Weekly economic briefing: Prices rising fastest for those on government benefits

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Prices rising fastest for those on government benefits, according to ABS Living Cost Index

The Australian Bureau of Statistics’ Living Costs Index (LCI) measures the impact of changes in prices on the out-of-pocket expenses incurred by different types of households, based on a fixed basket of consumer goods and services. The LCI is different to the consumer price index (CPI) because it tracks the difference in financial outlays (including differences in rental payments, mortgage payments and the effects of living costs on credit card interest) rather than changes in prices of goods and services.

The September quarter LCI results indicate that the cost of living is rising faster for households where the main source of income is government benefits – such as unemployment and disability benefits – compared to self-funded households, where income comes from employment or retirement assets.

Over all household types, low inflation is keeping a lid on the cost of living. Record-low wage growth and continuing underemployment across Australia is putting downward pressure on prices and keeping many aspects of the cost of living for households at bay. All household types have seen lower living costs growth over the last year, compared with the five-year average to September 2017 (see Chart 1 below). Employee household living costs grew by just 1.5% over the past year, while self-funded retirees saw 1.6% living costs growth.

Chart 1: Annual living cost index growth by household type

Source: ABS 6467.0

But downward price pressure isn’t affecting households equally. Households relying on government benefits (other than the age pension) saw higher cost of living changes, with 2.1% growth in the cost of living over the last year.

Price changes are affecting household types differently because of the different ways that households spend their income. Chart 2 shows the relative importance of components of spending for different household types. Employees spend the highest share of any group on insurance and financial services and transport, while self-funded retirees spend a higher share of their after-tax income on discretionary goods (particularly recreation) and health. Age pension households tend to spend a higher than average portion of their income on housing and health, while other government benefit households tend to spend a higher share of their income on housing and a lower share on discretionary goods, compared to other groups.

Chart 2: Relative importance of spending categories for household cost of living

Source: ABS 6467.0

This means that food and housing prices impact government benefit households while discretionary product prices affect self-funded households. Rising alcohol and tobacco costs impact government benefit households the most, as lower-socioeconomic groups tend to spend more of their income on these products. On the other side of the spectrum, employee and self-funded retiree household costs of living are more affected by discretionary product prices. The falling costs of discretionary goods such as clothing, homewares and furnishings has helped to dampen the increases in cost of living for these groups.

All in all, even though broad measures of inflation are subdued, the faster rise in the cost of food, housing and other non-discretionary products is putting relatively more pressure on more vulnerable households.

For more information on the Australian brief, please contact co-authors David Rumbens and Adelaide Timbrell.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Mr Trump’s first 12 months – Political fireworks, steady as she goes on the economy

  • This Wednesday marks the anniversary of Donald Trump’s election victory, one of the most surprising and unexpected in US history. A year on we reflect on what effect the new president has had on the US economy and financial markets.
  • Before the election some saw Mr Trump as a Ronald Reagan-like figure who would pursue pro-growth policies, cutting taxes, boosting public spending and reducing regulation. Others focused on Mr Trump’s commitment to put America first and counter on ‘unfair’ foreign competition. During the campaign Mr Trump said his economic policies could virtually double trend US growth to 4.0% a year.
  • Plenty of others saw dangers in ‘Trumponomics’. Before the election 370 economists, including eight Nobel Laureates, signed a letter describing Mr Trump as “a dangerous and destructive choice” who posed, “a unique danger to the functioning of…economic institutions, and to the prosperity of the country”. Last June the ratings agency, Moody’s, warned that, if implemented, Mr Trump’s economic proposals could produce a prolonged recession and heavy job losses. In the immediate aftermath of the US election, Paul Krugman, the Nobel prize-winning economist, suggested a global recession was imminent.
  • In office Mr Trump has had less impact on the economy than either the optimists hoped or his critics feared.
  • US activity has picked up as expected before last November’s election, with growth this year likely to come in at an unspectacular 2.2% level. Next year should be a bit better. There’s been no Trump downturn nor a surge in growth. The Federal Reserve characterises the US recovery as “solid” and has felt sufficiently confident to raise interest rates twice this year, each time by 25bp, and is likely to do so again in December. Unemployment keeps falling though wage growth remains weak.
  • Despite talk of the uncertainties surrounding the new administration, standard indicators of confidence are upbeat. US equities have risen strongly since Mr Trump’s election and the VIX index, a gauge of financial market risk aversion, is close to a 25-year low. US business confidence has risen sharply in the last year. Consumer confidence is at a 17-year high.
  • Yet the performance of the US economy since Mr Trump’s election seems to have had more to do with the unfolding US economic cycle than the new administration. US growth was heading up at the time of last year’s election courtesy of cheap money and a global recovery. Despite the political fireworks the Trump presidency has not much altered the trajectory of the recovery.
  • The checks and balances in the US system, shifts in policy, changes in personnel and the inability of the new administration to build alliances within the Republican Party or Congress have blunted Mr Trump’s radicalism.
  • In the process a proposed $1 trillion infrastructure plan has been scaled back and the pledge to build a wall on the Mexican border, paid for by the Mexican government, has been watered down. A proposal to abolish ‘Obamacare’, the Affordable Care Act, did not make it to the floor of Congress.
  • On the economic front arguably the most notable event of Mr Trump’s presidency so far was last week’s appointment of Jerome Powell as Chairman of the Federal Reserve. Mr Trump’s earlier criticisms of the Federal Reserve had raised the possibility of a radical departure in this appointment. In the event Mr Powell, as an Obama appointee who has never disagreed with his predecessor Ms Yellen’s monetary decisions, represents continuity.
  • The Trump administration could still achieve radical change on taxation. Last Thursday Republican lawmakers revealed a sweeping rewrite of the tax code, outlining a $1.5 trillion plan for major corporate tax cuts and more modest reductions for ‘middle class’ families. Whether there is appetite and consensus to get the bill through the House of Representatives remains to be seen.
  • Mr Trump’s powers over taxation and public expenditure are limited, but he has greater authority in other areas, especially foreign and trade policy.
  • The US administration has withdrawn from the Trans-Pacific Partnership, the Asian free trade agreement, in the process creating an opening for China to exert leadership in the region. The administration is seeking to renegotiate the North American Free Trade Agreement. Mr Trump’s appointee as head of the the Environmental Protection Agency, Scott Pruitt, is better disposed to deregulation and fossil fuels than his predecessor. In June Mr Trump said the US would withdraw from the Paris climate change agreement and seek a new deal that would not disadvantage US businesses.
  • These changes, and ones still to come, could yet make a significant difference to the US economy.
  • But so far the effects of Mr Trump’s presidency on the economy and financial markets have been small. In part this testifies to the constrained powers of the US president relative to a prime minister in a parliamentary system. To prevail US presidents have to build consensus. But this illustrates something else. Political fireworks are less important drivers of growth than the far duller triumvirate of monetary policy, the economic cycle and global activity.

