 No surprise this week as MPC votes to hold rates … It’s that time of month again …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 purchased assets at £375 billion. The minutes of the meeting will be published on the 17 September. Can’t wait! The hawks views may have been subdued by the latest data on retail sales and earnings data but the economics news this week remains bullish about growth this year. Car Sales … Car sales in August were up by 9% in the month and just over 10% in the year to date. The UK is on track to sell 2.45 million cars this year. That’s higher than the pre crash levels recorded in 2007. Commercial vehicle sales were up almost 12% in August, increasing by 13% for the year to date. The car market remains a powerful indicator of consumer confidence and spending trends. August, with registrations of just 72,000, is no longer a big month for sales. September is the one to watch with over 400,000 new car sales recorded last year, 425,000 a hurdle number! UK Survey Data … The Markit/CIPS UK PMI® surveys for August were released this week. Chris Williamson, Chief Economist at Markit, claimed “An acceleration of growth in the services sector and an on-going construction boom offset a weakened performance in manufacturing in August. The three PMI surveys indicate that the economy grew at the fastest rate since last November, providing further ammunition for policymakers arguing for higher interest rates.” In the service sector, activity growth was the strongest for ten months. The headline Business Activity Index recorded 60.5 up from 59.1 in July, representing the sharpest monthly improvement in activity since October 2013. In the construction sector, output appears to have risen at the fastest pace for seven months. The key index recorded a level of 64.0 in the month, up from 62.4 in July. Residential construction posted the fastest growth in activity. News from the manufacturing sector disappointed slightly. The Manufacturing PMI index posted 52.5 in August, down from 54.8 in July. Albeit a 14 month low, the index is still in growth (above 50) territory. Domestic sales dominate, export demand is strong in North America, the Middle East and China but obvious problems in European order books persist. So what of the rest of the world? US jobs disappoint but Fed still on track to tighten … The US labour market added 142,000 new jobs in August, significantly below consensus expectations and well below the 225,000 average over the prior six months. The unemployment rate fell to 6.1%. Positive news on car sales and manufacturing output also hit the headlines … “The data doesn’t say the economy is slowing down but it does not suggest it is accelerating much either” according to Steven Blitz chief economist at ITG Investment Research. Nor we would add, is there much in the data to suggest the Fed will stray from the path of gently monetary tightening in the first half of 2015. In Europe … The ECB adopted further measures in an attempt to stimulate the slow recovery and low inflation in the Eurozone. Growth in Q2 increased by 0.7% compared with Q2 last year with some evidence of a slow down in Germany. Inflation fell to 0.3% and unemployment remained stubbornly high at 11.5%. The ECB lowered policy rates by 10 basis points, the refinancing rate moved down to 0.05%, the marginal lending facility fell to 0.3% and the deposit rate was pushed further into negative territory, dropping to -0.2%. No escape from Planet ZIRP in prospect! Despite the concerns about deflation, GDP is forecast to increase by 0.9% in 2014 and 1.6% in 2015. Low prices are an international phenomenon, not confined to Europe. Negative rates and QE are unlikely to provide the solution to low commodity prices. A slow for recovery for Europe is in prospect. Marooned on Planet ZIRP, digging up the runway will not improve the timetable for takeoff and escape. There is an old Iberian imprecation, “May the builders be in your home”. Far worse - the curse “May the academics be in your central bank”. So what of base rates … In the UK base rates were held at 50 basis points with no additions to the asset purchase programme. The chances of a rate rise before the end of the year are receding. Hot money is moving to February for the first rate hike but if the bad news from Europe continues, the hike may be post hustings after all. Is this at odds with the latest data? Of course. Demand conditions are strong, the labour market is tightening, recruitment challenges are increasing and skill shortages are ubiquitous. Pay and earnings remain subdued and international energy and commodity prices remain low. For the moment the inflation target remains within reach, easing the grip of the hawks on monetary policy. So what happened to sterling this week? Sterling fell against the dollar to $1.630 from $1.658 and down against the Euro at 1.259 from 1.261. The Euro was down against the dollar at 1.295 (1.314). Oil Price Brent Crude closed down at $100.98 from 102.19. The average price in September last year was $111.60. Markets, move up slightly. The Dow closed up at 17,103 from 17,084 and the FTSE closed up at 6,855 from 6,819. UK Ten year gilt yields move up to 2.49 from 2.37 and US Treasury yields closed at 2.44 from 2.33. Gold was slightly tarnished at $1,265 from $1,286. That’s all for this week but we would like to introduce the Bracken Bower Prize to our readers! John Introducing the Bracken Bower Prize The Financial Times and