Car sales soar but so will the trade deficit … Good news of the recovery. Car registrations rose to 465,000 in March, an increase of 18% on last year. The new 2014 plates have been great for the car market. More new cars were registered last month, than at any time in the last ten years according to the Society of Motor Manufacturers and Traders. As Mike Hawes, SMMT Chief Executive explains. “Given the past six years of subdued economic performance across the UK, there is still a substantial margin of pent-up demand, contributing to a strong new and used car market.” Easy finance deals and advanced technologies make new cars cheaper to buy and to run. There has never been a better time to buy a new car. The pent up demand is to be unleashed. Bear in mind, we have over 31 million cars on the road in the UK, of which over one third are over nine years old. Let’s hope the owners don’t all appear in the showroom at once.That would create a traffic jam at the docks. The car market demonstrates clearly the problems with the march of the makers, the rebalancing agenda and the inability of sterling depreciation to remedy the trade balance. We expect car sales to increase to around 2.5 million units in 2014 returning to levels last seen in 2004 and 2005. Production is forecast to increase to 1.6 million units following the increase to 1.5 million last year. A further increase to 1.7 million units, then 1.8 million units is expected by 2016. Good news for manufacturing? Of course. But the majority of production is exported. Export sales may hit 1.3 million units in 2014, rising to 1.5 million by 2016. As a result, imports will have to increase to 2.2 million units in 2014, rising to 2.4 million units by 2016 to satisfy domestic demand. The trade deficit (unit sales) will increase to 0.8 or 0.9 million units. An increase to levels least seen pre recession. The recovery in the UK economy will exacerbate the trade deficit in cars just as it will in many other commodities. Relative rates of economic growth here and particularly in Europe primarily determine the demand for imports and exports. Demand is relatively inelastic with regard to price, particularly with exports. Manufacturers price to market or products form part of international syndication. Sterling has a minor role to play in determining the direction of trade in the international car market. Supply, is output constrained and cannot respond to domestic market growth. In fact 80% of car production is exported and 90% of domestic demand is satisfied by imports. We have warned previously, the UK cannot grow faster than trade partners in Europe or North America without a deterioration in the trade account. The car market is a simple arithmetic of the dilemma. Download the short report Car Market - Driving recovery or driving the deficit to access the underlying data. PMI Markit Surveys This is the week of the PMI Markit survey data with information on the March updates. The recovery continues in services, construction and manufacturing. The manufacturing upturn remains solid, service sector activity remains strong and construction firms report brightest outlook for business activity since January 2007. We have upgraded our forecast for UK growth this year to 2.9% based on the strength of the Manchester Index® and latest GM Chamber of Commerce QES survey data. House Prices, Nationwide reports house prices increasing by 9.5% across the UK, increasing by 18% in London. Prices remain slightly below the peak levels of 2007 except in the capital, were levels are now some 20% above peak. Should we worry about the boom in prices? Perhaps but not just yet. Activity levels are still subdued relative to the pre recession peaks but the recovery in prices will be of concern to policy makers as will the developing trade deficit. In our economics presentations we begin to touch on concerns about the recovery. Deflation is not one of them, house prices may be. The current account deficit certainly is. Especially if the trends in investment income from overseas are maintained. Then we shall see just what will happen to sterling. So what happened to sterling this week? The pound closed at $1.659 from $1.664 and at 1.21 unchanged against the Euro. The dollar closed at 1.370 from 1.375 against the euro and at 103.26 from 102.82against the Yen. Oil Price Brent Crude closed at $106.72 from $108.01. The average price in March last year was $108. Markets, the Dow closed up at 16,526 from 16,323 and the FTSE closed at 6,6956 from 6,615. UK Ten year gilt yields closed at 2.72 (2.72) and US Treasury yields closed at 2.76 from 2.72. Gold moved higher to $1,304 from $1,293. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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 receipt of this email should not be construed as the giving of investment advice.
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UK rates on hold … No surprise this week - the MPC voted to keep rates on hold and maintain the size of the asset purchase programme at £375 billion. It will be some months yet before rates begin to rise. Our current assumption is that rates will begin to rise in the second quarter of 2015. 