 Economic output exceeded pre-pandemic levels for the first time in November. GDP increased by 0.9% compared to prior month. Compared to prior year output increased by 8.1%. Despite an assumed setback in December, we now think the economy will have grown by 8% for the year as a whole.
In our forecasts for 2021 we model growth at 7.5% with an upside of 8%. We attached greater uncertainty at that time to the outlook for manufacturing and construction. Construction output was up by almost 7% in the month. Manufacturing growth slowed to just 0.4% year on year. Service sector growth was up by 9.5% in November. We expect growth of 8% in the final quarter and 8.3% for the year. To some extent more clarity is provided on the direction of travel. Our low growth scenario for construction and our high growth scenario for manufacturing, have been eliminated. We expect growth of around 5.5% in 2022, slowing to the trend rate of growth of 2.1% thereafter. This means the economy will enjoy a period of nominal growth of the three year period of almost 25%. A great opportunity for debt absorption in relation to GDP or revenues on a national or corporate level. You can access our updated 30 page chart book on our Flipsnack Channel The Saturday Economist Forecasts for 2022 by clicking on the link. We model GDP(O) output as we would with our conventional business models. No theory, just pragmatic, empirical analysis. Rates Set To Rise ... Markets are bracing for the escape from Planet ZIRP. Our Friday Forward Guidance outlines the pattern of rate hikes. Base rates in the U.S. and the U.K. will end the year around 1%. Bond yields are set to rise to 2.5% in the U.S. and 1.5% plus in the U.K. The outlook for pension fund deficits will look much better this time next year. Market volatility is expected in the current year. Equity markets took a hit last week. Our Monday Morning Markets update will assess the damage and try to explain the Sterling rally! Our Labor Market and Inflation outlook will be updated next week. The Fed is reacting to the 7% rise in December's headline rate in the U.S.. The Bank of England may not have to wait until April for the 6% CPI spike in the U.K. Trade Deficit Set To Increase ... The latest data suggests the deficit trade in goods will increase to £155 billion this year from £129 billion last year. Exports increased by 4.6%. Imports increased by just over 9%. The pattern of trade is moving away from the EU, more in terms of imports rather than exports. The EU share of imports fell to 47% in 2021 compared to 53% in 2020. Truly global Britain is becoming an open market to container shipments from around the globel as the workshop of the world continues to lose share of trade, The trade deficit in goods was offset by the service sector surplus of some £135 billion last year. Combined exports (goods and services) of just over £600 billion, still leave us some way short of that £1 trillion Pound export target. Forecasts for 2022 ... That's all for this week. Have a great weekend and a great week ahead. You can access the chart book The Saturday Economist Forecasts for 2022 by clicking on the link. Forward to a friend or colleague, encourage them to sign up for our FREE updates. My thanks to every one for their support during the past year. We continue to work with a number of private clients including Protiviti and Robert Half this year. If you would like to join our Private Client Group just drop me a line. "Great Research dies in darkness." The reaction to our Monday Morning Markets and Friday Forward Guidance has been great. We look forward to a great year ahead as we extend the coverage of economics, strategy and financial markets. The Saturday Economist, we always keep you in the picture ... John John Ashcroft : Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...
0 Comments
 Forecasts for 2022 ...
