![]() Brigitte Bardot, the "impossible dream of married men", will be 80 years of age tomorrow. Now a great grandmother, in a birthday interview for Paris Match, Ms Bardot claimed “I have loved a lot, passionately madly and not at all. Yet, I only keep one man in mind : the next one”. I feel much the same way about economic forecasts. I love a lot, passionately and madly, some not at all. I only keep one forecast in mind - the next one. Especially the next forecasts resulting from the GDP revisions out next Tuesday. The inclusion of drug dealing and prostitution for the first time, will no doubt, boost output and productivity in the UK economy. UK growth forecasts for the year will be revised as a result. The productivity dilemma resolved, understanding economic agents, burn a spliff, lie back and think of England as they contribute to economic growth. Forecast Revisions … Good news from Spain this week, as forecasts of growth have been revised up. The Finance Minister, Luis de Guindos has suggested growth this year will be 1.3% and 2% next. Still some way to go to full employment, the government now expects the unemployment rate to be 22.9% in 2015, down from prior forecasts of 23.3%. In the USA, growth in the second quarter has also been revised up! The annualised rate of growth revised higher to 4.6% from the previous 4.2%. The underlying growth rate (year on year) revised to 2.6% in the quarter. We now expect US growth of 2.5% for the year as a whole, following the slow start in the first quarter. The Manchester Index™, In the UK, the economy is on track for growth of 3.1% this year slowing to 2.8% next according to the latest data from GM Chamber of Commerce Quarterly Economic Survey and the influential Manchester Index™. The Manchester Index™ index moderated from 33.6 in Q2 to 32.0 in the third quarter largely as a result of the change in outlook for exports. The index remains above the pre recession average for the period 2005 - 2007. The outlook for home orders and deliveries improved slightly in both the service sector and the manufacturing sector. Exports, on the other demonstrated a significant fall in deliveries in both manufacturing and services. Service sector orders fell but the drop in export manufacturing orders was particularly marked. Overall confidence in turnover and profits was maintained and the prospects for employment and investment was particularly marked. Borrowing figures … Government borrowing figures were released this week. Public sector net borrowing was £11.6 billion in August, an increase of £0.7 billion compared with August 2013. For the year to date, total borrowing was £45.4 billion, an increase of £2.6 billion compared with the same period in 2013/14. Receipts in the month were boosted by Stamp duty up 24% and VAT receipts with a recovery in income tax payments, up by 2.4%. The cautionary note, expenditure £54 billion increased by 3.3%. The government is off track to meet the deficit targets this year. The good news, borrowing was revised down for 2013/14 to £99.3 billion. The reduction to £95 billion this year, less of a challenge as a result but there is still much to do with seven months to go before the end of the financial year if the targets are to be hit. So what of base rates … The Governor delivered a speech in Wales this week. “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer. In recent months the judgement about precisely when to raise Bank Rate has become more balanced. While there is always uncertainty about the future, you can expect interest rates to begin to increase. We have no pre-set course, however; the timing will depend on the data.” So what does this mean for UK rates? As we said last week, weak growth in Europe, monetary accommodation in the US, low inflation and earnings data in the UK, will push the increase in UK base rates into 2015. Despite the schism on the committee, the MPC will be reluctant to move ahead of the Fed. The timing will depend on the data. The inflation and pay data says “don’t move yet but February is the best bet”. So what happened to sterling this week? Sterling slipped against the dollar to $1.624 from $1.630 but up against the Euro at 1.280 from 1.270. The Euro closed against the dollar at 1.269 (1.270). Oil Price Brent Crude closed down at $96.83 from $98.08. The average price in September last year was $111.60. Markets, moved down. The Dow closed at 17,017 from 17,291 and the FTSE closed down at 6,649 from 6,837. UK Ten year gilt yields move up to 2.46 from 2.55 and US Treasury yields closed at 2.53 from 2.62. Gold moved sideways at $1,221 from $1,218. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company : Economics, Corporate Strategy and Social Media ... Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.
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![]() The prospect of a UK base rate rise before the end of the year receded this week with the release of latest data on inflation and earnings … Retail Prices … Retail price inflation CPI basis slowed to 1.5% in August from 1.6% prior month. Falls in the prices of motor fuels and food provided the largest downward contributions to the change in the rate. Markets expect CPI inflation to average 1.7% over the final quarter of the year, significantly below the MPC benchmark 2% target. Don’t worry about deflation too much, service sector inflation actually increased to a rate 2.7%, as goods inflation fell to 0.6%. Manufacturing Prices … Manufacturing output prices actually fell in August, down by -0.3% compared to a fall of -0.1% in July. Input costs, price of materials and fuels bought by UK manufacturers, fell -7.2% in the year to August, compared with a fall of -7.5% in the year to July. Crude oil costs were down by 14% as price of energy and import costs generally benefited from the weakness of world commodity and trade prices. The appreciation of Sterling helped, up by 8% against the dollar in the month. Home food material costs were down by -10%. Evidence that weak food prices at retail level are not really attributable to supermarket food wars after all. For the moment, inflation, or lack of it, is always and everywhere an international phenomenon. World trade prices are weak. Oil price Brent Crude is trading