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.
0 Comments
Employment surge will force rethink on forward guidance … The governor went to Davos this week and also appeared on the Paxman Show. He was asked about unemployment, forward guidance and Bitcoins! Excellent. Unemployment Unemployment fell to 7.1% in the three months to November according to the latest data from the ONS. Over 30 million were in employment up by 280,000 on the prior three months. Good news for the economy and a measure of the strong recovery in the UK, particularly in the second half of the year. The claimant count measure fell by 24,000 to a rate of 3.7%. The unemployed (claimant count) will fall below the one million mark by the end of 2014 based on our current forecasts. This would be in with levels last seen in September of 2008. No need then to worry about household incomes, earnings will begin to recover significantly as the job market tightens through the year. Forward Guidance So what of forward guidance? “Mark Carney has torn up his original low interest rate policy after completely misjudging the speed at which unemployment would fall” according to Phillip Aldrick writing in The Times today. Well not really. It is true the Bank of England model assumed the 7% hurdle rate would be triggered in 2015 rather then by the end of 2013! Nevertheless, the overall parameters of forward guidance remain in tact. The major concern of central bankers is conditioned by the experience of The Great Depression and the Lost Decade. Monetary policy will remain accommodating until the recovery and “escape velocity” from recession is secured. Even then, rates will rise slowly and gradually. It will be some years before a return to equilibrium base rates of 4.5% is achieved, the additional guideline. In the Inflation Report due next month, the bank will consider a range of options to update Forward Guidance. The simplest solution, an update to the unemployment hurdle rate from 7% to 6.5%. The challenge of a more complex hybrid may prove irresistible. As for escape velocity, tapering in the US is expected to accelerate. There seems little justification, if indeed there ever was, to continue to spend Fed dollars on US Treasuries and mortgage debt. 3% growth in the USA economy appears possible this year. That’s a faster rate than in the years leading up to the collapse in 2008. Borrowing Figures The UK Government borrowing figures were released this week. The government is on track to reduce the level of borrowing to between £105 billion and £110 billion this year. Receipts are rising faster than spending and the overall level of borrowing in the first nine months of the year is down by over £5 billion. Inflation down, borrowing down, unemployment down, earnings will begin to rise later this year. The platform for the election is well set. Just the trade figures alone will continue to disappoint as problems in Europe persist. So what happened to sterling? Markets were disturbed by the possibility of more tapering, undermining stock market strength in the USA and destabilizing international capital flows across developing economies. Poor readings from manufacturing data in China and Japan, plus problems with the Argentinian peso created the “perfect storm” for markets at the end of the week. The CBOE Vix volatility index shot up from 13.8 to 18.14 at close. Some way off the 55 level recorded in the depths of despair in 2010 but a measure of late volatility nevertheless. The pound closed at $1.6481 from $1.6422 against the dollar and 1.2041 from 1.2127 against the Euro. The dollar closing at 1.3681 from 1.3538 against the euro and 102.34 104.23 against the Yen. Oil Price Brent Crude closed at $107.88 from $106.48. The average price in January last year was almost $113, so no real threat to inflation from crude oil prices Markets, moved down - The Dow closed at 15,879 from 16,458 and the FTSE closed at 6,663 from 6,829. 7,000 on the FTSE a soft call for the near term, requiring a little more work in progress. UK Ten year gilt yields closed at 2.78 from 2.84 and US Treasury yields closed at 2.72 from 2.82. Yields will test the 3% level as tapering accelerates into 2014 but for this week, 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. Economics news – the spirit of Christmas present is a cheerful spirit ... The spirit of Christmas Past - should not be forgotten. The spirit of Christmas Present - is a cheerful spirit. The spirit of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon”. Excellent. Don’t you just love a central banker with a Christmas message. Governor Carney was speaking in New York this week at the Economic Club of New York. The Governor is anxious to secure the message, interest rates will not rise any time soon. The recovery will not be put at risk. The UK will achieve escape velocity from a liquidity trap, avoiding secular stagnation in the process. Forward guidance is the new policy mantra, secular stagnation the new spectre on the blog. The UK is set for recovery, despite the prophets of gloom on either side of the Atlantic. Forward guidance is integral to the central bankers response to the recession and setback. FG reduces uncertainty, providing reassurance that monetary policy will not be tightened before the recovery is sufficiently established. Businesses will have the confidence to invest. Households