The Bank of England Inflation Report - May - So when will rates rise? Q2 2015 still the best bet. The final whistle not for some time yet! The Bank of England Inflation Report was released this week. It was all so predictable. The Governor’s opening remarks explained, “The overall outlook for GDP growth and inflation in this report is little changed from February. The UK economy continues to perform strongly. Having increased by more than 3% in the past year, output is now close to regaining the pre-crisis level. 700,000 more people are in work than a year ago and inflation is below, but close to, the 2% target. And so it proved. The strong labour market performance continued into April. The claimant count rate fell by 25,000, to a rate of 3.3%. The wider LFS data (to March) also reflected the improvement with a fall in the overall rate to 6.8%. On current trends the job centres really will be closing in 2017! The MPC expectations are for growth to increase by 3.2% in the second quarter and by 3.4% for the year as a whole, with continued expansion in household spending. Spending will be supported by an increase in real wages as inflation remains close to target and earnings increase moderately, with a gradual improvement in productivity. The MPC obsession with spare capacity continues. “While there is a range of views on the Committee, the best collective judgement is the margin of spare capacity is around 1% to 1.5% of GDP.” Charlie Bean is not entirely convinced about the “fuzzy concept” of spare capacity. “There is a real danger of spurious precision and the pretence of knowledge in this area” said the Deputy Governor. Quite so. That and many others perhaps! Does spare capacity impact on inflation prospects? Not so much. International inflationary pressures are key to current price trends and for the moment remain subdued. “The global picture is consistent with muted external inflationary pressures which, coupled with sterling’s appreciation, will moderate CPI inflation in the near term” said the Governor. Inflation has fallen sharply since the Autumn and the outlook for inflation in the medium term remains benign. A benign inflation outlook which will avoid undue pressure, in the short term, to increase rates, despite the strong growth figures and the buoyant housing market. So what of rates? The strength of the recovery has moved the economy “closer to the point at which interest rates will have to rise”, the official statement. So when will rates rise? In February, the MPC were happy to attach some credence to the market view that rates would begin to rise in the second quarter of next year. If anything the view in May is slightly more “dovish” or certainly more obtuse. “Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages, that a sustained expansion demands.” Rates are still unlikely to move until the second quarter of next year, the implication. As we explained last week, the MPC will be reluctant to move ahead of the Fed and the ECB. Forward guidance then lapsed into sporting analogy as the governor explained : “Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement but not the ultimate goal. The real tournament is just beginning and the prize is a strong, sustained and balanced expansion.” Yes the the Governor is laying out his team formation for the tournament ahead . “A flat back four with growth, inflation, unemployment and borrowing all heading in the right direction. Two strikers up front, household spending, with support to come from business investment. Some confusion in mid field from the housing market but no mention of exports and rebalancing. So expect the odd own goal from the trade performance, errant on the wing, as we move into the final stages of the competition. The Governor, for now, is not “taking away the punchbowl as the match gets going”. Far from it, you may continue to consume alcohol on the terraces, well into the final stages. Base rates are not expected to rise anytime soon. Q2 next year still the best bet. The final whistle will not be blown for some time yet.” So what happened to sterling this week? The pound closed broadly unchanged against the dollar at $1.683 from $1.685 and up against the Euro at 1.227 (1.224). The dollar closed at 1.370 from 1.375 against the euro and at 101.54 (101.18) against the Yen. Oil Price Brent Crude closed up at $109.91 from $108.16. The average price in May last year was $102.3. Markets, the Dow closed down at 16,447 from 16,544 but the FTSE closed up at 6,855 from 6,821. The markets are set to move, the push before the summer rush. UK Ten year gilt yields closed at 2.56 (2.68) and US Treasury yields closed at 2.51 from 2.62. Gold moved up slightly $1,293 from $1,287. 