This is our first Saturday Economist publication for 2022. Yesterday we released our Friday Forward Guidance. On Monday we published our Monday Morning Markets Review of past year. Today we update our forecasts for the UK economy for the year ahead. You can access the full chart set on our Flipsnack channel using the link or clicking on the photo. We use the word "forecast" cautiously. It is a best guess scenario. A benchmark at best. Lot of caution and uncertainty surround the outlook for growth, inflation and monetary policy. So what's new about that. World Growth ... In October, the IMF released their forecasts for the world economy. Growth of 4.5% was then expected for the year ahead. Our good friends at CEBR have adjusted their outlook for the year down to 4.0%. Economies are currently hampered by supply side shortages and the impact of the omicron variant. Growth of 4% - 4.5% would remain a fair call for the twelve months ahead. We outline in detail our expectations for major markets in our Saturday Economist Live updates. World trade expanded by around 12% last year, leading to supply side shortages and delivery issues especially in container freight. Growth in the second quarter was up by 22% slowing to 8% in the third quarter. We expect growth to slow to around 4.5% this year. It may take some time for container congestion to unwind. UK Growth ... Economists have penciled in growth of 7% in 2021, slowing to 4.7% in 2022 according to HMT Forecasts for the UK Economy published in December. Our outlook is a slightly more optimistic scenario. We expect growth of 7.5% in 2021, slowing to just over 5% in 2022. We attach greater uncertainty to the outlook for manufacturing and construction. We assume a short term setback in the first quarter for leisure, hospitality and travel. Inflation ... CPI inflation is expected to average 5% in the final quarter for 2021. The Bank of England expects the level to peak at around 6% in April. 7% could be the level attained, without some intervention to moderate the energy price cap. Thereafter inflation is expected to slow towards 3.5% by the end of the year. The inflationary impact of the rise in oil prices last year fades into the second quarter of the year and is eliminated into the second half. Greggs are warning of price increases to come in the year ahead. Sainsburys have announced an increase in minimum wage. The big fear is price transmission into earnings as domestic household costs rise. We expect earnings to slow to a trend rate 3.5% by the end of the year. The cost of living squeeze, acute at the start of year, eases by close. Labour Market ... In October, the unemployment rate fell to 4.2%. There were 1.4 million unemployed. The number of vacancies in the economy was 1.2 million. Earnings growth had slowed to 4.9%. There were 32.5 million in work. The numbers on furlough had been largely absorbed into work or so it would appear. In the US, the unemployment rate fell to 3.9%. So what to make of our projections into 2022? We model out with an unemployment rate of 4.5% through 2022. The number of vacancies expected to fall to 750,000 by the end of the year but then again? Twin Deficits Borrowing and Trade ... In the chart set we forecast the outlook for the twin deficits of Public Sector Borrowing and Trade. We also provide a first look at the impact of Brexit on trade. No discernible impact on the volume and pattern of exports, share of imports increasing from the rest of the world. Markets and Interest Rates ... Our Monday Morning Markets and Friday Forward Guidance provide weeky updates on trends in financial markets. Last week, bond yields moved higher, the Nasdaq slipped 4%. The S&P closed down in the first week of trading. This is a bad omen for performance in the year ahead as we will explain on Monday. That's all for this week. Have a great weekend and a great week and year ahead. This is the first in our series for 2022. The Forecasts will provide a benchmark during the year. My thanks to every one for their support during the past year. My special thanks to everyone with whom we have been able to work this year. Thanks also to our Premium Subscribers. Your support is invaluable to be able to develop the product offer. The reaction to our Monday Morning Markets and Friday Forward Guidance has been great. We look forward to a great year ahead as we extend the coverage of economics, strategy and financial markets. The Saturday Economist, we always keep you in the picture ... John John Ashcroft : Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...  It was a week which started off pretty well. The PMI Markit Flash Forecast for December, suggested the rate of growth was slowing towards the end of the year. The headline index closed at 53.2 from 57.6 prior month.
