UK march of the makers … Good news for the march of the makers this week, - manufacturing output increased by 3.3% in January compared to disappointing growth of just 1.9% in the final quarter of 2013. Still some way to go to restore the sector to positive growth. Output remains some 9% below the peak registered in the first quarter of 2008. Output of Investment and capital goods increased by 3.8%, continuing the strong trend since the setback in 2008. We expect manufacturing output to increase by 2.9% for the year as whole and around 2.7% in the following year. Consumer goods output remained weak with further declines in the month. For some sectors of manufacturing, the march of the makers is more like a retreat from Moscow, than a move across the Rhineland. The makers will fail to make a real contribution to the rebalancing agenda. So what of net trade … The trade figures for January were released this week. After the December aberration, a month in which the ONS appears to have lost some £2 billion of imports, the total trade balance returned to normality. A deficit of £2.6 billion compared to £0.7 billion last month. There was a trade shortfall of £9.8 billion on goods, partly offset by an estimated surplus of £7.2 billion on services. For the year as a whole, we expect the trade deficit in goods to increase to £114 billion, offset by a trade in service surplus of £85 billion. The overall trade in goods and services shortfall will be £29 billion. At less than 2% of GDP, the deficit will not pose a threat to the outlook for sterling, assuming investment capital flows recover. The trade deficit will fail to make a real contribution to the rebalancing agenda. And what of Construction … Good news in construction. Output increased by 5.4% in January compared to the same month last year. New work increased by almost 6% in the month, as repair and maintenance budgets also increased by 4.5%. For the year as a whole we expect construction growth of around 6%, with strong growth in housing and commercial property expansion fuelling growth. Prospects for the year … The OECD suggests the UK economy will grow by over 3% in the first half of the year, in line with the strong expectations from the Bank of England “Nowcasting” model, news of which was also released this week. The NIESR GDP tracker for February suggests growth may have slowed to 2.6% in February after strong growth of 3.2% in the prior month. For the year as a whole most forecasters are moving to a 2.7% growth figure. Seems reasonable for now. The recovery appears secure and sustainable. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint as we have long pointed out. Charlie Bean on the North East Scene … Charlie Bean was in the North East this week, delivering a speech to the Chamber of Commerce. Further reassurance the MPC will be doing its utmost to ensure that recovery is not nipped in the bud. “When the time does come for us to start raising Bank Rate, we should celebrate that as a welcome sign that the economy is finally well on the road back to normality”. Excellent. Much of the rest of the speech was devoted to investment, productivity and net trade. As the deputy governor points out, the United Kingdom has run a persistent trade deficit of the order of 2-3% of GDP since the beginning of the century. So much for “rebalancing”. On investment, productivity, depreciation and “on shoring”, the speech demonstrates the lack of fundamental understanding of the real economy amongst policy makers at a senior level. We had hoped for better from the new regime. Charlie represents the old guard due to retire in June this year. Of The Treasury Select Committee … The Governor and members of the MPC were in front of the Treasury Select Committee this week. The protocol still eludes the new man. Governor Carney actually winked at Chairman Tyrie at one stage. It is difficult to imagine Governor King, managing a nod let alone a wink. It appears the meetings of the MPC are minuted and recorded. Then for good measure the tapes are destroyed. Lack of good recording equipment formed part of the explanation by the old guard. The solution to invest in better equipment seemed a little too obvious for the Chairman and the new Governor. Expect a rethink! Wink Wink. So what happened to sterling? The pound closed at $1.662 from $1.672 and at 1.196 from 1.205 from against the Euro. The dollar closed at 1.390 from 1.387 against the euro and 101.31 from 103.3 against the Yen. Oil Price Brent Crude closed at $108.34 from $108.86. The average price in March last year was $108. Markets, moved down concerned about China and the Ukraine - The Dow closed at 16,107 from 16,458 and the FTSE closed at 6,527 from 6,712. UK Ten year gilt yields closed at 2.67 from 2.81and US Treasury yields closed at 2.65 from 2.80. Gold loves a crisis, closing up at $1,378 from $1,338. That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results will be recorded then destroyed. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.