below $100 per barrel compared to $112 last year. Sterling closed at $1.63 this week up by just 3% compared to September last year. A warning perhaps, the currency contribution may be eroding and the dramatic fall in manufacturing costs may soon be reversed. Unemployment data … The number of people unemployed, claimant count basis fell below 1 million in August, the actual figure was 966,500 and a rate of 2.9%. Over the last six months over 200,000 have left the register. At this rate, job centres will be closing by the end of 2017, there will be no one looking for work. Despite the surging jobs market, pay data remains remarkably weak. Average earnings increased by 0.7% in July. Surprising given the rate of jobs growth. Some evidence of compression is more evident in manufacturing pay, up almost 2% and construction, up by 4%. Retail Sales ... Retail sales rallied in August as volumes increased by 3.9% year on year and values increased by 2.7%. Online sales volumes were up by 8.3% accounting for 11% of all retail transactions. Households are spending and will continue to do so. The August ©GfK Consumer Confidence Barometer confirms households are more optimistic, feel better off and believe it is a good time to spend. So what of base rates …? Janet Yellen, head of the Fed, gave additional guidance on the direction of US rates this week. “The Committee currently anticipates that economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run”. “A highly accommodative stance remains appropriate”. There was no real change in the police stance. Markets rallied and the Dow closed above 17,000. Analysts do not expect a rate rise in the USA before June next year. So what does this mean for UK rates? Weak growth in Europe, monetary accommodation in the US, low inflation and earnings data in the UK, will push the increase in UK base rates into 2015. Despite the schism on the committee, the MPC will be reluctant to move ahead of the Fed. No escape from Planet ZIRP just yet, we may regret the delayed take off in the years ahead. So what happened to sterling this week? Sterling rallied against the dollar to $1.630 from $1.626 and well up against the Euro at 1.270 from 1.254. The Euro was down against the dollar at 1.270 (1.297). Oil Price Brent Crude closed down at $98.08 from $97.62. The average price in September last year was $111.60. Markets, move up. The Dow closed at 17,291 from 16,978 and the FTSE closed down at 6,837 from 6,806. UK Ten year gilt yields moved 2.55 from 2.49 and US Treasury yields closed at 2.62 from 2.60. Gold drifted lower at $1,218 from $1,227. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Economics, Strategy and Social Media ... Experience worth sharing. Disclaimer The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a colleague or friend. Or they can sign up here ![]() USA ... When will US rates rise? According to the latest survey in the Wall Street Journal, most economists expect the Fed to raise rates in June next year. 40% expect rates to rise in the second quarter and almost half expect the rise to be delayed until the second half of the year. Positive about the prospects for growth in the US, economists believe concerns about Europe and challenges in the Ukraine suggest the Fed will be anxious to hold the rate rise for as long as possible and well into the year ahead. Mark Carney in Liverpool … The Governor was in Liverpool this week speaking to the TUC Annual Congress. Reassuring union members he and 3,600 staff in the Bank of England were paid a living wage, the governor went on to explain the “judgement about precisely when to raise Bank Rate has become more balanced”. “With no pre set course, the timing would depend on the data.” This week, the data suggests there will be no pressure to increase rates anytime soon and probably not before the end of the year. Oil Price … Fears of inflation abate, as the oil price fell below the $100 dollar mark. Despite turmoil in Iraq and Syria, Oil Price Brent Crude closed at $97.62. The average price in September last year was $112. UK manufacturing prices and headline inflation rates will soften as a result. For the moment, the Saudi swing producers are relaxed. The seasonal low will impact and prices will take the hit. Restoration to the $100 - $110 band will follow in the Autumn, demand and supply will adjust to ensure this is the case. Manufacturing … UK Manufacturing output increased by just 2.2% in July after growth of 3.5% in the first half of the year. Output of capital goods and consumer goods was surprisingly week in the month. We have downgraded our forecasts for the third quarter and the year as a whole (3.4%) as a result. Construction output ... UK Construction output growth slowed to 2.6% in July after growth of 6% in the first half of the year. Strong growth in new housing (both public and private) up by 27% and in private industrial (up by 20%) was offset by weakness in infrastructure and related public sector projects. For the year as a whole we expect growth of 4.6% slightly down on the June forecast of 5.1%. UK Trade Figures … The trade deficit (goods) increased to £10.2 billion in July offset by a £6.8 surplus in services. Our forecasts for the year as whole - unchanged as a result. We expect the deficit (trade in goods) to be £30.8 billion in the quarter and £112.5 billion for the year as a whole. Is this a threat to recovery? Not really. The trade in services surplus will reduce the combined deficit in the year, to around £30 billion. Less than 2% of GDP, the deficit is easily funded. No pressure on policy makers to increase rates, assuming overseas dividends recover to finance the shortfall. Growth in the UK … Despite the soft figures in manufacturing and construction in July, our forecast for growth in the UK in the Q3 and for the year as a whole remains unchanged around 3.1% So what of base rates … Last week, base rates were held at 50 basis points. The chances of a rate rise before the end of the year are receding. Next week’s inflation and retail figures will be soft but the labour stats will suggest further tightening in the claimant count and vacancy rates. There will be nothing in next week’s data to precipitate a rate rise this year. So what happened to sterling this week? Sterling fell against the dollar to $1.626 from $1.630 and down against the Euro at 1.254 from 1.259. The Euro was up against the dollar at 1.297 (1.295). Oil Price Brent Crude closed down at $97.62 from 100.98. The average price in September last year was $111.60. Markets, move down slightly. The Dow closed down at 16,978 from 17,103 and the FTSE closed down at 6,806 from 6,855. UK Ten year gilt yields move up to 2.55 from 2.49 and US Treasury yields closed at 2.60 from 2.44. Gold was further tarnished at $1,227 from $1,265. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Economics, Strategy and Social Media ... Experience worth sharing. Disclaimer The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a colleague or friend. Or they can sign up here ![]() Give a man a fish and you feed him for a day Teach a man to fish - and you feed him for a lifetime! Yep - The old proverbs are great at summation but sometimes over looking the broader implications of the proposition. For the fisherman, thrusting a rod into hands is not enough. We have to preserve fish stocks, avoid pollution and ensure the piscators have a boat to reach the offshore shoals. A bit of international regulation helps, to guarantee the floating fish factories don’t suck away the livelihood of the locals. Yes, you can teach a man to fish but you leave him with nothing more than a stick in his hands and a soft line dangling into empty waters, unless broader policy issues are addressed. The great enemy of the truth is … What has this got to do with economics you may ask? We have to ensure the first principles of any proposition are covered in depth. JFK would say, “The great enemy of truth is very often not the lie - deliberate, contrived and dishonest but the myth - persistent, persuasive and unrealistic.” I feel the same way about QE, as I do about fishing. Allegedly stimulating growth and inflation, QE is a process in which central bankers buy debt from the debt management office underwritten by Treasury. In the UK HMT can then claim back the yield coupon eliminating the cost of debt issuance. It’s “money for nothing, gilts for free” a form of Dire Straits economics, which does little or nothing for growth or inflation. It is a combination of debt monetisation and financial repression. Ten year gilt yields at 2.3% are symptoms of the malaise, a combination of an over long stay on planet ZIRP with a toxic dose of QE, from time to time, in a misguided attempt to sustain life. QE is not the answer for Europe … In the UK, QE, intellectually discredited, came to an abrupt end in 2012. The Fed will terminate the US experiment in October this year. In Japan the nonsense persists. Kuroda, the Governor of the Bank of Japan continues with a QE programme worth $1.4tn (£923bn) despite the damage to the international gilt curve. This is the economy which introduced a sales tax in April, to stimulate inflation, ignoring the impact on demand and output. The impact on revenues muted in the process. In Europe, the torpor of the Euro economy continues, with news of rising employment and falling inflation. The Economist leads with “That Sinking Feeling Again” but what can Draghi do? Interest rates at the floor, Draghi can do no more, than talk down the Euro with a hint of QE to come. Why hold back? The ECB well understand, if there is nothing more powerful than idea whose time has come, there can be nothing more impotent or futile as an idea, for which the time has been and gone. So it is with QE, in part the problem of deflation lies elsewhere …. No Carnival in Brazil … In South America the bad news continues, a technical default in Argentina, major challenges in Venezuela and a down grade of growth forecasts in Brazil to just over 1% this year. An awful lot of coffee but no pick me up in Brazil as the world cup damaged output. Let them eat cacao but not watch football, the lesson from history. The latest data on world trade suggest that growth increased by 3.2% in the second quarter compared to 2.7% in Q1. The US recovery is assisting the process with news of a US GDP revision in the second quarter to growth of 2.5% compared to the earlier estimate of 2.4%. The world is recovering … So what of world prices? Deflation may be the spectre that haunts Europe but world price trends are partly to blame. World trade prices increased by just 0.4% in the second quarter after a fall of 1% in Q1. Oil, energy and commodity prices remain subdued. No rising prices as yet, so rates may be on hold for a bit longer … So what of base rates … Flip flops are becoming the footwear of choice for central bankers. Mark Carney, the unreliable boyfriend, started the fad, closely followed by Janet Yellen, fishing for answers in Wyoming last week. The consensus is for UK rates to rise by 25 basis points in February, as a rate rise before the end of the year is ruled out. So what happened to sterling this week? Sterling closed unchanged against the dollar at $1.658 from $1.657 but up against the Euro at 1.261 from 1.252. The Euro was down against the dollar at 1.314 (1.324). Oil Price Brent Crude closed down at $102.19 from 102.32. The average price in August last year was $111.28. Markets, rallied on the fishing report from Wyoming. The Dow closed up at 17,084 from 17,031 and the FTSE closed up at 6,819 from 6,775. UK Ten year gilt yields slipped to 2.37 from 2.41 and US Treasury yields closed at 2.33 from 2.34. Gold was slightly tarnished at $1,286 from 1,302. That’s all for this week. Join the mailing list for The Saturday Economist or please forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Economics, Strategy and Social Media ... Experience worth sharing. Disclaimer The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a colleague or friend. Or they can sign up here *|MC:SHARE|* ![]() Jackson Hole, Wyoming. Skiing in Winter and Fly Fishing in Summer, there are several perks to the role of central banker. This week the bankers were in Jackson Hole, Wyoming, fishing for answers to the employment - inflation conundrum. The occasion - the Federal Reserve, Kansas City, Economic Symposium, Jackson Hole, Wyoming. Why Wyoming? You may well ask? In 1982 the conference moved to Jackson Hole (Kansas City district) to persuade Paul Volcker, then chairman