40% of respondents in the latest Bank of England/GfK Inflation survey expect rates to rise over the next twelve months. No worries for the future apparently. Once on the rise, over 70% expect rates to be less than 3% in five years time. So much for the madness of crowds. Clearly the general public have a much better grasp of the latest simulations of the “equilibrium real interest rate associated with a neutral monetary policy over the medium term” than is generally assumed. They must have been listening to the speech by David Miles last month. Asked about the current rate of inflation, the median answer was 3.5% down from 4.4% in November. Excellent. So much for the madness and the wisdom of crowds. US Payroll data up … In the USA, better than expected payroll data guarantees the Federal Reserve will continue to taper, with a further reduction this month to $55 billion. Employers added 175,000 more jobs in February. Movement in US futures suggest the markets attach a "higher probability to a US rate rise in the middle of 2015". Fed officials have said they are “comfortable with market expectations of future rate rises”. We think US rate rises could be on the agenda by the end of 2014 or early 2015. The implications for UK rate rises should be evident. Our mantra - watch the USA and add six months - may be a little more compressed in this cycle. UK survey data … This week the February Markit/CIPS UK PMI® surveys were released. The strong upswing in the UK manufacturing sector continued in February. Output and new business continued to rise at above-trend rates. The leading index at 56.9 was up from a revised reading of 56.6 in January. In construction, the pace of expansion continued to rise sharply. The leading index scored 62.6 in February, down from a 77-month high of 64.6 in January. Still a very strong performance. In the service sector, output continues to expand strongly in the month. The headline Business Activity Index recorded 58.2 during February, little changed on January’s 58.3 and indicative of a sharp rise in activity on a monthly basis. Overall, output in construction, manufacturing and services suggest the economy continues to recover across the board at a very strong rate. The latest NIESR GDP tracker suggest growth increased by 3.5% in January. The Bank of England expects growth of over 3.5% in the first quarter. For the year as a whole, the consensus forecast is for growth of 2.7% this year. We await the details of the latest GM Chamber of Commerce survey before raising our estimates of growth this year. The GDP(O) model is signalling growth of 3% for the year as a whole. The survey data is a little more tempered, I suspect. In the UK and the USA, growth is accelerating and the job market is “tightening”. The pay round will become more difficult by the end of the year. Earnings are set to increase significantly as critical unemployment levels are breached by early 2015. Household incomes are set to improve and the recovery in spending will continue. There will be no “rebalancing”, whatever that really means. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint. If growth hits 3% this year, disappointment could turn to shock and alarm. Then all forward rate bets will be off. So what happened to sterling? The pound closed at $1.672 from $1.675 and at 1.205 from 1.213 against the Euro. The dollar closed at 1.387 from 1.381 against the euro and 103.3 from 101.7 against the Yen. Oil Price Brent Crude closed at $108.86 from $109.02. The average price in February last year was almost $116 falling to $108 in March. Markets, moved slightly - The Dow closed at 16,458 from 16,367 and the FTSE slipped closing at 6,712 from 6,809. UK Ten year gilt yields closed at 2.81 from 2.72 and US Treasury yields closed at 2.80 from 2.67. Gold lovers worship alone with a close at $1,338. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. 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 receipt of this email should not be construed as the giving of investment advice. Economics news – UK recovery continues at pace in January ... According to survey data this week, [Markit/CIPS UK PMI® January], the recovery in the UK economy continues at pace into the New Year. Manufacturing, construction and services all continued to demonstrate strong levels of activity. In the manufacturing sector, the strong rebound continued with improved domestic demand and rising export orders suggesting robust growth in the month. Construction survey data suggests the sector is experiencing the sharpest rise in construction output since August 2007. Housing activity is increasing at the sharpest rate for over ten years. Service activity remains elevated with a headline index rate at 58.3 during January, down slightly from 58.8 in December. Service sector output is still at a very high level, anything above 50 suggests growth. The latest monthly NIESR GDP tracker suggests the economy grew by over 3% in January. This week, NIESR also upgraded UK forecasts for growth this year to 2.5% with projections of unemployment falling, inflation tracking the 2% target level and government borrowing continuing to reduce. In fact on current plans, according to the leading think tank, the public sector finances will be in surplus in 2018-19. So much for fears of prolonged austerity to come. So growth up, inflation down, employment up and borrowing down. Just the trade performance is expected to deteriorate with the external current balance increasing from a deficit of £54 billion in 2013 to £78 billion by 2015. ONS Data on Trade ... ONS data this week for trade was a little surprising. The trade deficit in December improved significantly compared to our forecasts. Seasonally adjusted, the UK's deficit on trade in goods and services was estimated to have been £1.0 billion in December 2013, compared with a deficit of £3.6 billion in November 2013. There was a deficit of £7.7 billion on goods, partly offset by an estimated surplus of £6.7 billion on services. Some £2 billion of imports appear to have been lost in the analysis. If domestic demand was as strong as the data suggests, the fall in imports for the month is illogical. In any case, don’t get to excited about the rebalancing agenda - for the year as a whole, the deficit trade in goods was £108 billion. US Payroll data ... Over in the US, payroll data upset the markets as jobs growth proved disappointing for the second month running. US payrolls rose a seasonally adjusted 113,000 in January after gains of just 75,000 in December. The unemployment rate continued to move down, to 6.6% the lowest level since December 2008 and perilously close to the Fed forward guidance hurdle rate. It is thought the latest data is unlikely to change the Fed stance on progressive tapering through 2014. Janet Yellen, the new chair of the Federal Reserve Board, makes her first appearance before Congress next week. Emerging markets will shudder as the adjustment in the stance of QE and tapering continues. Rate rises could be on the US agenda by the end of the year. So what happened to sterling? Sterling closed at $1.6407 from $1.6433 and 1.2030 from 1.2184 against the euro. The dollar closing at 1.3635 from 1.3487 against the euro and 102.31 against the Yen. Oil Price Brent Crude closed at $109.57 from $106.40 The average price in February last year was almost $116. Markets, steadied - The Dow closed at 15,794 from 15,698 and the FTSE closed at 6,571 from 6,5210. UK Ten year gilt yields closed at 2.71 from 2.72 and US Treasury yields closed at 2.69 from 2.65. