 Give a man a fish and you feed him for a day Teach a man to fish - and you feed him for a lifetime! Yep - The old proverbs are great at summation but sometimes over looking the broader implications of the proposition. For the fisherman, thrusting a rod into hands is not enough. We have to preserve fish stocks, avoid pollution and ensure the piscators have a boat to reach the offshore shoals. A bit of international regulation helps, to guarantee the floating fish factories don’t suck away the livelihood of the locals. Yes, you can teach a man to fish but you leave him with nothing more than a stick in his hands and a soft line dangling into empty waters, unless broader policy issues are addressed. The great enemy of the truth is … What has this got to do with economics you may ask? We have to ensure the first principles of any proposition are covered in depth. JFK would say, “The great enemy of truth is very often not the lie - deliberate, contrived and dishonest but the myth - persistent, persuasive and unrealistic.” I feel the same way about QE, as I do about fishing. Allegedly stimulating growth and inflation, QE is a process in which central bankers buy debt from the debt management office underwritten by Treasury. In the UK HMT can then claim back the yield coupon eliminating the cost of debt issuance. It’s “money for nothing, gilts for free” a form of Dire Straits economics, which does little or nothing for growth or inflation. It is a combination of debt monetisation and financial repression. Ten year gilt yields at 2.3% are symptoms of the malaise, a combination of an over long stay on planet ZIRP with a toxic dose of QE, from time to time, in a misguided attempt to sustain life. QE is not the answer for Europe … In the UK, QE, intellectually discredited, came to an abrupt end in 2012. The Fed will terminate the US experiment in October this year. In Japan the nonsense persists. Kuroda, the Governor of the Bank of Japan continues with a QE programme worth $1.4tn (£923bn) despite the damage to the international gilt curve. This is the economy which introduced a sales tax in April, to stimulate inflation, ignoring the impact on demand and output. The impact on revenues muted in the process. In Europe, the torpor of the Euro economy continues, with news of rising employment and falling inflation. The Economist leads with “That Sinking Feeling Again” but what can Draghi do? Interest rates at the floor, Draghi can do no more, than talk down the Euro with a hint of QE to come. Why hold back? The ECB well understand, if there is nothing more powerful than idea whose time has come, there can be nothing more impotent or futile as an idea, for which the time has been and gone. So it is with QE, in part the problem of deflation lies elsewhere …. No Carnival in Brazil … In South America the bad news continues, a technical default in Argentina, major challenges in Venezuela and a down grade of growth forecasts in Brazil to just over 1% this year. An awful lot of coffee but no pick me up in Brazil as the world cup damaged output. Let them eat cacao but not watch football, the lesson from history. The latest data on world trade suggest that growth increased by 3.2% in the second quarter compared to 2.7% in Q1. The US recovery is assisting the process with news of a US GDP revision in the second quarter to growth of 2.5% compared to the earlier estimate of 2.4%. The world is recovering … So what of world prices? Deflation may be the spectre that haunts Europe but world price trends are partly to blame. World trade prices increased by just 0.4% in the second quarter after a fall of 1% in Q1. Oil, energy and commodity prices remain subdued. No rising prices as yet, so rates may be on hold for a bit longer … So what of base rates … Flip flops are becoming the footwear of choice for central bankers. Mark Carney, the unreliable boyfriend, started the fad, closely followed by Janet Yellen, fishing for answers in Wyoming last week. The consensus is for UK rates to rise by 25 basis points in February, as a rate rise before the end of the year is ruled out. So what happened to sterling this week? Sterling closed unchanged against the dollar at $1.658 from $1.657 but up against the Euro at 1.261 from 1.252. The Euro was down against the dollar at 1.314 (1.324). Oil Price Brent Crude closed down at $102.19 from 102.32. The average price in August last year was $111.28. Markets, rallied on the fishing report from Wyoming. The Dow closed up at 17,084 from 17,031 and the FTSE closed up at 6,819 from 6,775. UK Ten year gilt yields slipped to 2.37 from 2.41 and US Treasury yields closed at 2.33 from 2.34. Gold was slightly tarnished at $1,286 from 1,302. That’s all for this week. Join the mailing list for The Saturday Economist or please forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Economics, Strategy and Social Media ... Experience worth sharing. Disclaimer 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. If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a colleague or friend. Or they can sign up here *|MC:SHARE|* 