McKinsey & Company, organisers of the Business Book of the Year Award, want to encourage young authors to tackle emerging business themes. They hope to unearth new talent and encourage writers to research ideas that could fill future business books of the year. A prize of £15,000 will be given for the best book proposal. The Bracken Bower Prize is named after Brendan Bracken who was chairman of the FT from 1945 to 1958 and Marvin Bower, managing director of McKinsey from 1950 to 1967, who were instrumental in laying the foundations for the present day success of the two institutions. This prize honours their legacy but also opens a new chapter by encouraging young writers and researchers to identify and analyse the business trends of the future. The inaugural prize will be awarded to the best proposal for a book about the challenges and opportunities of growth. The main theme of the proposed work should be forward-looking. In the spirit of the Business Book of the Year, the proposed book should aim to provide a compelling and enjoyable insight into future trends in business, economics, finance or management. The judges will favour authors who write with knowledge, creativity, originality and style and whose proposed books promise to break new ground, or examine pressing business challenges in original ways. Only writers who are under 35 on November 11 2014 (the day the prize will be awarded) are eligible. They can be a published author, but the proposal itself must be original and must not have been previously submitted to a publisher. The proposal should be no longer than 5,000 words – an essay or an article that conveys the argument, scope and style of the proposed book – and must include a description of how the finished work would be structured, for example, a list of chapter headings and a short bullet-point description of each chapter. In addition entrants should submit a biography, emphasising why they are qualified to write a book on this topic. The best proposals will be published on FT.com. Full rules for The Bracken Bower prize are available here or here http://membership.ft.com/PR/brackenbower/ © 2014 The Saturday Economist by John Ashcroft and Company : Economics, Corporate Strategy and Social Media ... 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. 
0 Comments
 UK Interest Rates on hold ...
No surprise this week as the MPC voted to keep rates on hold and to maintain the asset purchase facility at £375 billion. The decision to increase rates may becoming more finely balanced for some but the news from around the world, will disturb the hawks and give succour to the doves. The rate rise may well be held over into the new year, despite the continued strong performance of the domestic economy. The minutes of the MPC meeting, due later this month, may provide some insight into the overall views of the individual committee members. ECB and Rates ... problems in the East In Europe, rates were kept on hold as Draghi continues to consider QE. Action is needed but the futile process of debt monetisation will do little to offset the economies beset by weak levels of domestic demand. Complaints against the need for labour reform and excessive regulation will largely miss the point. Italy is slipping back into recession with forecasts for the current year downgraded once again to growth of just 0.2%. France will struggle to hit the 1% growth target this year and German export performance is slowing as economies are transfixed by the crisis in Ukraine. Trade sanctions and threat of war are damaging exports from Euro land to Eastern Europe and to Russia. The Euro trading block is now imperilled by it’s very “raison d’être” at inception. Growth in the Euro economies is expected to be just 1% this year with no prospect of a rate rise on the horizon until late 2015 / 2016 at the earliest. Production and Manufacturing ... In the UK, manufacturing data was surprisingly weak in the latest data for June but Euroland is not to blame. Output increased in the month by just 1.9% after strong growth of 3.6% in the first quarter and 4% in April and May. In the second quarter overall growth was up by 3.2%. The underlying data from the Markit/CIPS Manufacturing PMI® suggests strong growth continued into June and July which suggests the latest ONS data may be something of an aberration. [We are adjusting our forecast for the year to growth in manufacturing of 3.4% based on the latest data. Expectations for UK GDP growth are unchanged at 3% following revisions to our service sector forecast.] The Car Market … The SMMT reported strong car sales in July, with new registrations up by 6% in the month and 10% in the year to date. Output increased by 3.5% over the year. The car market is on track to sell 2.45 million units this year. That’s actually higher than the levels achieved in 2007. Assuming output hits the 1.55 million mark, the deficit (trade in cars) will increase to almost 900,000 units. Car manufacturing is benefitting from the recovery in consumer confidence and household spending but the trade deficit will increase as a result of the strength of domestic demand and limitations to domestic capacity. The UK cannot enjoy a period as the strongest growth economy in the Western world without a significant deterioration in the trade balance. Deficit trade in goods and services … And so it continued to prove with the latest trade data. The deficit trade in goods increased slightly in the month of