BBC News - UK economy to grow by 2.5% this year, says NIESR

The UK economy will grow by 2.5% this year and 2.1% in 2015, the National Institute of Social and Economic Research (NIESR) has forecast.

Consumer spending is expected to keep driving UK growth this year

The think tank said the UK's economic recovery has become "entrenched".

The estimates are broadly in line with those of other forecasters, including the UK's Office for Budget Responsibility.

NIESR also said it expected unemployment to fall below 7% before the end of the year.

Last year the Bank of England said it would consider raising interest rates from their current historic lows if unemployment fell below the 7% threshold, though it has since played down expectations of rate rises in the near future.

NIESR's forecast follows similar raised UK growth forecasts from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), which are also increasingly optimistic about the UK's economic prospects.

Bank of England 'questions raised'

Falling unemployment and rising house prices have helped encourage consumers to spend more, fuelling the recovery.

More sluggish sectors of the economy such as construction are also now showing signs of strengthening.

But concerns remain - particularly levels of business investment, which remain low, and stagnant wage growth which means prices are continuing to rise faster than many people's salaries.

"The UK's economic recovery is entrenched," the NIESR said in a statement. "Above trend growth returned in 2013, while the remarkable performance of the labour market persists."

"We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market."

It added that the rapid fall in unemployment seen in recent months had "raised questions over the credibility" of the Bank of England's forward guidance, which saw 7% unemployment as an important threshold.

The NIESR said it now forecasts a rise in interest rates as early as the second quarter of 2015, though this is expected to be a year after the 7% threshold is breached.

The Bank of England opted to keep rates at 0.5% again on Thursday. They have been at the historic low since 2009.

BBC News - Eurozone manufacturing grows strongly in January

Eurozone manufacturing grew strongly in January on the back of new orders, a closely-watched business survey suggests, with Germany leading the way.

Eurozone manufacturing activity is at its strongest since mid-2011

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 54 in January, its strongest month since May 2011 - a figure above 50 indicates growth.

This compares to December's figure of 52.7 and reflects the overall pickup in eurozone economic activity.

But France failed to break the 50 mark.

"The eurozone manufacturing recovery gained significant further momentum in January, with final PMI readings for Germany, France and the region as a whole all exceeding the earlier flash estimates," said Chris Williamson, Markit's chief economist.

Germany's manufacturing PMI rose to a 32-month peak, said Markit, while France's rate of contraction slowed, but it still failed to move into growth territory.

Greece's PMI was 51.2 - the first time it has been above 50 since 2009 - joining Italy, Spain, the Netherlands, Austria and Ireland in the growth stakes.

All the countries in the survey reported an increase in exports.

New orders across the 18-country region rose at their fastest pace for nearly three years, Markit said, encouraging manufacturers to take on new staff.

As a result, the employment index rose from 49.9 to 51 in January - the first time it has moved into positive territory for two years.

Despite this, eurozone unemployment remains stubbornly high at 12%.

Reuters News - Australia central bank shuts door on rate cuts, A$ surges

A construction crane is reflected on the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013.

CREDIT: REUTERS/DANIEL MUNOZ

(Reuters) - Australia's central bank kept its main cash rate at a record low of 2.5 percent on Tuesday as widely expected but surprised some by saying further cuts were not in the cards - dropping its bias towards easing policy.

The Australian dollar surged over half a U.S. cent after the Reserve Bank of Australia (RBA) also toned down its rhetorical campaign for a weaker currency, saying only that a recent decline would assist the economy if sustained.

"In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," RBA Governor Glenn Stevens said in a brief statement.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

It had previously stated that it remained open to the possibility of another cut if needed. However, signs of an improving economy combined with a surprisingly high inflation reading last quarter had sparked speculation it would skip the easing bias this time.

"I think the most significant aspect in the statement is the fact it ends with the comment that 'the most prudent course of action is through stability in interest rates' so they seem to have moved more firmly into the neutral camp than they have been," said Shane Oliver, chief economist at AMP Capital.

"They do seem to have watered down the $A comment."

A Reuters poll of 21 analysts had found all expected the RBA to hold steady, while many argued the next move would be up rather than down, albeit not for many months yet.