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 The Inflation Report Press Conference … Reassurance from the Inflation Report Press Conference this week. The Bank of England may be uncertain about what is happening in the economy but it is certainly not clueless. Excellent. £3.5 million spent on the economics model and 200 PhDs in the pot to stir up the data, not all is for nought. James Macintosh of the FT put the difficult question “It would appear you've been moving over the past five years from a fair degree of certainty towards a fair degree of cluelessness and currently - you are at the more clueless end of the spectrum.” Is this a fair point? Well perhaps. Larry Elliott of the Guardian had begun the challenge suggesting there's a wide range of views on the Committee about the likely degree of slack in the economy. There is uncertainty about the housing market, wages may go up, they may not go up. Guidance on the pace and extent of interest rate rises is an expectation not a promise … “I mean once you cut through all this doesn't it lead you to three conclusions - one, that the Bank hasn't really got a clue what's going on out there; two, that the MPC is divided about what's going on out there; and thirdly, any person thinking about taking out a mortgage on the basis of the Bank's forward guidance would be ill-advised to do so, because anything you say, has to be taken with a very large pinch of salt?” Oh dear ... The Carney honeymoon is over … Well one thing we can be certain about, this is not the questioning we would have expected under Governor King. For Governor Carney the honeymoon is over. So much for the open routine. The Emperor’s economics models are proving to be as insubstantial as the clothing. Perhaps it is time to return to the enigmatic, grumpy old professor emeritus routine, dismissive of those of a lower intellectual order including undergraduates and the press core particularly. Ed Conway now with Sky News, would occasionally rattle Governor King teasing about the accuracy of the inflation forecasts, (not actually forecasts of course) but Governor Carney,cast in the role as the unreliable boyfriend, is taking more and more hits. All a bit of a muddle … Clearly Asa Bennett From the Huffington Post rattled the Governor, sensitive to criticism of forward guidance, “I just wanted to ask Governor about the evolution of your forward guidance plan, particularly when it started with the sort of clear to understand unemployment threshold, and then the sort of output gap, and then this bolt on about pay growth. Do you wish you started with this at the beginning? Hasn’t it all been a bit of a muddle or is it a learning process? “Well you’re muddled I'm afraid”. The playground retort from the Governor of the Bank of England. So is that the best we can get? The Old Lady of Threadneedle Street - the Aunt Sally of Fleet Street … The Old Lady of Threadneedle Street is becoming the Aunt Sally of Fleet Street. It would help if Jenny Scott, Executive Director of Communications, chairing the press conference, appeared to know some of the names of the press corp, instead of jabbing a pencil in this or that direction, when it came to question time. Perhaps Jenny was trying to ward off evil spirits, waving the magic wand of oblivion, which Governor King carried so successfully in his cloak. For debutante MPC member Minouche Shafik, it was all too much. Shifting uneasily, apparently bored, struggling under the weight, not of office but of a voluminous hair style, the governor allowed Minouche one question response on Europe … Minouche : “It would be good for us if Europe grew faster since it’s our key trading market, but for the near term that doesn’t look very likely”. “That’s all we have time for”, said the Director of Communications and that was that. Well, we must hope there is much more to come. So what happened this week? GDP Estimate … The ONS second estimate of GDP was released this week. Growth in the UK Q2 increased by 3.2% compared to the prior estimate of 3.1%. Actually the numbers hadn’t changed, the statisticians were using a more accurate calculator this time round for the rounding. Our estimates of growth for the year are unchanged at 3% which makes the Bank of England estimates of growth (3.5%) all the more difficult to understand. Either the economy will grow at an eye watering 4% in the second half of the year or the Bank expects big revisions to the data in September as a result of the inclusion of drugs and prostitution in the national accounts. Who would have thought hookers had that much clout. We shall have to wait until the end of September for the update. Labour Market Stats … The jobs outlook just gets better. The claimant count rate fell to 3% in July at just over 1 million unemployed. 