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UK rates on hold … No surprise this week - the MPC voted to keep rates on hold and maintain the size of the asset purchase programme at £375 billion. It will be some months yet before rates begin to rise. Our current assumption is that rates will begin to rise in the second quarter of 2015. 40% of respondents in the latest Bank of England/GfK Inflation survey expect rates to rise over the next twelve months. No worries for the future apparently. Once on the rise, over 70% expect rates to be less than 3% in five years time. So much for the madness of crowds. Clearly the general public have a much better grasp of the latest simulations of the “equilibrium real interest rate associated with a neutral monetary policy over the medium term” than is generally assumed. They must have been listening to the speech by David Miles last month. Asked about the current rate of inflation, the median answer was 3.5% down from 4.4% in November. Excellent. So much for the madness and the wisdom of crowds. US Payroll data up … In the USA, better than expected payroll data guarantees the Federal Reserve will continue to taper, with a further reduction this month to $55 billion. Employers added 175,000 more jobs in February. Movement in US futures suggest the markets attach a "higher probability to a US rate rise in the middle of 2015". Fed officials have said they are “comfortable with market expectations of future rate rises”. We think US rate rises could be on the agenda by the end of 2014 or early 2015. The implications for UK rate rises should be evident. Our mantra - watch the USA and add six months - may be a little more compressed in this cycle. UK survey data … This week the February Markit/CIPS UK PMI® surveys were released. The strong upswing in the UK manufacturing sector continued in February. Output and new business continued to rise at above-trend rates. The leading index at 56.9 was up from a revised reading of 56.6 in January. In construction, the pace of expansion continued to rise sharply. The leading index scored 62.6 in February, down from a 77-month high of 64.6 in January. Still a very strong performance. In the service sector, output continues to expand strongly in the month. The headline Business Activity Index recorded 58.2 during February, little changed on January’s 58.3 and indicative of a sharp rise in activity on a monthly basis. Overall, output in construction, manufacturing and services suggest the economy continues to recover across the board at a very strong rate. The latest NIESR GDP tracker suggest growth increased by 3.5% in January. The Bank of England expects growth of over 3.5% in the first quarter. For the year as a whole, the consensus forecast is for growth of 2.7% this year. We await the details of the latest GM Chamber of Commerce survey before raising our estimates of growth this year. The GDP(O) model is signalling growth of 3% for the year as a whole. The survey data is a little more tempered, I suspect. In the UK and the USA, growth is accelerating and the job market is “tightening”. The pay round will become more difficult by the end of the year. Earnings are set to increase significantly as critical unemployment levels are breached by early 2015. Household incomes are set to improve and the recovery in spending will continue. There will be no “rebalancing”, whatever that really means. Growth up, unemployment down, inflation down and borrowing heading in the right direction. Just the trade figures will continue to disappoint. If growth hits 3% this year, disappointment could turn to shock and alarm. Then all forward rate bets will be off. So what happened to sterling? The pound closed at $1.672 from $1.675 and at 1.205 from 1.213 against the Euro. The dollar closed at 1.387 from 1.381 against the euro and 103.3 from 101.7 against the Yen. Oil Price Brent Crude closed at $108.86 from $109.02. The average price in February last year was almost $116 falling to $108 in March. Markets, moved slightly - The Dow closed at 16,458 from 16,367 and the FTSE slipped closing at 6,712 from 6,809. UK Ten year gilt yields closed at 2.81 from 2.72 and US Treasury yields closed at 2.80 from 2.67. Gold lovers worship alone with a close at $1,338. 