The market had priced in almost no chance of a move this week and trimmed the probability of a further cut to just one-in five.

The central bank will have scope to expand on its reasoning in its quarterly economic outlook due on Friday.

NOT SO UNCOMFORTABLE

The RBA also dropped a reference to the Australian dollar being "uncomfortably high", which had been part of a long verbal campaign to pull the currency lower to benefit the trade-exposed sectors of the economy.

On Tuesday it stated only that: "The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy."

The change could in part be due to a surprising acceleration in underlying inflation last quarter to an annual 2.6 percent, well above the 2.25 percent the central bank had forecast.

Stevens noted that the fall in the local dollar was feeding through to inflation more quickly than anticipated.

Yet, he added that while inflation was now likely to be somewhat higher than first thought, it was still expected to remain within the bank's 2 to 3 percent target over the next two years.

Low interest rates have been filtering through to higher house prices and home building, while boosting household wealth and giving consumers the confidence to start spending again.

The RBA started lowering rates all the way back in November 2011 and its last move was in August 2013.

Stevens made only passing reference to the recent turmoil in emerging markets and the recent slide in stocks.

Bloomberg News - Gold Mint Runs Overtime in Race to Meet World Coin Demand

Photographer: Gianluca Colla/Bloomberg

Small balls of solid gold are collected in a basin during the semi-automated gold manufacturing process at a precious metal refinery near Mendrisio, Switzerland

 Austria’s mint is running 24 hours a day to meet orders for gold coins, joining counterparts from the U.S. to the U.K. toAustralia in reporting accelerating demand boosted by the bear market in bullion.

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group Inc. predicts bullion will “grind lower” over 2014.

“The long-term physical buyers see these price drops as opportunities to accumulate more assets,” said Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer. “We have witnessed some top selling days in the past few weeks.”

Gold futures in New York climbed 5.2 percent this month to $1,264.50 an ounce, heading for the first gain since August. The Standard & Poor’s GSCI Spot Index of 24 raw materials slid 1.2 percent, while the MSCI All-Country World index of equities dropped 2.9 percent. The Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, advanced 0.7 percent.

Prices Rebound

Prices rebounded 7.2 percent since reaching a 34-month low in June as physical buying rose. The Shanghai Gold Exchange, China’s largest bullion bourse, delivered 2,197 metric tons to customers in 2013, compared with 1,139 tons in 2012, it said Jan. 15. The Asian country toppedIndia as the world’s top buyer last year as demand probably reached a record, the World Gold Council estimates.

The U.K.’s Royal Mint, which traces its history back more than 1,000 years, ran out of 2014 Sovereign gold coins because of “exceptional demand,” it said in a statement on Jan. 8. Coins weren’t available to customers until six days later when inventories were replenished. Sales by the Perth Mint, which also has workers producing coins in three shifts a day, will probably beat last year’s record, Ron Currie, the marketing director, said Jan. 20.

Goldman, Morgan

Bullion tumbled in 2013 after some investors lost faith in the metal as a store of value, snapping 12 straight years of gains. Holdings through exchange-traded products fell 33 percent in the past 12 months, erasing $69.1 billion from the value of the funds, data compiled by Bloomberg show. Prices also fell as U.S. equities rallied and inflation remained low.

Goldman expects bullion to fall to $1,050 in the next 12 months as the Federal Reserve reduces monetary stimulus, analysts led by Jeffrey Currie, the bank’s head of commodities research, said in a report Jan. 12. Precious metals are Morgan Stanley’s “least preferred” commodities, and physical demand won’t be enough to buoy prices, analysts Adam Longson, Bennett Meier and Peter Richardson said in a Jan. 17 report. The bank cut its 2014 target 12 percent to $1,160 on Jan. 22.

“Prices are likely to drop further as global economic conditions are stabilizing and tapering worries continue,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “There is no doubt that physical demand has improved, but it will not be enough to support prices.”

Coin Sales

The U.S. Mint, the world’s largest, sold 89,500 ounces so far this month. The Austrian mint that makes Philharmonic coins, saw sales jump 36 percent last year and expects “good business” for the next couple of months, Andrea Lang, the marketing and sales director of Austria’s Muenze Oesterreich AG, said in an e-mail.