400,000 have found work in the past year. At the current rate of growth we will be closing the job centres at the end of 2016, there will be no on left on the register looking for work. The wider LFS data confirmed the trend with the unemployment rate falling to 6.4%. More people in work, unemployment rates falling, recruitment increasing, skills shortages heightening, which makes the pay data even more inexplicable. Earnings increased by less than one per cent in June. We would expect increases in line with inflation or more at 3% plus at this stage in the recovery. For this we have much sympathy with the models at the Bank of England, something strange is happening on Planet ZIRP. Maybe low rates are the problem and no the solution? So what of base rates … Growth and jobs data would push the argument for a rates rise before the end of the year. Inflation and pay data would suggest the rates could be kept on hold until 2015. The latest data from Europe confirms a rate rise is off the agenda for months if not years to come. The MPC will be loathe to act ahead of the Fed and not too eager to move in advance of the ECB. Markets assumed rates will be kept on hold as a result of the Inflation Report… So what happened to sterling this week? Sterling closed down against the dollar at $1.669 from $1.6774 and down against the Euro at 1.246 from 1.252. The Euro was down against the dollar at 1.246 (1.341). Oil Price Brent Crude closed down at $102.96 from 105.02. The average price in August last year was $111.28. Markets, rallied on the rates news. The Dow closed up at 16,637 from 16,554 and the FTSE closed up at 6,685 from 6,567. UK Ten year gilt yields were down at 2.41 from 2.55 and US Treasury yields closed at 2.39 from 2.49. Gold was largely unchanged at $1,303 from $1,305. 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. 
 The Bank of England Inflation Report - May - So when will rates rise? Q2 2015 still the best bet. The final whistle not for some time yet! The Bank of England Inflation Report was released this week. It was all so predictable. The Governor’s opening remarks explained, “The overall outlook for GDP growth and inflation in this report is little changed from February. The UK economy continues to perform strongly. Having increased by more than 3% in the past year, output is now close to regaining the pre-crisis level. 700,000 more people are in work than a year ago and inflation is below, but close to, the 2% target. And so it proved. The strong labour market performance continued into April. The claimant count rate fell by 25,000, to a rate of 3.3%. The wider LFS data (to March) also reflected the improvement with a fall in the overall rate to 6.8%. On current trends the job centres really will be closing in 2017! The MPC expectations are for growth to increase by 3.2% in the second quarter and by 3.4% for the year as a whole, with continued expansion in household spending. Spending will be supported by an increase in real wages as inflation remains close to target and earnings increase moderately, with a gradual improvement in productivity. The MPC obsession with spare capacity continues. “While there is a range of views on the Committee, the best collective judgement is the margin of spare capacity is around 1% to 1.5% of GDP.” Charlie Bean is not entirely convinced about the “fuzzy concept” of spare capacity. “There is a real danger of spurious precision and the pretence of knowledge in this area” said the Deputy Governor. Quite so. That and many others perhaps! Does spare capacity impact on inflation prospects? Not so much. International inflationary pressures are key to current price trends and for the moment remain subdued. “The global picture is consistent with muted external inflationary pressures which, coupled with sterling’s appreciation, will moderate CPI inflation in the near term” said the Governor. Inflation has fallen sharply since the Autumn and the outlook for inflation in the medium term remains benign. A benign inflation outlook which will avoid undue pressure, in the short term, to increase rates, despite the strong growth figures and the buoyant housing market. So what of rates? The strength of the recovery has moved the economy “closer to the point at which interest rates will have to rise”, the official statement. So when will