A slowdown, yes but still well into positive territory. Concerns were rising about tighter pandemic restrictions and greater business uncertainty. Manufacturing activity appeared to be the better performer, compared to the challenges in the service sector. On Tuesday, the Labour Market Statistics were released. Concerns had been expressed about the shock to the jobs market once the furlough scheme came to an end. Fears were, of an increase in redundancies and job losses, with an escalation in the unemployment rate towards 5%. The Chancellor planned a trip to California, just in case the headlines were too intense. The reality was quite different, Vacancies in the economy increased.. The unemployment rate fell. The number of people unemployed fell to 1.4 million. There were 1.2 million vacancies in the economy. In the Goldilocks scenario, average earnings, excluding bonus pay, slowed to 4.3%. Goldilocks' three bears might suggest the economy is in danger of over heating. It was a message the Bank of England could not ignore. On Wednesday, the inflation data for November was released. Producer output prices increased to 9.1%. Manufacturing input costs increased to 14.3%. The largest contributor to the price hikes was petroleum costs. Chemicals, metals and machinery also featured. Oil prices Brent Crude basis averaged $81 dollars in the month, compared to $43 dollars last year. Petroleum products (excluding duty) were up 86% in November. No real surprise there. CPI inflation jumped to 5.1%. Consumer goods inflation increased to 6.5%. Electricity, gas and other fuels increased by over 23%. Second hand car prices leapt by 27%. Furniture prices were up by 11%. Household appliances were up by 6%. Central bankers became less convinced that inflation is always and everywhere a transitory phenomenon. In the U.S., the Fed determined to stop buying bonds and mortgage backed securities in March next year. In the U.K., the MPC voted to increase base rates by 15 basis points. The rate hike in December was a surprise. The first increase pre Christmas for over fifty years at least. So what happens next? In our Friday Forward Guidance we outline the possibility of two or three rate hikes next year in the U.S. and the U.K. Inflation pressures will ease into the second half of the year as oil price comparisons dissipate. Concerns will rise about the ability to develop monetary policy to curb inflation without creating a recession. Larry Summers writing in the Washington Post has already begun the process. "There have been few, if any, instances, in which inflation has been successfully stabilized without recession" he warns. Concerns are rising about the impact of the Omicron variant. Despite assurances from the Prime Minister, the possibility of a lock down may gather momentum into the New Year. The hospitality sector is already feeling the impact of Chris Whitty's warnings to cut back on social events and think about with whom they would like to spend the time. So a week of surprises to end the year. Tories lost the North Shropshire by-election. Boris Johnson is drinking in the last chance saloon, according to Sir Roger Gale, the MP for North Thanet. Perhaps the Prime Minister will get more time to spend in Peppa Pig World next year. Senior backbenchers believe he has a year to sort himself out ... or dig deeper ...  The latest ONS estimate for GDP growth was released this week. Data for October suggested the economy was slowing down. "Construction slowdown holds back recovery" the headline in the Times. It was a similar story in manufacturing.
The data revealed, the economy grew by just 0.1% in October compared to 0.5% prior month. Construction and manufacturing sectors were hit by supply chain problems and rising material prices. Should we be concerned? Earlier in the week, PMI Markit data for the construction sector reported the fastest rise in construction output for four months in November. The headline index increased to 55.5 in the month up from 54.6 in October. The index has been in positive territory for ten consecutive months. The bounce back was led by robust rise in commercial work. Supply delays continued to increase but cost inflation dipped to a seven month low. Looking at the ONS data more closely, we prefer to analyze the year on year rate of growth. It's a house style. We also model GDP(O) primarily. It's more akin to business modelling as opposed to theoretical expenditure and income models. Compared to prior year, year on year growth in October was up by 4.6%. Service sector growth was up by 5.4%. The transport sector was up by 9.5%. Construction was up by over 3%. Manufacturing growth was up by just 1.3%. For the year as whole, we still expect growth of over 7.5% this year and around 5.5% next year, assuming no widespread shock from additional anti omicron measures. The service sector will increase by 5.9% this year. Manufacturing will be up by 4.3% and construction output will be up by almost 20%. You can download the TSE UK Forecast December Slide Deck using the link. It's a sort of Christmas treat! Businesses, especially in hospitality, travel and leisure are concerned about the impact of Plan B on activity into the New Year. Markets are convinced the December rate rise that never was, will now never take place. Sterling closed up. U.K. bond yields closed down. Why? Don't miss our Monday Morning Markets update. "Any explanation is better than none" Nietzsche.  Markets were braced for a rise in U.S. inflation. November data revealed a near forty year high. The headline CPI rate increased to 6.8%.
