Markets Fret About Rising Rates ...
The Dow closed down, the dollar moved up. Ten year bond yields moved higher by just three basis points. Not much of a taper tantrum, more of a milk shake than an earthquake. The Fed announced the policy decision mid week, effectively to do nothing.
It wasn't really making any changes. There would be no increase in base rates. The asset purchase program would continue at an eye watering $120 billion dollars per month. No real concerns about inflation. It remains always and everywhere a transitory phenomenon. The long run targets of 2% inflation and a return to maximum employment remain in place. The committee expects to "maintain an accommodative stance until these outcomes are achieved."
The Dow tumbled over 1,000 points. The S&P closed 2% down. The overvalued Nasdaq moved higher yet. The Dollar moved up against Sterling and the Euro. The mood is moving back in favour of the dollar. Sterling closed at $1.38, the push on $1.42 a move too far.
It was all about the Dot Plot. So what's a dot plot? Members of the FOMC mark, with a dot on a chart, expected base rate changes into the future. It's like pin the tail on the donkey but with financial futures, all eyes open. Policy makers signaled they expect to raise interest rates by late 2023, sooner than they had previously anticipated.
Sentiment took a further hit on Friday after Federal Reserve Bank of St. Louis leader James Bullard said he expects the first rate increase even sooner, in late 2022. Bullard doesn't actually have a vote.
Fed Chairman Jerome Powell affirmed, “rate increases are really not the focus of the committee” right now. “The real near-term discussion that we will begin, is about the path of asset purchases and when the central bank would be able to pull back on that".
Has the mood changed in the Fed? “It’s the end of peak dovishness,” said Bleakley Global Advisors chief investment officer Peter Boockvar. “It’s not going hawkish. It’s just we’re past peak dovishness. Ah yes peak dovishness, a new phrase for the monetary policy handbook on Planet ZIRP.
The Fed increased forecasts for US growth to 7% in 2021 and 3.3% in 2022. The reversion to trend at 1.8% is expected from 2024 onward. PCE inflation is expected to hit 3.5% this year slowing to 2.1% next. Unemployment is expected to slow to 4.5% this year and 3.8% next.
Fed officials discussed an eventual reduction, or tapering, of the central bank’s bond-buying program. The timing of such a move remains uncertain. Central bank largesse may have to continue (in the US and the UK), until the burden of borrowing falls within the capacity of the private sector.
Stocks and bonds fell after the Fed statements. The change in tone and new forecasts were “a wake-up call for the market” said Phil Orlando, chief equity-market strategist at Federated Hermes Inc.
It may well have been a wake up call. By the end of the week, the markets had pressed the snooze button. It was time time to push the NASDAQ higher. Inflation is always and everywhere a transitory phenomenon after all ...
CBI Forecasts Growth of 8.2% ...
Just when we thought our 7.5% call may be a bit over the top, the CBI upped the stakes with forecasts of 8.2% growth in 2021 and 6.1% next. The CBI expects a much lower peak in the unemployment rate at 5.5% in Q3 in the third quarter as a result.
Household spending is to be the linchpin of the recovery, driving just over a quarter of GDP growth in 2021, and 70% of growth in 2022. Actual retail sales slipped in May, food sales were down as shoppers went to the pub. The drop of 1.4% in the month contrasts with a near 25% growth year on year. Online sales slipped to 29% as a proportion of all retail activity.
It was a big week for UK economics. The Labor stats reported a fall in unemployment to 4.7%. Earnings increased by over 8%, with a 14% jump in construction pay. The number of vacancies increased to 758,000 in May. Recruitment difficulties are increasing. The pre lock down level will soon be within reach. Businesses are calling for a relaxation of rules on immigration. EU workers are reluctant to return.
The onset of the wage inflation spiral is the worry for policy makers. Inflation CPI basis hit 2.1% in May. We expect a rise to over 3% within months. Manufacturing prices increased by almost 5% as input costs moved to 11%. The manufacturing hike is in large part about oil prices. We had expected prices to fall from the $70 dollar level. The push on to $73 dollars this week is concerning.
The threat of inflation and a wage spiral suggests rates may have too rise sooner than expected according to some. Bank of America, Merrill Lynch and Credit Suisse have brought forward forecasts of the first rate hike to May next year ...
Really? This is life on Planet ZIRP ... don't get dotty about that dot plot ...