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 … This week, the Bank of England’s Monetary Policy Committee voted to maintain Bank Rate at 0.5%. The Committee also voted to maintain the stock of QE assets at £375 billion. No real surprise, UK rates are expected to remain on hold until the second quarter of 2015. For the moment, UK policy is relatively clear cut. USA … Over in the USA, matters became a little more diffuse. Tapering is expected to continue, concluding the asset purchase programme in September or October this year. But then what happens next? In March, Janet Yellen head of the Fed, gave a clear indication US rates would begin to rise within six months of the end of tapering. Markets reacted badly and the FOMC was minded to recant. This week, testifying before the Joint Economic Committee of the U.S. Congress, Chairman Kevin Brady pushed pushed Yellen for more clarity on when the FOMC would raise interest rates. The Fed chair would not be drawn on this occasion. “There is no mechanical formula for when that would occur” - the somewhat mechanical and evasive response. Oh yes, a month is a long time in the formulation of monetary policy. Europe … In Europe, Mario Draghi, President of the ECB, faced the opposite dilemma. With modest growth forecast for Euroland this year, inflation below target at less than 1% and a Euro strengthening against the dollar ($1.375), the Italian banker is under pressure to alleviate European monetary conditions still further. Playing for time, Draghi stated policy makers at the bank were comfortable with action in early June. Action awaits the “staff projections” for growth and inflation next month, before considering the next step. Draghi must hope forecasts are revised upwards. Having promised to “do what it takes” to stimulate growth, the President is clearly at a loss, as to what can be done next. A reduction in base rates to the zero floor would have little economic impact. Experimentation with negative rates is a high risk strategy. The move would thrill academic economists but cause trauma in the markets. This is no time for experimentation with central bank novelties. QE is muted as a possibility but with German and French long rates at 1.45% and 1.9%, there seems little cause to push rates lower. Ten year bond rates in Spain and Italy are this week trading within 25 basis points of UK gilts. MPC Dilemma … So here in a way is the dilemma for the MPC. The UK economy is growing at 3% a year, unemployment is falling at such a rate, we may have to close the job centres in 2017. Inflation is below target but as Mario Draghi pointed out this week, it is the weakness in international commodity prices, oil, energy and food, the real determinants of low inflation. Low inflationary pressure exacerbated or assisted by the rise in the Euro (and Sterling) against the Dollar. The UK is caught in the Dollar Euro vortex, with basic economics pushing monetary policy in opposing directions apparently. The MPC cannot move ahead of the Fed or much in advance of Europe for that matter without pushing Sterling still higher. Deflation the illusion - OECD World Forecasts This month the OECD forecast a recovery in world growth this year to 3.4% in 2014 and almost 4% in 2015. The Euro area is set to grow by 1.2% and 1.7% over the period. Euro inflation is set to rise above 1.2% next year. Commodity prices (base metals) are demonstrating a price basing action, Oil Brent Crude basis is trading ahead of last year. The international price profile can change quickly and dramatically. The threat of deflation - an illusion - which may quickly dissipate. A strong ECB president should do nothing. The US must accept rates will rise within six months of the end of tapering. This would leave the MPC free to begin the inevitable rate rise in the second quarter of next year. Want to here more, don’t miss the quarterly economics presentation on Wednesday at DWF next week. The multi media roadshow rolls on! So what happened to sterling this week? The pound closed unchanged against the dollar at $1.685 from $1.687 and up against the Euro at 1.224 (1.217). The dollar closed at 1.375 from 1.377 against the euro and at 101.18 (102.23) against the Yen. Oil Price Brent Crude closed at $108.16 from $108.50. The average price in May last year was $102.3. Markets, the Dow closed unchanged at 16,544 from 16,542 and the FTSE also closed up at 6,821 from 6,814. The markets are set to the move, the push before the rush. UK Ten year gilt yields closed at 2.68 (2.72) and US Treasury yields closed at 2.62 from 2.72. Gold moved down $1,287 from $1,296. 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. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. GDP Figures Q1 … UK growth in the first quarter of 2014 was an impressive 3.1% year on year with significant growth in construction, manufacturing and the service sector. [According to the preliminary estimate from the Office for National Statistics released this week.] Construction growth increased by 5.1% in the quarter and manufacturing output increased by 3.5%. Service sector output was up by 2.9% with continued strong growth in distribution, hotels, and leisure (4.9%). The business and financial services sector increased by 3.6%. The outturn is more or less in line with our estimates in the Quarterly Economics Outlook released in March. Following the latest data, we have lowered our forecasts for growth in the construction sector for the year as a whole and increased our estimate of growth