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? The list is growing as is our research and research team. Over ten thousand receive The Saturday Economist each and every week! © 2014 The Saturday Economist. John Ashcroft and Company. Experience worth sharing. 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 receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. The release of the second estimate of GDP in the 3rd quarter brought few surprises. Growth was confirmed at 1.7% year on year following growth of 1.4% in the second quarter. Service sector output continues to drive the recovery with particularly strong growth in the leisure sector. Construction output increased by 4% with manufacturing growth relatively flat in the latest three month period. In current value spending terms the economy grew by 3.8% as incomes of employees and businesses continued to show strong growth. Expenditure within the economy was driven by household spending up by 2.4% in real terms plus a build up in inventories. Government spending was up by just 1.1%, investment fell slightly and the trade figures continue to disappoint. Exports fell and imports increased as UK domestic demand exceeded the rate of growth in Europe and the USA. So what does this all mean? We expect strong growth to continue into the final quarter with overall growth around 2.4% bringing the year on year growth rate to 1.3%. We still think the economy is on track for growth of around 2.4% in 2014. Check out our latest publication “Modeling GDP(O)”. We release the forecasts of the ten key sectors and sub sectors in the UK economy over the next two years. Should we too worried by the lack of investment? Not really. At this stage in the cycle we would expect investment to be weak. Plant and machinery accounts for just 20%, of total investment. Spending on commercial real estate will continue to be subdued for some time yet as the overhang continues. We expect strong growth in productive capacity in the final quarter of the year and into next year. The four year capital stock model is down by just 15% from the peaks of 2008. No need to worry about “lost output” for the years ahead, trend rate of growth can be recovered and maintained. Investment will receive a significant boost in the final three months of the year and into next. Our UK investment model will be released next week. Prospects for the UK look good, but without a strong recovery in Europe and sustained growth in the USA, the trade figures will continue to be a net drain on overall performance. This should be no surprise to regular readers! The trade deficit in goods will increase largely (but not entirely) offset by a strong performance in service sector exports. Is this the wrong kind of growth? The UK economy has been dependent on domestic consumption since our records began. Growth based on investment and exports a policy dreamboat. There will be no rebalancing of the economy just more of the same to come. Bank moves on mortage lending Which is perhaps why the Bank of England modified the terms of FLS away from mortgage lending towards business loans. The old lady is no fan of the help to buy votes scheme. The Governor has made it clear the Bank of England will move to prevent another housing boom. The policy response includes several options this time around including post code selective spread and capital provisions to curb excessive movements in house prices if necessary. What happened to sterling? The pound closed up at £1.6360 from £1.6215. Against the Euro, Sterling closed at €1.2045 from €1.1966. The dollar moved down up the yen closing at ¥102.4 from ¥101.3 and closing at 1.3582 from 1.3555 against the Euro. Sterling is on a rally which has led to a break out above £1.60, pushing through resistance at €1.20 euro basis. Oil Price Brent Crude closed at $109.65 from $111.05. The average price in November last year was almost $110. The average price just $106 this year. Markets, US pushed higher - The Dow closed at 16,086 up from 16,065. The FTSE closed at 6,650 from 6,674. 7,000 FTSE still the call before Christmas. UK Ten year gilt yields closed at 2.78 from 2.79 US Treasury yields closed at 2.75 from 2.74. Yields will test the 3% level over the coming months but this may await the New Year. Gold closed at $1,252 from $1,244. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Monthly Markets updates coming in the New Year. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist, #TheSaturdayEconomist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. 