of the Fed and an avid fly-fisherman, to attend. Flies and fish were the big lure for the head of the Fed - and so it began. The location, based some 2,000 miles from New York and 5,000 miles from London is not ideal. Communication - in the early days - not always ideal either. Want a copy of the New York Times? The local store stocked today’s and yesterday’s but if you wanted today’s copy, you had to come back tomorrow - delivery lagged a day behind. Monetary Policy and the Muddler Minnow* … This year the theme was Labor Market Dynamics and Monetary Policy. Mario Draghi reassured markets there would be no early rise in rates in Europe! Quelle Surprise! Janet Yellen delivered a lecture on structural, cyclical, secular and frictional unemployment before claiming the mantle of Truman’s two handed economist to explain the Fed’s stance on future monetary policy. On the one hand … “If progress in the labor market continues to be more rapid than anticipated or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter.” On the other hand … “If economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate.” Excellent. Yellen then left the room, thrust on a pair of waders, tied on a muddler minnow before making an excellent double spey cast into the River Snake. [*The muddler minnow is currently one of the most favoured trout flies amongst central bankers.] The MPC Minutes … muddying the waters … Back in the UK, the Bank of England released the minutes of the August MPC meeting. Two members of the committee, Martin Weale and Ian McCafferty voted for an increase in base rates by 25 basis points. The Carney consensus has cracked. Charm school is out for the Summer. Markets fell, Sterling rallied, on the prospect of an early rate rise. Inflation Update ... The day before, the ONS released the inflation figures for July. CPI fell to 1.6% from 1.9% prior month. Markets had rallied, Sterling fell, prospects of an imminent rate rise postponed. No one seemed to notice that service sector inflation was unchanged at 2.5%. The overall drop in the headline rate - attributable to goods inflation down to 0.8% from 1.4% in June. So why the drop in goods inflation? Manufacturing output prices were flat but input costs fell by over 7% in the month. Effects of sluggish world trade, weak commodity and energy prices were exacerbated by the translation impact of a stronger Sterling. Government Borrowing … Thursday and the ONS released figures on government borrowing for the month of July. Four months into the year and borrowing remains off track compared to last year and to plan. In the first four months, total borrowing was £37.0 billion compared to £35.2 billion in 2013. In July borrowing was down to £0.7 billion from £1.6 billion last year. An improvement but with an economy expanding by over 3% in the first half of the year, we would expect a big improvement in borrowing given the strength of the recovery. Government spending is not the problem, nor VAT receipts up by 5%. The problem is revenues from income and capital gains tax are actually down on prior year over the first four months of the fiscal year. In part this is a result of strong receipts in the first quarter last year which may level out in due course. Compared to two years ago, revenues are up 5%. Even so, for the year as a whole the Chancellor will still have some work to do if the OBR target is to be met. Retail Sales … Retail sales in July were up by 2.6% after growth of 4% in the first half of the year. A disappointment, perhaps. Internet sales were up by 11% accounting for 11% of all retail activity. It will take more than a few digital mannequins to reverse fortunes on the high street but it is a tad to soon to make the call about a slow down in overall activity. The house market remains strong in terms of prices and the Council of Mortgage Lenders reported a 15% increase in gross mortgage leading last month. So what of base rates … The MPC minutes suggested the rate rise could come earlier than expected but news on inflation and retail sales suggest the rates will be kept on hold until 2015. No rate rise in prospect in Europe but Janet Yellen has “nowcast” a muddler minnow into the thought stream. A rate rise in the USA on the cards for Q2 next year or even earlier? Possibly. In the UK - February or June would appear to be the call. So what happened to sterling this week? Sterling closed down against the dollar at $1.657 from $1.669 but up against the Euro at 1.252 from 1.246. The Euro was down against the dollar at 1.324 (1.246). Oil Price Brent Crude closed down at $102.32 from 102.96. The average price in August last year was $111.28. Markets, rallied on the fishing report from Wyoming. The Dow closed up at 17,031 from 16,637 and the FTSE closed up at 6,775 from 6,685. UK Ten year gilt yields were unchanged at 2.41 and US Treasury yields closed at 2.342 from 2.39. Gold was largely unchanged at $1,302. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Economics, Corporate Strategy and Social Media ... Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. ![]() The Inflation Report Press Conference … Reassurance from the Inflation Report Press Conference this week. The Bank of England may be uncertain about what is happening in the economy but it is certainly not clueless. Excellent. £3.5 million spent on the economics model and 200 PhDs in the pot to stir up the data, not all is for nought. James Macintosh of the FT put the difficult question “It would appear you've been moving over the past five years from a fair degree of certainty towards a fair degree of cluelessness and currently - you are at the more clueless end of the spectrum.” Is this a fair point? Well perhaps. Larry Elliott of the Guardian had begun the challenge suggesting there's a wide range of views on the Committee about the likely degree of slack in the economy. There is uncertainty about the housing market, wages may go up, they may not go up. Guidance on the pace and extent of interest rate rises is an expectation not a promise … “I mean once you cut through all this doesn't it lead you to three conclusions - one, that the Bank hasn't really got a clue what's going on out there; two, that the MPC is divided about what's going on out there; and thirdly, any