will have the confidence to spend. A liquidity trap is avoided. A liquidity trap occurs when the short-term nominal interest rate hits the zero lower bound. Typically in a liquidity trap, inflation is low, the equilibrium real interest rate is negative, creating a persistent inability to match aggregate demand and supply. Businesses won’t invest and consumers are reluctant to spend, aggregate demand continues to fall and a deflationary spiral develops. Fiscal constraints ensure Government spending cannot bridge the output gap. In the UK, the financial crisis pushed the equilibrium real interest rate to the lower bound. With nominal interest rates stuck at zero, and inflation low, monetary policy was unable to push actual real rates to a level low enough to generate growth allegedly. “Pushing on a string, is no way to wag the dog”. I think Keynes said that. Hence the emergence of QE on Planet ZIRP. Allegedly, a way to stimulate liquidity AND activity. In reality, a great way to undermine the gilt curve and returns to savers and investors in the process. So what of secular stagnation? Larry Summers had recently raised the spectre of secular stagnation at the IMF meeting in November in honour of Stanley Fischer, guru of monetary theory at MIT. Secular stagnation, a concept first developed by Alvin Hansen in the 1920s suggested the “new normal” in the USA (post depression) was of lower growth, primarily a result of lower population growth and technological exhaustion. No new things to boost productivity, that sort of thing. Larry Summers, resurrected the term, suggesting the short term real interest rate consistent with full employment may have fallen to -2% -3% in the middle of the last decade. “The natural and equilibrium interest rates may have fallen significantly below zero”. “We may have to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their long run potential.” he said. In theory, the Fed funds rate can be kept at ZIRP forever but it is much harder to do “extraordinary additional stuff” forever” either in the form of QE, or government deficit funding perhaps. This said Summers, is “my” lesson from this crisis which the world has “under internalised”. Actually Summers went on to say “Now this may all be madness and I may not have this right at all”. Mmm. Stuck on Planet ZIRP, QE was introduced, the effect of which, was to ensure we were marooned on the planet for longer. ZIRP creates of itself a problem which is compounded by QE. In the UK, QE has lost intellectual credibility and momentum but in the USA the persistent purchase of Treasuries and Mortgages (CMBS) continues, achieving no more for Uncle Sam, than a monthly dispensation into a NASDAQ tracker fund. It really is time to begin tapering in the US, end QE and return the equilibrium rate of interest to a natural rate. A natural rate for gilts and treasuries, which reflects an inflation hedge and a real rate of return to risk. In his speech, Summers said, “we have learned one thing, finance cannot be left to the financiers”. Perhaps but then I have always felt much the same about monetary economics. We should begin to think how we can manage an economy in which the academics are confined to campus and not allowed near policy levers. The concept of a negative equilibrium interest rate, which may have fallen to -3% pre recession is as incomprehensible, as life on Planet ZIRP without oxygen. The escape from ZIRP and the beginning of recovery can only be accelerated by an end to QE. Let the free markets free and end QE - the cry. It is time to suggest “Schools out for Summers” and the MIT class of 14462. The US is set to grow by over 2.5% next year or has no one noticed. Back in the UK Back in the UK, as expected the march of the makers picked up the pace in October. Manufacturing growth year on year increased to 2.7% in the month. Construction output grew at over 5% in the latest data for October. The trade figures on the other hand continued to disappoint. The UK's deficit on trade in goods and services was estimated to have been £2.6 billion in October 2013, unchanged from September. The deficit of £9.7 billion on goods, partly offset by an estimated surplus of £7.1 billion on services. Yes, the march of the makers is picking up pace, momentum is “building”, investment plans will be brought back to the board room, just the trade figures alone will continue to disappoint, as the UK recovery gains pace. What happened to sterling? The pound closed at £1.6294 from £1.6346. Against the Euro, Sterling closed at €1.1856 from €1.1922. The dollar moved down up the yen closing at ¥103.2 from ¥102.8 and closing at 1.3740 from 1.3700 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 $108.83 from $111.61. The average price in December last year was almost $110, so no threat to inflation. Markets, US moved lower - The Dow closed at 15,755 from 16,020. The FTSE closed at 6,434 from 6,552. 7,000 FTSE now a tough call before Christmas. The markets still nervous until tapering finally begins. UK Ten year gilt yields closed at 2.90 from 2.91 US Treasury yields closed at 2.87 from 2.86. Yields will test the 3% level over the coming months but this will await the New Year. Gold closed at $1,239 from $1,231. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Monthly Markets updates coming in the New Year. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. The release of the second estimate of GDP in the 3rd quarter brought few surprises. Growth was confirmed at 1.7% year on year following growth of 1.4% in the second quarter. Service sector output continues to drive the recovery with particularly strong growth in the leisure sector. Construction output increased by 4% with manufacturing growth relatively flat in the latest three month period. In current value spending terms the economy grew by 3.8% as incomes of employees and businesses continued to show strong growth. Expenditure within the economy was driven by household spending up by 2.4% in real terms plus a build up in inventories. Government spending was up by just 1.1%, investment fell slightly and the trade figures continue to disappoint. Exports fell and imports increased as UK domestic demand exceeded the rate of growth in Europe and the USA. So what does this all mean? We expect strong growth to continue into the final quarter with overall growth around 2.4% bringing the year on year growth rate to 1.3%. We still think the economy is on track for growth of around 2.4% in 2014. Check out our latest publication “Modeling GDP(O)”. We release the forecasts of the ten key sectors and sub sectors in the UK economy over the next two years. Should we too worried by the lack of investment? Not really. At this stage in the cycle we would expect investment to be weak. Plant and machinery accounts for just 20%, of total investment. Spending on commercial real estate will continue to be subdued for some time yet as the overhang continues. We expect strong growth in productive capacity in the final quarter of the year and into next year. The four year capital stock model is down by just 15% from the peaks of 2008. No need to worry about “lost output” for the years ahead, trend rate of growth can be recovered and maintained. Investment will receive a significant boost in the final three months of the year and into next. Our UK investment model will be released next week. Prospects for the UK look good, but without a strong recovery in Europe and sustained growth in the USA, the trade figures will continue to be a net drain on overall performance. This should be no surprise to regular readers! The trade deficit in goods will increase largely (but not entirely) offset by a strong performance in service sector exports. Is this the wrong kind of growth? The UK economy has been dependent on domestic consumption since our records began. Growth based on investment and exports a policy dreamboat. There will be no rebalancing of the economy just more of the same to come. Bank moves on mortage lending Which is perhaps why the Bank of England modified the terms of FLS away from mortgage lending towards business loans. The old lady is no fan of the help to buy votes scheme. The Governor has made it clear the Bank of England will move to prevent another housing boom. The policy response includes several options this time around including post code selective spread and capital provisions to curb excessive movements in house prices if necessary. What happened to sterling? The pound closed up at £1.6360 from £1.6215. Against the Euro, Sterling closed at €1.2045 from €1.1966. The dollar moved down up the yen closing at ¥102.4 from ¥101.3 and closing at 1.3582 from 1.3555 against the Euro. Sterling is on a rally which has led to a break out above £1.60, pushing through resistance at €1.20 euro basis. Oil Price Brent Crude closed at $109.65 from $111.05. The average price in November last year was almost $110. The average price just $106 this year. Markets, US pushed higher - The Dow closed at 16,086 up from 16,065. The FTSE closed at 6,650 from 6,674. 7,000 FTSE still the call before Christmas. UK Ten year gilt yields closed at 2.78 from 2.79 US Treasury yields closed at 2.75 from 2.74. Yields will test the 3% level over the coming months but this may await the New Year. Gold closed at $1,252 from $1,244. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Monthly Markets updates coming in the New Year. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. 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. 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. On the road to prosperity Chancellor Osborne greeted the GDP figures this week with the confident claim we are on the road to prosperity. “Britain’s hard work is paying off, we see that in the economic numbers today”. Indeed we do. Growth in the third quarter increased by 1.6% year on year, exactly as we had expected. Service sector growth continues to underpin the recovery, increasing by 1.9% with particularly strong growth in the distribution, hotels and leisure sector (3.8%). Construction output, boosted by developments in the housing market, increased by almost 5%. Manufacturing output was flat in Q3 up by just 0.1%. Of itself this is a measure of recovery. Output (goods) fell by almost 3% in the first quarter of the year. We expect the recovery in manufacturing to continue with strong growth of over 2% in the final quarter of the year. Our forecast for growth in the year as a whole is unchanged at 1.5%. We expect the economy to be running at trend rate (around 2.5%) in the final quarter. We are on the road to recovery, with prosperity for some, but not all, as growth will continue at 2.5% into 2014. Open for Business Open for business