rates rise? In February, the MPC were happy to attach some credence to the market view that rates would begin to rise in the second quarter of next year. If anything the view in May is slightly more “dovish” or certainly more obtuse. “Our guidance is giving businesses and households confidence that we won’t take risks with price stability, financial stability, or the incipient expansion. It will promote the recovery in business investment, productivity and real wages, that a sustained expansion demands.” Rates are still unlikely to move until the second quarter of next year, the implication. As we explained last week, the MPC will be reluctant to move ahead of the Fed and the ECB. Forward guidance then lapsed into sporting analogy as the governor explained : “Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement but not the ultimate goal. The real tournament is just beginning and the prize is a strong, sustained and balanced expansion.” Yes the the Governor is laying out his team formation for the tournament ahead . “A flat back four with growth, inflation, unemployment and borrowing all heading in the right direction. Two strikers up front, household spending, with support to come from business investment. Some confusion in mid field from the housing market but no mention of exports and rebalancing. So expect the odd own goal from the trade performance, errant on the wing, as we move into the final stages of the competition. The Governor, for now, is not “taking away the punchbowl as the match gets going”. Far from it, you may continue to consume alcohol on the terraces, well into the final stages. Base rates are not expected to rise anytime soon. Q2 next year still the best bet. The final whistle will not be blown for some time yet.” So what happened to sterling this week? The pound closed broadly unchanged against the dollar at $1.683 from $1.685 and up against the Euro at 1.227 (1.224). The dollar closed at 1.370 from 1.375 against the euro and at 101.54 (101.18) against the Yen. Oil Price Brent Crude closed up at $109.91 from $108.16. The average price in May last year was $102.3. Markets, the Dow closed down at 16,447 from 16,544 but the FTSE closed up at 6,855 from 6,821. The markets are set to move, the push before the summer rush. UK Ten year gilt yields closed at 2.56 (2.68) and US Treasury yields closed at 2.51 from 2.62. Gold moved up slightly $1,293 from $1,287. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.   GDP growth up in the UK .. The ONS delivered the preliminary estimate of growth in the final quarter of the year this week. The UK economy grew by 2.8% year on year and 1.9% for the year as a whole. Who would believe this time last year markets were still fretting about a triple dip recession. The service sector, accounting for almost 80% of activity increased by 2.6%, construction increased by 4.5% and even the beleaguered manufacturing sector managed to push output up by 2.6%. Within the service sector, the leisure pound was once again to the fore, with strong growth in distribution, hotels and restaurants up by 4.5%. Business services increased by over 3%. We expect growth to be revised up to 2% for 2013 at some stage. For the moment we stick with our forecast of growth in 2014 and 2015 of 2.5% and 2.7% respectively. Our GDP(O) model is still performing well. The dataset has been updated and is available on the Publications page, along with our latest review of world trade. For economists, it doesn’t get more exciting. The release of the preliminary estimate is comparable to the release of a first draft of a Harry Potter chapter. What happened to the Weasleys, Gilderoy and Malfoy? Has Hagrid shaved off his beard as an end of year bet? Has Dumbledore lost weight. Has Voldemort renounced the devil and all his works? So what happened to Hermione and Harry? Can water supply and sewage really have grown by 8% in the final three months of the year? All is revealed to muggles and analysts alike by Joe Grice Chief Economist of the Office for National Statistics. In a high profile press conference, analagous to the lottery or some talent show, Joe reveals all... and the number is 1.9%. Excellent, thanks Joe. Data revisions are always interesting. But imagine if the next chapter of Rowling release revealed, the philosopher’s stone has been lost, the Chamber of Secrets has been opened to the public, the prisoner of Azkaban has been recaptured and the goblet of fire turns out to be a flaming glass of sambuca. It really can be so dramatic. After all the double dip disappeared. One day we may discover there was no recession in 2008 after all. Can’t wait for the next chapter in the GDP chronicles on the 26th February. So what happened to consumer