That's all for this week, we will be back with more next week, stay safe ...
The economy is hotting up ...
Official data from the Office For National Statistics this week revealed "the economy is hotting up". UK GDP is estimated to have grown by 2.3% in April, as government restrictions continued to ease.
Compared to prior year, the economy grew by 28%. Construction activity was up by 80%. Manufacturing output increased by 40%. Service sector activity increased by 30%. The increase in the service sector was driven by a surge in retail expansion with strong growth in education, accommodation and food.
Construction activity slowed slightly in the month. Developments in the service sector were faster than we had expected. The service sector expanded by 3.4% compared to March.
The return to work continues. At the end of April, 3.4 million were on furlough compared to 4.7 million at the start of the year. We now expect this number to fall to around 2 million through the second quarter. Data from the ONS suggests the number may have fallen to 1.8 million at the end of May.
For the year as a whole, we now expect growth of 7.5% this year and over 5% next. Thereafter, growth is expected to return to an underlying trend rate of 2% extending to 2025. Want to know more? We will be expanding on our five year forecasts at the Saturday Economist Live Session later this month.
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US Inflation on the rise ...
In the U.S. inflation spooks shuddered as CPI inflation hit 5% in May. The Fed shrugged. Markets moved on. Ten year bond yields fell eleven basis points to 1.46. Nasdaq moved higher, the S&P moved sideways, the Dow closed lower but not by much. Gold prices eased by $15 dollars. Oil prices moved up, one dollar. Inflation remains, as far as the Fed is concerned, "always and everywhere, a transitory phenomenon".
It was all about "Oil Wells and Car Wheels". The oil price comparison with the 2020 slump to blame. Gasoline and Fuel oil prices were up by over 50% in the month. Transportation costs were up by 11%. Second hand car prices were up by 30%. Buyers are scrambling to buy depleted show room stocks. Production of new cars is hampered by supply shortages in a world of "Chips with Everything".
The Fed is relaxed about inflation. Officials indicated they expect interest rates to remain close to zero until 2024. Fed forecasts for growth have been increased to 6.5% this year, thanks to the fiscal stimulus and the success of the vaccine roll out. No thoughts of tapering for the moment. Bond purchases will continue until the central government deficit slows.
Expect the same in the UK. Rates on hold. The Trillion Pound bank note on offer to the Treasury until the central government deficit falls to around £100 billion. That could happen in fiscal 2022/23. Until then we remain trapped on Planet ZIRP with central bankers as buyers of last resort.
Good News For Bitcoin ...
Good news for "hodlers" of Bitcoin. El Salvador has become the first country in the world to accept Bitcoin as legal currency. President Nayib Bukele at the Bitcoin party in Miami this week said "The decision will help to push humanity in the right direction". El Salvador is in negotiations with the IMF to secure a $1 billion dollar loan. That's about 28,000 bitcoin at closing prices. A positive decision from the IMF on the loan, would be a bigger push for Central American humanity, he might have added ....
That's all for this week, we will be back with more next week, stay safe ... see you on the 25th ...
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Construction growing through the roof ...
Great headlines from the Times this week. "The economy is growing at an eye popping rate". "Construction growth is going through the roof". "Manufacturing leads strong performance", "Red hot economy lifts markets, ".
It didn't help when Nationwide reported house prices rising by 10.9% in April. Then the SMMT reported car sales increasing to 157,000 in the month from just 20,000 last year. Amazing what can happen once the showrooms reopen.
Interesting, Diesel car share fell below 10%. Hybrid sales accounted for over 40% of all registrations. Not too difficult to imagine what will happen as greater supply comes on stream. Ford's claim that 40% of total global sales will be electric by 2030 appears a tad conservative.
Back to the headlines. This is the week of the IHS Markit / CIPS UK PMI® data series. Hang on to your hats and cling to your eyeballs. Manufacturing surged to a record high in May, as new work intakes increased at a record rate. In construction, new orders increased at the fastest rate since the survey began in April 1997. In the service sector output growth increased at the fastest rate since May 1997.
The manufacturing index hit 65.6, the construction index hit 64.2, the service sector index hit 62.9. Bear in mind anything over 50 reflects growth in the sector and in the economy more generally, then it is understandable, why eye balls are popping. The economy is roaring back to life.