person thinking about taking out a mortgage on the basis of the Bank's forward guidance would be ill-advised to do so, because anything you say, has to be taken with a very large pinch of salt?” Oh dear ... The Carney honeymoon is over … Well one thing we can be certain about, this is not the questioning we would have expected under Governor King. For Governor Carney the honeymoon is over. So much for the open routine. The Emperor’s economics models are proving to be as insubstantial as the clothing. Perhaps it is time to return to the enigmatic, grumpy old professor emeritus routine, dismissive of those of a lower intellectual order including undergraduates and the press core particularly. Ed Conway now with Sky News, would occasionally rattle Governor King teasing about the accuracy of the inflation forecasts, (not actually forecasts of course) but Governor Carney,cast in the role as the unreliable boyfriend, is taking more and more hits. All a bit of a muddle … Clearly Asa Bennett From the Huffington Post rattled the Governor, sensitive to criticism of forward guidance, “I just wanted to ask Governor about the evolution of your forward guidance plan, particularly when it started with the sort of clear to understand unemployment threshold, and then the sort of output gap, and then this bolt on about pay growth. Do you wish you started with this at the beginning? Hasn’t it all been a bit of a muddle or is it a learning process? “Well you’re muddled I'm afraid”. The playground retort from the Governor of the Bank of England. So is that the best we can get? The Old Lady of Threadneedle Street - the Aunt Sally of Fleet Street … The Old Lady of Threadneedle Street is becoming the Aunt Sally of Fleet Street. It would help if Jenny Scott, Executive Director of Communications, chairing the press conference, appeared to know some of the names of the press corp, instead of jabbing a pencil in this or that direction, when it came to question time. Perhaps Jenny was trying to ward off evil spirits, waving the magic wand of oblivion, which Governor King carried so successfully in his cloak. For debutante MPC member Minouche Shafik, it was all too much. Shifting uneasily, apparently bored, struggling under the weight, not of office but of a voluminous hair style, the governor allowed Minouche one question response on Europe … Minouche : “It would be good for us if Europe grew faster since it’s our key trading market, but for the near term that doesn’t look very likely”. “That’s all we have time for”, said the Director of Communications and that was that. Well, we must hope there is much more to come. So what happened this week? GDP Estimate … The ONS second estimate of GDP was released this week. Growth in the UK Q2 increased by 3.2% compared to the prior estimate of 3.1%. Actually the numbers hadn’t changed, the statisticians were using a more accurate calculator this time round for the rounding. Our estimates of growth for the year are unchanged at 3% which makes the Bank of England estimates of growth (3.5%) all the more difficult to understand. Either the economy will grow at an eye watering 4% in the second half of the year or the Bank expects big revisions to the data in September as a result of the inclusion of drugs and prostitution in the national accounts. Who would have thought hookers had that much clout. We shall have to wait until the end of September for the update. Labour Market Stats … The jobs outlook just gets better. The claimant count rate fell to 3% in July at just over 1 million unemployed. 400,000 have found work in the past year. At the current rate of growth we will be closing the job centres at the end of 2016, there will be no on left on the register looking for work. The wider LFS data confirmed the trend with the unemployment rate falling to 6.4%. More people in work, unemployment rates falling, recruitment increasing, skills shortages heightening, which makes the pay data even more inexplicable. Earnings increased by less than one per cent in June. We would expect increases in line with inflation or more at 3% plus at this stage in the recovery. For this we have much sympathy with the models at the Bank of England, something strange is happening on Planet ZIRP. Maybe low rates are the problem and no the solution? So what of base rates … Growth and jobs data would push the argument for a rates rise before the end of the year. Inflation and pay data would suggest the rates could be kept on hold until 2015. The latest data from Europe confirms a rate rise is off the agenda for months if not years to come. The MPC will be loathe to act ahead of the Fed and not too eager to move in advance of the ECB. Markets assumed rates will be kept on hold as a result of the Inflation Report… So what happened to sterling this week? Sterling closed down against the dollar at $1.669 from $1.6774 and down against the Euro at 1.246 from 1.252. The Euro was down against the dollar at 1.246 (1.341). Oil Price Brent Crude closed down at $102.96 from 105.02. The average price in August last year was $111.28. Markets, rallied on the rates news. The Dow closed up at 16,637 from 16,554 and the FTSE closed up at 6,685 from 6,567. UK Ten year gilt yields were down at 2.41 from 2.55 and US Treasury yields closed at 2.39 from 2.49. Gold was largely unchanged at $1,303 from $1,305. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. ![]() A letter from America … This week the Professor is in America, reviewing the prospects for the US economy. Despite the pressure on the Bank of England to increase rates before the end of the year, the MPC will be reluctant to move ahead of the Fed and be the first to leave Planet ZIRP. So what are the prospects of a US rate rise any time soon? Two Fed policy hawks, Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed, made comments this week, suggesting they have seen enough evidence to support an interest rate rise earlier than expected. Currently, tapering is expected to continue, extinguishing the asset purchase programme in October. US rates are not expected to rise until Q1 or even Q2 next year. The Prof thinks the latest crop of economics data will take the pressure off the doves to move earlier. Growth in the USA … In the USA, real gross domestic product increased at an annual rate of 4.0 percent in the second quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. 