New car prices increased by 11%. There were significant hikes in energy and gas costs. Prices were rising in household furniture and appliances. Fast food prices were up by 8%. The core measure of inflation and food was up by 4.9%. Inflation is widespread in many sectors. In our work, we make much of the seismic shock to the economy. The tectonic plates of demand and supply shifted out of balance, causing supply shortages and escalating material costs. In the US, the economy has also been subject to a Tsunami of dollar waves from cash injections into US households. The boost to domestic incomes has boosted the demand for goods. This "helicopter money" has created the Tsunami of dollar waves following the tectonic shift in supply and demand. Inflation is rising higher than we expect to be the case in the UK. We will find out more on this next week! The Fed has retired the word "transitory" from the central bank vocabulary. Powell is under pressure to get the policy and messaging right. Officials have had to accept their expectations for inflation have missed the mark. As we explained in this week's Friday Forward Guidance, the Fed is expected to accelerate "tapering". We now expect the process to be completed by the end of the second quarter. This would leave the way open for two rate rises at least, before the end of 2022. Markets are accepting the process of monetary tightening is underway. For the moment, there appears to be no prospect of a "taper tantrum". G-7 finance leaders will meet on Monday to discuss rising inflation and the appropriate central bank reaction function. The focus of policy is moving away from protecting jobs, to protecting standards of living and curbing the rise in prices. It may well be a coordinated move to push rates higher. Travel plans for 2022 may include the escape from Planet ZIRP. Cancellation insurance always advisable ...  Service sector growth hit a five year high in November, according to the latest data from IHS Markit /CIPS. The survey highlighted another round of rapid cost inflation, driven by higher fuel prices, wages and utility bills. Prices charged by service providers, also increased at the fastest rate since the survey began in 1985.
It was a similar story in the manufacturing sector. Output increased to a three month high. Production, new orders, employment, stock purchases, all had a positive influence. Output increased for the eighteenth month running. Domestic order flows and stock building boosted output. Manufacturers faced a "challenging environment" it was said. Stretched supply chains disrupted production schedules. Lead times increased. Cost prices increased to the "greatest extent in the 30 year history" of data collection. Order flows were up, determined by strong domestic market conditions. Export orders books were lower. Weaker demand from China impacted. Disruption to trade with the EU resulted in some cancellation of orders. Despite fears of a slow down in the economy, we still expect growth of 7.5% this year and around 5.5% growth in 2022. Inflation CPI basis is expected to rise to 5% by the end of the year. CPI goods inflation is already at 4.9%. Manufacturing input costs increased by 13% in November. Output costs were up by 8%. It may get a bit worse before it gets better. The good news, oil prices have fallen back significantly. Oil closed at $70.39 this week. The inflationary impact of higher prices will ease into the second quarter next year. Gas prices are down by 40% from peak. Iron ore and lumber prices are down 50%. Aluminum prices down 20%. Copper prices down 10%. Shipping rates to the U..S. West coast from China have fallen back by almost 30% in September, to around $14,500 dollars. Inflation is always and everywhere a transitory phenomenon. Sometimes it takes a little bit longer to pass through. Inflation levels will ease into 2022 but we expect levels to remain above target, even by the end of next year. Sterling closed lower against the dollar at $1.3236. This will only increase the short term cost pressure for manufacturing. Our forecasts for domestic demand and growth remain resilient. The prospects for truly global Britain not quite so good. Free trade deals with the rest of the world will open up the domestic market to increased competition. The latest data suggests no significant shift in the pattern of export trade. UK export performance has been disappointing, despite the rapid recovery in world trade. Imports have increased with a great share now apportioned to non EU participants. On Friday we released our new "Friday Forward Guidance". This delivers our trilogy of "Friday Forward Guidance", "The Saturday Economist" and "Monday Morning Markets". Club members and Premium subscribers can access the working data sets, including our UK Forecast Pack, on our Flipsnack channel. Since we pressed send on our Friday missive, Michael Saunders of the MPC has suggested there will be no rate rise in December. No surprise there. When we pressed send on Monday, we warned of Bitcoin vulnerability. Prices hit $44,000 dollars yesterday from the $67,000 dollar peak in November. Don't miss our Monday Morning Markets update next week. "Markets are madder than ever", warns Charlie Munger, the 97 year old vice chairman of Berkshire Hathaway. "It's now even crazier than the dotcom boom." As for Cryptocurrencies "I wish they had never been invented". "I just can't stand participating in these insane booms." Don''t even ask Charlie about NFTs ... Data Sources: IHS Markit/CIPS UK Services PMI® Business Activity Index IHS Markit/CIPS UK Manufacturing PMI® Business Activity Index  Andrew Bailey, Governor of the Bank of England explained this week "Forward Guidance is a Murky Job". Obscure or dark and gloomy, we cannot he absolutely sure about the Governor's meaning or intent.