in manufacturing. The overall GDP position remains unchanged. We still forecast GDP growth of 2.9% in 2014 and 2.8% in 2015. Growth continues into Q2 … The good news continued this week, with the latest Markit/CIPS PMI® survey data on manufacturing and construction. In April the UK manufacturing sector maintained a robust start to the year. At 57.3, the seasonally adjusted index rose to a five-month high and registered one of the best readings over the past three years. Construction output continued to increase in April, albeit at the slowest pace for six months. The index recording of 60.2 is down from the peaks at the turn of the year but still ahead of the long run average of 54.3. Residential construction was the best performing area of activity. The rate of expansion in April remained one of the fastest seen over the past ten years … just as well! House Prices - increase into double figures … House prices increased by over 10% according to the latest figures from Nationwide. Robert Gardner, Nationwide's Chief Economist said: “After several months of moderation, the pace of house price growth picked up in April. Annual house price growth reached double digits for the first time in four years, with the price of a typical home 10.9% higher than April 2013. Still much to be done in construction however, “The upturn in construction of new homes continues to lag far behind the upturn in demand, with the number of new homes being built in England still around 40% below pre crisis levels.” Sir Jon Cunliffe, Deputy Governor of the Bank of England, expressed some concerns about the housing market in a speech in London this week. “The question for the Financial Policy Committee, is whether the sustained momentum in the housing market will lead to unsustainable growth in household indebtedness, undermining the resilience of the financial system. The growing momentum in the housing market is now the brightest light on the dashboard of warning lights.” You have been warned! Growth in the USA ... In the USA, growth in the first quarter was up by 2.3% year on year (0.1% quarter on quarter). The relatively disappointing number was attributed to a severe winter and much bad, wet weather. The Federal reserve derived some consolation from the strength of the jobs numbers released this week. In April, the number of non farm payroll jobs increased by almost 290,000, the unemployment rate fell to 6.3% and revisions to the employment numbers over the past three months confirmed the strength of the US recovery. Jobs growth over the last three months has averaged almost 240,000. With evidence of a strong performance in employment and household spending, the Federal reserve announced a further reduction in tapering with a reduction in asset purchases to $45 billion per month. Tapering is on track to completion by the September / October this year. Interest rate rises will then ensue possibly within six months. With inflation below target, wages rising by just 1.9% and almost 10 million Americans unemployed, the FOMC will be in no rush to act. So what happened to sterling this week? The pound closed up against the dollar at $1.687 from $1.681 and up against the Euro slightly at 1.217 (1.215). The dollar closed at 1.387 from 1.382 against the euro and at 102.23 (102.15) against the Yen. Oil Price Brent Crude closed at $108.50 from $109.54. The average price in May last year was $102.3. Markets, the Dow closed up at 16,542 from 16,370 and the FTSE also closed up at 6,821 from 6,685. The markets are making the move, the push before the rush, may see the FTSE hit 7000 before the summer sell off! UK Ten year gilt yields closed at 2.72 (2.66) and US Treasury yields closed at 2.72 from 2.67. Gold moved down $1,296 from $1,301. 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. Next week the ONS will release the first estimate of GDP for Q1 2014. Expectations are for growth in the UK to be between 3% and 3.3% for the first three months of the year. The UK will be the fastest growing country in the developed world. A soggy start to the year may have damaged hopes in Washington to a claim on the title. Our own forecasts, realised last month, are at the bottom end of the range at just 3%. The Chancellor is creating a great platform in the run up to the election. Growth up, inflation down, employment up, borrowing down. Just the trade figures will continue to disappoint. The Osborne model for “austerity in recovery” may provide the textbook examples for the revisionist theory in the years to come. Four out of five rabbits ain’t so bad! The good news continued this week … Car Manufacturing According to the SMMT, car manufacturing picked up the pace in March as home and export markets improved significantly. UK car production rose 12% in the month to 142,158 units, bringing year to date growth to 2.9%. Good news for the UK’s volume manufacturers as European demand for cars strengthens. Not so good for the balance of payments. The growth in output will do little to offset the strength in domestic sales. New car registrations increased by 14% in the first three months of the