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. Revisions to GDP … The second estimates of growth in the UK and the USA were released this week. In the US growth of 3.2% in the final quarter of the year, was revised down to a more modest 2.5%. Janet Yellen, head of the Fed is prepared to dismiss recent soft economic data as possible result of the bad cold snap. For the year as a whole, US growth in 2013 was a respectable 1.9%. Most forecasters still expect US growth of 2.8% to 2.9% in 2014. In the UK, the second estimate of GDP was also released this week. Growth in 2013 was revised down to 1.8%. Oh dear, the UK is no longer the fastest growing economy in the developed world. Just as well, the balance of payments strain would have been too much. The outlook for the current year hasn’t changed overall. We still expect growth of 2.5% in the year, with the consensus forecast slightly higher around 2.7%. The right kind of growth? … But is it the right kind of growth? For the purists, probably not. For the pragmatic, what’s not to like? The service sector continued to drive expansion in the economy, with significant growth in the leisure sector along with business and financial services. Distribution, hotels and restaurant trades grew by almost 4% in the year, up by almost 5% in the final quarter. Business and financial services were up by 3% in the last quarter, up by 2.6% for the year as a whole. The service sector accounts for 80% of total output in the economy. The real driver of recovery. Good news in construction … The good news in construction continued with growth up by 4.4% in the last three months of the year. Developments in the housing sector providing foundations for recovery. Assuming we can make the bricks, growth should continue into 2014 with our forecast growth over 6% in the current year. The march of the makers … So what of the march of the makers? Growth in manufacturing output was revised down to less than 2% in the final quarter. This is particularly disappointing, since the prior year figure was a “nothing to beat number”. For the year, manufacturing output actually fell by 0.6%. Output is still almost 10% below the pre recession peak. We have to be realistic when formulating a policy for industry. We expect growth for the manufacturing sector broadly in line with total GDP this year but not much more. So what of rebalancing … Household spending last year was up by 2.5% accounting for over 60% of GDP. There is little evidence of rebalancing in the economy, either in terms of net trade or investment. Investment, accounting for 14% of total spending, actually fell slightly, despite growth of over 8% in the final three months. Was this a trend reversal, end of year? Possibly. We expect investment growth to continue into 2014 as the forward outlook clears and confidence returns to the board room. M & A activity, will assist the figures. Plus, 60% of investment is related to dwellings and commercial property. Investment in plant and machinery, the real capital stock within the economy, accounts for just 20% of total investment. With property resurgent, we expect investment growth of 8% in 2014. And what of base rates? … In the US, Janet Yellen affirmed the Fed commitment to continued tapering. QE could be eliminated by the Fall with a steady reduction of $10 billion per month. That could mean, a US rate rise could be on the agenda by the end of the year. The mantra for the UK remains watch the USA and add six months. The MPC cannot move ahead of the Fed without significant appreciation of sterling. When will UK rates rise? Martin Weale has suggested UK rates will rise in the Spring next year and could rise earlier if productivity fails to improve and inflation ticks up. Ian McCafferty a fellow MPC member suggests the rate rise may be held back because of the strength of sterling and the resultant mitigating impact on inflation. Either way, rates are set to rise, probably in 2015 but possibly after the May election. The banks are beginning to model affordability and pay back with a 5% base rate test. This may prove too severe for some years yet. The MPC would have us believe rates will be held below 2% until late 2017. David Miles in a speech to the Mile End group this week, suggests the “new normal” could include an equilibrium base rate of 2.5% to 3% over the long term. Imagine, we may never see the 4.5% base rate again! So much for 320 years of history, in which we have endured an average base rate of 4.5% to 5%. If only! New normals usually end up as the same old same olds. So what happened to sterling? The pound closed up at $1.675 from $1.664 and at 1.213 from 1.210 against the Euro. The dollar closed at 1.381 from 1.374 against the euro and 101.7 from 102.5 against the Yen. Oil Price Brent Crude closed at $109.02 from $109.67. The average price in February last year was almost $116 falling to $108 in March. Markets, moved slightly - The Dow closed at 16,367 from 16,143 and the FTSE closed at 6,809 from 6,838. UK Ten year gilt yields closed at 2.72 from 2.79 and US Treasury yields closed at 2.67 from 2.75. 