EIU: UK Rates Will Rise in First Half

Robin Bew: Yes, I think that's right. I mean if you look at what's going on in the US, for example, latest GDP data looks pretty good. There is some signs that consumer demand is really rising pretty smartly now.

There are weak points like the jobs market, but broadly, America looks pretty strong. Of course, a lot of that is coming from fiscal injections, so questions further out, but now it looks good.

If you look to Europe, there clearly is quite a bit of disappointment in Europe, but there is also lots of good news. Germany looks very, very strong. And you look in the emerging markets, they look strong too.

So there is definitely a sense that the world is really starting to pick up and move forwards and that while there is a cohort of countries that are disappointing, the vast majority look quite strong. Certainly conversations about double-dip for the world economy at least they've all dissipated now. There are particular markets that we worry about, but the world in general looks reasonably good.

McMahon: With that recovery in mind, where do you see the UK's Bank of England and the ECB taking interest rates in the first half of this year?

Bew: Well we think in the UK rates are going to go up in the first half of this year. And what's going on there really is inflation clearly has been a lot stronger than the Bank of England thought and they have undercooked their inflation forecast for quite a long time now, so their credibility in the markets is being eroded to some extent.

We think that ultimately they're going to have to move in part just to rebuild some of that credibility, so we think rates will go up first half of this year.

When you look to Europe though, Continental Europe, although Germany is very strong, the rest of Europe still has quite a lot of problems and of course, across Europe in general, there is quite a bit of fiscal austerity in place, that's going to hold growth back to some extent.

So we don't think they're going to raise interest rates until the first half of next year - 2012. And then actually, America, the Federal Reserve, we don't think they'll be raising rates until even further out than that.

So when you look at it, Bank of England is going to move first, ECB next and then the Fed last of all.

McMahon: You've described the fiscal situation of the United States as 'dire'. Is Obama going to get to grips with deficit reduction?

Bew: Well he's not been able to get tough so far. Clearly, at the moment, this is the only major economy around the world which we still see being in fiscal expansion mode. So we've just had the tax cuts extended further, unemployment insurance extended. Those things of course are contributing to the fact that the American economy looks pretty strong right now, but the fiscal position is pretty desperate.

Of course, cyclically, because of the financial crisis and the tax cuts that we've had on the back of it, but also structurally because of the aging population and the implications that has for healthcare spending.

They're going to have to get tough with the deficit at some point, but at the moment, it's pretty difficult to see a political story where that's going to happen until after the next Presidential election.

So I think we've got a couple more years of people being quite worried about the fiscal situation, but any serious programme of cutting the deficit probably won't happen until after, for another couple of years or so. And you can see that coming through in the political debate at the moment. There is some quite good debate going on about what they could do, but there's no serious conversation about what they will do.

McMahon: US jobs data doesn't exactly point to a recovery in consumer confidence in the short-term.

Bew: The jobs data is actually pretty murky at the moment. We're not seeing a lot of job creation, although there are signs in the latest surveys that that's going to pick up going forward. So it wouldn't surprise me if in the next couple of months we did see a slightly stronger job creation story.

But when you look at the labour market more broadly, it's becoming quite difficult to understand that the labour force is not rising in a way that you might have expected. It almost looks as if people are still leaving the labour market.

And there's a bit of a sense that the US is going through a sea-change which may partly be statistical, which is always a worry for economists trying to forecast the economy, but it may also be structural; that people have become disillusioned with job prospects in the US and are leaving the labour market altogether.

But certainly, jobs is the weak spot in the US right now. There are some signs that in the next few months that may start to turnaround and I think Obama will breathe a very big sigh of relief if that proves to be the case. But at least so far, job creation has been pretty disappointing.

McMahon: The upheavals we've been seeing in the Middle East affect relatively small markets, but do you think those events could have wider repercussions?

Bew: I guess the Middle East in aggregate is a relatively small region, although of course Egypt is quite a big economy within it, the biggest Arab economy in the world.

The implications I think are perhaps a bit more significant than people would give credit for. We've seen oil go all the way to $100 a barrel and the global ramifications of that will be quite significant if that persists because we know that high energy prices will have a retarding affect on growth all around the world, albeit on a one or two year horizon rather than immediate.

But of course, I think the big worry for everyone now is whether this will spread and as a result of it spreading lead to a real change in sentiment about political stability more broadly in developing economies. Of course, there's lots of work being done at the moment to try and pick who might be next and whether the countries which have already seen a lot of turmoil can recover and perhaps see peaceful development going forwards.

Of course in Egypt, the fall of an authoritarian regime is viewed very, very positively, but not a lot of sense about what's going to happen going forwards or how the economy will fare in the longer term, or indeed, how civil rights will fare.

It's a similar kind of story in Tunisia as well. So when we look more broadly around the region, there's a lot of potential for some quite uplifting political change, but what's going to happen to the economies while that is going on I think is still a very open question and we know in this very commodity rich region that what happens there can have a pretty big impact elsewhere around the world.

McMahon: Much smaller upheavals in Europe over belt tightening, but if the opposition gets fiercer, do you think politicians are going to have the stomach to see through austerity programmes?

Bew: Well, what politicians do when left to their own devices I think is a very open question, but of course it's not just them, it's what's going on with the financial markets too.

I think the real issue for a lot of politicians in Europe is they would clearly like to slowdown the pace of fiscal consolidation. In fact, I think in some instances they would like to do nothing at all. But the financial markets aren't going to let them and they look at what's happened to Greece and they look at what's happened to Ireland and what might be happening to Portugal and they think, well, we certainly don't want that to happen to us. And as a result of that, we think the pressure will remain on governments to consolidate fiscal policy. If they don't do that, there is this fear that financial markets could turn against them in a way that would make the situation much, much worse.

I mean that's certainly one of the things that's keeping the UK government very closely following this track of consolidation, is this fear that if we didn't do that, that you could see the UK being hit in financial markets in the way that Greece was.

So I think left to their own devices, politicians perhaps would like to backpedal. We've certainly seen Obama manage to do that in the US. But in Europe, you're not left to your own devices.

McMahon: You're still highlighting inflation threats in emerging markets. Is this just all down to food costing more?

Bew: Food is the biggest single driver by quite a long way. In the emerging markets, because incomes are low, food forms a much bigger share of the consumer basket then it does in the developed markets and food prices have gone through the roof. And of course now we see energy prices rising very sharply too, so that is important.

But of course, the issue then is how does that knock through more broadly into the economy? Does it start to feed through into wage demands? Does it start to feed through into the prices that they're able to charge for their exports? Would then knock into what's going on in prices around the rest of the world, so that's a big worry.

The other worry, of course, is that inflation, to some extent, is being fuelled by big capital inflows as money is flowing out of the West where interest rates are low and into developing economies where people think economic prospects are much brighter.

Those capital flows of themselves are driving up prices, not just of consumer goods or investment goods, but also of assets. So we see property prices rising very sharply in a lot of emerging markets because they can't control this capital coming into the country.

And so there, I think, there is the possibility of perhaps a sharper slowdown in the next couple of years or so as governments realise that they're going to have take more aggressive policy measures if they're going to try and get prices under control in an environment where so much money is flooding out of the West and into their economies.

So food is the main driver at the moment, but there is other stuff going on and I think in most countries you're going to have to see some sort of policy tightening as a result.

McMahon: Thank you Robin. Well, world events seem to be moving at an ever-quicker pace, so make sure you tune in next month to the Global Forecast. In the meantime, you can of course Tweet with Robin Bew. His address is appearing on screen now and until we meet again, thank you and goodbye.

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