June to £9.5 billion offset by a £7 billion surplus in services. For the second quarter, the deficit was £27.4 billion (trade in goods) and just under £7 billion overall, goods and services. The service sector surplus was £20.5 billion. For the year as a whole, we expect the goods deficit to be £112.3 billion offset by an £80 billion plus serve sector surplus. No threat to the recovery but we still have concerns about the current account deterioration and the drop in overseas investment income. In the first six months of the year, exports of goods have fallen by almost 8% in value and imports have fallen by 4.6%. World trade growth has been subdued in the first six months of the year yet UK domestic demand increased by 3%. Sterling appreciation against the dollar has lead to a translation impact on the trade balance rather than an elasticity effect. Construction and housing ... The latest adjustment for construction data confirms the recovery continues driven by a huge increase in new housing. Total output increased by 5.3% in June, up by 4.8% in Q2 2014 compared to Q2 last year. The total value of new work in the month increased by 5.8% with the volume of new housing increasing by 18% compared to June last year. House Prices ... The increase in housing supply is doing little to assuage the demand for house moves and house prices. Halifax and Nationwide reported prices up by 10% in July. Our transaction model is simple. Activity is a function of house prices and the real cost of borrowing. With mortgages fixed at 4%, the double digit capital appreciation is irresistible to the basic mechanics of a free market. The real cost of borrowing is negative 6%. Demand for housing will continue to out strip supply, despite the regulatory adjustments to the mortgage market. So what happened to sterling this week? Sterling closed down against the dollar at $1.6774 from $1.682 and unchanged against the Euro at 1.252. The Euro was largely unchanged against the dollar at 1.341. Oil Price Brent Crude closed up slightly at $105.02 from 104.84. The average price in August last year was $111.28. Markets, closed mixed. The Dow closed up 61 points at 16,554 from 16,493 and the FTSE closed down 112 points at 6,567 from 6,679. UK Ten year gilt yields were down at 2.46 from 2.557and US Treasury yields closed at 2.42 from 2.49. Gold was up at $1,305 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.  Of inflation and unemployment? Job centers will be closing in 2017 … This week the ONS released latest data on inflation and unemployment. The rate of employment growth is such, job centers will be closing in 2017, if current trends hold. Unemployment falls … Unemployment fell to 3.1% in June, (claimant count basis) and to 6.5% in the three months to May (LFS basis). The number of unemployed in June was 1.04 million. The rate of job creation has surprised not just our models but those of the Bank of England. Spare capacity will be eliminated within the next three months. Claimant count levels will be back at pre recession levels within six months and job centres will be closing by 2017 - no-one will be looking for work. Is this realistic? Probably not! Earnings remain at unrealistic levels if we accept the official data (sub 1%). The level of recorded earnings does not correlate with job levels. Neither does it sit well with evidence of household spending on car sales, retail sales and trends in the housing market. Our evidence on recruitment and skills shortages also infers that earnings should be on the increase. It is a strange world on Planet ZIRP! As for the so-called Productivity Paradox, do we really believe our businesses are taking on more and more people to do less and less work - of course not. The economy is in danger of overheating based on job trends. Productivity absorption will improve as output increases but this will not really ameliorate the inflation impact! So what of inflation in June? Inflation rises … Inflation CPI basis increased to 1.9% in June from 1.5% in May. Service sector inflation increased to 2.5% and goods inflation also increased to 0.9%. The largest contributions to rising prices came from clothing, food, drinks and transport. We expect inflation to hover above the 2% level for the rest of the year assuming sterling tracks $1.75. Manufacturing prices, increased by just 0.2% in the twelve months to June, slightly down from the prior month. Low world prices and higher sterling dollar values are easing the pressure on input costs. Metals, materials, parts and chemicals are all down in price, import cost basis. Housing Market … So what of the housing market this week? The Council of Mortgage Lenders released the latest gross lending figures for June. “The pace of lending slowed” according to the headlines. Commenting on market conditions in this month’s Market Commentary, CML chief economist Bob Pannell observes: "The macro-prudential interventions announced by the Financial Policy Committee in late June are finely calibrated and precautionary, but could nevertheless reinforce April’s Mortgage Market Review in tipping the UK towards a more conservative lending environment.” Yeah, thanks Bob. Lending was up by 20% in the first quarter, that’s an increase of almost 30% for the first six months of the year. Despite the interventions of the FPC we expect the volume of activity to increase by 25% this year and by a further 15% in 2015. Even then, activity will still be some 20% below pre