In the manufacturing sector, export orders increased at a survey record pace. Businesses reported stronger demand from the EU, the US and China. No surprise really, world trade increased by almost 10% in the first quarter of the year. Growth is expected to continue at a similar rate for the rest of the year.
The strong and swift upswing in activity, is leading to capacity limitations, delivery delays, supply shortages and rising prices. The good news business optimism is rising with over 70% of manufacturers forecasting higher levels of production, in twelve months time.
Businesses are recruiting. Difficulties are reported, especially in the hospitality sector. Really? The latest furlough data from HMRC reports numbers down to 3.4 million at the end of April of which almost one million were in accommodation and food. The sooner they, and the 1,700 furloughed in the energy sector, get back to work, the better.
In the US, President Biden is suggesting labour support schemes should be ended in September. Rishi Sunak may well be of the same opinion ...
Money For Nothing ... GiIts for Free.
The next episode of The Saturday Economist Live will be on the 25th June. We are spreading our multi media reach. We now have over 4000 hits on our Podcast channel, over 1000 views in the Saturday Economist Club Library. We regularly get over 1000 views on our weekly LinkedIn Channel. Premium Subscribers numbers are increasing at a "Record Rate" ...
We are working on a special feature "Digital Acceleration and the Smart Enterprise". This is an update on our work on Digital Disruption featuring in our Gazprom Moscow visit in at the end of 2019. We will talking about this at TSEL session later this month. The final drafts will be available to Premium Subscribers and members of the Saturday Economist Club.
In our regular sessions we have talked much about Monetary Policy. QE is dead. "Money For Nothing" Gilts for free. The Bank of England is engaging in monetary financing of the fiscal deficit. Someone had to.
According to the latest data from the Debt Management Office, total government liabilities increased by £450 billion in 2020. Foreign investors picked up less than 20% of the issue. Domestic insurance companies and pension funds bought into just 6% of the Treasury burden.
The Bank of England picked up 70% of the gilts on offer. The "lender of last resort" became the "buyer of last resort". Nobody likes a "Gilt Strike". The Old Lady of Threadneedle Street now has 32% of total government debt in the handbag. The Trillion Pound Bank note handed to the Chancellor may yet not be enough ... now that IS eye popping ...
That's all for this week, we will be back with more next week, stay safe ...
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Where does the money come from ...
Focus on the U.S. This week. Joe Biden announced his £6 trillion dollar budget. The President is committed to an expansion of support for infrastructure, education and the social safety net.
Questions are asked, "Where does the money come from?" "Do budget deficits matter any more?" "What will happen to inflation?" Is there a risk of hyperinflation" "Will Interest rates have to rise?"
The President's budget forecasts a $1.8 trillion deficit in the fiscal year 2022, followed by a $1.3 trillion deficit in subsequent years. This follows a $3.7 trillion deficit in fiscal 2021. The good news, the deficit is falling as a percentage of GDP from 17% this year to 8% next, then falling further in subsequent years.
$10 trillion dollars will have been added to the U.S. debt pile over a period of five years. Where does the money come from? The Fed has been ready to step in as the buyer of last resort. Modern Monetary Financing of the fiscal deficit ensures the Fed will continue to mop up new issuance, at the rate of $120 billion per month.
The Fed balance sheet has expanded from $4.2 trillion at the beginning of January last year, to $7.4 trillion by the end of December 2021. A $10 trillion dollar balance sheet is within reach in 2022. Where does the money come from? "We print it digitally" explains the Chairman of the Federal Reserve Jerome Powell in The Saturday Economist Live episode this month.
Domestic markets are happy to accept the increase in dollar reserves and money supply. US bond yields hold steady at 1.6%. Foreign exchanges are a little more circumspect about the prospects for the Greenback. Federal debt will increase to 110% of GDP this year. It is set to rise to almost 120% by the end of the decade. Sterling continues to test the $1.42 level. Some expect the move to $1.49 by the end of the year.
Growth expectations rise for the year ...
Stronger growth could help.The US administration is forecasting growth of 5.2% this year and 3.2% next. The IMF is forecasting growth of 6.5% this year. The latest IHS Markit US Composite index hit 68 in April, that's a series high. Businesses reported an unprecedented expansion in activity in services and in manufacturing. US growth may well exceed 7% this year, assuming firms can secure staff and supplies to support the recovery.