year. Government Borrowing Better news on borrowing. Public sector borrowing totalled £107.7bn in the financial year. The out turn is £7.5bn lower than the £115.1bn borrowed in the prior year. Receipts were up by 4% with expenditure increasing by just 1%. The trend is heading in the right direction. The OBR expect borrowing to fall to £95 billion over the next twelve months and £75 billion in the following year. At the end of March 2014, public sector debt excluding temporary effects of financial interventions was £1,268.7 billion, equivalent to 75.8% of gross domestic product. Net debt has doubled since the end of the 2008/9 financial year. Retail Sales Even better news. Retail sales in March increased by 4.2% in volume and by 3.9% in value terms. Average prices of goods sold in March 2014 showed deflation of 0.5%. Fuel once again provided the greatest contribution to the fall in prices. The figures are consistent with the latest CPI data. But as we warned last week, oil prices Brent Crude Basis are now tracking ahead of last years levels for April and May. The deflationary shock may well be over. Domestic earnings are rising and world commodity prices are turning as the world and European recovery particularly, gathers momentum. Online sales were strong once again. The amount spent online increased by 7.1% in March 2014 compared with March last year. On line sales now account for almost 11% of total sales with a marked growth in food sales on line, increasing by almost 14%. Corporate Strategy Series Watch out for our Amazon case study coming soon. Over the Easter holidays, we released the second in our international corporate strategy series. The LEGO case study, follows on from the Apple Case Study originally developed for the Business School in Manchester. The third in the trilogy, Amazon will be released next month. Amazon is a great case study in how to grow (or how not to grow) an online business. Amazon with losses in 2000 of $1.4 billion on sales of $2.8 billion is probably the greatest example yet of a turnaround from burn rate to earn rate. How long can the Amazon model continue to grow? Is there much point in delivering salads in Seattle as part of the Amazon Fresh programme? Watch out for news of the release date.] So what happened to sterling this week? The pound closed up against the dollar at $1.681 from $1.679 and unchanged at 1.215 against the Euro. The dollar closed at 1.382 from 1.382 against the euro and at 102.15 (102.42) against the Yen. Oil Price Brent Crude closed at $109.54 from $109.76. The average price in April last year was $101.2. Markets, the Dow closed down slightly at 16,370 from 16,408 and the FTSE also closed up at 6,685 from 6,625. The markets will have to rally soon, if we are to sell in May and go away! UK Ten year gilt yields closed at 2.66 (2.70) and US Treasury yields closed at 2.67 from 2.72. Gold moved up to $1,301 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. 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. Good news in the car market but the higher level of sales will drive the trade deficit higher - no rebalancing on the road ahead. Download the file here. The new 14 plates have been great for the car market. Registrations in March were 465,000, up by 18% on March last year. UK car registration increased by 15% in the first three months of 2014. We forecast total sales of almost 2.5 million this year, returning to levels of sales, 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? 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. The trade deficit (unit sales) will increase to 0.8 million units, to the levels least seen pre recession. The surge in car sales is a welcome demonstration of UK demand. 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 that is contributing to a strong new and used car market.” The pent up demand is to be unleashed. Remember we have over 31 million cars on the road in the UK of which over one third are over nine years old. 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. Let’s hope they don’t all rush at once. That would create a traffic jam at the docks. That’s another reason why we say the trade figures will continue to disappoint, and threaten the recovery, especially if the collapse in investment income continues. Download the short report here. UK Balance of Payments 2013 - Current Account Deficit could be a real threat to recovery. Download the full report. In 2013, overseas investment earnings collapsed and the trade deficit persisted. The UK current account deficit was over 4% of GDP. This has happened in only two years since the 1950s. The first time was in 1974 and the second time was in 1989. In each of the two years, UK base rates were hiked to 12% and 14% respectively. In 1976 the IMF paid a visit to assist with funding. We do not know as yet if the fall in investment returns last year was a blip or a statistical error which may be reversed in due course. We do know that if the trends in investment income continue, the UK will face a balance of payments problem of Tsunami proportions. Capital outflows would become difficult to finance - international investors already own 30% of the gilt market and over 50% of quoted stocks. Forward guidance would be of little value in the enforced knee jerk reaction required. International - not domestic developments would force base rates higher. The Bank of England would have to act to prop up sterling. “A new generation of economists will have to come to grips with the terminology of a balance of payments crisis, a run on sterling and the concept of the balance of payments as a constraint to growth.” In this short report, we analyse the UK balance of payments from 1955 to the current day. Developments in the current account, particularly in investment income, if continued, will present a real challenge to recovery and growth in the UK. Download a copy of the report here. Download a copy of the Keynote Files Here. Inflation, deflation and retail sales … Inflation CPI basis fell to 1.7% in February from 1.9% at the start of the year. Good news for households as net earnings improve. Good news for the Bank of England as inflation hits the lowest level for almost five years. Interest rates are more likely to stay on hold into 2015. We never thought otherwise. Should we be worried about deflation? Not really. The fall was marked by a reduction in goods inflation. Service sector inflation, accounting for half the index, was unchanged at 2.4%. The other half, “goods stuff” slowed to 1.2% from 1.4%. Despite higher growth, lower unemployment and expansive monetary policy, inflation is drifting lower but it isn’t all one way. Fish and sewage prices increased by 6%, tobacco prices by 7%, utilities, gas and electricity up by over 6% and insurance costs up by 5%. If you plan to send a post card from your hospital bed to the kids in private school about a book you have just read. Don’t do it! Hospital services, postal services and book costs were up 6%. Education costs increased by over 10%. Stay healthy, watch TV and Skype the better solution. Strong growth in the UK suggests prices should be rising. So why the drop? The fall in inflation, particularly goods inflation is assisted by trends in world trade and prices, assisted by the appreciation of sterling. Manufacturing Prices … Sterling has appreciated by 10% over the year. World prices, oil and basic materials are relatively flat. In February, manufacturing input costs fell by 5.7% overall. Crude oil prices fell by 11% and imported metals and materials fell by 15% and 5% respectively. Imports of parts and equipment assisted the fall, down by 7%. Manufacturing output prices slowed to 0.5% from 0.9%. This will improve the retail inflation outlook over the short term. We haven't seen input costs fall like this since September 2009 as the UK and the world grappled with recession. So can it really last? World growth is increasing, world trade is growing, we still await the full recovery in Europe but it will come. Oil prices are becalmed, as the market tries to understand the implications of fracking in the USA. Commodity prices, particularly metals, copper, lead, zinc and iron ore are experiencing a market work out which reflects stock adjustment rather than supply and demand derterminants.. Sooner or later, commodity prices will turn, perhaps in the second half of the year. Fears of deflation are over played, as are the suggestions the inflation genie is back in the bottle in the UK. Retail Sales … UK domestic demand conditions are improving demonstrated by the strength of retail sales in the UK. Retail sales in February increased by 3.7%. Sales growth over the last three months has averaged 4.3%. Values in February increased by just 3.8%. On line sales increased by 12% in value accounting for almost 11% of all retail sales. Food sales increased by 14% with a 4% penetration. Clothing and footwear sales were up by 15% with an 11% share. National Accounts Data The latest revisions to UK gross domestic product (GDP) were released on Friday. GDP is estimated to have increased by 1.7% in 2013 revised down 0.1percentage points from the previously estimated 1.8% increase. Does this affect out outlook for the year? Not really. We have just released the GM Chamber of Commerce Quarterly Economic Outlook, in which we think growth will be around 2.9% this year. The forecast upgrade is as a result of the latest survey data and the strength of the Manchester Index®, a powerful indicator of trends in the UK economy. The late revisions will lower or forecasts for construction a little. Check out the full forecast on the GM Chamber Economics Web site. Manchester News Good news for Lynder Myers with a restructuring effected by Jepson Holt, Assure Law, EY and Duff & Phelps. Paul Smith from Duff & Phelps summed it up “the primary objective to find a solvent and consensual solution to a complex problem”. Excellent. So what happened to sterling? The pound closed at $1.664 from $1.649 and at 1.21 from 1.1956 against the Euro. The dollar closed at 1.375 from 1.3790 against the euro and 102.82 from 102.27 against the Yen. Oil Price Brent Crude closed at $108.01 from $107.37. The average price in March last year was $108. Markets, the Dow closed down at 16,323 from 16,410 and the FTSE closed at 6,615 from 6,557. UK Ten year gilt yields closed at 2.72 from 2.76 and US Treasury yields closed at 2.72 from 2.77. Gold loves a crisis, the crisis is over as the metal moved lower to $1,293 from $1,358. 