4% sounds quite exhilarating but …. According to our year on year comparison, US GDP Q2 increased by 2.4% in the second quarter compared to Q2 2013. This followed growth of 1.9% in the first quarter - both below trend rate. Our forecast of growth at 2.4% in 2014 is unchanged based on the latest data. The latest GDP estimates ensure there is no pressure on the Fed to accelerate the change in monetary policy. We expect tapering to continue into the Autumn, with a rate rise postponed into 2015. Jobs in the USA … Friday's employment and income reports pointed to steady U.S. job growth with the number of non farm payroll jobs increasing by 209,000. The unemployment rate ticked higher to 6.2% but this a refection of a widening labour pool rather than a slow down in the economy. Moderate expansion in payroll numbers, slightly below expectations, will ensure there is no short term pressure to increase rates anytime soon. Inflation in the USA … The US Consumer Price Index increased by 2.1 percent in the twelve months to June. The PCE (personal consumption expenditure) price index, the Fed's favoured measure of inflation, was up 1.6%. Average hourly earnings of private-sector workers were up 2.0% from a year earlier, unchanged from the range of the past few years. Growth, jobs, earnings and inflation are all demonstrating trends that are likely to keep the Federal Reserve on course to conclude the bond-purchase program in October but remain cautious about raising short-term interest rates before the end of the year. We would expect US rates to rise in the Spring of 2015. Despite any further increase in The Saturday Economist™ Overheating Index™, the MPC will be reluctant to increase rates this year and open the “Spread with the Fed”. So what of the UK? The latest manufacturing data from Markit/CIPS UK PMI® confirmed the strong output growth continued into July. Production and new orders both continued to rise at robust, above long-run average rates in the month. At 55.4, down from 57.2 in June, the headline index posted the lowest reading in one year but remained well above the survey average of 51.5. No need to worry about manufacturing output! Something to worry about … Ben Broadbent, Deputy Governor for monetary policy, Bank of England, made a speech in London this week. His theme - “The UK Current Account Deficit”. Last year the UK current account deficit was 4.5% of GDP. That’s the second-highest annual figure since the Second World War. So is the near record deficit a threat to growth? The Deputy Governor concludes the “significance [of the deficit] depends on the health of a country’s net foreign asset position and more fundamentally, on the trust in its institutions”. “…having a balanced net asset position seems to reduce the threat from a large current account deficit, as does a floating currency.” Now that is concerning. In the 80’s Chancellor Lawson argued the Balance of Payments “doesn’t matter”. It does and in the end it did! Interest rates had to rise dramatically to curtail domestic demand. In the current cycle, the deficit, trade in goods, is offset in part by the service sector surplus. At around 2% to 2.5% of GDP, the deficit is not a threat to growth. The collapse in overseas earnings on the other hand is a more serious concern. A current account deficit of 4.5% is unsustainable. A dismissive speech at Chatham House will not disguise the extent of the problem, rule or no rule. So what happened to sterling this week? Sterling closed down against the dollar at $1.682 from $1.698 and down against the Euro to 1.252 from (1.2653). The Euro was unchanged against the dollar at 1.343. Oil Price Brent Crude closed down at $104.84 from 108.30. The average price in August last year was $111.28. Markets, closed down. The Dow closed down 460 points at 16,493 from 16,953 and the FTSE was down 12 points at 6,679 from 6,791. UK Ten year gilt yields were down at 2.55 from 2.57 and US Treasury yields closed at 2.49 from 2.47. Gold was unchanged at $1,293 from $1,294. That’s all for this week. Join the mailing list for The Saturday Economist or forward to a friend. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. ![]() Of inflation and unemployment? Job centers will be closing in 2017 … This week the ONS released latest data on inflation and unemployment. The rate of employment growth is such, job centers will be closing in 2017, if current trends hold. Unemployment falls … Unemployment fell to 3.1% in June, (claimant count basis) and to 6.5% in the three months to May (LFS basis). The number of unemployed in June was 1.04 million. The rate of job creation has surprised not just our models but those of the Bank of England. Spare capacity will be eliminated within the next three months. Claimant count levels will be back at pre recession levels within six months and job centres will be closing by 2017 - no-one will be looking for work. Is this realistic? Probably not! Earnings remain at unrealistic levels if we accept the official data (sub 1%). The level of recorded earnings does not correlate with job levels. Neither does it sit well with evidence of household spending on car sales, retail sales and trends in the housing market. Our evidence on recruitment and skills shortages also infers that earnings should be on the increase. It is a strange world on Planet ZIRP! As for the so-called Productivity Paradox, do we really believe our businesses are taking on more and more people to do less and less work - of course not. The economy is in danger of overheating based on job trends. Productivity absorption will improve as output increases but this will not really ameliorate the inflation impact! So what of inflation in June? Inflation rises … Inflation CPI basis increased to 1.9% in June from 1.5% in May. Service sector inflation increased to 2.5% and goods inflation also increased to 0.9%. The largest contributions to rising prices came from clothing, food, drinks and transport. We expect inflation to hover above the 2% level for the rest of the year assuming sterling tracks $1.75. Manufacturing prices, increased by just 0.2% in the twelve months to