Prices are rising. The Bureau of Economic Analysis released the latest personal consumption inflation measure for April. It came in ahead of expectations at 3.6%. It was the strongest reading in 13 years. Not sure what the fuss is about, CPI inflation hit 4.2% in the same month. The pick up in inflation is happening as the rebound in demand meets supply shortages. Output is slow to return to pre-pandemic levels. Prices are squeezed higher. Basing effects are evident. Prices collapsed in April last year. Oil prices WTI basis traded at $16 dollars a barrel. In one week, traders were paid $35 dollars just to roll the barrels away.
Inflation is always and everywhere a transitory phenomenon. The Fed is prepared to look through the short term blip in prices, avoiding "tapering" and an increase in base rates to secure first, a return to full employment.
Not all are convinced. Former Treasury Secretary Lawrence Summers thinks President Biden’s budget risks overheating the U.S. economy. Summers said Biden is right to be trying to fix infrastructure and reduce inequality but he is worried by the large budget deficits. “I am worried in both the short and medium term about overheating.”
The President's tax plan may ease fears on that score. Higher rate tax payers will pay part of the price, the top rate of capital gains tax will rise to 40% in the Biden plan.
Either way, for prices this is not a return to high inflation of the 1970s when the collapse of the Peruvian anchovy crop led to hyper-inflation around the world. OK the quadrupling of oil prices didn't help.
Today's inflation is transitory and transient. It's due to bottle necks, excessive commodity speculation and a manufacturing diet of "Chips With Everything. The best cure for rising prices is rising prices ...
That's all for this week, we will be back with more next week, stay safe ...
Spend! Spend! Spend! The Shoppers are Back ... Driving Recovery
Retail sales jumped by over 9% in April as masked shoppers returned to the high street. Sales were up 40% compared to April last year. Sales were up by 12% compared to pre-pandemic levels in the months of 2019.
Clothing stores were major beneficiaries. Sales volumes increased by 70% compared to prior month. Household goods sales jumped 10%. Furniture sales leapt by 30% as showrooms reopened. Electricals were up by 29%. Sales of cosmetics were up by 25%. DIY and garden centre sales were down. Shoppers had other things on their mind as the high street moved back into business.
Salvation for the high street? More of a respite perhaps. Online sales increased by 32% year on year. Clothing sales were up by over 80% year on year. Household goods sales were up by almost 30%. As a proportion of all retail sales, online slipped to 30% of all retail. This was in line with our 30% forecast for the second quarter, as more options open for retail traffic.
Fastest Output Growth for Twenty Years ...
Business activity is expanding at the fastest rate since records began according to the latest PMI® data compiled by IHS Markit and CIPS. The composite output index increased to 62.0 compared to 60.7 last month. The manufacturing index increased to 63.2. The service sector index increased to 61.8. This all bodes well for a strong recovery this year.
Chris Williamson, Chief Business Economist at IHS Markit, said "The UK is enjoying an unprecedented growth spurt as the economy reopens. Factory orders are surging at a record pace as global demand continues to revive. The service sector is reporting near record growth as the opening up of the economy allows more businesses to trade. Business confidence has hit an all time high as concerns about the impact of the pandemic continue to fade.
The strongest upturns in demand were reported for hotels, restaurants and other consumer facing services. The output and order book growth seen in May, and the record level of business optimism, are consistent with GDP rising sharply in the second quarter, he said
Growth expectations rise for the year ...
Growth expectations have been revised up according to the latest forecasts for the UK economy published by HM Treasury this month. The average forecast for GDP growth is now 6.4% compared to 5.3% last month. Growth in 2022 is expected to slow slightly to 5.7% compared to 5.3% last month. The American banks lead the pack. Goldman Sachs forecast growth of 8.1%. JP Morgan forecast growth of 7.9%. The Bank of England now expects growth of 7.25% in 2021.
For the moment economists appear to be pretty relaxed about the prospects for inflation. CPI inflation is expected to average 2.2% in the final quarter and through most of the following year. The unemployment rate is expected to fall to 5.2% by the end of 2022.
The Saturday Economist Live ...
Want to know more? We will be talking about growth, jobs and inflation at The Saturday Economist Live on zoom, Thursday next week. Almost 200 have already signed up. You can do so today ... We are very excited about the format ... fast moving, content rich and fun! We will be talking about What's next for crypto with some great clips of Elon Musk, the "Father of Dogecoin" on Saturday Night Live ... Don't miss that.