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. The week of the budget … “I have never shied away from presenting difficult truths to the British people. And one difficult truth the British people must confront, is that by this time next year, I may well appear to be the most successful Chancellor in UK history.” Well it would have been a great start to the budget speech - and yes it could well be true! Growth up, inflation down. Employment up, borrowing down, just the trade figures will continue to disappoint. Construction will be much higher. Investment and real earnings will be rising by the second half of the year. The Tories could not hope for a better economic platform to pitch at the hustings next year. The Budget 2014 simply enhanced economic prospects for the year ahead. Proclaimed as a budget for makers, doers and savers. The savers did particularly well but above all else, it was a budget for voters. The Chancellor offered a prudent budget with fiscal constraint and an obvious eye on the electorate. “Fixing the roof whilst the sun is shining” the mantra. It is clear the Bullingdon boys are fixing the roof in Downing Street, intent on a prolonged stay beyond May 2015. For a more comprehensive note on the budget itself, check out the full post here. It was a budget which 24 hours later was considered (by the IFS and others) to be more expansionary than at first thought. It was a clever budget. Hard to think it came from the same stable as the "omni shambles" just two years ago. The polls have Labour just 3 to 4 points ahead of the Conservatives. Tory analysts will have an eye on the 1986 rally. A fifteen point swing in just twelve months, to enable the Thatcher administration to stay in power. The Lib Dem vote has collapsed, the UKIP vote will evaporate. The Chancellor has created a winning platform. It will be difficult, but not impossible, for Prime Minister Cameron to slip from the podium. Borrowing … The borrowing figures for February were released on Friday. At first sight the figures appear disappointing. Borrowing in the month was £9.3 billion, slightly up from £9.2 billion in the prior year. Heading in the wrong direction? Not really. The prior year figures were enhanced by the £2.3 billion sale of 4G licences. For the year as a whole the OBR projections assume borrowing of around £108 billion in the year down from £115 billion last year. Over the next four years, assuming the budget forecasts for spending are achieved, borrowing could be eliminated within four years. Entirely plausible. Then the real task of reducing the £1.5 trillion debt can begin. Unemployment … The good news on employment continued with further news this week. The claimant count fell by almost 35,000 in February to a rate of 3.5%. Over the last twelve months the count has fallen by 360,000 to a level of 1.175 million. Over the last three months, the count has fallen by 100,000. On current trends, assuming growth of around 2.7% in the year, the unemployment level could fall below 1 million by the end of the year, hitting the critical 2.5% rate by the middle of next year. Why so critical? This would be the best performance since the beginning of 2008. A 2.5% claimant count rate is consistent with earnings of 4% - 5%. Far more than current achievements of 1.5%. “Spare capacity” could become a scarce resource, sooner than we think. Base rates are set to rise in the first half of next year. The rate rise could be sooner and thereafter faster than we are currently led to believe. Rate rise USA … Janet Yellen as the new head of the Fed gave a clear indication, US tapering will continue with a possible elimination of the whole QE programme by the Fall. Thereafter Yellen made clear, US rate rises are likely to follow within six months. Watch the UK and add six months, our mantra modified to perhaps three months, the guideline last week. On current job trends, we caution, watch the US and don’t blink. The UK rate rise - much sooner than you think. So what happened to sterling? The pound closed at $1.649 from $1.662 and at 1.1956 from 1.196 against the Euro. The dollar closed at 1.379 from 1.390 against the euro and 102.27 from 101.31 against the Yen. Oil Price Brent Crude closed at $107.37 from $108.34. The average price in March last year was $108. Markets, the Dow closed at 16,410 from 16,107 and the FTSE closed at 6,557 from 6,527. UK Ten year gilt yields closed at 2.76 from 2.67 and US Treasury yields closed at 277 from 2.65. Gold loves a crisis, the crisis is over as the metal moved lower to $1,3358 from $1,378. That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results - recorded - then destroyed. 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. Experts in strategy. 