recession levels. A great recovery but no real threat to the economic outlook over the medium term either. So what of interest rates … The Saturday Economist™ Overheating Index™, ticked higher this week as a result of the inflation and jobs update. Our overall growth outlook is unchanged but the chances of a rate rise before the end of the year ticked higher in line with the index. So what happened to sterling this week? Sterling closed down against the dollar at $1.709 from $1.711 but up against the Euro to 1.263 from (1.258). The Euro moved down against the dollar at 1.352 from 1.360. Oil Price Brent Crude closed up at $108.40 from 106.90 from. The average price in July last year was $102.92. Markets, closed up. The Dow closed above the 17,000 level at 17,100 from 16,900 and the FTSE was up at 6,749 from 6,690. UK Ten year gilt yields were down at 2.60 from 2.61 and US Treasury yields closed at 2.49 from 2.52. Gold was down at $1,310 from $1,336. 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.   I made a trip to Liverpool this week. It was the Battle of the Economists, part of the International Festival of Business programme. Eight top economists were “in the ring” swapping punches. I “refereed” the morning event and hosted the Question Time session. It was a great event in the IFB calendar with lots of interesting perspectives on the world and UK economy. No blood spilled, nor egos bruised the outcome! To close the session, I asked the panel for views on when UK interest rates would begin to rise. Some argued for an immediate rate rise, most expected rates to rise in February next year and a few expected rates to rise in the November this year. As we said last week, “It is true there have been a lot of conflicting signals about when rates will rise! Following Mark Carney’s Mansion House speech, the odds in favour of a rate rise before the end of the year increased but then lengthened slightly, on the low inflation figures for May and the strength of sterling ”. “Don’t watch my lips - watch the data!” the new forward guidance from the Governor. This week, the data continued to suggest the rate rise would be sooner rather than later. House prices up almost 12% … House prices increased by almost 12% in the year to June according to Nationwide. In London prices increased by 26%. The price of a typical property in London, reached the £400,000 level with prices 30% above the 2007 highs. Should we be concerned? Of course but the rate of increase in house prices of itself, will not lead to an increase in interest rates necessarily. Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England was in Liverpool this week. “The main risk we see arising from the housing market is the risk that house prices continue to grow strongly and faster than earnings. The concern is the increase in prices leads to higher and more concentrated household indebtedness.” The Bank is not worried about the rise in house prices per se. The FPC (Financial Policy Committee) is concerned about the risk to the banking sector from high household indebtedness exposed to the inevitable rate rise and potential collapse in asset prices. The introduction of measures on interest rate multiples and leverage, the confines of policy intervention for the moment. Car Sales up 10.6% year to date … The strength of the housing market demonstrates the strength of consumer confidence and spending. The economy is growing at 3% this year, retail sales were up by almost 4.5% in the first five months of the year, car sales were up by 6% in June and by 11% in the first six months. We are forecasting registrations will be over 2.4 million in 2014, higher than the pre recession levels recorded in 2007, placing additional pressure on the balance of payments in the process. Yet rates remain pegged at 0.5%! Does this continue to make sense? PMI Markit Purchasing Managers’ Index® Survey Data The influential PMI Markit surveys continue to demonstrate strong growth in the economy into June. In manufacturing, strong growth of output, new orders and jobs completed a robust second quarter. In construction, output growth continued at a four-month high and job creation continued at a record pace. In the service sector, the Business Activity Index, recorded 57.7 in June. The survey produced a record increase in employment with reports of higher wages pushing up operating costs. The Manchester Index™- nowcasting the UK economy The Manchester Index™, developed from the GM Chamber of Commerce Quarterly Economic Survey, slowed slightly from 35.1 in the first quarter to 33.6 in the second quarter, still well above pre recession levels. The data within the survey, confirms our projections for growth in the UK economy this year of 3%, moderating slightly to 2.8% in 2015. So when will rates rise ? The Saturday Economist Overheating Index revealed ... At the GM Chamber of Commerce Quarterly Economics Survey yesterday, we revealed the “overheating Index”. This is a summary of fourteen key indicators which form the basis of any decision to increase rates by the Monetary Policy Committee (MPC). The strength of consumer spending, reflected in house prices, retail sales and car sales would argue in favour of a rate rise earlier rather than later, as would the growth in the UK economy at 3% above trend rate. On the other hand, inflation, reflected in retail prices and manufacturing prices remain subdued. Despite the strength of the jobs market, earnings remain below