That's all for this week, I look forward to seeing you on Thursday, Stay Safe,
Andy Haldane Chief Economist of The Bank of England was writing in the Daily Mail this week. "A year from now, it is realistic to expect growth to be in 'double digits' such will be the tennis ball bounce in the UK economy".
The Bank of England is forecasting growth of over 7% this year. That's already a stretch. Ten per cent plus growth next year would be pure fantasy land special. Economists are beginning to talk of an economy in double figures but more for inflation than GDP expansion.
CPI inflation hit 4.2% in the USA in April. Producer prices hit 6.8% in China, 6.2% in the USA and 5.9% in the UK, with more to come in next weeks UK data. In the UK our inflation cost models suggest inflation will move to 2.5% real soon. Our monetary models suggest inflation will rise to 4.0% next year. Central banks risk falling behind the curve in the pressure to increase rates. Not least in the UK were retail spending is now above pre Covid levels.
Restaurant and pub bookings are recovering rapidly. The housing market is currently "going gangbusters" [Haldane]. Households have accumulated almost £200 billion of forced savings, boosting consumer confidence and encouraging spenders to splash the cash. Asset prices, housing and cryptos appear to be the major beneficiaries.
The UK data for Q1 was released this week ...
The UK data for Q1 was released this week. Year on year output fell by around 5% compared to last year. In March, manufacturing output was up 5%, construction output was up 6%. Retail distribution was up 7%. The rally in the service sector will continue as accommodation, food, arts, entertainment and leisure sectors come on stream. For the year as a whole we expect growth of 6% this year. This may well be upgraded following the release of the more complete national accounts data next month.
A closer look at US Inflation ...
US inflation CPI basis hit 4.2% in April very much above forecast expectations. Markets took the hit, bond yields moved higher. Gold moved up. Cryptos moved lower. Elon Musk expressed concerns about the green credentials of Crypto mining.
Within the US data, much was made of the hike in second hand car prices, up by 20%. Really it was a story about oil. Gasolene prices and energy costs were up by almost 50% compared to last year. No surprise really. In April last year, Oil prices WTI basis were down at just $16.55 dollars compared to $62 dollars this year. On the 20th April 2020 traders were paid $38 dollars per barrel just to roll the surplus oil stocks away. The oil shock will ease through the rest of the year.This is one of the many reasons the Fed considers the inflation spike to be transitory.
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The Bank of England revised up its forecast for the UK economy this week. Growth of 7.25% is expected in the current year. In February growth of just 5% was anticipated.
The success of the vaccine program, pent up demand amongst households, gross savings and the extension of measures to protect jobs and businesses, improved the outlook for the current year.
Growth is expected to slow to 5.75% next year. Over the two years, the bank is forecasting growth of 13% compared to 12.25% last time. It is the shape of recovery, rather than the quantum of recovery, providing the major difference.
The bank expects inflation to move above target and hit the 2.5% CPI level later this year. This is largely due to rising energy prices and the comparison effects of price falls recorded last year. Thereafter inflation is expected to return to target as domestic demand and the comparison effect of energy costs from 2020 impacts on producer and retail prices.
"Transitory" is the new word in the central bank inflation vocabulary. Both the Fed in the US and the Bank in the UK are keen to see through any short term "drift" above the inflation target. Maintaining an accomodative stance for monetary policy is the priority. The Bank held rates and maintained the asset purchase plan in place for the moment.
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The Economy is Hotting Up ...
The bank forecast for jobs is pretty optimistic. The unemployment rate is expected to hold at the 5% level this year before easing to 4% over the next two years. We outline our views in the TSE Club special. The outlook for jobs and inflation appears to be "transitory". Expect revisions.
This week the latest PMI data suggested the economy is hotting up. The manufacturing index increased to 60.9, the service sector index hit 61.0 and the construction index eased to 61.6. What does this all mean? We examine the details in our monthly TSE Club PMI Monthly Review, out next week
So what does this mean for inflation?
Commodity prices are rising. Copper soared to an all time high this week. Futures rose above $10,000 dollars. Iron Ore prices moved to an all time high. Strong demand from China pushed prices above $200 dollars per tonne.
In the UK construction industry costs are accelerating. Timber has increased by 80% in the last six months. Polymer costs are up by 60%. Copper and steel costs have increased by 40% with more price rises to come. Paints and vanishes are up by one third.