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. Economics news – "The recovery is not yet secure" says the Chancellor ... The recovery is not yet secure and our economy is still too unbalanced. The Chancellor made use of a visit to Hong Kong this week to warn on the perils of the recovery. Just as well the Governor Mark Carney has stated the MPC will not take any risks with the rally. The Chancellor is concerned about the strength of the recovery. It is not yet secure, we are not making enough and we are not exporting enough, the continued claim. Hence in four weeks time George Osborne will deliver a budget that supports investment, manufacturing and exports. “A budget that ensures around the world, you can't help but see “Made in Britain”. A budget that lays the foundations for long term economic security". Excellent. Investment incentives and export support are both welcome. But we must ensure policy is founded on economic reality. We don’t need subsidies for the Spinning Jenny and a ban on homespun cotton from ancient empire. A strategy for investment and manufacturing, has to be grounded on firm foundations, fit for the 21st century. Christine Lagarde - the age of multilateralism As Christine Lagarde, pointed out in the Dimbleby lecture earlier this month, we live in the age of multilateralism. A world of integrated supply chains, where more than half of total manufactured imports and more than 70 percent of total service imports, are intermediate goods or services. “A typical manufacturing company today uses inputs from more than 35 different contractors across the world” according to the leader of the IMF. It is not so much as “Made in Britain” as assembled in Britain. It is not so much a question of exporting but “re-exporting”. Manufacturing exports are dependent on imports for raw materials, energy, processed goods, semi manufactures and finished components. The good news a strong currency will improve cost inputs, mitigating any re sale price effect. The bad news, any improvement in net trade in goods will be elusive. The Chancellor claimed “We cannot rely on consumers alone for our economic growth and we cannot put all our chips on the success of the City of London.” The fact is the recovery is driven by growth in the service sector, accounting for 80% of total output. Leisure, retail and financial services are leading the recovery, meeting the needs of an ambitious household sector accounting for two thirds of demand in the economy. We need a successful city of London, to generate the service sector surplus to offset the trade in goods deficit. As the Chancellor announced in Hong Kong, the UK is the first country in the G7 to agree an Renminbi swap line with the People’s Bank of China. London investors will have the confidence to expand their RMB activities. We may have in due course a RMB clearing bank in London. Chinese banks will be able to set up wholesale branches in the UK. This is all good news for the Banking, Financial and Professional services sector - essential for growth in the age of multilateralism. A policy dependent on the “March of the Makers” rebuilding the workshop of the world is neither balanced nor sustainable in the 21st Century. We shall see, just what the budget delivers next month. So what happened in the economy this week … A raft of economic data, confirming the recovery is on track for growth this year. Inflation, CPI basis, fell to 1.9% in January, pushed lower by a fall in goods inflation (1.4%) as service sector inflation remained steady at 2.4%. Unemployment fell, with a strong fall in the claimant count to 1.2 million, a rate of 3.6%. The wider LFS unemployment count, also fell in the month, albeit with a rate slightly up in the month to 7.2%. Earnings increased towards the end of the year. Retail sales were up in January by 4.3% in volume terms and 4.5% in value. The government borrowing figures for January at first sight, were a little disappointing with repayment in the month at £4.7 billion down from £6.3 billion last year. Tax receipts were significantly lower in the month, which is surprising given another 400,000 are in work with earnings are increasing. The figures will look better by the end of the financial year. We still think borrowing will be around £105 billion for the year as a whole. Heading in the right direction to eliminate the deficit in due course. So what does this all mean? The recovery may be unbalanced but probably is secure. Growth up, inflation down, employment up, borrowing down, just the trade figures will continue to disappoint, as we have long pointed out. So what happened to sterling? The pound closed down at $1.6640 from $1.6730 and at 1.210 from 1.222 against the Euro. The dollar closed at 1.3740 against the euro and 102.499 against the Yen. Oil Price Brent Crude closed at $109.67 from $108.56. The average price in February last year was almost $116. Markets, moved up - The Dow closed at 16,143 from 16,105 and the FTSE closed at 6,838 from 6,663. UK Ten year gilt yields closed at 2.79 from 2.80 and US Treasury yields closed at 2.75 from 2.74. 