June, slightly down from the prior month. Low world prices and higher sterling dollar values are easing the pressure on input costs. Metals, materials, parts and chemicals are all down in price, import cost basis. Housing Market … So what of the housing market this week? The Council of Mortgage Lenders released the latest gross lending figures for June. “The pace of lending slowed” according to the headlines. Commenting on market conditions in this month’s Market Commentary, CML chief economist Bob Pannell observes: "The macro-prudential interventions announced by the Financial Policy Committee in late June are finely calibrated and precautionary, but could nevertheless reinforce April’s Mortgage Market Review in tipping the UK towards a more conservative lending environment.” Yeah, thanks Bob. Lending was up by 20% in the first quarter, that’s an increase of almost 30% for the first six months of the year. Despite the interventions of the FPC we expect the volume of activity to increase by 25% this year and by a further 15% in 2015. Even then, activity will still be some 20% below pre recession levels. A great recovery but no real threat to the economic outlook over the medium term either. So what of interest rates … The Saturday Economist™ Overheating Index™, ticked higher this week as a result of the inflation and jobs update. Our overall growth outlook is unchanged but the chances of a rate rise before the end of the year ticked higher in line with the index. So what happened to sterling this week? Sterling closed down against the dollar at $1.709 from $1.711 but up against the Euro to 1.263 from (1.258). The Euro moved down against the dollar at 1.352 from 1.360. Oil Price Brent Crude closed up at $108.40 from 106.90 from. The average price in July last year was $102.92. Markets, closed up. The Dow closed above the 17,000 level at 17,100 from 16,900 and the FTSE was up at 6,749 from 6,690. UK Ten year gilt yields were down at 2.60 from 2.61 and US Treasury yields closed at 2.49 from 2.52. Gold was down at $1,310 from $1,336. That’s all for this week. Join the mailing list for The Saturday Economist™ or forward to a friend. John © 2014 The Saturday Economist™ by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. ![]() Earlier this month is his speech at the Mansion House, Mark Carney, Governor of the Bank of England, referenced the Sterling Crisis of 1931 and imbalances within the economy. “We need balance. One has only to look back to 1931 when Britain’s economic prospects were strained by a large budget deficit and a deteriorating balance of payments. In 1931 the UK faced a balance of payments crisis and a run on the pound sterling which in the end led to a negation of the Gold peg and the dollar pricing of $4.86. By modern standards the deficit was no big deal. In 1929, the country had a credit balance (current account) of some £100 million falling to £30 million in 1930. In 1931 there was an estimated debit balance of £90 to £120 millions. It was this anticipated deficit on current account that led to a run on Sterling and a repatriation of assets particularly to France and the USA. The problem for the balance of payments was a deterioration in the net receipts from invisible exports largely as a result of the fall in international trade and collapse of shipping revenues. The government was unwilling to raise interest rates to defend the currency given the overwhelming concern re unemployment. The visible account had long been in substantial deficit, despite a surplus on manufactures and semi manufactures. Imports of raw materials and food, particularly food, meant that exports of manufactures and a surplus in invisible earnings had to finance the food bill of the UK population. In 1931, food exports totalled £39 billion but the import bill was £377 billion producing a deficit of £338 million. The proposition to remedy the balance of payments problem was to eat less, import fewer manufactures and export more. Food, drink and tobacco imports should be reduced by 7%, manufactured goods imports should be reduced by 25% and exports of manufactures increased by 25%. A combination of import tariffs and duties would assist in the process. Certain items were considered to be non-essential including shell fish, game, pickles and pickled vegetables, precious stones, feathers, flowers, plants and bulbs. The category of non essentials, totalled £13 million. The “pickled imports” alone cost the UK £6,000 such was the level of detail in the analysis. In 1930 and 1931, the deficit on merchandise trade was £386m in both years and this was offset by invisible receipts of £400m – £420m in 1931, falling to £285m to £315m in 1931 largely as a result of the fall in income from overseas investments. In 1930, the visible deficit was equal to almost 9% of GDP but thanks to the surplus on invisible account the current account was in balance. It was argued there is no problem of the balance of trade so long as the “£ is free to move” as, if the balance is adverse, sterling will automatically fall to the point necessary to maintain equilibrium. “The real problem is to secure such a balance of payments as is consistent with a reasonable exchange values of the £.” (Committee on the Balance of Trade – report January 19th 1932). In September 1931 the British Government suspended obligations due under the Gold Standard Act of 1925 which required the bank to sell gold at a fixed price. As the statement from the Prime Minister Ramsay MacDonald explained. “In the last few days the international financial markets have been “demoralised” and seem intent on liquidating their foreign assets in a sense of panic. Since the middle of July, funds amounting to more than £200 million have been withdrawn from the London market. The withdrawals have been met partly from gold and foreign currency held by the Bank of England, and short term credits of £130 million from the USA and France.” By September 1931, reserves were exhausted. In a chilling note from the Bank of England to the Prime Minister, the Deputy Governor E M Harvey reported : Gentlemen, I am directed to state that the credits for $125,000,000 (£25.7m) and FFs. 3,100,000,000, (£25m) arranged by the Bank of England in New York and Paris respectively, are