In the service sector, manufacturing , construction and housing, the news is good news...
The August Inflation Report was presented this month by Mark Carney, the new Governor of the Bank of England. The Bank is forecasting growth of almost 1.5% this year and 2.5% next. Inflation will remain above target but base rates may be kept on hold for a further three years. So much for forward guidance. The time may come when the central banker "will take away the punchbowl" but for the moment Carney is "putting his credit card behind the bar". Enjoy.
Business activity in the service sector increased in July at fastest rate since late 2006 according to the latest survey data*. The headline Business Activity Index climbed to its highest reading since December 2006, posting 60.2 up from 56.9 in June. Above 50.0 readings have now been recorded for seven months in a row, with growth accelerating continuously throughout this period. *Markit/CIPS UK Services PMI® data.
In the manufacturing sector, output was up by 2% in June compared to prior year after a disappointing first half. Capital goods, continue to drive recovery with strong growth of almost 4%. Consumer goods also rallied in June with output of consumer durables increasing by 2%.
In construction, output in the second quarter was estimated to be 1.4% higher when compared with Q1 2013. Comparing Q2 2013 with the same period a year ago, construction output actually fell by 0.5%. We expect a further recovery in output into the second half with growth of 1% year on year, boosted by some housing activity.
On trade, the deficit on trade in goods reduced to £24.9 billion in Q2 2013 from £26.5 billion in the first quarter. Exports of goods in the second quarter of 2013 reached £78.4 billion, the highest on record. Imports of goods also increased in Q2 2013 to £103.3 billion. Seasonally adjusted, the UK’s deficit on trade in goods and services was estimated to have been £1.5 billion in June, compared with a deficit of £2.6 billion in May. The deficit of £8.1 billion on goods, was offset by an estimated surplus of £6.5 billion on services.
So what does this mean for the year ahead? We still expect the deficit trade in goods to increase to £105 billion in the year. Exports of goods will improve as world trade recovers but imports will increase to meet the improving demand in the domestic economy.
The service sector will continue to drive recovery with a trend rate accelerating from 1.5% to 2% over the next six months. Manufacturing and construction output will improve in the second half but contribution to growth for the year will be muted following such a poor start.
Our forecast for growth this year is around 1.2% with further growth in 2014 of around 2%. Slightly more bearish than the “Bank”. For the moment, the good news keeps on coming, a sustained recovery will require a growth in real household incomes.
In the housing market, the Halifax reported prices increasing by almost 5% in July. There is little sign of a great change in the volume of activity for the moment, although the Council of Mortgage Lenders reported a strong recovery in buy to let activity. Lenders advanced 40,000 mortgages, worth £5.1 billion, to buy-to-let investors in the second quarter of 2013. Both the number of buy-to-let loans, and the value of lending, were the highest since the third quarter of 2008. The promise of low rates will push prices higher as the real cost of borrowing falls. Strong rental yields, low costs of borrowing and the prospects of capital appreciation present a heady cocktail for buy to let. More pressure on first time buyers, the real price of life on planet ZIRP.
What happened to sterling?
Sterling responded to forward guidance, moving higher. The pound closed at $1.5505 from $1.5284 against the dollar and €1.1617 from €1.1504 against the euro. The dollar slipped against the yen closing at ¥96.24
Oil Price Brent Crude closed largely unchanged at $108.22 from $108.95. The average price in August last year was almost $115. Not much pressure on price as we move into the Autumn.
Markets, were up - The Dow fell to 15,425 from 15,658. The FTSE closed down slightly to 6,583 from 6,648. Markets trade softly into August. Still a good time to average in. The FTSE will clear 7000 within ten weeks.
UK Ten year gilt yields closed at 2.45 from 2.42, US Treasury yields closed down at 2.58 from 2.60. Yields are set to move higher but the path will be slow, we remain parked on the runway of Planet ZIRP, the pilot has gone off the to pub.
Gold closed down at $1,315 from $1,308. Still waiting for the next big move but which way? The arguments are building for the bulls.
That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow.
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John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work.
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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.