole). As noted in the Reuters report:

Consumers are increasingly aware that the economy is improving and, more importantly, expect job prospects to become more favorable in 2011.

However, rising prices remains a thorn in the collective sides of consumers; but the key takeaway is that the result was good, and possibly signals further strength in the U.S. economy.

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4. U.S. House Prices
The December results for the S&P/Case Shiller house price index showed further monthly declines with a -0.4% drop in December 2010, and an annual decline of -2.4%, extending a six month string of monthly drops in the 20-city index. The numbers just go to show that even though the rest of the U.S. economy is starting to show more and more signs of life, the housing market still has a lot of ground to cover. The fact is that the fundamentals just aren't there to support rising house prices. But with the improving economy, rising consumer confidence, and slowly but surely improving job market, the higher probability outcome is stabilization or sideways movement in the price; rather than downward. But the housing market still remains a risk for the U.S. economic recovery.

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5. Monetary Policy Review
The monetary policy scene was dominated by emerging markets in the past week, with Russia, Colombia and Israel hiking rates 25bps and Vietnam going for another 100bps (on top of a 200bp increase the week before). The running theme in the statements from the central banks were basically about the aggregate demand drivers (econ growth) as well as the supply/price side drivers i.e. commodity prices. Indeed, the variety of supply hits around the world in agriculture have seen a strong run up in agriculture commodity prices. Energy has also popped up somewhat, but metals have also seen a rally (with copper still being a benefactor of emerging market growth). So the emerging markets inflation theme will likely continue for most of this year and of course creates a bit of policy risk - i.e. can the central banks get inflation under control without stomping out economic growth?

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So we saw what looked like the U.K. economy heading into a double dip, recording a negative quarter of GDP growth in December last year. Then we saw the opposite in Germany; continued strength and a source of stability (but possibly also instability) in the Euro Zone. In the U.S., the consumer appeared to be getting more confident as conditions start to improve; adding signs of momentum in the U.S. economic recovery. But the U.S. housing market remained in the doldrums in December, as the fundamentals are yet to support more than stabilization in prices. Finally, in monetary policy we saw more tightening as the running theme of emerging market inflation played through, with policy risks proving that emerging market growth may not be such a sure thing over the medium term.

1. OECD Statistics
2. OECD Statistics
3. Thomson Reuters
4. Standard & Poor's

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.