was the theme of a Mark Carney speech this week. The Governor of the Bank of England is shaking up the Bank of England significantly. Last week, Spencer Dale Chief Economist was on Twitter, in an online Agony Aunt economics session. This week, the Governor hired McKinsey and Deloitte to review the central bank's resources and identify cost savings. There will be blood, sweat and tears in Threadneedle Street, as the Old Lady sheds a few layers. The UK is at the heart of a renewed financial globalisation the headline of the Governors speech to celebrate the 125th anniversary of the Financial Times in London. The UK has a strong financial services sector which is to be sustained and developed. [Don’t kill the Golden Goose just because it bit the postman? is the message, if not the exact central bank wording on the subject.] To help the process, the Bank of England is open for business in supporting the banking sector. Facilities will be made available at lower coupon rates and covering a wider risk profile. “The Bank of England today is the friend of resilient banks, continuous markets, and good collateral”. Hurray! Now we have a sensible grasp on economics strategy from the Chancellor and a central banker who talks to the bankers. Whatever next? Borrowing Figures Well lower borrowing figures for one thing. This week, the ONS released the PSNBR figures for the month of September. In September 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £11.1 billion. This was £1.0 billion lower than in September 2012, when it was £12.1 billion. There is more good news to come. Public Sector borrowing is set to fall to £104.5 billion in the current financial year compared to £115 billion in 2012/13. Given the acceleration of growth in the economy into the second half of the year, we believe borrowing could possibly fall below the £100 billion threshold for the year as a whole and below £90 billion in the following year. Good news for the Chancellor as tax receipts including VAT, capital gains and income tax increased by almost 5% in the first six months of the year. Spending on the other hand was up by just 2.4%. Public sector debt was £1.2 trillion at the end of September, equal to 76% of GDP. Of itself a prosperity challenge for the grandchildren. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. Base rates are now more likely to rise by around 50 basis points in 2015 rather than 2016. A short rate rise by the end of 2014 still has low odds given the prevarications in the USA. What happened to sterling? Sterling steadied against the dollar and moved down against the Euro. The pound closed at £1.6166 from £1.6174. Against the Euro, Sterling closed at €1.1713 from €1.1816. The dollar moved down against the yen closing at ¥97.4 from ¥97.7, closing at 1.3803 from 1.3682 against the Euro. Oil Price Brent Crude closed at $106.93 from $109.94. The average price in October last year was almost $112. We expect oil to average less than $110 in the month, with no real inflationary impact. Markets, pushed higher - The Dow closed at 15,570 up from 15,399. The FTSE closed at 6,721 from 6,623. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.63 from 2.72, US Treasury yields closed at 2.51 from 2.58. Gold closed at $1,352 from $1,313. The bulls have it, at least for last week. 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. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. 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. Economics news – lunch with the Governor and a trip to the Isle of Manchester It has been an interesting week, lunch with the Governor of the Bank of England on Thursday before catching a flight to the Isle on Man to spend the day as a guest of the Government Economic Development Office. Lots of key meetings crammed into a 24 hour visit to understand more of the great opportunities for cross trade between Manchester and the Isle of Man. More on that next week. As for the lunch with Mark Carney, you have to admire the new regime at the Bank. Pragmatic, approachable, with a real understanding of the banking sector. The governor is skeptical about QE, has allowed long rates to decouple from short rates, understands low rates do not of themselves lead to a surge in investment and depreciation will not, of itself, lead to a boost to exports. Indeed in the Budget for Greater Manchester, many of our “Ten challenges to economic thinking at the Bank of England” have largely been confined to the dustbin of economics history. (Along with many of the old theories of Governor King). Yes we welcome the regime change at the Bank and we are also supportive of Forward Guidance. My thanks to John Young for the invitation. What is it about FG? The great thing about FG, is that it marks the end of QE. For this alone we should be grateful. Analysts and commentators are having real trouble accepting forward guidance. William Buiter writing for Citigroup, describes FG as a “pleonasm”. I had to look it up! Pleonasm, the use of more words or word parts than is necessary for clear expression. How absurd. It’s just two words after all. WB then goes on to describe over 17 pages, using 12,000 words in the process, why this is so, with a bit of obtuse greek econometrics thrown in for good measure. What does FG offer? During the recovery, the Bank will not move to inhibit growth by an early increase in