trend levels. The decision, on when to increase rates, remains finely balanced for MPC members at this time. Our overheating index is broadly neutral but tipped slightly in favour of a rate rise now. By the final quarter of the year, assuming earnings and inflation rally from current levels, the decision will be much more clear cut. Based on data from the Overheating Index, we expect rates to rise before the end of the year. Clearly markets think so too ... So what happened to sterling this week? Sterling closed up again against the dollar at $1.715 from $1.702 and up against the Euro to 1.261 from (1.247). The Euro moved down against the dollar at 1.360 from 1.365. Oil Price Brent Crude closed down at $110.66 from $111.35. The average price in June last year was $102.92. Markets, US closed up on the strong jobs data. The Dow closed above the 17,000 level at 17,068 from 16,771 and the FTSE was also up at 6,866 from 6,757, the move above 7,000, too much for the moment. UK Ten year gilt yields were up at 2.75 from 2.63 and US Treasury yields closed at 2.64 from 2.63. Gold was up slightly at $1,320 from $1,316. 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 Manchester Index™ The influential Manchester Index™, is developed from the GM Chamber of Commerce Quarterly Economic Survey. It is a big survey which is comprehensive, authoritative and timely. Now we also have the Manchester Index™. The Manchester Index™ is an early indicator of trends in both the Manchester and the UK economy. Using the Manchester Index we are in a great position to “nowcast” the UK economy and get a pretty good steer on employment and investment in the process.   It was one of those heavy weeks for economics releases. Inflation, retail sales, government borrowing plus the eagerly awaited second estimate of GDP. Add in ONS house price information and a heady cocktail of excited headlines was to be expected from the financial pages. Inflation data as expected … It began quietly enough with the inflation data. No surprises, CPI inflation edged up to 1.8% in April from 1.6% in the prior month. The large rise in service sector inflation to 2.8% from 2.3% was offset by a small decline in goods inflation, falling to 0.9% from 1.0%. The uptick was marginally reflected in producer prices, increasing to 0.6% from 0.5%. The more volatile input costs, fell at a slower rate -5.5%, from -6.3% prior month. Energy and oil prices, were again significant in the reduced input costs. Imported metals, chemicals, parts and equipment fell significantly assisted by the 10% appreciation of sterling against the dollar. For the year as a whole, we think inflation will hover close to the target for the best part of the year. The risk remains to the upside in the final quarter. A rise in international prices, and domestic demand, boosted by compression in the labour market is likely to push prices higher. No risk of deflation on the UK horizon, a real risk to the upside is developing. House Prices .. UK house prices increased, according to the ONS data, by 8% in the twelve months to March. “The house market may derail the recovery", the headline. “Carney believes that house prices are the biggest risk to the economy” the great caution. No matter, that house prices increased by over 9% in the prior month or that house prices outside London are increasing by just 4% on average. In the North West prices increased by just over 3%, in Scotland prices hardly increased at all. In London, house prices increased by 17%. Foreign cash buyers at the top end of the market may be confusing the overall trend. However, significant volume and price escalation in the mid tier market is also impacting on price averages. Governor Carney has made it clear interest rates will not rise to combat rising house prices. The remit to action lies with the Financial Policy Committee. Already, action has already been taken to modify the Funding for Lending Scheme away from mortgage lending. Discussions between the Bank and Treasury will continue to consider modifications to the “Help to Buy Scheme”. Implementation of the Mortgage Market Review will also curb lending into 2014. There is a structural problem in the housing market. Mark Carney, Governor of Threadneedle Street, points out that Canada has half the population of the UK but builds twice as many houses. No wonder there is a supply issue. But is the Bank of England prepared to help out? Not really. The Little Old Lady will not turn a sod, grab a hod nor build a single house this year. “We are not in the business of building houses” the Governor’s mantra. The Bank of England will not build a single house in this cycle but neither will it allow the housing market to derail the recovery, provoking a premature move in base rates. Retail Sales … Retail sales figures, on the other hand, suggest rates may have to rise much sooner than expected. Retail sales volumes increased by 6.8% in April compared to prior year. It was May 2004 when retail sales volumes increased at a similar rate. Base rates were 4.75% at the time rising to over 5% within eighteen months. Retail sales values increased by just over 6%. Online sales increased by 13%, accounting for 11% of total action. Consumer confidence is back to the pre recession levels, car sales are up by 8% this year and retail sales are soaring. From a UK perspective, rates should be on the move by the Autumn of this year. The MPC will be reluctant to move ahead of the Fed and