“The market is very busy,” Lang said. “We can’t meet the demand, even if we work overtime.”

The price for the Austrian mint’s 1-ounce Philharmonic gold coin slumped 27 percent last year, according to data from the Certified Coin Exchange.

“It’s been a very bad year for gold,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “People who bought coins have lost value, but they are not looking at short-term gains, and hope springs eternal.”   By Debarati Roy

BBC News - Argentina to ease foreign exchange controls after peso slump

Argentina is to relax its strict foreign exchange controls, a day after the peso suffered its steepest daily decline in 12 years.

The economy has grown during Cristina Fernandez de Kirchner's presidency, but inflation has soared

Cabinet chief Jorge Capitanich said the country would reduce the tax rate on dollar purchases and allow the purchase of dollars for savings accounts.

The measures would take effect from Monday, he said.

On Thursday, the peso fell 11% against the dollar, its steepest fall since the country's 2002 financial crisis.

The central bank had been acting to support the waning currency amid a loss of investor confidence in the country. But the bank abandoned this policy on Thursday, sparking the peso's fall.

Despite efforts to support the economy, inflation has soared and many analysts expect it to reach about 30% this year.

That erodes confidence in the peso, prompting investors to put their money into US dollars rather than the sinking domestic currency.

Mr Capitanich said the government would reduce the tax rate on dollar purchases to 20% from the current 35%.

He said: "This decision reflects the government's belief that in the context of a floating exchange rate, the price of the currency - that is, the dollar - has reached an acceptable level for the objectives of economic policy."

BBC economics correspondent Andrew Walker said: "Argentina seems to be moving towards a more flexible exchange rate system, which could mean further weakness for the peso.

"That would help the country's competitiveness but the danger is that it could aggravate what is already a serous inflation problem."

Restrictions

Under the presidency of Cristina Fernandez de Kirchner, Argentina has introduced a number of restrictions on transactions with foreign currency.

This week, it introduced new restrictions on online shopping as part of efforts to stop foreign currency reserves from falling any further.

Anyone buying items through international websites must sign a declaration and produce it at a customs office, where the packages have to be collected.

The government now limits tax-free purchases to two a year.

Argentina's reserves of hard currency dropped by 30% last year, making support for the peso increasingly unaffordable.

In 2002, millions of Argentines saw their incomes and living standards collapse amid a crisis that included a government default on international debts and 41% inflation.

BBC News - China and UK trade at 'record high'

Bilateral trade between China and the United Kingdom hit a "record high" in 2013, according to the Chinese ambassador to the UK, Liu Xiaoming.

The UK has been looking to foster closer trade ties with China

The state-owned Xinhua news agency quoted Mr Liu as saying that bi-lateral trade between the two surpassed $70bn (£43bn) last year.

He said the UK's exports to China grew more than other EU countries.

The UK has been pushing to boost trade ties with Beijing in an attempt to tap into China's domestic market.

Last year, British Prime Minister David Cameron visited the world's second-largest economy to foster closer trade ties.

He was accompanied by more than 100 British business people on the three-day visit - his second to the country.

"The two countries' leaders reached a broad consensus on pushing forward bilateral relationship and expanding co-operation," said Stephen Perry, chairman of the 48 Group Club, an independent business network that looks to promote ties between China and the UK.

"China and the UK working together will benefit our people and contribute to global peace and development," Mr Perry was quoted as saying by Xinhua.

Open economy

Meanwhile, Chinese firms have been keen to invest in the UK as they look to expand their global reach.

Among the Chinese companies that have announced plans to invest in the UK are Dalian Wanda Group, which has said it will spend £1bn to buy a British yacht maker and develop a hotel property in London.

Network equipment maker Huawei has said it will invest £1.3bn in expanding its UK operations.

The UK has welcomed Huawei's increased investment and expansion despite the firm facing security concerns in other economies such as the US and Australia.

Meanwhile, Beijing Construction Engineering Group (BCEG) will be part of a group investing £800m in Manchester Airport to develop its surrounding business.

Britain is among the top 10 nations globally for outbound Chinese investment and attracts more than double the investment of any other nation in Europe.