Monetarists are worried about the surge in liquidity. In the US broad money M2 increased by 24%. In the UK M4 money increased by 12.5%. Soon it will be time to worry about what happens next after what happens next. It could be sooner than you think. Don't worry about inflation, it could be hyperinflation we should be worrying about.
We will cover this and more at the next Saturday Economist Live episode on Thursday 27th May at 9:00 am. Don't Miss that ... Fast moving, content rich and fun ... and slightly controversial ... of course ...
That's all for this week .. we will be back with more next week. Sign up for The Saturday Economist Club Join the Club
Don't Miss Out. John
Forecasts of growth in the UK are being revised up. The EY ITEM Club joined the 6% club last month, projecting growth of 6.8% this year. Bloomberg and JP Morgan revised growth forecasts to 7%. The latest estimate from Goldman Sachs suggests growth of 7.8% is possible, outpacing the USA in 2021.
Uncle Sam's shop grew at an annualized rate of 6.4% in the first quarter, according to the Bureau of Economic Affairs. The U.S. is on track to exceed the IMF forecasts made in April of 6.4% growth.
The Federal Reserve upgraded its view of the US economic recovery this week. Officials noted an improvement in the economy and offered a brighter picture in the short term. "Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened," the FOMC said.
Hardly surprising, US household incomes increased by 21% in April as Uncle Joe's stimulus checks dropped through the letterbox. The checks will help to fuel the economic revival. Savings rates leapt to 28% in March. Forced savings during the pandemic, suggest consumer spending is set to soar, supporting the recovery.
In Europe ...
In the EU, growth fell by -1.7% in the first quarter. Spain and Portugal were the most badly hit, with growth down by -4.3% and -5.4% respectively. The Italian economy was down by 1.4%. Just France and Lithuania were in growth territory. The French economy increased growth, up by 1.5%.
The IMF forecasts growth of 4.4% in the EU area this year following a setback of around 6.5% last year. More suspect is the 12.5% growth penciled in for India in the year. This suggests China will emerge as the fastest growing economy in the world this year at 8.4%.
Modern Monetary Policy ...
In the USA the Fed maintained the easy monetary stance. The Fedd funds rate remains within a target range of 0% and 0.25%. The asset purchase program is set to continue as $120 billion dollars per month. The Fed has set a high bar before the removal of any stimulus is imminent.
"Substantial further progress will have to be made toward the goals of full employment". Inflation may rise above target in the short term but this is a result of "transitory factors" which will drop out of the system by the end of the year. The Fed continues "Topping up the punch-bowl and handing out the spliffs." Base rates are expected to remain on hold into 2023.
So What of Inflation ...
In the UK house prices increased by 7.1% in April according to the latest data from Nationwide. Annual growth rates could hit ten per cent by June if prices are flat over the next new months. Inflation CPI remains subdued. Central bank stimulus continues. In the UK Money Supply M4 increased by 12.5%. In the US Money Supply M2 increased by 24%. Will excess liquidity and rising household spending lead to higher inflation? Perhaps!
Soon it will be time to worry about what happens next, after what happens next. For the moment forecasts of growth are just getting better and better ... enjoy the what happens next ...
That's all for this week .. we will be back with more next week. Our next Saturday Economist Live on Zoom is on Thursday 27th May at 9:00 am. Don't Miss that ... Fast moving, content rich and fun ... and slightly controversial ... of course ...
Check out our short trailer and intro to modern monetary policy on our Movie Channel. We explain Q.E. is dead long live Modern Monetary Policy ...
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Surfs Up ... Drop In ... Pull In ... Kick Out
The UK Economy is bouncing back from the coronavirus. Businesses are ready to shoot the curl! Surf's Up! It's time to Drop In, Pull In, Kick Out and enjoy the ride.
We expect the economy to grow by 6% this year and by 11% over the two year period. In nominal terms the economy will grow by over 20% over the next three years, providing strong support for businesses and jobs in the process.
Interest rates will remain on hold. Monetary policy will continue to be expansive. Fiscal policy will remain neutral. Even the so-called zombie companies will benefit from high levels of forbearance and debt erosion.