spending and what of investment? Still stuck in the deathly hallows no doubt. US GDP also increased by 2.7% in the final quarter ... Over in the US, the Bureau of Economic Analysis announced growth of 2.7% in the final quarter and 1.9% for the year as a whole. The UK and the USA are neck an neck in the race to be the fastest growing economies in the Western World. Makes you wonder why the Fed were spending $85 million each month on treasuries and mortgage debt. No wonder the decision was made to taper further and reduce the spend to $65 billion with immediate effect. It is said that if a butterfly flaps its wings in Nicaragua, it can cause a hurricane in New York. I always found that difficult to be believe. But then who would have thought gay marriage could cause such flooding in Somerset according to UKIP. Even so, Bernanke flapping his tapering wings in Washington caused chaos in capital markets across the world. The tapering announcement led to falls in international stock markets, capital flight from developing economies and exchange rates rattling in India, Turkey and Argentina. Turkey hiked rates to over 10% to persuade the dollars to stick around. In Buenos Aires, they have long since departed. So what happened to sterling? Markets were disturbed by the decision on tapering, once again undermining stock market strength in the USA and destabilizing international capital flows across developing economies. Nevertheless, the CBOE Vix volatility index closed relatively unchanged over the week at 18.4. The pound closed at $1.6433 from $1.6481 against the dollar and 1.2184 from 1.2041 against the Euro. The dollar closing at 1.3487 from 1.3681 against the euro and 101.96 from 102.34 against the Yen. Oil Price Brent Crude closed at $106.40 from $107.88. The average price in January last year was almost $113, no real threat to inflation from crude oil prices Markets, moved down - The Dow closed at 15,698 from 15,879 and the FTSE closed at 6,5210 from 6,663. 7,000 on the FTSE no longer such a soft call for the near term. UK Ten year gilt yields closed at 2.72 from 2.78 and US Treasury yields closed at 2.65 from 2.72. Yields will test the 3% level as tapering accelerates into 2014 but for this week, once again, the flight to quality led the market. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.   The good news for policy makers continued this week as inflation and unemployment continued to head in the right direction. The latest revisions to the National Accounts suggest the economy will grow by 2% this year. Inflation CPI ... falling Inflation CPI basis fell to 2.1% in November down from 2.2% in October. Manufacturing output prices increased by less than 1% in the month, unchanged from the prior period. Input costs for manufacturers actually fell by 1% as world commodity prices including metals and oil remained subdued. Overall the inflation outlook is benign with inflationary pressures diminishing. It will take some time for world demand to impact on price levels as long as the recovery in Europe remains protracted. We expect the international inflation outlook to look pretty soft over the next twelve months. Labour Costs ... set to rise On the other hand we expect a reversal in the trend in domestic labour costs by the end of next year. The claimant count fell by 37,000 in November to a level of 1.269 million, a rate of 3.8%. The overall number of claimants, over the past year, has fallen by 300,000 down from a rate of 4.6% in November 2012. 120,000 have found work over the past three months. At the current rate of jobs growth, the claimant count rate will fall to around 2.5%, within twelve to fifteen months. This is a pre recession rate, consistent with significant growth in rates of pay and remuneration. As it is, the rate of private sector earnings increased by almost 1.5% in October. The widely reported “whole economy rate” increased by just under 1% but the warning signs are there for policy makers - domestic inflationary pressures and labour costs will be back on the MPC agenda by the end of 2014. As unemployment falls ... The wider Labour Force Survey Data confirmed the unemployment level fell to 2.388 million in October and a rate of 7.4%. This is a fall of 120,000 over the past year as the overall number of people in employment increased by almost 500,000. The 7% hurdle rate outlined in Forward Guidance could be within reach within twelve months as the rate of economic growth accelerates into the final quarter of 2013 and into next. Interest rates are set to rise, probably after the 2015 election. Bank of England MPC Minutes ... The minutes of the Bank of England Monetary Policy Committee were released this week, explaining why base rates were not increased