Mr Perry said: "The UK can be the most profitable destination in the Western world for Chinese outward investment in infrastructure, real estate, energy and transportation".

Bloomberg News - Investor Animal Spirits Spread to Companies Worldwide

Companies around the world are starting to share the exuberance that inspired investors last year.

As executives gather in Davos, Switzerland, this week for the World Economic Forum’s annual meeting, business confidence is rising, with a weekly gauge compiled by Moody’s Analytics Inc. at its highest level since the survey began in 2003.

Mergers and acquisitions are surging, with $130 billion in takeover offers already announced this year. And enterprises from Microsoft Corp. (MSFT) toVolkswagen AG (VOW) are readying plans to step up capital spending after companies have squirreled away a record amount of cash to protect against a new financial crisis.

“The animal spirits are coming back,” said Mark Zandi, chief economist for New York-based Moody’s. “This is going to be a good year” for capital expenditures and hiring.

Behind the projected upturn: increased confidence in the durability of expansion following faster U.S. and global growth late last year, the need to replace aging and out-of-date equipment, and a waning of what Zandi calls “existential fears,” including concerns about a breakup of the euro region.

A comeback is critical for the global economy and financial markets. Strategists at Goldman Sachs Group Inc. and Credit Suisse Group AG are forecasting the fastest worldwide growth since 2011 and continued gains for equities -- predicated partly on optimism spreading from investors to companies.

Record High

The MSCI World Index is up 19 percent from a year ago. Sales of high-yield, high-risk bonds set a record in 2013, and the average yield investors demand to hold bonds from Greece, Ireland, Italy, Portugal and Spain over benchmark German securities fell this month to the lowest since April 2010, Bank of America Merrill Lynch bond indexes show.

“You’d have to say that values are more stretched than they were a year ago,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg Television on Jan. 6. The Davos veteran warns major economies are threatened by “secular stagnation” that even zero-percentinterest rates can’t solve.

Investors may need to see more demand from consumers and companies soon if they’re going to become even more positive, according to Adam Posen, president of the Peterson Institute for International Economics in Washington.

“Continued appreciation of equities in the U.S. and Europe would require the handoff,” said the former U.K. policy maker, who is attending this week’s economic forum. “You need something more.”

Sense of Dread

Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the annual get-togethers of executives and government policy makers in Davos frequently have been dominated by a sense of dread about the stability of the world financial system. A global recession and doubts about the euro’s survival only augmented the stress.

While last year’s forum was calmer, it still was dogged by worries about Europe’s economic slump, a possible hard landing for China’s economy, questions about Japanese stimulus plans and wrangling between President Barack Obama and congressional Republicans over raising the federal debt limit.

“What is fresh is we are now in less of a crisis mood,” said Ernesto Zedillo, former president of Mexico and now a professor at Yale University in New Haven, Connecticut, who’s attending the forum. “People were extremely fearful a year ago. Now we seem to be in better shape but with significant fragilities.”

Waning Anxieties

The question is whether waning anxieties will stir what the late economist John Maynard Keynescalled “animal spirits,” leading executives to shed their conservatism and step up investment.

At the end of 2012, large global businesses, excluding financial, sat on $4.5 trillion in cash, 73 percent more than in 2006, according to BofA Merrill Lynch. The piles totaled $1.4 trillion in the U.S., $1.1 trillion in Europe and $613 billion in Japan.

So why spend now? One reason is to ride the acceleration in global growth. The International Monetary Fund will raise its forecast tomorrow from the 3.6 percent it predicted in October, Managing Director Christine Lagarde told reporters Jan. 7. Credit Suisse and Goldman Sachs economists are penciling in expansion of 3.7 percent this year after 2.9 percent last year.

Companies already are taking note. JPMorgan Chase & Co. reports its global index of sentiment among manufacturing purchasing managers was the highest last month since April 2011.

Growing Optimism

The growing optimism is reflected in the merger market. Charter Communications Inc. (CHTR)said last week it is seeking to purchase Time Warner Cable Inc. (TWC) for about $61.3 billion. Suntory Holdings Ltd. announced it will buy spirits maker Beam Inc. (BEAM) for about $16 billion. Both deals include debt.