The latest flash PMI*data for April released this week demonstrated a strong revival in output growth in manufacturing and services. The composite output index increased to 60.0 from 56.4 in March. Both sectors are reporting stronger order books both at home and abroad. Manufacturers are reporting a growing willingness to spend, even among EU clients.
Business activity is expected to grow strongly in May and June, setting the scene for a bumper second quarter. There is good news for the job market. Businesses are recruiting and taking on staff at a rate not seen for over three and a half years. The latest jobs data for March reported a drop in the unemployment rate to 4.9%. We expect furlough numbers to drop significantly by the end of the second quarter.
There may be time to worry about inflation but not just yet. CPI inflation increased to just 0.7% in the month from 0.4% in February. Manufacturing prices ticked up in March. Input costs increased by 6%. Hardly surprising when the oil price Brent Crude averaged $63 dollars in the month, compared to $32 dollars last year. [Prices fell below $20 dollars in April 2020].
Retail sales bounced back. Year on year, sales increased by over 7%. DIY sales increased by 45%. Garden center sales increased by 34%. Online sales increased by 62% accounting for 35% of all transactions. Clothing sales on line increased by 80% accounting for 56% of all sales. Online sales at Zara increased by 95% in April. Primark reported record sales as stores reopened. Some stores closed early as capacity limits were stretched to the limit.
Even the borrowing figures turned out better than expected. Total borrowing hit £303 billion in the financial year, well below the OBR forecast of £355 billion in March and significantly below the near £400 billion spend expected in October last year. [The OBR forecasts included a £27 billion provision for loans under the government loan guarantee schemes. No provision is made in the latest ONS data.]
Tax receipts fell by 5% or £35 billion in the financial year. Special pandemic measures, including support for individuals and businesses, increased total spending by £203 billion. Total debt increased to £2.1 trillion, almost one third of which sits in the Bank of England coffers and of course is interest free. In the current financial year, the OBR are forecasting borrowing of £230 billion. Stronger growth and the end of lock down could push this much lower to around £150 billion.
With rates on hold, gilt yields suppressed, the Bank's "money for nothing gilts for free" policy ensures debt service is not a problem for the Treasury in the medium term. So get ready to shoot the curl, surfs up, enjoy the ride ...
China's economy surged by 18.3% in the first quarter of the year. The growth rate was the highest recorded since records began. The year on year comparison was impacted by the near 7% drop in output in the first quarter of 2020, as Beijing reacted to the Covid pandemic with a shut down of large parts of the economy.
For the year as a whole, most analysts, including the IMF, are forecasting growth in China of 8.5%, compared to 6.5% in the US and perhaps 6% in the UK.
Chinese consumers have emerged from the pandemic even stronger than they were before. In the first quarter of the year, retail sales were up by 34% compared to a year earlier. Home sales were up by 95.5% in the first three months of the year.
New car registrations were up by 70% over the same period. 5.1 million vehicles were sold, broadly in line with the same period two years ago. Electric car sales quadrupled to over 400,000 units. The Chinese Passenger Car Association predicts sales of electric vehicles will hit the 2 million mark this year.
Daimler reported sales up by 60% in Q1. Nissan recorded growth of 70%. [Don't expect a march on Beijing any time soon from the fragile Biden alliance]. Industrial output increased 14% in March. Fixed Asset Investment increased by 26% in Q1.
China vaulted to the top spot in the world in terms of new semi conductor investment. Investment levels overhauled South Korea, Taiwan and Japan, as domestic manufacturers rushed to build capacity. Investment increased by 39% to $19 billion dollars US in 2020.
Imports surged in March as Beijing pushed manufacturers to expand the local supply base. Tax rebates, state subsidies were granted. Import duties were waived for ten years. The dragon's appetite for chips with everything will be met, despite the restrictions from Uncle Sam. ASML CEO Peter Wennink has warned, export controls on China will not only fail to halt the country's technological progress but hurt the US economy in the process.
This week the Biden administration committed to a withdrawal of US troops from Afghanistan. A recognition perhaps, of a war that cannot be won as the Russians and the British have demonstrated in the past. The time must come for the White House to admit, a trade war with China, cannot be won. Trump's trade policy has already provided more recent evidence of that ...
That's all for this week ... stay safe ... we will be back with more next week ... off to have a bark at Dogecoin and join the search for a garden gnome ... is the shortage because of Brexit? Ye it must be Brexit. Don't believe that Suez Canal Cabal ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
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