The Warwickshire Outlook

The Central Bankers' Dilemma

Economic theory on money supply presents a relatively simple relationship between interest rates, spending behaviours and inflation.

When inflation is high, it is assumed that people are effectively spending too much, and so there is more money than things to buy, thus pushing up prices. Interest rates are therefore increased to tempt people to save more, thus having less money to spend and reducing demand – this helps act as a brake on the economy and reduces inflation. Conversely, when the economy is struggling and/or there is a period of deflation, the standard response is to cut interest rates to encourage people to save less and spend more, thus boosting economic activity.

The textbook response for the 2007/08 financial crisis and ensuing recession was followed by the central banks of the western world, with a significant reduction in interest rates. For instance, the Bank of England cut its rates to 0.5%, the Federal Reserve (FED) cut America’s rate to 0.25% and the European Central Bank (perhaps somewhat belatedly) cut its rates to 1% in 2009.

While many economies have seen a return to growth over the last few years, central banks have found it very difficult to increase interest rates. The FED did increase its rate slightly in December 2015 from 0.25% to 0.5%, but the markets did not respond well to this change and there has been criticism that this move is starting to choke off demand.

Indeed, the problem seems to be getting more acute. Just this month, the European Central Bank cut its main rate again to 0% in attempt to boost growth. Japan, Switzerland and Denmark now have negative interest rates for saving (i.e. you have to pay the bank to hold your money) and in February, Sweden became the first central bank in the world to have negative interest rates for borrowing – in other words, the banks pay you to hold their money!  Mark Carney (the Governor of the Bank of England) recently suggested that interest rates in the UK could potentially fall to 0%, but ruled out the idea of the introduction of negative rates.

This extraordinary period of low (or even zero) interest rates highlight the continued weakness in the global economy and general lack of demand, and this is being reflected in the fragility of the various stock-markets around the world.  However, the real concern which is unsettling investors is that the central banks have no real weapons with which to face another significant financial crisis of global economic slowdown. Central bankers cannot increase their interest rates for fear of killing off growth, but this means that they cannot use a cut in interest rates as their standard tool for providing an economic stimulus.  This is creating a real dilemma for the central banks, and a need to reconsider the standard approaches to monetary policy.

As zero-hour contracts increase, Warwickshire’s unemployment rate halves the national average

The latest JSA data released by NOMIS, shows that unemployment across the county continues to fall at a steady rate. Just fewer than 2,600 residents signed up for Jobseeker’s Allowance in January 2016; equating to less than 1% (0.8%) of the working age population. Nearly a third of Warwickshire’s residents who claimed JSA a year ago, are now back in employment; driven particularly by Stratford’s sharp drop in claimants.

Whilst Warwickshire saw a dip in its unemployment rate from the previous month, the national unemployment rate increased slightly to 1.5%; nearly doubling the county average. A consistent strong performance low JSA claimant rates implies that there are growing business and employment opportunities in the local economy, when compared elsewhere.

Source: NOMIS

There are, however, some concerns that the low number of JSA claimants under-represents issues around employment levels, and may in part be a result of increased part-time or zero-hour contract work.  A recent study published by ONS, suggests that zero-hour contracts are on the rise across the country, which may be driving an increase in employment over time; particularly among students and young people. Nationally, the Labour Force Survey (LFS) estimated that 2.5% of workers may be employed on zero-hours contracts, with nearly a million people relying on this type of employment as a main source of income.

Whilst the rise in zero-hour contracts have helped to improve labour market flexibility, benefiting businesses and residents alike, this phenomenon could potentially lead to lower consumer income due to fewer hours worked, falling productivity rates and therefore restrict future economic growth and wellbeing.