"The boundary between commentary on the state of the economy and what the central bank is likely to do with interest rates is hard to define." he said, especially when you consider "the words we use" he added. The system put in place by my predecessor, Mark Carney, is pretty hazardous and "more hazardous in an uncertain world". Gosh who knew it was a system. Carney announced in 2013, the Bank would consider raising rates when unemployment fell to 7%. Unemployment hit 4.3% in the latest data, inflation RPI surged to 6%. Former Governor Mervyn King berated the current crop of central bankers. Central banks have been caught unawares by rising prices. This has exposed the "King Canute" theory of inflation. In a lecture to the Institute of International Monetary Research, he explained, "A thousand years ago, King Canute (of England) set his throne by the seashore and commanded the incoming tide to halt. The tide continued to rise and dashed over his feet and legs." [But at least the number of illegal immigrants hitting the beach that day fell.] "Canute was defied by the laws of nature" and the lack of an adequate flood defense system. The moral of the story, central bankers cannot expect inflation to fall, just because the models say it will. A satisfactory theory of inflation cannot take the form of "inflation will return to target because they say it will", [just because it always worked for me.] "A central bank should not be ashamed to acknowledge that it does not know where interest rates will be in the future, because it cannot know where the economy will go in the months and years ahead." Many may prefer the murky obscurity of the current regime to the Mervyn King reality check. No such problem for Huw Pill, Chief Economist at the Bank ..."Given where we are in terms of data and analysis, I view the likely direction of travel for monetary policy from here as pretty clear". He signaled he was ready to press ahead with the first rate rise, now "the ground has been prepared for policy action". It was the clearest hint, it was said, that borrowing costs will rise, as early as next month. Students of history will recall there has been no increase in base rates in December for the last fifty years. The Chief Economist sweetened the pill with a note of caution. The economic outlook remained uncertain and there was no guarantee that rates would rise. Excellent ... The Chief Economist was speaking at the CBI conference this week, so too was the Prime Minister ... Have You Been To Peppa Pig World ...? "Hands up, if you have been to Peppa Pig World", the Prime Minister asked a startled group of business leaders on a visit to the CBI conference in the North East of England this week. Boris Johnson had been forced to beg forgiveness, as he lost his place in a rambling speech. Words passed over the head of the audience, as the pages slipped out of sequence in his hands. The Prime Minister liked Peppa Pig World. "It was my kind of place". There was order in the classrooms, no violence on the streets and an integrated transport system, with gated entry to keep out illegals. The business was now worth £6 billion, with theme parks in China, America and the New Forest. It was a tribute to the power of UK creativity. It was a pig that looked like a hairdryer. It has been rejected by the BBC. No government in the world, no Whitehall civil servant could conceivably come up with Peppa. "It was" he said "pure genius". Civil servants were shocked to realize, creating children's characters was part of the Whitehall remit. Mr Blobby was upset by Number Ten acclaim for a surreal Pig. "Have you been to Peppa Pig World" asked the Prime Minister "Not enough" the retort. It is a long way from Tyneside to the New Forest. HS2 and an integrated rail plan for the North East would help to improve traffic to the resort ... delegates were surely mumbling under their breath ... That's all for this week. Have a great weekend and a great week ahead, Don't miss our Monday Morning Markets update this week ... it was an interesting week as markets reacted to news of the Omicron variant ... John  Is it time to talk about overheating ... ?.