exhausted, and that the credit for $200,000,000 arranged in New York by His Majesty's Government, together with credits for a total of FFs. 5 millions negotiated in Paris, are practically exhausted also. The heavy demands for exchange on New York and Paris still continue. Under these circumstances, the Bank consider that, having regard to the above commitments and to contingencies that may arise, it would be impossible for them to meet the demands for gold with which they would be faced on withdrawal of support from the New York and Paris exchanges. The Bank therefore feel it their duty to represent that, in their opinion, it is expedient in the national interest that they should be relieved of their obligation to sell gold under the provisions of Section 1 subjection 2 of the Gold Standard Act, 1925. I am, Gentlemen, Your obedient Servant. And so it was, the UK abandoned the Gold Standard, the Pound was left to float, to a level which will automatically produce equilibrium. The rest “as they say” is history. This article was originally posted in April 2011 ![]() Deficits with inky blots and rotten parchment bonds sustained - of Balance of Payments and Public Sector Finances. Earlier this month is his speech at the Mansion House, Mark Carney, Governor of the Bank of England, referenced the Sterling Crisis of 1931 and imbalances within the economy. “We need balance. One has only to look back to 1931 when Britain’s economic prospects were strained by a large budget deficit and a deteriorating balance of payments. In the ensuing crisis, the government of the day resigned, sterling was forced off the gold standard" [and the Governor of the day went back to Canada.] In 2014, despite significant internal and external deficits, neither the resignation of the government, nor the repatriation of the Governor of the Bank of England appears imminent. It is however, worth revisiting 1931 and recalling the worlds of Sir Warren Fisher, permanent secretary to the Treasury. In September of that year, Sir Warren Fisher, warned Cabinet, of the Balance of Payments Crisis and the National Budget problem - "Deficits with inky blots and rotten parchment bonds sustained". He could easily have been talking of the present day, QE and debt monetisation. Trade Deficit ... Fisher 1931: The seriousness of the financial difficulties which are engaging public attention is perhaps not fully realised. The root cause of the "run on Sterling" on the part of the foreign depositor is the fact of our living beyond our means as evidenced by our ordering from abroad more goods than we could pay for and therefore our owing to other countries more in dollars and francs than they owe to us in sterling.” Public Sector Finances … Fisher 1931: Closely associated with this fact in the foreign mind is the question of our national Budget. After the war a certain number of countries continued to have difficulties in balancing their budgets and instead of pulling in their belts, resorted to the expedient of meeting deficits by printing innumerable bank or currency notes. Whenever this was done, the national currency lost much or all of its value i.e. purchasing power, and with the corresponding rise in prices, hardship, even hunger, was widespread. Consequently, when any of these countries subsequently desired financial assistance from other countries before the citizens of the latter could be induced to lend, they insisted on the borrowing country balancing its budget. And no one was more emphatic than ourselves in preaching this doctrine. National Budget … Fisher 1931: A national Budget has thus come to be regarded as a touchstone of a country's financial stability second only in importance to its international balance of trade; and if, as the case at present with us, we are "down" on our balance of trade with other countries, foreigners to whom we owe money automatically turn a microscope on to our Budget. And if the Budget is not really balanced, but is merely dressed up to look as though it were, the distrust abroad of our soundness would be intensified. Any expectation that we might continue on a "rake's progress" would complete the destruction of international confidence and thus result in the final collapse of our greatest asset, i.e. our credit. Living beyond our means … Fisher 1931: The remedy is to reverse the process which has been responsible for the trouble, and this means that instead of living at a level which has entailed ordering abroad more goods than we can pay for, we must relate our orders to our capacity to pay. And unless we can produce and sell abroad more goods (including "services") than we have been doing, we shall be forced to cut down our orders abroad, and our and our standard of living must be reduced accordingly. Consequences ... If not the epitaph of us English of to-day will be written by historians to come in Shakespeare' words (Richard II , Act 2, Scene l ) "England, bound in with the triumphant sea, Whose rocky shore beats back the envious siege of watery Neptune, Is now bound in with shame, with inky blots and rotten parchment bonds. That England, that was won’t to conquer others, hath made a shameful conquest of itself". Lessons from History And so history is revisited. With inky blots and rotten bonds sustained. The latest data on the Public Sector Finances is hardly reassuring and the trade deficit will continue to present a problem for an economy growing faster than major trading partners. Note "By the Secretary, The attached memorandum by Sir Warren Fisher is circulated to the Cabinet by instructions from the Prime Minister. (Signed) M. P. A. HANKEY Secretary, Cabinet, Whitehall Gardens, SW1. September 14th, 1931. Footnote : Up to this time the pound sterling, has for international purposes been valued and accepted as the equivalent of a gold pound or of 4.00 dollars or 124 Francs. The Financial and Economic Position of the United Kingdom 1931. Memo to Cabinet from Sir Warren Fisher, Permanent Secretary to the Treasury September 1931. Deficits with Inky Blots and Rotten Parchment Bonds sustained. This article was originally published John Ashcroft.co.uk in July 2009. References : Fun with the National Archives : Cabinet Papers |
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