base rates before certain conditions relating to employment and inflation have been met. FG is not “carte blanche”. It is state dependent not time dependent. The MPC reserve the right to increase rates notwithstanding the forward guidance. For the moment, it offers reassurance to businesses. Investment plans can be brought back to the board table, with rate risk evaluated, as the economic outlook clears. GDP and UK Growth and clearing it is. The GDP stats this week did not change the view of the economy over the first half of the year but the outlook for the second half is improving radically. In the GM Chamber of Commerce Survey for Q3 to be released next week, The QES Composite Leading Indicator® surged higher in the latest survey suggesting strong growth in the third quarter of around 1.5% rising to trend rate 2.4% by the final quarter. The index measured 28.3 from 18.9 in the second quarter, higher than the peak levels recorded in 2007. As a result of this, we are upgrading our forecast for GDP growth in the year as a whole, to 1.5% rising to around 2.5% next year. Why so positive? The outlook for orders and deliveries were much higher in the quarter in both the service sector and in the manufacturing sector. Growth was positive in both the UK and export markets but particularly strong in domestic activity. Businesses are less worried about interest rates and are revising the investment plans! In the wider economy, growth, jobs, inflation, government debt and borrowing are all heading in the right direction. Only the trade figures will continue to disappoint. The UK cannot grow faster than Europe and the USA without exacerbating the structural trade in goods deficit. World trade is also recovering. Flat in the second quarter but up by 3.6% in July, for the year as a whole we expect world trade growth of just over 3% well down on the pre recession growth of 5.5% but a recovery nevertheless. House Prices, The Nationwide House Price index confirms house prices increased by 5% in September. The increases confined not just to the South East but across the UK. In the North West prices increased by over 3%. The housing market is also recovering but for the moment, the overall level of transactions is still well down on the “boom” years. No need to worry about another “Boom” just yet. Is this the right time to introduce, Help to Buy Stage 2 in the New Year? Of course not. This week the Chancellor invited the FPC to exercise more control over the Help to Buy scheme. A bit like handing over car keys and credit cards before heading out for a night on the town. Enjoyable in the short term with a bad hangover in the offing, the bank will move to limit the damage with higher interest rate spreads and capital provisions forthcoming. The FPC will ensure money is “put behind the bar”, to pin the profligacy. What happened to sterling? Sterling moved up against the dollar and up against the Euro. The pound closed at £1.6150 from $1.5994 clearing the 1.60 level intra week. Against the Euro, Sterling closed up at €1.1935 from €1.1840. The dollar moved down against the yen closing at ¥98.2 from ¥99.3.The dollar euro cross rate at 1.353 was largely unchanged. Oil Price Brent Crude closed at $108.63 from $109. The average price in September last year was almost $113. We expect oil to average $110 in the current quarter, with no real inflationary impact. Markets, slipped - The Dow closed at 15,258 from 15,451. The FTSE closed at 6,512 from 6,596. The Fed statement forgotten, markets are beginning to fret about the US debt ceiling. It creates volume if nothing else. What’s the problem with the ceiling? The plasterers will be called in to cover the cracks sooner or later, usually later. UK Ten year gilt yields closed at 2.73 from 2.92, US Treasury yields closed at 2.63 from 2.79. The fed statement has now pulled long rates down by 25 basis points. Long rates are decoupling from shorts, returning to fair value. They are reluctant to leave, with pleas from the FOMC to “stick around” but leave they must. Gold closed at $1,336 from $1,331. The bulls have it or do they? The news on tapering bought more upside gain but not much, we think gold will trade sideways for some time yet. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist, #TheSaturdayEconomist by John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Good news for the economy continued this week. A fall in the rate of unemployment AND an increase in output and orders for the construction industry. Who would believe it was just a few months ago headlines were devoted to the risk of a triple dip recession? The year is becoming a tale of two halves with a significant pick up in activity and sentiment into the third quarter. Get ready, we are leaving Planet ZIRP. Speed bumps in the housing market It is a strange recovery with strange roles in evidence. The Bank of England is hoping to keep base rates on hold for three years. The RICS warned this week of the need to maintain a stable and sustainable path for house prices. “We suggest setting an annual growth rate threshold in a national index, which if exceeded, triggers tighter macro prudential policy” said Josh Miller Senior Economist in the RICS report. The RICS is advocating “speed bumps” to limit the rate of price increases. The Bank of England (in the form of the FPC) should intervene to regulate mortgage