UK inflation CPI basis hit 4.2% in October. That's a big rise from the September level of 3.1%. Goods inflation increased to 4.9%. Service sector inflation jumped to 3.2%. Energy and fuel dominate the cost curve. Electricity, gas and other fuels were up by 28%. Fuel costs were up by 20%. Transport costs were up by 10%. Second hand car prices were up by 23%. Durable goods, including furniture and household appliances, were up by 10% and 7% respectively. For the moment, food prices remain below the 2% inflation target threshold. The Bank is forecasting inflation to rise to 4.5% in the final quarter, peaking at around 5% in April 2022, then averaging just over 3% for the year as a whole. This remains a fair call assuming energy costs and shipping costs ease back. Brent Crude closed below the $80 dollar level this week at $78.35. The cost of shipping a container from China to the U.S. West Coast dropped to $14,000 dollars from a peak of $21,000 in September. Producer Prices ... UK producer prices increased in October. Input costs were up by 13%. Oil prices were up by almost 90%. Metal prices were up by 20%. Chemical prices were up by over 12%. Output prices increased by 8%. The pass through rate, from input to output cost, was 61%. We model the pass through rate at 50% using long run data. The impact on goods inflation would be a rise to over 5% in the short term. Assuming service sector inflation averages 3.5% over the period. CPI inflation would peak at between 4.5% and 5%. The good news, oil prices are easing back below $80. In any case, the inflation impact wanes into the second quarter next year, as the year on year comparisons fade. Labour Market ... The latest jobs data confirms the strength of the recovery. The unemployment rate fell to 4.3%. Vacancies increased to 1.2 million. There were 32.5 million in work. Earnings increased by 5.8%. There were 1.1 million on furlough at the end of September. The expectation rises, there will be no significant increase in unemployment before the end of the year. So is it time to talk about overheating? Not yet. Retail sales were up by 5% compared to October 2019. In value terms sales were up by 10% compared to pre lock-down levels. Vibrant but not vibrating. No real need to tighten rates just yet ... Interest Rate Rises May Be Steeper ... This week, Christine Lagarde President of the EU Central Bank, suggested there would be no increase in Euro base rates in 2022. In the U.S., Fed Governor Christopher Waller argued the Fed should accelerate the tempo of tapering, with an end to further asset purchases by April. Huw Pill, the Chief Economist at the Bank of England raised the prospect the first UK rate rise could be steeper than the 15 basis point rise currently priced into markets. Governor Andrew Bailey admitted he remains "concerned about inflation". Markets begin to think a rate rise before Christmas could be a possibility. We have argued inflation, driven by energy costs, will be a transitional phenomenon. Wage costs will level out. The disruption of lock down created a "Seismic Event" . One in which the tectonic plates of demand and supply were pushed out of balance, as demand recovery surged ahead of supply impeded. The US economy faces the problem of the same "seismic event" compounded by the trillions of dollars spent by government to support the US economy. The largesse including "Helicopter Money" has augmented the demand shock. Our chart of the week is courtesy of Bridgewater. Growth in US nominal demand is way ahead of the global production of goods for U.S. consumers, increasing price pressures. Fed spending was $2.8 trillion dollars in the financial year ending September. US CPI inflation hit 6.2% in October. In the US, the seismic event was followed by the Tsunami of easy money. The Fed may have to taper faster and raise rates sooner, than markets expect. Despite the comments from Huw Pill this week, markets are now plotting an increase in rates to 0.25 early next year, rising to perhaps 1% by the end of the year. Our modified Taylor rule suggests rates could rise to 1.5% by the end of the year. Too soon to worry about overheating. Not too soon to outline the rate rise options. The synchronized swim with Europe would suggest no rate rise at all in 2022. Our modified Taylor rule suggest are rise to 1.5% by the end of the year. Our escape from Planet ZIRP would suggest a return to pre 2008 rules. Inflation at 2%. Base rates at over 4% and ten year gilts at 4.5% over the medium term. That's a risk based scenario option, not our central planning forecast ... That's all for this week. Have a great weekend and a great week ahead, Don't miss our Monday Morning Markets. The open rates are now as high as The Saturday Economist. Also coming soon our "OK Boomer" series, a purchase guide to NFTs, retail Investor Apes, and the street lingo of the new traders ... Will Bitcoin hit $500,000 dollars as some fans expect ...  This week, the ONS released the latest overview of the UK economy. The "first quarterly estimate of GDP" up to and including the third quarter of the year was revealed on Thursday.