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 receipt of this email should not be construed as the giving of investment advice. Housing Market and Leisure Sector continue to lead recovery ... Nationwide House Prices House prices increased at a rate of almost 6% in October according to the Nationwide House Price Index. Access to finance, a result of FLS and H2B have improved the willingness of buyers to step into the market. The housing market is up, up and away as our October review of the UK Housing market confirms. Is there a boom in prospect? Robert Gardner, Nationwide's Chief Economist, points out that “while house price growth has picked up - prices remain 7% below their 2007 peak.” Houses are generally affordable - ‘typical mortgage servicing costs remain modest by historic standards thanks to the ultra-low level of interest rates. A typical mortgage payment for a first time buyer is currently equal to around 29% of take home pay, in line with the long term average.” Well it won’t take long for the price lag to be wiped out, even on the Nationwide index. The “real cost of borrowing” is negative - borrowing rates are lower than asset price rises. The essential conditions for market expansion. We expect transactions to increase above one million this year, still well below the peak of 2007. No boom in prospect but a healthy recovery is in train, the house market is up, up and away on a sustainable growth path. Service Sector Growth The service sector continues to provide the back bone of growth in the economy, with growth accelerating to over 2% for the year as a whole. The leisure sector is now the fastest growing sector of the UK economy. Distribution, hotels and leisure have expanded at a rate of 4% in the year. Check out our Service Sector Update for November. Six slides to explain just what is happening in the UK economy. Manufacturing Not the march of the makers, that’s for sure. The latest Markit/CIPS UK Manufacturing PMI® survey was released on Friday. The index slipped to 56.0 in October, down from a revised reading of 56.3 in September. “The UK manufacturing sector continued a strong third quarter performance into the final quarter of the year according to the summary”. Yet manufacturing growth in the third quarter was pretty flat. Nevertheless we still expect growth of over 2% in the final quarter of the year (in manufacturing). Last year was such a dismal quarter, even the stumbling marchers can make progress. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. We still think base rates are now more likely to rise by around 50 basis points in 2015 rather than 2016. We still say this, despite the decision by the Fed this week to hold rates and continue with QE. Growth in the US is weak, inflation is below target and the housing market is confusing analysts. We expect tapering will be back on the agenda in the New Year as we migrate to Planet Janet. What happened to sterling? It was all about the dollar this week. Sterling slipped against the dollar but moved up against the Euro. The pound closed at £1.5912 from £1.6166. Against the Euro, Sterling closed at €1.1814 from €1.1713. The dollar moved up against the yen closing at ¥98.7 from ¥97.4, closing at 1.3484 from 1.3803 against the Euro. Oil Price Brent Crude closed at $105.91 from $106.93. The average price in November last year was almost $110. We expect Brent Crude to average $110 - $115 in the month, with no material inflationary impact. Markets, pushed higher - The Dow closed at 15,616 up from 15,570. The FTSE closed at 6,7351 from 6,721. The rally continues. UK Ten year gilt yields closed at 2.66 from 2.63 US Treasury yields closed at 2.62 from 2.51. Gold closed at $1,312 from $1,352. The bulls may have it but are pegged and penned for the moment. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist, #TheSaturdayEconomist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. 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 receipt of this email should not be construed as the giving of investment advice. Economics news – news from Washington and Beijing ... Washington Good news from across the Pond, a Washington truce has been achieved. The US government has returned to work, Yosemite National Park is open, international creditors will be paid. The debt crisis is over. A twenty week truce has been secured. Markets rallied, the dollar slipped, Google shares breached the $1,000 level and the S&P 500 hit a new high. What more could we ask? Beijing In China, growth continued at 7.8% into the third quarter up from 7.5% in the second. For those fearing a hard landing, crash landing, soft landing, end of the world scenario, it is time to stop shorting the markets and buy in, the world is not coming to an end any time soon. London - Mortgages In the UK, mortgage lending increased by 32% in the third quarter compared to Q3 last year. FLS and Help to Buy are boosting the market. We expect house prices to rise by 5% this year and almost 8% next year before a normalized escalation returns. Prices are beginning to rise across the UK. Yes Prices will move across the UK, like a tidal wave across the flood plain. Check out The Saturday Economist Housing Market Review for more information. Inflation Tuesday, the ONS released the latest inflation figures for September. CPI inflation was unchanged at 2.7% as RPI moved down slightly to 3.2% from 3.3%. We expect a further fall in CPI inflation around 30 basis points next month, as education fees drop out of the data series. Thereafter prices will be pretty sticky around 2.5%. Energy costs are set to rise and service sector inflation at 3.4% up from 3.0% last month will create problems for policy makers. As we have long pointed out, service sector inflation has averaged 3.7% for the last twenty years. Manufacturing prices Manufacturing Prices, on the other hand, have averaged around 1% over the same period, boosted by falls in clothing and footwear specifically. The immediate outlook for manufacturing prices is pretty benign, Output prices increased by just 1.2% in September and input costs increased by 1.1%, down from 5% in July. Retail sales Retail sales were also released this week. Retail sales volumes were up by 2.2% in September and by 2.4% in the third quarter. Sales values increased by almost 4% in the three months boosted by on line sales and department store sales. Is the housing market stimulating footfall? Quite