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. UK march of the makers … Good news for the march of the makers this week, - manufacturing output increased by 3.3% in January compared to disappointing growth of just 1.9% in the final quarter of 2013. Still some way to go to restore the sector to positive growth. Output remains some 9% below the peak registered in the first quarter of 2008. Output of Investment and capital goods increased by 3.8%, continuing the strong trend since the setback in 2008. We expect manufacturing output to increase by 2.9% for the year as whole and around 2.7% in the following year. Consumer goods output remained weak with further declines in the month. For some sectors of manufacturing, the march of the makers is more like a retreat from Moscow, than a move across the Rhineland. The makers will fail to make a real contribution to the rebalancing agenda. So what of net trade … The trade figures for January were released this week. After the December aberration, a month in which the ONS appears to have lost some £2 billion of imports, the total trade balance returned to normality. A deficit of £2.6 billion compared to £0.7 billion last month. There was a trade shortfall of £9.8 billion on goods, partly offset by an estimated surplus of £7.2 billion on services. For the year as a whole, we expect the trade deficit in goods to increase to £114 billion, offset by a trade in service surplus of £85 billion. The overall trade in goods and services shortfall will be £29 billion. At less than 2% of GDP, the deficit will not pose a threat to the outlook for sterling, assuming investment capital flows recover. The trade deficit will fail to make a real contribution to the rebalancing agenda. And what of Construction … Good news in construction. Output increased by 5.4% in January compared to the same month last year. New work increased by almost 6% in the month, as repair and maintenance budgets also increased by 4.5%. For the year as a whole we expect construction growth of around 6%, with strong growth in housing and commercial property expansion fuelling growth. Prospects for the year … The OECD suggests the UK economy will grow by over 3% in the first half of the year, in line with the strong expectations from the Bank of England “Nowcasting” model, news of which was also released this week. The NIESR GDP tracker for February suggests growth may have slowed to 2.6% in February after strong growth of 3.2% in the prior month. For the year as a whole most forecasters are moving to a 2.7% growth figure. Seems reasonable for now. The recovery appears secure and sustainable. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint as we have long pointed out. Charlie Bean on the North East Scene … Charlie Bean was in the North East this week, delivering a speech to the Chamber of Commerce. Further reassurance the MPC will be doing its utmost to ensure that recovery is not nipped in the bud. “When the time does come for us to start raising Bank Rate, we should celebrate that as a welcome sign that the economy is finally well on the road back to normality”. Excellent. Much of the rest of the speech was devoted to investment, productivity and net trade. As the deputy governor points out, the United Kingdom has run a persistent trade deficit of the order of 2-3% of GDP since the beginning of the century. So much for “rebalancing”. On investment, productivity, depreciation and “on shoring”, the speech demonstrates the lack of fundamental understanding of the real economy amongst policy makers at a senior level. We had hoped for better from the new regime. Charlie represents the old guard due to retire in June this year. Of The Treasury Select Committee … The Governor and members of the MPC were in front of the Treasury Select Committee this week. The protocol still eludes the new man. Governor Carney actually winked at Chairman Tyrie at one stage. It is difficult to imagine Governor King, managing a nod let alone a wink. It appears the meetings of the MPC are minuted and recorded. Then for good measure the tapes are destroyed. Lack of good recording equipment formed part of the explanation by the old guard. The solution to invest in better equipment seemed a little too obvious for the Chairman and the new Governor. Expect a rethink! Wink Wink. So what happened to sterling? The pound closed at $1.662 from $1.672 and at 1.196 from 1.205 from against the Euro. The dollar closed at 1.390 from 1.387 against the euro and 101.31 from 103.3 against the Yen. Oil Price Brent Crude closed at $108.34 from $108.86. The average price in March last year was $108. Markets, moved down concerned about China and the Ukraine - The Dow closed at 16,107 from 16,458 and the FTSE closed at 6,527 from 6,712. UK Ten year gilt yields closed at 2.67 from 2.81and US Treasury yields closed at 2.65 from 2.80. Gold loves a crisis, closing up at $1,378 from $1,338. That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results will be recorded then destroyed. 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. |
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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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