As always it made for interesting reading. It's a good opportunity to update our forecasts for the UK economy for this year and next. Growth ... Output growth in the third quarter of the year was up by 6.5% year on year. This followed growth of 24% in the second quarter and a negative downturn of almost 6% in the first quarter. Much has been made of the slow down in the economy. Nevertheless, manufacturing output was up by 4.4% in Q3, construction output was up by almost 10% and service sector growth was up by over 7%, bolstered by a near 14% growth in government output. There is evidence of a slow down in manufacturing and construction as a result of labour and supply shortages. No such evidence exists in the service sector as a whole. Assuming growth slows to around 5% year on year in the final quarter of the year, our forecast for output this year would remain unchanged at around 7.25%. The latest Bank of England assumption is for growth this year of 7% and 5% next. Our models suggest growth could be 5.5% next year slowing to a trend rate of growth at 2% by 2024. Assuming no more black swans, the economy is set to expand by over 15% over the next three years. Add in a modicum of inflation and nominal growth would be 25% over the next four years. A great backdrop to support jobs, investment and debt deflation in the years ahead. Jobs and Unemployment ... The Labour Market Update will be released on Tuesday next week. Latest data suggests the unemployment level will be around 1.5 million at the end of September. The u rate will be around 4.5%. Vacancies hit 1.1 million in the month. The numbers on furlough are estimated at 1.0 million. Latest evidence on growth, vacancies and recruitment suggests there will be no significant rise in unemployment by the end of the year as the furlough scheme comes to an end. The Bank assumes unemployment will average 4.5% though the final quarter falling to 4% by the end of next year. Our worst case scenario would suggest a rise in unemployment to 5% as we move into the New Year. A cyclical rise of almost 200,000 job losses would be absorbed through 2022. The U rate is expected to be around 4.5% by the end of next year. Trade and The Balance of Payments ... The trade data has been revised significantly in the latest data. We now expect the trade deficit in goods to rise to £156 billion this year from £130 billion last year. At 7% of GDP this would be considered a threat to stability in the not too recent past. The trade surplus in services is expected to be £140 billion. The residual £16 billion deficit in goods and services, is of itself, unlikely to undermine the strength of Sterling or threaten stability. Analysis of EU trade suggests little change in the destination of exports from the UK away from the trade group. Exports to the EU are down by 12.5% from the end of 2018. They are down by a more modest 10% to the rest of the world (rolling four quarter basis). This reveals little change in the share of export trade. Analysis of EU trade suggests imports from the rest of the world have increased share of imports to 49% by the end of Q3 from 45% at the of 2018. Imports from the EU were down by 15%. Imports from the rest of the world were down by 7%. Inflation and Interest Rates ... In the U.S. inflation CPI basis hit 6.2% in October. In the EU inflation is expected to rise to 4.1% in October. In the U.K. Inflation CPI basis is expected to rise to 3.8% in the month. The latest ONS data will be released on Wednesday. Something to look forward to! The MPC expect inflation to average 4.25% in the final quarter. It is expected to peak at around 5% in April before slowing to around 3.5% in the final quarter of the year. It will be an interesting couple of months. Energy costs are significant. The oil price is key. Brent crude closed at $82.21 this week. Gas prices await the implications of any Russian invasion of the Ukraine. Forecasting the future path of inflation is becoming really problematic. Forecasting the future path of interest rates is even more problematic. Markets are pricing in a rise in UK base rates to 1% by the end of 2022 with a 15 basis point rise by the end of the first quarter next year. Our modified Taylor rule suggests rates should rise to 1.25% by end of 2022 rising to 1.75% in the first half of 2023. This should be accepted as a "central scenario" subject to revision at any stage. The Bank forecasts for inflation form the basis of our "central scenario". We expect the peak in inflation to be sooner and slightly lower but not by much. So what will that mean for bond yields and equities? Don't miss our Monday Morning Markets Update next week ...  The Vote is Seven to Two ...
