Monday December 19, 2005 - 11:22:34 GMT
Share This Story
Lloyds TSB Financial Markets - www.lloydstsb.com/corporatemarkets
Forex: Economic forecasts of 2005 were accurate in placesEconomics Weekly: Economic forecasts of 2005 were accurate in places
How has the 2005 economic performance surprised?
How did growth, inflation and interest rates for the major economies turn out in 2005 (on latest estimates) compared with expectations made by around 30 economists at the start of the year? We analyse this by comparing the consensus forecasts made in the December 2004 issue of Consensus Economics for 2005 with those for the same year in the December 2005 issue.
Growth trends are mixed...
US and Japanese economic growth in 2005 have both exceeded expectations made in December 2004. The UK has grown less than expected, along with the EU. Growth has turned out to be higher in Japan than in the UK or the EU, even though it was expected to be the slowest expanding economic entity in 2005. However, growth in the UK has still comfortably exceeded that of the euro area, where growth of 1.5% is now expected against last yearís expectation of 1.7%, the rate the UK is now projected to record. It should be noted that Ĺ% of the UK undershoot of the 2.5% growth that was expected a year ago is down purely to data revisions, so the actual undershoot is just 0.3%. The US economy has outperformed, even though it experienced damaging hurricanes, due to a strong housing market that buoyed consumer and investment spending. Japan outperformed because of fast rising exports to China, which seem to have kick-started the domestic economy as well.
...but inflation is generally higher than expected
What about inflation? As to be expected, faster growth than was expected in the US has meant that inflation there has overshot projections made a year ago compared with those made now (with 10 months of the yearís data now in). But inflation was also higher than expected in all the other areas as well, apart from Japan. In the latter though the difference is hardly large, with prices now expected to fall by 0.2% against last yearís expectation of 0.1%. The reason for the overshoot in all the other economies is clearly due to the fact that oil prices are significantly higher than was expected a year ago. Oil prices in December this year are at $60 a barrel compared with $42 last year, a rise of 43%. But US consumer price inflation has overshot most of all, even though, given the increase in oil prices, it is remarkable that inflation remains so low overall.
Short term interest rates are higher than projected in the US...
Interest rate trends though have echoes of the inflation profile. Chart C shows that short term interest rates (based on the Treasury bill rate) in the US have ended up over twice as high as was expected a year ago, at just over 4% compared with 2%. This actual outcome is to be expected, given faster than expected growth and higher than expected inflation. Although inflation is also higher than expected in the UK, economic growth there is lower than was expected as well, so it is no real surprise that short term interest rates are lower than was expected, though not by much (4.5% now against 4.9% projected last year). For the eurozone, the current short term interest rate is exactly what was expected a year earlier. This means that it is US economic indicators and interest rates that have surprised most to the upside.
...as were long term interest rates...
What about long term interest rates, given the inflation outcome? Given the preceding trends, it is no surprise to see that only in the US are long term interest rates higher now than was expected a year ago, see chart D. Interest rates in Japan are spot on what was projected. Despite slightly higher than projected inflation in the UK and euro area (which was compensated for by having weaker than expected economic growth), long term interest rates have turned out lower than projected in both.
...in summary, these trends may have driven the US$ in 2005
In summary, these economic outcomes go some way to explaining the strength of the dollar over the year. An outperformance of the economy and higher short term and long term interest rates than were expected have combined with lower than expected interest rates and growth in the euro area and the UK to push the dollar higher than many anticipated. Although Japanís economy performed much better than expected, its interest rates are still at zero at the short end and only 1.7% at the long end, so the yen has been sold versus dollars. Some of this pattern may now be changing. In another weekly brief, we will look at what forecasters are looking for in 2006.
UK economic indicators
UK economic indicators this week are expected to show that the economy grew by just 0.4% in Q3, with data due on Friday. But the public finances will worsen, data on Tuesday, with the government typically borrowing heavily in November. MPC minutes of the December meeting could show that they speculated about cutting interest rates in the face of weak growth and a weak labour market. After dismal figures, it may that CBI retailers are finally expecting sales to improve over the holiday period.
Trevor Williams, Chief Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."