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. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? The list is growing as is our research and research team. Over ten thousand receive The Saturday Economist each and every week! © 2014 The Saturday Economist. John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. We will not take risks with this recovery … The Bank of England will not take risks with this recovery, according to the latest statements from Mark Carney, Governor of the Bank of England. Base rates will remain on hold for some time yet. When they begin to rise, the increase will be slow and gradual. It will be many years before fair value base rates of 4.5% will be on the agenda, according to the guidelines issued this week. Markets anticipate the first rate rise may appear in the second quarter of 2015. Thereafter a rise to 2% may be possible but not until the end of 2016 or the beginning of the following year 2017. “The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis,” the more cryptic quote. The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began and the inflation rate is back at 2%. “The recovery has been underpinned by a revival in confidence, a reduction in uncertainty, and an easing in credit conditions”. Yes, Forward Guidance has been a success! The Bank of England expect the economy to grow by 3.8% this year and 3.3% next year assuming interest rates are held at 0.5% through 2014 and into 2015. Assuming rates follow the path outlined in current market profiles, growth will be a more modest 3.4% this year falling to 2.7% next. A recovery neither balanced or sustainable … No wonder the Bank consider the recovery is neither balanced nor sustainable. The recovery is dependent upon household spending, with a sluggish investment performance to date and a structural trade deficit, exacerbated by weak growth in Europe. Growth of 3.4% is significantly above trend rate and above most forecasts for the year. Consensus forecasts predict growth of just 2.7% in 2014 falling to around 2.5% next. The bank is very bullish on a recovery in earnings, consumer spending and investment. We shall see who is right in due course. For the moment, the Bank looks hot! So what of Forward Guidance … Forward guidance may have been a success but the single point reference to the unemployment rate has been beset with problems. The 7% guideline for unemployment will be breached in the first quarter this year. Hence the single point guideline is on the way out. It was too easy to understand. The Governor will not be allowed to make the same mistake again. The Bank collective has had its way. “To allow others to monitor how the economy is evolving relative to our projections, today we are publishing forecasts of 18 more economic indicators.” Excellent. Yes, now we will have eighteen guidelines to better understand policy. The output gap is back, as is the meandering NAIRU. Eighteen reasons why it will prove more difficult to pin the Governor in difficult interviews on Newsnight in the future. It was never clear why 7% was the correct number to choose anyway. The Americans bagged the 6.5% level first but the Governor admitted the long term NAIRU was more like 5% anyway. It was just a number but at least we could “see it” so to speak. Not so the “Output Gap”. What is the size of the output gap? What colour are the eyes of a Yeti? an equally productive debate. In a service sector economy with limited supply constraints, does it really matter anyway? Forward Guidance is a great step forward. Simplicity, part of the success, made the process just too transparent for some. Forward Guidance USA … Over in the USA, Janet Yellen, as the new Chair of the Fed provided assurances there would be policy continuance following the Bernanke regime. Accommodative monetary policy, with progressive tapering remains on the agenda. The US is expected to grow by almost 3% this year with inflation below 2%. Unemployment will fall below 6.5% through the year. So what of forward guidance, - markets believe a rise in base rates may be possible towards the end of this year or early next. So what happened to sterling? The pound closed up at $1.6730 from $1.6407 and 1.2220 from 1.2030 against the Euro. The dollar closed at 1.3690 from 1.3635 against the euro and 101.82 from 102.31 against the Yen. Oil Price Brent Crude closed at $108.56 from $109.57 The average price in February last year was almost $116. Markets, moved up - The Dow closed at 16,105 from 15,794 and the FTSE closed at 6,663 from 6,571. UK Ten year gilt yields closed at 2.80 from 2.71 and US Treasury yields closed at 2.74 from 2.69. 