Building recovery - one brick at a time

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.

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© 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.

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