PS – Last week we covered the nascent recovery in commodity prices. This week, oil prices hit a two-year high thanks to production cuts from OPEC. The IMF cautioned against the effects of rising oil prices, saying that “if the oil price goes up, the appetite for social and economic reform (in the Middle East, North Africa, Afghanistan and Pakistan) will go down”.

PPS – The Resolution Foundation said that the interest rate rise by the Bank of England will have a limited effect on households. Their research points to the fact that just over 40% of mortgages are variable rate, compared to a pre-crisis level of 70%. They also estimated the increase in interest payments by households that had variable-rate mortgages would average just £6.40 a month.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.7%, at 7,560. The bourse inched up to a record high thanks to stronger than expected services sector data and a weaker pound boosting overseas earnings.

The Bank of England (BoE) raised interest rates for the first time since 2007 in a move that was widely anticipated by financial markets. The 0.25% increase led to a weaker pound as the central bank signalled a gradual increase in borrowing costs.

International economic briefing by Ian Stewart

Economics and business

  • The BoE’s deputy governor Ben Broadbent said that the rate rise was “moderate” and that interest payments on debt were still at record lows
  • The US announced that Jay Powell will replace Janet Yellen as head of the Federal Reserve in February
  • The UK services sector expanded at its fastest rate in six months whilst employment in manufacturing reached a three-year high, according to PMI data
  • UK consumers are still willing to spend despite falling confidence, according to a GfK survey
  • Euro area economic confidence hit a 16-year high
  • 25% of Britons return to work within 15 years of retiring, according to research from the University of Manchester and King’s College London
  • Eurozone GDP growth beat forecasts, and the unemployment rate fell below 9% for the first time since 2009
  • The UK was ranked 7th in the World Bank’s ‘Ease of Doing Business’ index, down from number 6 last year
  • The World Economic Forum found that the global gender pay gap will take 100 years to close at the current rate of change
  • The Chicago Mercantile Exchange announced it will list bitcoin futures later this year, prompting another surge in the cryptocurrency
  • US job growth increased strongly in October, but wage growth slowed

Brexit and European politics

  • Spanish 10-year yields fell to a seven-week low following Catalonia’s declaration for independence last week
  • The UK government will publish findings from 58 studies which assess the economic impact of Brexit after a motion was passed by the House of Commons
  • Despite the Brexit referendum result, foreign investment in the UK reached a record high during 2016
  • David Davis, the UK’s Brexit secretary, described the impact studies as containing “excruciating detail” on potential Brexit consequences
  • The number of EU nurses coming to work in Britain declined by 89% in the 12 months to September compared to the preceding 12 months
  • The Bank of England warned that 10,000 jobs could leave the City on “day one” after the UK leaves the EU
  • The debate of whether to lower UK food standards to facilitate a US trade deal continued with the UK’s trade secretary, Liam Fox, defending the practice of disinfecting chicken with chlorine
  • Senior executives from the car industry asked for “urgent clarity” on the future UK-EU trading arrangement in lights of investment in the industry falling by 75 per cent in two years
  • The FT reports that Brexit could result in the employment of 30,000 additional officials such as customs officers and immigration case workers
  • David Davis revealed that “the [Brexit] withdrawal agreement will probably favour the union on things like money”
  • Office leasing in the City of London is at a ten-year low as firms delay decisions, according to the property developer Brookfield

And finally…

  • A pensioner in Germany called the authorities fearing that a gigantic courgette lying at the end of his garden was an unexploded bomb – marrow escape

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