in the December meeting. The domestic recovery was robust with inflationary pressure diminishing it was said. The GDP figures had confirmed the rapid pick up in consumption growth. Strong contribution from stock building had been offset by a large drag from net trade. The overall divergence between domestic demand and net trade had been larger than expected. Any significant narrowing of the current account deficit in the near term seemed unlikely! Rebalancing ? Does this mean the MPC had got the message about the rebalancing agenda? Sadly not. The minutes went on to claim that a sustained recovery would require some rebalancing from domestic to external demand! Some hope, the UK is set for a classic consumption rally with domestic demand growth of significant proportions. Fears about the appreciation of sterling are misguided. Higher sterling will alleviate inflationary pressures and de facto improve margins and competitiveness of exports. For exporters, demand (not price) conditions are dominant. The sluggish recovery in Europe will be the real obstacle to export growth over the next twelve months. And what of Investment ... Better news for investment however. The minutes claimed that beyond the near term, it seemed likely that a pick up in business investment spending would be necessary, Business and Dwellings investment had been weaker than expected to date. Weaker than expected in the Bank of England model, perhaps. The good news is that, we expect a strong rally in investment spending in 2014 as capital expenditure projects are brought back to the board room on the back of stronger domestic demand. Just 20% of total investment is determined by plant and machinery and our models suggest the four year capital stock has fallen to £163 billion down from an average £183 billion in the three years prior to recession. That represents a fall of 12%. Our less aggressive ten year Capital Stock Model suggests the overall level of productive investment has fallen by just 2%. No threat to the output capacity of UK PLC. The shortfall will be addressed by additional investment over the next three years to restore capacity equilibrium. Investment in transport equipment is set to rally on the back of a a 10% increase in commercial vehicle sales this year. Intangibles “investment” is set to rise on the back of a healthier M & A and corporate finance market in 2014. Together transport equipment and intangible investments account for a further 20% of total investment. Why has investment been subdued ... ? Why has investment been subdued post recession? Well in general businesses will invest in response to rising demand not a fall in the cost of capital. More specifically, 60% of investment identified in the national accounts is linked to property, either dwellings or commercial real estate. No policy maker should be surprised by the lag in investment intentions in this sector. Significant price collapse has left almost half the banked commercial real estate under water on a conventional 65% LTV (loan to value) test. A significant recovery in prices is required to restore equilibrium in the commercial real estate sector. The recovery in property and real estate may be a little more protracted, than “other investment classes”. Nevertheless we expect strong investment growth in 2014 and 2015 with investment in “dwellings” staging a marked recovery. So what of the revisions to the National Accounts? The latest revisions to the National Accounts confirm the economy grew by 2% year on year in Q3. We now expect the economy to grow by 2% for the year as a whole and by 2.5% in 2014 rising to 2.7% in the following year. And what of tapering? The Fed announced the beginning of tapering with a reduction in the rate of asset purchases by $10 billion from January 2014. What is that all about? The Fed said, “The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.” Oh dear? The link between longer term rates and growth has never been fully explained as neither has the linkage between domestic asset price inflation and international deflationary pressures. Nevertheless, it is time to buckle up, we are leaving Planet ZIRP - This week, the US growth rate was revised up to 2% year on year in Q3, Fed rates will also be on the rise in 2015. What happened to sterling? The pound closed at £1.6351 from £1.6294. Against the Euro, Sterling closed at €1.1950 from €1.1856. The dollar moved up against the yen closing at ¥104. from ¥103.6 and closing at 1.3678 from 1.3740 against the Euro. Sterling is on a rally which has led to a break out above £1.60, but €1.20 still presents significant overhead resistance. Oil Price Brent Crude closed at $111.58 from $108.53. The average price in December last year was almost $110, so no real threat to inflation. Markets, US moved higher - The Dow closed at 16,275 from 15,755. The FTSE closed at 6,606 from 6,434. 