allocations of LTV ratios across the UK if prices moved over 5%. That sort of thing. “Taking away the punch bowl as the party gets started” is the traditional role of the central banker. Now some of the heavy drinkers are suggesting, we dilute the hooch. How strange. Most commentators have reacted badly to the suggestion. Why 5%? Is there a regional variation? Is it the same for maisonettes and mansions? Should the government confiscate revenues where prices exceed the guidelines? Are the RICS advocating a prices and incomes board, monitored by the RICS perhaps? Graeme Leach at the IOD has suggested it is a “statist solution to a state created problem”. Calm down Graeme, it was just for fun and not to be taken too seriously. The FPC is to meet this week. Top of the agenda will be the need to limit loan to value ratios. The government “homes for heroes” scheme, (the scheme in which the tax payer underwrites high loan values for house buyers) will be on the agenda no doubt. Unemployment The unemployment rate ticked down in July to 7.7% in July. The claimant count fell to 4.2% in August. The number of claimants - down by 32,000 to 1.4 million. Further indicators the recovery is on track, towards trend rate of growth, into the final quarter. What does this mean for forward guidance? The models still suggest it will be the end of 2015 at least before the 7% threshold will be reached. That is the rate at which the MPC will begin to think about base rate rises, (speed bumps and knock out drops aside). The caveat about earnings continues. The recovery cannot be sustained without a change in household fortunes, either lower inflation or higher earnings growth is required. Plus, the UK cannot grow at a faster rate then Europe for too long, without the trade deficit coming under severe pressure. The trade deficit, of itself, “a speed bump or pothole”, where growth is concerned. Construction Good news on construction. Output increased in July by 2% compared to July last year. Orders for new work, especially in the housing market, were up by 33% compared to the same time last year. This is an important change indicator for the sector. Overall the growth in services continues. The recovery in manufacturing and construction will look much stronger into the final quarter of the year. The UK recovery is on track. It is just over eighteen months to the election. Buckle up, we are leaving Planet ZIRP. Gilts are already in low orbit. What happened to sterling? Sterling responded to the economics news, moving up against the dollar and also against the Euro. The pound closed at $1.5871 from $1.5627 and at €1.1940 from €1.1860 against the euro. The dollar moved up against the yen closing at ¥99.4 from ¥99.0 Oil Price Brent Crude closed at $111 from $114. The average price in September last year was almost $113. We expect oil to average $112 in the current quarter, with no real inflationary impact. Markets, rallied - The Dow closed up at 15,376 from 14,923. The FTSE closed up at 6,584 from 6,547. The Fed statement this month will mark the larger DOW move. Still a good time to move in? The FTSE will clear 7000 within ten weeks and the DOW will press 16,000. UK Ten year gilt yields closed at 2.94 from 2.95, US Treasury yields closed at 2.89 from 2.93. Long rates are decoupling from shorts, returning to fair value. They are just a bit reluctant to leave! Gold closed at $1,312 from $1,388. The bulls have it or do they? Some still worry about tapering. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. Join the mailing list for The Saturday Economist or forward to a friend UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 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. Economics news – the Governor speaks on forward guidance ... A relatively quiet week for UK economics news. Nationwide announced house prices increased by 3.5% over the past twelve months and the Bank of England reported the number of mortgage approvals for house purchases had increased to 60,624 compared to around 48,000 in July last year. That’s a 30% increase in activity over the year. Housing Boom? The Funding for Lending Scheme and the Help to Buy scheme are stimulating a recovery, already manifest over the last three years. Are we about to experience a housing boom? Well not just yet. Activity is still a long way off the top, half the level of January 2007 and still way down from the average 100,000 level experienced from 2000 to 2007. Even so, Treasury would be wise to re-examine the plans for Help to Buy phase 2. This the plan to support LTV ratios for all house purchase transactions (under £600,000). An election winner perhaps, but Chancellor Osborne should heed the words of Jack Kennedy senior. “Dear Jack, Don't buy a single vote more than is necessary. I'll be damned if I'm going to pay for a landslide.” Yes, the house market is on the move, no need to rock the foundations in the process. In Nottingham, Mark Carney made a key speech to business leaders reaffirming the foundations of forward guidance. The governor offered further reassurance base rates would be kept on hold until unemployment falls below 7%, probably 2016 at the earliest. An opportunity for businesses to invest and households to spend wisely in the interim. The Governor stressed the 2% CPI inflation target is still paramount beyond the medium term. At present, 