probably. We expect the volume of housing transactions to increase significantly this year, boosting sales of carpets, furniture durables and DIY goods in the process. Employment The employment figures were also released this week. The claimant count fell by over 40,000 in September to a rate of 4% compared to 4.2% last month. The wider FLS count fell in the three months to August, to 2.87 million, a rate of 7.7% from 7.8% last month. Lagging as it does, the broader unemployment rate could fall to around 7.5% by the end of the year. The Bank of England “knock out rate” under forward guidance at 7% could be in sight by the end of 2014. So what of base rates? Interesting Spencer Dale the Bank of England’s chief economist was on Twitter this week in a hashtag #AskBoE “open hour” adventure. The telling tweet - a rate rise in 2014 was unlikely. Just as unlikely as a rate rise in 2016 no doubt. The markets expect a move in 2015 but will it wait until after polling day? We will have to ask next time the bank is online, perhaps using Facetime or Skype? What would Governor King have made of it all! So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The first estimate of GDP in Q3 will be released next week. We expect growth year on year to be over 1.5% rising to trend rate in the final quarter of the year. Inflation is falling, employment is rising, even the debt figures due next week will look much better. Energy costs may provide a problem for households but “wear a jumper”, the ministerial advice could keep bills down and boost retail sales in the process. What happened to sterling? Sterling moved up against the dollar and against the Euro as the dollar slipped. The pound closed at £1.6174 from $1.5954. Against the Euro, Sterling closed at €1.1816 from €1.1772. The dollar moved down against the yen closing at ¥97.7 from ¥98.5 and closing at 1.3682 against the Euro. Oil Price Brent Crude closed at $109.94 from $111.28. The average price in October last year was almost $112. We expect oil to average less than $112 in the month, with no inflationary impact. Markets, pushed higher - The Dow closed at 15,399 up from 15,237. The FTSE closed at 6,623 from 6,487. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.72 from 2.74, US Treasury yields closed at 2.58 from 2.69. Gold closed at $1,313 from $1,270. The bulls have it, at least for the week. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy. 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 receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below. If you enjoy the content, why not forward to colleague or friend. Economics news – Building recovery one brick at time .. Construction data Good news this week from the construction sector. Output in August was up by 4% compared to August last year. New work increased by almost 6% driven by developments in the housing market. FLS and Help to Buy are stimulating new mortgage activity on a really significant scale. The Council of Mortgage Lenders announced home-owner house purchase lending was up by 15% on August last year. First-time buyers took out 27,100 loans in August, an increase of 33% compared to August 2012. The house market is on the move. We expect the surge in housing activity to continue into the final quarter of the year and into 2014. Do we really need “Help to Buy Phase 2” probably not. No need to pay for a landslide, the economic recovery secured. We have increased our forecasts for GDP growth this year to 1.5% increasing to 2.5% next year. NIESR monthly GDP data Our estimates are in line with the NIESR monthly GDP tracker for September, released this week. The (NIESR) GDP rate of growth in the third quarter was 1.6% year on year. We expect the rate of growth to accelerate further into the final quarter towards trend rate of 2.4%, driven by a steady recovery in the service sector and a big push in construction output. Monetary Policy No surprise this week the MPC voted to keep interest rates and QE on hold. Forward Guidance is the new mantra. UK base rates will not rise until the U rate falls to 7%, assuming no shocks to the monetary system and the inflation outlook. In the USA, the Fed continued with the monthly asset purchases of $85 billion. What is it about the USA? The Fed might as well commit dollars to a NASDAQ tracker fund to sustain confidence in the markets. “Tapering will not begin until the DOW hits 17,000 could be the new forward guidance. Janet Yellen is to replace an exhausted Bernanke. Such a dove, they should “paint her white and give her wings”, the markets will love Planet Janet orbiting, as it will, around Planet ZIRP. So what of the UK recovery? The trade figures and manufacturing data were also released this week. Remember, "the march of the makers, rebuilding the workshop of the world, rebalancing the UK economy away from domestic consumption with an improvement in net trade"? Well forget that. The professor (Milton Keynes) invested in a sandwich board and spent his summer holidays in Cornwall this year. Stationed at Land’s End, facing Western traffic, the sign read “sail on - the earth is not flat”. “We get the message” shouted a wise cracking grockle. The professor turned to reveal the message on the other side, “Exports will not lead a UK recovery”, “yeah but how long did it take”, replied the perspicacious prof. Trade Data And so it proved with the trade data this month. The trade in goods deficit was £9.6 billion in August. We expect a deficit of £29 billion in the quarter compared to £26 billion last year. Our forecast for the year, is now at the top end for the year as a whole around £110 billion. The UK recovery will exacerbate the deficit. Monthly data can be erratic but fifty year trends provide a certain guide. The UK cannot grow faster than Europe and the USA without a significant deterioration in net trade in goods. Is this such a problem? Not really. The surplus on services will mitigate the deficit to around £30 billion. At 2% of GDP this is neither a threat to sterling nor a constraint to growth. Manufacturing The march of the makers skipped a drum beat in August as output fell by -0.2% compared to August last year. Consumer goods output fell by just over 2% as capital goods growth slowed to a similar level. We expect a better performance in September and in the final quarter of the year. Housing new build and a higher level of transactions will stimulate direct related construction output, (bricks & mortar). Housing related spending on products including furniture and carpets will also stimulate growth. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. Will US debt intransigence derail recovery? We assume not. If you lived through the Cuban missile crisis and the era of an international nuclear strategy underwritten by the concept of Mutually Assured Destruction, (They call it MAD), You assume sooner or later, the Republican ships will turn around and avoid the disaster that could unfold. Failing that, the President can always mint a few Trillion Dollar Platinum coins, develop section four of the fourteenth amendment or invoke the 1861 Feed and Forage Act. Union soldiers were allowed to “eat your crops, kill your chickens and water their horses”. The Act ensured, sooner or later, Congress would enact the necessary appropriation. The troops had to eat even though the deficit had not been approved. And so it is with debt markets, “let them eat noodles” is no message to send to international creditors. What happened to sterling? Sterling moved down against the dollar and against the Euro. The pound closed at £1.5954 from $1.6012. Against the Euro, Sterling closed at €1.1772 from €1.1816. The dollar moved up against the yen closing at ¥98.5 from ¥97.4.The dollar euro cross rate at 1.3542 was largely unchanged from 1.3556 Oil Price Brent Crude closed at $111.28 from $109.46. The average price in October last year was almost $112. We expect oil to average $112 in the month, with no real inflationary impact. Markets, rallied - The Dow closed at 15,237 from 15,073. The FTSE closed at 6,487 from 6,454. The markets sense a deal on the deficit is in sight. UK Ten year gilt yields closed at 2.74 from 2.75, US Treasury yields closed at 2.69 from 2.64. Gold closed at $1,270 from $1,310. The bulls have it or do they? Gold will trade sideways for some time yet. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. By John Ashcroft and Company, Dimensions of Strategy. 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 receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. 1 House Prices set to rise by over 5% this year and by over 8% in 2014. House prices are rising with the latest data from Nationwide and Halifax suggesting house prices are rising by 5%. Data from the ONS, indicates prices are rising slightly less in the information available to July. We expect the year on year out turn to be around 5.5% with a further increase in prices of between 7.5% to 10% next year. Download the full report below ... 2 Regional Prices will rise too ... London and the South East are leading the way with price rises averaging 10% in London based on both the Nationwide and ONS data. The ONS suggest prices are increasing less markedly across the regions with some indication prices are still falling in the North West. The Nationwide data suggests the increases are far more widespread averaging over 3.5% across the UK, with marked increases in the East Midlands specifically. Price rises will spread across the UK, like a tidal wave across the flood plain. We expect an acceleration of house prices across the regions into the final quarter of 2014 and into 2015. 3 Long Term Fundamentals support the price move The Nationwide long term fundamentals will support the price rise. Real long term house prices are below the trend rate. And the house price to earnings ratio appears to have established a resilient higher level post 2008. 4 As prices rise, the real cost of borrowing falls As prices rise, the real cost of borrowing falls and with no immediate base rate rises on the horizon for a further two years, the real cost of borrowing will fall to -2% or more increasing to -5% next year. Of itself this is a great stimulus to house market activity. 5 Mortgage Lending will increase by over 20% this year Mortgage lending is set to increase by over 30% in the third quarter and by over 20% for the year as a whole. This will still be less than half the activity at peak of market but a dramatic turnaround in any case. We anticipate an increase in lending to over £225 billion by 2015. 6 Housing transactions will increase by over 12% this year Housing transactions, after a slow start to the year, will increase by 24% in the third quarter and by over 12.5% for the year as a whole. We are projecting an increase to over one million transactions in the year, still well down on the peak 1.8 million in 2007 but a significant recovery from the lows of 2008-9. 7 House building set to increase by over 30% House builders are reacting to the recovery with a significant increase in housing starts. We are forecasting an increase of 30% over the year as activity accelerates into the second half. We expect further skill shortages in bricklaying and plastering and a significant increase in the cost per 000 index for brick layers. 8 Is this the right time for Help to Buy Stage 2? Probably not. The house market is on the move. No need to impart a significant demand shock to the recovery which the help to buy scheme represents. The scheme could increase house market transactions by as much as 100,000 in each of three years. The housing sector may increase the new build from 125,000 last year to over 150,000 this year. If we assume further supply increase in 2014, cost price pressures will begin to place additional pressure on the demand price shock. The Bank of England will not hesitate to take action in this cycle to mitigate price increases. Help to buy will be pared back in the September 2014 review. The spreads on high LTV loans will rise and higher capital provisions for high LTV lending will be in the mixer. John Ashcroft October 2013