7,000. UK Ten year gilt yields closed at 2.94 from 2.90 US Treasury yields closed at 2.89 from 2.87. Yields will test the 3% level as tapering accelerates. Gold closed at $1,207 from $1,239. That’s all for this week, and for this year. No Sunday Times and Croissants tomorrow or for the next few weeks. The professor and his team are away for a short break. Have a great Christmas of Holiday Break and have a Happy New Year. Join the mailing list for The Saturday Economist or forward to a friend John © 2013 The Saturday Economist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. 
 Economics news – you don’t have to be an optimist to see the glass is half full .. Yes it's the Inflation Report “You don’t have to be an optimist to see the glass is half full”, the opening remarks from Governor Carney’s Inflation Report presentation this week. The Governor went on to say, “the glass is half full and it will be filled”. A clear reference the recovery will be allowed to gain momentum before the Bank of England and the MPC will intervene “to take away the punch bowl” and begin the rise in base rates. The MPC are sticking with forward guidance. Rate rises will not even be considered until the level of unemployment hits 7% or even lower. [Subject to caveats on inflation expectations and market stability]. When will this be? In August the Bank assumed this would be in 2016 at the earliest. On Wednesday, the Governor admitted there was a 40% chance this could be by the end of 2014 with a 60% chance it would be by the end of 2015. Such has been the strength of the economics data over the last three months. Our own models assume the knock out unemployment rate will be hit by the third quarter of 2015. Thereafter rates may rise by around 50 basis points in short time. For the moment, the MPC are on a learning journey. The path of productivity, earnings, job creation and unemployment so unclear, we are all embarking on a “learning journey” suggested the governor. The £5m recently spent on the Bank of England model, of little value in the new world it would appear. Charlie Bean appeared most discomfited by the trip. Economics from Cambridge, a PhD from MIT and teaching at Stanford and LSE in the knowledge pack. One could be forgiven the reluctance to take the Mark Carney refresher course. But then why not? Having seriously failed to understand the impact of low rates on investment and depreciation on the trade balance, it is time to denounce the omniscient stance of the Oxbridge collective. Yes send them back to school. Martin Weale was indeed sent back to school this week. The MPC member was delivering a speech on the role of monetary policy and forward guidance to A-level students in London. “To cut a long story short, our job is to ensure that people buy coats when they need them”. Excellent. I am sure that cleared things up. Martin once worked in a shop apparently. Yes the black cloud gang disbanded, it’s back to school for all. Fill up your glasses, the punch bowl is on the table, the Carney Credit card is behind the bar. Inflation Good news for the Governor, inflation fell in October CPI to 2.2% from 2.7% in the prior month. Education hikes last year fell out of the index as we expected but the fall in transport costs pushed the index even lower. 2.4% CPI inflation was our call and still seems to be a reasonable target by the end of the year. Manufacturing prices suggest there is little cost pressure in the economy but retail energy prices are moving significantly higher. Retail Sales Retail sales figures in October were slightly disappointing, an increase of 1.8% in volume and 2.5% in value, slightly down on the averages in Q3. The demise of Barratts Shoes and Blockbuster a reminder, conditions remain tough on the high street as household real incomes remain under pressure. Internationally Janet Yellen, the new head at the Fed is still worried about the strength of the US recovery. Tapering may be postponed still later into the New Year. Growth in France and Japan in the third quarter a further warning the world recovery still requires accommodation. QE tapering US style is not the answer. Buying treasuries and Mortgage Backed Securities to support asset prices makes no sense. Blend a NASDAQ tracker fund into the purchase mix would follow the logic and demonstrate the folly. What happened to sterling? Sterling closed at £1.6113 from £1.6018. Against the Euro, Sterling closed at €1.1940 from €1.1982. The dollar moved up against the yen closing at ¥100.1 from ¥99.1 and closing at 1.3494 from 1.3368 against the Euro. Oil Price Brent Crude closed at $108.50 from $105.12. 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 15,962 up from 15,762. The FTSE closed at 6,693 from 6,708. UK Ten year gilt yields closed at 2.75 from 2.77 US Treasury yields closed at 2.70 from 2.75. Yields will test the 3% level over the coming months. Gold closed at $1,288 from $1,284. 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. 