2.4% CPI is a more realistic inflation target for the foreseeable future and probably the Governor’s tenure in office for that matter. Markets believe 2015 may see the first rise in base rates, the governor suggests, it’s a three year wait. We suspect more QE is off the agenda, now the old regime has moved aside. Interesting the Governor is decoupling base rates from long term gilt rates. The Governor keen to stress the MPC controls the short rate no matter what markets may think or do. Just as well, markets will push the gilt curve back into shape, offering a real yield over the ten year horizon and about time to. Good news for the banks and lending, the governor announced an easing of liquidity requirements once the 7% capital ratios have been achieved. Here is a central banker who talks to the banks. Moral dilemma confined to the tutorial room. A pragmatist not limited by theory and dogma. A man with whom we can all do business. The Governor skillfully avoided any comment on exchange rates “some will go up and some will go down” the actual remark. Those who thought the new regime would seek further currency weakness will be disappointed. What’s wrong with forward guidance. Not much. FG offers a commitment to securing growth at the expense of an inflation trade, off in the recovery phase. Policy makers are concerned about making a move (on rates) too soon in the cycle. Japan revisited and a lost decade in prospect, if monetary policy is tightened too quickly and escape velocity is not secured. The risk at the moment, still slightly to the downside, as world trade slows, despite the evidence of UK recovery. Is there a risk of runaway inflation? Not really. Despite domestic and international price pressures, the substantial output gap, relative to trend rate of growth, will ensure there will be no runaway inflation. Real wages will improve over the next few years but substantial escalation will be avoided. In any case, FG offers guidance with lots of small print. Rates may rise at any time within the guidelines. Borrowers beware. During the past week, the downward pressure on the BISTO kids continued with the currencies of Brazil, India, Indonesia, South Africa and Turkey coming under further strain. Brazil has won the plaudits for swift action which included a substantial $60 billion foreign currency intervention plus base rate increases of 200 basis points, to a current level of 9%. Growth may be the victim as down grades follow, lower inflation currently at 6% the prize, plus, some element of stability in the exchange rate, the bonus. In India, growth forecasts have been cut to 4.5%. Inflation at 10%, a large government deficit and a $250 billion external funding requirement do not augur well for the rupee as the world faces a run to the Dollar. International hot money flows estimated at 15% of global GDP are on the move, as the prospect of the “start of the beginning of tapering” in the USA pushes up yields on Treasuries and funds are repatriated towards the homeland. The depth of foreign currency reserves and the limits to foreign debt, the real key to weathering the storm. Brazil better placed than India to withstand the cyclical pressure, which inevitably leads to capital flight at the expense of domestic asset prices, bonds, equities and real estate. Capital controls, fixed exchange rates and interest rate policies, the “trilemma” for policy makers. Hot money, leverage and asset price hikes the price of international liquidity. Yes, long term rates are on the move as bond prices come under pressure. Pack the bags and forward the luggage, we are leaving Planet ZIRP. Gold bulls have marked the next direction for the old relic. Black gold, is also on the move. Oil prices came under pressure as the prospect of an escalation of the Syrian crisis pushed prices to $114 dollars per barrel. What happened to sterling? Sterling responded to the economics news, moving lower the dollar but up against the Euro. The pound closed at $1.5494 from $1.5569 and at €1.1719 from €1.1629 against the euro. The dollar moved up against the yen closing at ¥98.1 from ¥98.6 Oil Price Brent Crude closed up at $114 from $111. The average price in August last year was almost $115. We expect oil to average $112 in the current quarter. Markets, slipped - The Dow closed down at 14,810 from 15,010. The FTSE closed down at 6,413 from 6,492. A further chance for market makers to clean out the bear pit as Syrian uncertainty adds to the shift. A good time to average in? We still think the FTSE will clear 7000 within ten weeks. UK Ten year gilt yields closed up at 2.79 from 2.72, US Treasury yields closed at 2.79 from 2.82. Gold closed up at $1,394 from $1,397. The bulls have it or do they? That’s all for this week, If you enjoy the Saturday Economist, why not forward to a colleague of friend. Here's is the link to join the Mailing list for The Saturday Economist. John 10,000 now receive the Saturday Economist each week. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John Ashcroft - 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. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
April 2024
Categories
All
|
The Saturday Economist |
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.
The Saturday Economist, weekly updates on the UK economy.
Sign Up Now! Stay Up To Date! | Privacy Policy | Terms and Conditions | |