The need to replace out-of-date equipment is another reason to spend now. The average age of capital stock has been pushed close to a record at more than 12 years in Europe and almost 17, the highest since 1970, in the U.S., Credit Suisse estimates.

Companies also may have to start spending to get on board with breakthroughs such as greater broadband connectivity and big data, according to Laura Tyson, a professor at the University of California at Berkeley’s Haas School of Business.

“There are technological reasons, as well as animal spirits, for why we can be optimistic there will be a pick up,” said Tyson, a former chairman of the White House Council of Economic Advisers.

Businesses Underinvesting

Investors are agitating for companies to loosen their purse strings. A record number of fund managers polled last month by BofA Merrill Lynch said businesses are underinvesting, and 55 percent -- the most since December 2005 -- want the cash to be used for capital expenditures.

In the U.S., the shift already may be under way. Orders for nonmilitary capital equipment, excluding aircraft, increased 4.1 percent (CGNOXAI%) in November, the most in 10 months, according to data from the Commerce Department.

While the expiration of a tax credit at the end of last year may have influenced some of that buying, companies are set to continue their spending in 2014. Redmond, Washington-based Microsoft plans to more than double investment to $6.5 billion in the fiscal year that ends in June compared with two years ago, mostly on data centers and networking equipment.

Rising Wealth

A sharp increase in wealth has helped convince executives the expansion has momentum, saidVincent Reinhart, chief U.S. economist for Morgan Stanley in New York. Household net worth increased by $6.3 trillion in the first three quarters of 2013 to $77.3 trillion, thanks to rising equity and home prices.

Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA in London, sounds a cautionary note. He sees less room than rivals for U.S. companies to spend because capital expenditures already have outpaced cash-flow growth for three years and, at about 7 percent of sales, are higher than before the financial crisis. Total debt also is 35 percent more than in 2008-2009.

“The problem is not a lack of desire to invest, but anemic demand reflected in very low sales growth,” he said in a Jan. 16 report to clients. “If the demand isn’t there, why invest?”

Almost a year after its recession ended -- and even as banks prove reluctant to lend -- Europe will enjoy a run-up in corporate investment, according to Erik Nielsen, chief global economist in London at UniCredit SpA.

Manufacturing Boost

A European Commission survey in November found that manufacturers plan to boost spending by 3 percent this year after cutting it that much in 2013. Volkswagen, Europe’s largest automaker, said that month it intends to invest 84.2 billion euros ($114 billion) through 2018 on developing new vehicles and upgrading factories.

“European companies have been sitting on their hands, waiting to see demand,” Nielsen said. “Capex during this year will kick start.” He anticipates economic growth of 1.5 percent in the euro area amid a 1.9 percent gain in fixed investment, which would be the most since 2007.

In Japan, the onus is on encouraging businesses to boost wages as inflation finally begins to take root in the world’s third largest economy.

“What we want is for wages to rise more than prices,” Prime Minister Shinzo Abe said last month in an interview. “We want to enter a virtuous cycle” where economic growth propels corporate profits, employers raise compensation and workers spend more, he said. Abe speaks in Davos on Jan. 22.

Higher Salaries

Although companies, including Nomura Holdings Inc. and Daiwa Securities Group Inc., say they will increase salaries for some workers, Bloomberg News surveys show that consumer prices in Japan still will climb five times faster than wage gains in the year starting April.

If corporations worldwide do beef up expenditures, it will boost the capacity of the global economy to expand in the longer-run, perhaps damping the concerns of Summers and others that industrial nations are stuck in a slow-growth trap.

In a sign that such pessimism may be misplaced, Emerson Electric Co. (EMR) Chief Executive Officer David Farr said he’s going on offense this year to boost sales after reining in spending. Emerson, a St. Louis-based maker of compressors and automation equipment, estimates its global fixed investment will rise as much as 4 percent after increasing 1 percent in 2013.

After two and a half years of “keeping things really tight,” it’s time “to pivot and to increase our investments,” Farr said in a November conference call with analysts. “We believe the wind is starting to shift to our back.”

To contact the reporters on this story: Simon Kennedy in London