The MPC voted to keep rates on hold this month. Markets misread the signals from the Bank. In the November meeting, just two members voted for a fifteen basis points rise in rates. It wasn't even a close call. Sterling fell, closing at $1.3489 against the dollar and down against the Euro at €1.1669. Ten year bond yields slumped to close at 0.85 down 18 points in the week. Volatility is returning to Forex, it has become a constant in the bond markets. The Governor took some flack, Andrew "Bailout" the call. As the successor to "Mark Carnage", he has yet some way to go before becoming the totally "unreliable boyfriend". Dave Ramsden and Michael Saunders were the hawks on the panel, the Governor and Silvana Tenreyro the notable doves. All members were convinced of the need to maintain the stock of corporate bonds at £20 billion. Probably because it was "chump change", in the grand scheme of things. Most had forgotten why they had bought them in the first place. Three members voted to reduce the target stock of UK government bond purchases from £875 billion to £855 billion. Catherine Mann, jumped onto the hawks perch, clearly forgetting the Treasury will have to issue over £180 billion bonds this year. The DMO will need more help from the buyer of last resort. No time to cut the cord just yet. The Governor may have said "The Bank will have to act" but gave no indication of the timeline. "It was a conditional statement" he explained "We make a lot of conditional statements." A move before the end of the year was always a long shot. Supply side bottlenecks do not form part of a monetary policy reaction function. "Raising rates will not cut gas prices, nor will it increase deliveries of semi conductor chips". The MPC will need time to assess the movements in the labour market as the furlough effect unwinds. "The labour market does look tight" the Governor said. If evidence develops of "inflationary expectations" becoming anchored, then rates are likely to rise. But when? The Bank has lowered the forecast for growth to 7% this year and 6% next. It has raised the forecast for inflation to 4.5% in the final quarter peaking at around 5% in April 2022, averaging over 3% over the year. Markets are now plotting an increase in rates to 0.25 early next year, rising to perhaps 1% by the end of the year. Will this be enough to return inflation to target? Will the Bank move ahead of the Fed and risk damaging the recovery in the year ahead? Our modified Taylor rule suggests rates could rise to 1.5% by the end of the year. 1% by year end now becomes our central scenario. The first hike may be just in time for Easter, that's on the 17th April next year. Chocks away, foreign travel is increasing. Catch 2022, may be the year we leave Planet ZIRP! Tickets refundable of course ... Fed Begins To Taper ... The Fed voted to maintain the target range for the federal funds rate at 0.00% to 0.25% this month. No surprise for markets over in the U.S. "Jerome the Powerful" holds court. As indicated, the committee decided to reduce the monthly pace of net asset purchases by $10 billion for Treasury securities and $5 billion for mortgage backed securities. The first cuts would take place in November and December. By the end of the year, the December spend would be $60 billion and $30 billion per month. The Committee judges that similar reductions in the pace of purchases will likely be appropriate each month. The distended Fed balance sheet would be on a firm diet by the end of June. US yields fell by thirteen basis points in the week. The Dollar rallied. The move had been well flagged and well received. A lesson in central bank communication perhaps. In the UK it is not clear why MPC members make so many market sensitive speeches, often with conflicting messages about policy direction. By the end of the week, news of over 500,000 new jobs added to Uncle Sam's workforce in October. Inflation CPI hit 5.4% in September. Congress approved A $1.2 trillion deal for infrastructure spending. The Fed is unlikely to move on rates despite the fall in the unemployment rate to 4.6%. Markets reacted with a bounce. The Dow, S&P and Nasdaq moved to record highs. The Dow closed above 36,000. *The prophetic writings of columnist James K. Glassman and economist Kevin A. Hassett were finally proved correct, just twenty years later. *Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market is a 1999 book by syndicated columnist James K. Glassman and economist Kevin A. Hassett. they argued that stocks in 1999 were significantly undervalued and concluded that there would be a fourfold market increase with the Dow Jones Industrial Average rising to 36,000 by 2002 or 2004. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy. Archives
March 2022
Categories
All
|
| The Saturday Economist |
RSS Feed
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
|
The Saturday Economist, weekly updates on the UK economy.
Sign Up Now! Stay Up To Date! | Privacy Policy | Terms and Conditions | |