 Economics news – for a further week, the good news keeps on coming ... falling inflation, a fall in unemployment plus a boost to retail sales in July ...
Inflation figures were reported on Tuesday. The CPI inflation index fell to 2.8% in July from 2.9% in the prior month. By the end of the year we expect inflation to fall below the 2.5% threshold but the 2% target will be elusive for many months if not years ahead. In October the hefty tuition fees will fall out of the index providing a drop of 20 - 30 basis points. The 2% target will be a challenge - goods inflation averaged 2.4% and service sector inflation averaged 3.1%. Bad news for rail travelers, the rail fares will be indexed to RPI plus 1%. A 4.1% increase in fares is in prospect for 2014, placing additional pressure on retail prices and disposable incomes. The unemployment picture continues to improve, for those who can find work at least. The claimant count fell by 29,000, to a rate of 4.3% in July. The wider LFS data suggests a more modest fall in the three months to June. The rate of unemployment at 7.8% was unchanged, still way above the 7% threshold that may signal a change in monetary policy. Retail sales volumes increased by 3% in July as sunshine and consumer confidence provoked a spending rush, stimulated by sunny weather, a Murray win at Wimbledon and the Royal baby allegedly. Sunny weather boosted sales across a range of products including food, alcohol, clothing and outdoor items. By value retail sales increased by almost 5%. After a slow start to the year, the retail outlook has improved in the summer months. Will this continue? Why not! Employment is increasing and earnings are improving. A further 400,000 are in work compared to this time last year and earnings increased by 2% in the three months to June. We expect the retail rally to continue, though perhaps not at the 3% rate for the rest of the year. Housing - The big story continues to be the housing market. Prices are rising, mortgage activity is increasing, the help to buy scheme is providing a boost to first time buyers. New home build is set to increase by almost 30% this year. The housing market is on the move, time to lock up your fixed rates, as prices rise, the real cost of borrowing is zero, capital appreciation - the bonus. So what does this mean for the year? Our forecast is for growth of around 1.2% plus, rising to 2% in 2014. The economy has turned, the real risk - monetary policy is behind the curve. It is difficult to believe rates will be kept on hold until 2016, watch the US and add six months the best guide as always. Markets were equally sceptical, gilts and treasury yields are rising - gold is beginning to glitter again. What happened to sterling? Sterling responded to the economics news, moving higher. The pound closed at $1.5633, from $1.5505 against the dollar and at €1.1713 from €1.1617 against the euro. The dollar up against the yen closing at ¥97.5 from ¥96.24 Oil Price Brent Crude closed up at $110.40 from $108.22. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, were troubled - The Dow fell to 15,081 from 15,425. The FTSE closed down at 6.499.99 from 6,583. It’s a chance for market makers to clean out the bear pit. A good time to make a move. We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed at 2.72 from 2.45, US Treasury yields closed up at 2.83 from 2.58. Yields are moving higher, despite the wishes of central bankers. The name is Carney not Canute after all. Gold closed up at $1,377 from $1,315. Still waiting for the next big move but which way? Last week we said, the arguments are building for the bulls. It looks like they have made a decision. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Check out The Saturday Economist web site, and the new Chart of the Day Page. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more! Join the mailing list for The Saturday Economist or forward to a friend to let them share the fun! John John Ashcroft is the Saturday Economist, Chief Economist at the Greater Manchester Chamber of Commerce, Economics Adviser to Duff & Phelps and Chief Executive of pro.manchester. The views expressed are personal and in no way reflect the policy statements of organisations with which we work. 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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