the ECB. The international context suggests the rate rise may be delayed until the second quarter of 2015. Thereafter, for those who would argue the forward horizon has 2.5% cap, the retail sales figures and base rate history should provide a warning of surprises to come. GDP Second Estimate … No surprises in the second estimate of GDP release for Q1. No revisions. The UK economy grew by 3.1% boosted by an 8% surge in investment activity. Manufacturing and Construction increased by over 3% and 5% respectively. The economy is rebalancing … well a little bit! Our May Quarterly Economics Update on behalf of GM Chamber of Commerce is released next week. The outlook for the year remains broadly unchanged. We expect the UK economy to grow by around 3% this year and 2.8% in the following year. The surge in retail activity has been a surprise, as is the continued strength in employment. The outlook remains much the same. Growth up, inflation rising slightly, employment increasing and borrowing, despite the blip in April, set to fall. Just the trade figures will continue to disappoint as we have long pointed out. So what happened to sterling? The pound closed broadly unchanged against the dollar at $1.682 from $1.683 and up against the Euro at 1.234 (1.227). The dollar closed at 1.363 from 1.370 against the euro and at 101.97 (101.54) against the Yen. Oil Price Brent Crude closed up at $110.52 from $109.91. The average price in May last year was $102.3. Markets, the Dow closed up at 16,593 from 16,447 but the FTSE adjusted to 6,815 from 6,855. The markets are set to move, the push before the summer rush perhaps. UK Ten year gilt yields closed at 2.63 (2.56 and US Treasury yields closed at 2.52 from 2.51. Gold was unchanged at $1,293 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. 
 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.  Economics news – no Flowers by arrangement ... Treasury Enquiry ... The Treasury has ordered an independent investigation into events at the Co-op Bank including the circumstances surrounding the appointment and governance of Paul Flowers. The former Chairman of the Bank was arrested on Thursday night, days after he was filmed handing over money for cocaine and exotic substance. Mr Flowers issued a statement apologising for doing some “stupid things” claiming, it had been a difficult year. Unfortunately, for lots of loyal workers and stakeholders at the Co-op bank the difficult years will roll on for some time yet. The Treasury enquiry will be led by an independent person appointed by the PRA and the FCA which of course replaced the FSA (which allowed the Flowers appointment in the first place). How the process of “Regulatory Scrabble” moves forward. The enquiry should ask what system considered Bob Diamond so unacceptable as a career banker, yet allowed Flowers to flourish when clearly out of his depth both managerially and professionally. Answers on a PRA, FCA postcard please. Borrowing Back to the economics, more good news for the Chancellor this week as the borrowing figures fell to £8.0 billion from £8.5 billion in October. The underlying data is much stronger than top line figures suggest. Expenditure year to date is up by just 2% but revenues have increased by almost 8%. Income tax and VAT revenues are increasing by over 5% as the recovery gathers momentum. Total borrowing at £115 billion last year will fall towards £100 billion in the current year. CBI and the March of the Makers The CBI survey reported a strong rise in output in the manufacturing sector in the latest survey data released this week. Growth in the manufacturing sector was the strongest for 18 years. Both the size of order books and the pace of output were the highest recorded since 1995. In other news, the SMMT reported a 17% increase in car manufacturing for the month of October. Output for domestic sales increased by over 50%. Don’t get too excited, year to date output growth is up by just over 5%. So what does this all mean? We expect a strong rally in manufacturing output in the final quarter of the year around 2.5% continuing into 2014. Borrowing figures for the year will be much better than expected. The median forecast of the HM Treasury panel is now just £100 billion for the current financial year, falling below £90 billion next year. Growth up, unemployment down, inflation down, borrowing down, only the trade figures will continue to disappoint the coalition platform as the election looms. What happened to sterling? The pound closed up at £1.6215 from £1.6113. Against the Euro, Sterling closed at €1.1966 from €1.1940. The dollar moved up against the yen closing at ¥101.3 from ¥100.1 and closing at 1.3555 from 1.3494 against the Euro. Oil Price Brent Crude closed at $111.05 from $108.50. The average price in November last year was almost $110. We expect Brent Crude to average $110 in the month, with no material inflationary impact. Markets, US pushed higher - The Dow closed at 16,065 up from 15,962. The FTSE closed at 6,674 from 6,693. 7,000 FTSE still the call before Christmas. UK Ten year gilt yields closed at 2.79 from 2.75 US Treasury yields closed at 2.74 from 2.70. Yields will test the 3% level over the coming months. Gold closed at $1,244 from $1,288. The bulls may have it may just have to wait for now. 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. John 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. © 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. 