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. Economics news – UK recovery continues at pace in January ... According to survey data this week, [Markit/CIPS UK PMI® January], the recovery in the UK economy continues at pace into the New Year. Manufacturing, construction and services all continued to demonstrate strong levels of activity. In the manufacturing sector, the strong rebound continued with improved domestic demand and rising export orders suggesting robust growth in the month. Construction survey data suggests the sector is experiencing the sharpest rise in construction output since August 2007. Housing activity is increasing at the sharpest rate for over ten years. Service activity remains elevated with a headline index rate at 58.3 during January, down slightly from 58.8 in December. Service sector output is still at a very high level, anything above 50 suggests growth. The latest monthly NIESR GDP tracker suggests the economy grew by over 3% in January. This week, NIESR also upgraded UK forecasts for growth this year to 2.5% with projections of unemployment falling, inflation tracking the 2% target level and government borrowing continuing to reduce. In fact on current plans, according to the leading think tank, the public sector finances will be in surplus in 2018-19. So much for fears of prolonged austerity to come. So growth up, inflation down, employment up and borrowing down. Just the trade performance is expected to deteriorate with the external current balance increasing from a deficit of £54 billion in 2013 to £78 billion by 2015. ONS Data on Trade ... ONS data this week for trade was a little surprising. The trade deficit in December improved significantly compared to our forecasts. Seasonally adjusted, the UK's deficit on trade in goods and services was estimated to have been £1.0 billion in December 2013, compared with a deficit of £3.6 billion in November 2013. There was a deficit of £7.7 billion on goods, partly offset by an estimated surplus of £6.7 billion on services. Some £2 billion of imports appear to have been lost in the analysis. If domestic demand was as strong as the data suggests, the fall in imports for the month is illogical. In any case, don’t get to excited about the rebalancing agenda - for the year as a whole, the deficit trade in goods was £108 billion. US Payroll data ... Over in the US, payroll data upset the markets as jobs growth proved disappointing for the second month running. US payrolls rose a seasonally adjusted 113,000 in January after gains of just 75,000 in December. The unemployment rate continued to move down, to 6.6% the lowest level since December 2008 and perilously close to the Fed forward guidance hurdle rate. It is thought the latest data is unlikely to change the Fed stance on progressive tapering through 2014. Janet Yellen, the new chair of the Federal Reserve Board, makes her first appearance before Congress next week. Emerging markets will shudder as the adjustment in the stance of QE and tapering continues. Rate rises could be on the US agenda by the end of the year. So what happened to sterling? Sterling closed at $1.6407 from $1.6433 and 1.2030 from 1.2184 against the euro. The dollar closing at 1.3635 from 1.3487 against the euro and 102.31 against the Yen. Oil Price Brent Crude closed at $109.57 from $106.40 The average price in February last year was almost $116. Markets, steadied - The Dow closed at 15,794 from 15,698 and the FTSE closed at 6,571 from 6,5210. UK Ten year gilt yields closed at 2.71 from 2.72 and US Treasury yields closed at 2.69 from 2.65. 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. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? The list is growing as is our research and research team. Over ten thousand receive The Saturday Economist each and every week! © 2014 The Saturday Economist. John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. GDP 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. “If inflation is the genie, deflation is the ogre that must be fought decisively...” Christine Lagarde head of the IMF was speaking to the National Press Club in Washington this week. With inflation below central bank targets in Japan, USA and Europe, the IMF believe the rising risks of deflation could prove disastrous for the world recovery. Western leaders, haunted by fears of the American Great Depression and Japan’s Lost Decade, are fearful of premature monetary tightening which could threaten the nascent recovery. In folklore, a genie is a supernatural creature who does the bidding once summoned. This may not have been the intentioned meaning by the boss of the IMF but Mark Carney Governor of the Bank of England, could be forgiven the interpretation. This week, the inflation figures for December were released by the ONS. CPI inflation increased