1 Sep 2011 ... therefore unsurprising that the level of the Misery Index is often viewed as an ... 6.
8. 10. 12. 14. 16. 18. 20. 1989. 1991. 1993. 1995. 1997. 1999.
September 2011
For professional investors and advisers only
The Misery Index A snapshot
Azad Zangana, European Economist, Schroders Anja May, Strategic Solutions Analyst, Schroders Unemployment is high. Inflation is rising. And at 12.5, the UK Misery Index has reached its highest level since February 1994. “More Misery”1 cannot be good, but what does it actually mean? While the somewhat dramatically named Misery Index has long been favoured by both the media and political campaigners, its value as a measure of economic reality remains to be questioned. This note aims to delve beneath the sensational exterior of the Misery Index with an overview of the index, an exploration of what it actually tells us about the state of the economy and a discussion of where we may see it move in the future. What is the Misery Index? In its simplest form, the Misery Index is the sum of inflation and unemployment rates. When the score on the index is high it means that the economy is experiencing both high inflation and high unemployment at the same time. Prices are rising, causing the real value of income and savings to be eroded, while at the same time people are jobless (and those with jobs possibly fearful that they may become jobless in the future) and are suffering from downward pressure on their wages. It is therefore unsurprising that the level of the Misery Index is often viewed as an expression of the financial well-being of a population. Chart 1: UK Misery Index 20 18 16 14 12 10 8 6 4 2 0 1989
1991
1993 Inflation
1995
1997
1999
Unemployment
Source: Datastream/Schroders, September 2011 1
City A.M. 18 August 2011
2001
2003
2005
2007
2009
2011
For professional investors and advisers only
The Misery Index
As chart 1 shows, a level of 12.5 is by no means the highest the Misery Index has been in the last 20 years. In the early 1990s, the index exceeded 17 with inflation far higher than it is today. However, the continuing rise in unemployment, combined with fiscal tightening and the failure of the Bank of England to bring inflation back to its 2% target, has caused the Misery Index to reach a level not seen in over 15 years, sparking concerns that this could be the beginning of an upward trend.
How useful is the Misery Index? The Misery Index is primarily used to quantify the financial well-being of a population. One would therefore expect movements in the Misery Index to be closely correlated with measures of consumer sentiment – after all, who better to judge how ‘miserable’ they are than the consumers themselves? To a certain extent, this does seem to be the case – for example, there has been a moderate inverse relationship between the UK Misery Index and the UK Consumer Confidence Indicator over the last 20 years (see chart 2 below). Chart 2: UK Misery Index versus Inverse UK Consumer Confidence 20
35
18
30
16
25
14
20
12 15
10 10
8 5
6 0
4
-5
2
-10
0 1989
1991
1993
1995
Misery Index
1997
1999
2001
2003
2005
2007
2009
2011
Inverse Consumer Confidence
Source: Datastream/Schroders, September 2011
In turn, changes in consumer confidence can be predictive of changes in economic variables such as the savings rates and household consumption, both of which are useful in predicting the performance of different asset classes. This is where the value of the Misery Index could lie from an investor’s perspective
2
For professional investors and advisers only
The Misery Index
Chart 3 shows how changes in the UK household savings ratio have been related to changes in UK consumer confidence over the last 20 years. Chart 3: Change in UK consumer confidence versus change in UK household savings rate 500%
250%
400%
200%
300%
150%
200% 100% 100% 50%
0%
0%
-100% -200%
-50% 1991
1993
1995
1997
1999
2001
% Change in Consumer Confidence
2003
2005
2007
2009
% Change in Household Savings Ratio
Source: Datastream/Schroders, September 2011
While newspaper headlines may claim that the “Misery index explains why we’re so glum”2, the relationship between the level of the Misery Index and consumer sentiment is not perfect. This was particularly noticeable in the recent credit crunch. While consumer confidence was extremely low, the Misery Index was tempered by the effects of falling inflation, and remained at levels usually associated with a more clement economic environment. As such, the Misery Index may better serve journalists and politicians, rather than investment professionals.
Where will the Misery Index move in the future?
Any projections of the future level of the Misery Index are obviously dependent on the inflation and unemployment outlook. With the impact of January’s VAT increase soon to be removed from the calculation of year-on-year price level increases, we expect inflation, and therefore the inflation component of the Misery Index to fall at the start of 2012. However, we expect inflation to remain slightly above the Bank of England’s 2% target, rising closer to 3% by the end of 2012 and into 2013 due to higher imported goods and energy inflation. There are considerable risks to this outlook. For example, if there were to be a double-dip recession (which is a possibility, given the current state of affairs in the eurozone and the US, and the severe impact the precipitation of a crisis in either region would have on the UK) we could see falls in inflation, and possibly even deflation. In this case we would expect to see the inflation component of the Misery Index to fall and possibly decouple from consumer confidence once again. However, our central view is that the global macro environment improves and a double-dip is avoided.
2
Sunday Times, 21 August 2011
3
The Misery Index
For professional investors and advisers only
With regards to unemployment, we believe the outlook to be fairly positive. While the UK has yet to experience the full effect of public sector job cuts – which will continue into 2012 and beyond– we expect the private sector to easily offset the public sector job losses. We therefore expect the unemployment component of the Misery Index to remain fairly stable in the short term, but to fall over the medium term.
Conclusion
With unemployment looking likely to remain where it is for the time being and with our inflation forecast showing falls on the horizon, the level of the Misery Index could well peak in coming months. In this case, given its limited usefulness to investment professionals, and the loss of its power to support sensational headlines, the Misery Index could once more disappear from the spotlight. On the other hand, if our outlook proves wrong for any reason, the Misery Index could continue to climb, garnering more media attention the higher it goes.
Important Information The views and opinions contained herein are those of Azad Zangana, Economist at Schroders and Anja May, Strategic Solutions Analyst at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.
4