 Economics news – import drive and the march of the makers ...
Import Drive ... “Sales of European cars drive trade gap wider” is the headline in the Times today as Britons “flocked” to buy cars built on the continent. The trade figures released this week, reveal the September deficit (trade in goods) increased to £9.8 billion from £9.6 billion last month. The trade deficit with the EU reached a record £6.0 billion as imports increased by £0.4 billion to £18.6 billion. “Half of the increase is attributed to cars”, according to the ONS, hence the slightly unbalanced headline from the Times. In reality, Britons have been flocking to the showrooms since the start of the year. Car sales are up by 10% this year. The deficit was offset as usual by a trade in services surplus of £6.5 billion. This is a familiar pattern which should come as no surprise to readers of The Saturday Economist. The trade deficit will deteriorate further especially if the UK continues to grow at a faster rate than major trading partners in the EU and USA. We are forecasting an overall trade deficit this year of £110 billion offset by a service sector surplus of almost £80 billion. The residual overall deficit easily financed. The September figures are confirmation of the trends within our well established trade model. Depreciation damages UK trade in goods performance. Imports do not react significantly to price changes. There will be no rebalancing of the economy. March of the makers picks up pace ... Did the march of the makers pick up the pace in September? Not really. According to the latest figures from the ONS. Manufacturing output increased in the month by just 0.8%. Output for the quarter was flat as signaled in the Markit/CIPS PMI® survey data last week. Nevertheless we still expect manufacturing growth of almost 2.5% in the final quarter of the year. Last year was such a dismal quarter, even the stumbling marchers will make progress. Watch out for the headlines heralding the rebalancing over the next few months and tie me to a chair. Other survey news ... The service sector continues to drive growth in the economy according to the Markit/CIPS UK Services PMI® for October. The headline Business Activity Index reached a level of 62.5 in October. “The UK service sector maintained its recent run of strong growth during October, with activity expanding at the fastest pace since May 1997 as levels of incoming new business rose at a survey record rate”. The construction rally also continues according to the Markit/CIPS UK Construction PMI® index. The sharp rebound in UK construction output continued in October. The lead index posted 59.4, up from 58.9 in September, above the 50.0 no-change threshold for the sixth consecutive month. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The pick up in manufacturing output will add to the growth in services and construction. Higher growth, more jobs, lower borrowing, inflation falling, investment will pick up in the second half of next year, it’s all looking pretty good for the Chancellor. Just the trade figures will continue to disappoint. We now think base rates are now more likely to rise by around 50 basis points in 2015. Higher growth will result in unemployment hitting the 7% hurdle rate in the third quarter of 2015, several months after the election. What happened to sterling? The Euro rate cut weakened the hybrid and Sterling strengthened as a result. The pound closed at £1.6018 from £1.5912. Against the Euro, Sterling closed at €1.1982 from €1.1814. The dollar moved up against the yen closing at ¥99.1from ¥98.7 and closing at 1.3368 from 1.3484 against the Euro. Oil Price Brent Crude closed at $105.12 from $105.91. The average price in November last year was almost $110. We expect Brent Crude to average $110 in the month, with no material inflationary impact. Markets, pushed higher - The Dow closed at 15,762 up from 15,616. The FTSE closed at 6,708 from 6,721. The rally continues with a stronger Santa rally in prospect over the next five weeks. UK Ten year gilt yields closed at 2.77 from 2.66 US Treasury yields closed at 2.75 from 2.62. Yields will test the 3% level over the coming months. Gold closed at $1,284 from $1,312. The bulls may have it may just have to wait for now. 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. John 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. © 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. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
August 2024
Categories
All
|
| The Saturday Economist |
RSS Feed