by just 2%. For the first time in over four years, the genie returned to target, as would an obedient creature, undertaking the bidding of the new Governor of the Bank of England. The genie is working hard to obey. It has taken some time to get the message into the bottle and the genie back on message! Mission accomplished? With such success, it would be churlish to point out that in the same month, RPI increased from 2.6% to 2.7%, goods inflation actually went up and service sector inflation closed the year at 2.4%. For the moment the wild ride of the last four years has come to a close. As Christine Lagarde stated, “Optimism is in the air, the deep freeze is behind us and the horizon is much brighter.” In further good news, UK manufacturing prices increased by just 1% in December and input costs actually fell by just over 1%. Import prices of metals, parts and equipment fell, reflecting higher sterling values and lower world prices. For the moment, the inflation outlook for 2014 appears benign. Deflation is the ogre ... So what of ogres and deflation. Ogres are monsters in legends and fairy tales that eat humans and are particularly cruel, brutish or hideous. In the UK fears of deflation are not evident. We still expect inflation to hover slightly above target through the year. The ogre of deflation will be banished within the Kingdom. Particularly with earnings on the rise and a Chancellor of the Exchequer, as the handsome prince, up for re election, pledging an increase in the minimum wage to £7 an hour over the next couple of years. Inflation has fallen to target much faster than we had envisaged. The good news - as earnings rise, the boost to real incomes will lead to a sustained level of growth in consumer expenditure and retail sales. Higher but not quite as high as the latest UK data might suggest perhaps! Retail Sales the nymph spirit ... This week, the ONS released the retail sales figures for December. Sales volumes increased by 5.3% and values increased by 6.1% compared to December last year. Despite the fears of the major retailers, the consumer hit the high street with great gusto in the run up to Christmas allegedly. Internet sales, increased by 11.8% and small stores, experienced higher growth with sales increasing by just over 8%. Can retail sales have been so strong in December? Contractions in volume sales amongst food stores and petrols stations adds to the confused picture in the month. According to the ONS, in the three months prior to December, retail sales volumes averaged just 2%. So much for saving for Christmas. The surge in activity in December appears rather high and slightly at odds to the anecdotal evidence from retailers themselves. The BRC, British Retail Consortium suggests sales increased by just 1.8% in December as footfall actually fell. The BDO high street tracker reported sales down in the pre Christmas week with a recovery to 3.5% growth in the final week of the year. Debenhams, M & S, Morrisons and Sainsburys struggled in the Christmas period. Argos, Dixons, Halfords, Primark, Lidl and Ocado amongst the winners in the multi channel race. The 5% growth in volumes reported by the ONS appears to be a high call. So much for lies, damned lies and seasonal adjustment. Shrek shacking up with the Sleeping Beauty ... Ogres returned to the High Street this week as Sports Direct revealed a near 5% stake in Debenhams. Imagine Shrek shacking up with Sleeping Beauty, shudders must have swept around the Debenhams board room. The subsequent put and call option by Sports Direct, just added more confusion to the retail horizon. So what happened to sterling? The pound closed at £1.6422 against the dollar and 1.2127 against the Euro. The dollar closing at 1.3538 against the euro and 104.23 against the Yen. Oil Price Brent Crude closed at $106.48. The average price in January last year was almost $113, so no real threat to inflation from crude oil prices Markets, moved higher. The Dow closed at 16,458 and the FTSE closed at 6,829. 7,000 on the FTSE a soft call for the near term. UK Ten year gilt yields closed at 2.84 and US Treasury yields closed at 2.82. Yields will test the 3% level as tapering accelerates into 2014. 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 and 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. Ten Predictions for 2014 We begin the year with our ten predictions for the economy in 2014. The professor and his team have dusted off the glass bowl and outlined the benchmark numbers by which we will judge the performance of the UK economy in the year ahead. Slideshare link. Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The UK cannot grow faster than major trading partners in Europe without a deterioration in the inherent structural trade deficit. Forget rebalancing and the new normal, growth will return to trend rate, pushed by the household and consumer recovery with some contribution from investment later in the year. Working with the GM Chamber of Commerce as their Chief Economist provides huge insights into the business sector. We use the influential quarterly economics survey to develop powerful coincident economic indicators for growth, inflation and employment. Significant indicators of trends in the Greater Manchester, North West and national economies as a whole. Our models of the economy are improving year on year with empirical adaptation as a result. Growth We expect GDP growth in 2013 to be revised up to 2% for the year following a robust performance in the final quarter of the year. The influential NIESR GDP tracker suggests growth was up by 2.9% in the final quarter of the year. Our own GM Chamber of Commerce co-incident indicator confirms the strong growth pattern. Following revisions to GDP released at the end of December, the economy grew by 2% in the second and third quarters. We expect the preliminary estimate, later this month, for 2013 as a whole, to be around 1.8% or 1.9% with a final revision to 2% by the end of the quarter. Last week, the ONS released the manufacturing figures for November. Manufacturing slowdown hits recovery - the headline in today’s Times. Hardly! Growth year on year was up by 2.8% following a 2.5% growth in October. We expect the rally in manufacturing to continue into this year. In 2014, the strong growth in service sector activity will continue with support from manufacturing and construction. We expect overall GDP growth of 2.5% in 2014 possibly rising to 2.7% in the following year. Inflation Inflation CPI basis, fell to 2.1% in November. We are forecasting CPI inflation of around 2.3% in the year ahead. Service sector inflation remains a challenge to the 2% target averaging over 2.5% in the final quarter of 2013. International commodity prices, including oil, should be less of a threat to the UK inflation outlook and some improvement in sterling exchange rates will assist. The oil price outlook appears benign with US shale oil and a lower Chinese propensity to import, moderating Brent crude prices around $110 dollars per barrel for the year as a whole. Unemployment and base rates Growing employment will push the claimant count down to around 3.8% this year and 3.3% next year. The wider LFS indicator will fall to the 7% level by the middle of 2015. Then and only then will the forward guidance from the MPC come under review. We expect base rates to be kept on hold until the middle of 2015, thereafter rising in line with US base rates. Gilt yields on the other hand, we expect to be trading at fair value 4.5% by the end of the forecast outlook. Earnings Stronger growth and a lower claimant count will lead to an acceleration in earnings and household incomes as a whole. The “new normal” may well appear to be the “same old same old” recovery consumer led recovery by the end of the year. Government Borrowing We expect significant improvements in the borrowing figures for this fiscal year and in the years ahead. Revenues in the eight months to November were up by 7% with spending up by less than 2% over the same period. We expect borrowing for this year to be around £105 billion falling to less than £90 billion in 2014/15. Still much to do but growth will restore equilibrium over the next four years assuming spending plans remain under control. Trade Last week the ONS released the trade figures for November. Nothing changes in the outlook. Our forecast deficit trade in goods remains around £110 billion this year rising to £117 billion in 2014. The service sector surplus will offset (in part) the trade in goods deficit. The bad news, - there will be no “net gain to trade” in the years ahead. The good news, there will be no balance of payments constraint to growth, nor a balance of payment crisis and “run on sterling” either. Ten predictions So there you have it. Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The full forecasts presentation is available below from the Saturday Economist web site or from the new Chamber of Commerce Economics web site. We will benchmark the economy using this forecast outlook as we move through the year. That’s all for this week. No Friday Financials this week and possibly no Sunday Times and Croissants tomorrow. The professor and his team are reviewing the Sunday strategy in this pre election year. Have a Happy New Year in any case. Join the mailing list for The Saturday Economist or forward to a friend John © 2013 The Saturday Economist, #TheSaturdayEconomist, 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. 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. |
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
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