Economics news – lunch with the Governor and a trip to the Isle of Manchester It has been an interesting week, lunch with the Governor of the Bank of England on Thursday before catching a flight to the Isle on Man to spend the day as a guest of the Government Economic Development Office. Lots of key meetings crammed into a 24 hour visit to understand more of the great opportunities for cross trade between Manchester and the Isle of Man. More on that next week. As for the lunch with Mark Carney, you have to admire the new regime at the Bank. Pragmatic, approachable, with a real understanding of the banking sector. The governor is skeptical about QE, has allowed long rates to decouple from short rates, understands low rates do not of themselves lead to a surge in investment and depreciation will not, of itself, lead to a boost to exports. Indeed in the Budget for Greater Manchester, many of our “Ten challenges to economic thinking at the Bank of England” have largely been confined to the dustbin of economics history. (Along with many of the old theories of Governor King). Yes we welcome the regime change at the Bank and we are also supportive of Forward Guidance. My thanks to John Young for the invitation. What is it about FG? The great thing about FG, is that it marks the end of QE. For this alone we should be grateful. Analysts and commentators are having real trouble accepting forward guidance. William Buiter writing for Citigroup, describes FG as a “pleonasm”. I had to look it up! Pleonasm, the use of more words or word parts than is necessary for clear expression. How absurd. It’s just two words after all. WB then goes on to describe over 17 pages, using 12,000 words in the process, why this is so, with a bit of obtuse greek econometrics thrown in for good measure. What does FG offer? During the recovery, the Bank will not move to inhibit growth by an early increase in base rates before certain conditions relating to employment and inflation have been met. FG is not “carte blanche”. It is state dependent not time dependent. The MPC reserve the right to increase rates notwithstanding the forward guidance. For the moment, it offers reassurance to businesses. Investment plans can be brought back to the board table, with rate risk evaluated, as the economic outlook clears. GDP and UK Growth and clearing it is. The GDP stats this week did not change the view of the economy over the first half of the year but the outlook for the second half is improving radically. In the GM Chamber of Commerce Survey for Q3 to be released next week, The QES Composite Leading Indicator® surged higher in the latest survey suggesting strong growth in the third quarter of around 1.5% rising to trend rate 2.4% by the final quarter. The index measured 28.3 from 18.9 in the second quarter, higher than the peak levels recorded in 2007. As a result of this, we are upgrading our forecast for GDP growth in the year as a whole, to 1.5% rising to around 2.5% next year. Why so positive? The outlook for orders and deliveries were much higher in the quarter in both the service sector and in the manufacturing sector. Growth was positive in both the UK and export markets but particularly strong in domestic activity. Businesses are less worried about interest rates and are revising the investment plans! In the wider economy, growth, jobs, inflation, government debt and borrowing are all heading in the right direction. Only the trade figures will continue to disappoint. The UK cannot grow faster than Europe and the USA without exacerbating the structural trade in goods deficit. World trade is also recovering. Flat in the second quarter but up by 3.6% in July, for the year as a whole we expect world trade growth of just over 3% well down on the pre recession growth of 5.5% but a recovery nevertheless. House Prices, The Nationwide House Price index confirms house prices increased by 5% in September. The increases confined not just to the South East but across the UK. In the North West prices increased by over 3%. The housing market is also recovering but for the moment, the overall level of transactions is still well down on the “boom” years. No need to worry about another “Boom” just yet. Is this the right time to introduce, Help to Buy Stage 2 in the New Year? Of course not. This week the Chancellor invited the FPC to exercise more control over the Help to Buy scheme. A bit like handing over car keys and credit cards before heading out for a night on the town. Enjoyable in the short term with a bad hangover in the offing, the bank will move to limit the damage with higher interest rate spreads and capital provisions forthcoming. The FPC will ensure money is “put behind the bar”, to pin the profligacy. What happened to sterling? Sterling moved up against the dollar and up against the Euro. The pound closed at £1.6150 from $1.5994 clearing the 1.60 level intra week. Against the Euro, Sterling closed up at €1.1935 from €1.1840. The dollar moved down against the yen closing at ¥98.2 from ¥99.3.The dollar euro cross rate at 1.353 was largely unchanged. Oil Price Brent Crude closed at $108.63 from $109. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact. Markets, slipped - The Dow closed at 15,258 from 15,451. The FTSE closed at 6,512 from 6,596. The Fed statement forgotten, markets are beginning to fret about the US debt ceiling. It creates volume if nothing else. What’s the problem with the ceiling? The plasterers will be called in to cover the cracks sooner or later, usually later. UK Ten year gilt yields closed at 2.73 from 2.92, US Treasury yields closed at 2.63 from 2.79. The fed statement has now pulled long rates down by 25 basis points. Long rates are decoupling from shorts, returning to fair value. They are reluctant to leave, with pleas from the FOMC to “stick around” but leave they must. Gold closed at $1,336 from $1,331. The bulls have it or do they? The news on tapering bought more upside gain but not much, we think gold will trade sideways for some time yet. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist, #TheSaturdayEconomist by John Ashcroft and Company, Dimensions of Strategy. 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 receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Economics news – inflation falls, no boom in the housing market, good news on borrowing, Chancellor Osborne is ticking the right boxes this week ... Inflation - Retail Prices The rate of inflation slowed to 2.7% in August compared to 2.8% in July. We expect a further significant fall next month and by the end of the year the inflation rate should be around 2.4%. Thereafter prices could be a little sticky. Service sector inflation was 3% in August and goods inflation was 2.4% in the latest monthly data. Inflation - Manufacturing Prices The good news on inflation was also manifest in the manufacturing sector. Output prices increased by just 1.6% compared to 2.1% in July. Input costs for manufacturers also fell back from 5% in July to 2.8%. Part of the reason for the slow down was oil and energy costs. The average price of oil in August was $111 dollars per barrel, slightly down on the same period last year. The rate of wages and earnings growth remains subdued, presenting a benign outlook for inflation over the short term. At close this week Brent Crude was trading at $109 dollars per barrel. The outlook for manufacturing inflation is pretty benign. House Prices - ONS data For those wary of a housing boom, the ONS also released the House Price Index in July. In the 12 months to July 2013 UK house prices increased by 3.3%, up from a 3.1% increase in the 12 months to June 2013. Signs of a national boom? Not really but certainly signs of a good recovery! Annual house price increases in England were driven by London (9.7%) and the South East (2.6%). Excluding London and the South East, UK house prices increased by just 0.8%. In the North West, prices actually fell by almost 1%. The RICS has made the call for a peg on prices around 5%. This to reflect a normalised earnings growth rate of 3% plus a supply side restraint adjustment to stimulate additional investment presumably. Would this work nationally? Obviously not. But some consideration to mortgage rationing on a regional basis especially in the South East may gain political if not market traction. Retail Sales August - A further indication, the recovery is on track with no signs of a runaway boom in prospect... Retail Sales in August were up by 2.1% in volume and 3.6% by value compared to August last year. Internet sales were up by 22% in the month accounting for 10% of all retail sales. Trading is better but not that much. With online trends and large store consolidation, life for most retailers is tough. Government Borrowing Further good news for the Chancellor, the level of borrowing fell in August. We expect further significant falls before the end of the financial year. In August 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £13.2 billion. This was £1.3 billion lower than in August 2012 when it was £14.4 billion. The Chancellor is on track for a significant fall in borrowing this year. We expect the level of borrowing excluding interventions and transfers to fall to around £105 billion compared to a revised £115 billion last year. Car Manufacturing Car output increased by 16% in August bring the year to date output growth to 3%. More good news but the August headline should be kept in perspective. The year to date total is the better trend guide and let’s not forget commercial vehicle output is down in the year by 17%. Tapering USA Despite clear indications “Tapering” may begin in the Fall, the Fed decided to continue the process of QE, purchasing mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities at the rate of $45 billion per month, this week. What does this mean for US and UK interest rates? Not much in the short term. Check out the Saturday Economist Special Post "No tapering, more tampering, leads to more questions than answers at the Fed". Assessing market reaction over the week, Bernanke fires a blank would have a more appropriate headline. What happened to sterling? Sterling responded to the news on tapering, moving up against the dollar but down against the Euro. The pound closed at $1.5994 from $1.5871 having tested the 1.60 level intra week. Against the Euro, Sterling closed down at €1.1824 from €1.1940. The dollar moved little against the yen closing at ¥99.3 from ¥99.4 Oil Price Brent Crude closed at $109 from $111. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact. Markets, rallied - The Dow closed up at 15,451 from 15,376 . The FTSE closed up at 6,596 from 6,584. The Fed statement this month was a mis fire non event. We still think the FTSE will clear 7000 within ten weeks and the DOW will press 16,000. UK Ten year gilt yields closed at 2.92 from 2.94, US Treasury yields closed at 2.79 from 2.89. The fed statement this week pulled long rates down by just 12 basis points. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave, with pleas from the FOMC to “stick around”! Gold closed at $1,331 from $1,312. The bulls have it or do they? The news on tapering bought some upside gain but not much, we think gold will trade sideways for some time. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy . 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 receipt of this email should not be construed as the giving of investment advice. |
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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.
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