We will not take risks with this recovery … The Bank of England will not take risks with this recovery, according to the latest statements from Mark Carney, Governor of the Bank of England. Base rates will remain on hold for some time yet. When they begin to rise, the increase will be slow and gradual. It will be many years before fair value base rates of 4.5% will be on the agenda, according to the guidelines issued this week. Markets anticipate the first rate rise may appear in the second quarter of 2015. Thereafter a rise to 2% may be possible but not until the end of 2016 or the beginning of the following year 2017. “The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis,” the more cryptic quote. The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began and the inflation rate is back at 2%. “The recovery has been underpinned by a revival in confidence, a reduction in uncertainty, and an easing in credit conditions”. Yes, Forward Guidance has been a success! The Bank of England expect the economy to grow by 3.8% this year and 3.3% next year assuming interest rates are held at 0.5% through 2014 and into 2015. Assuming rates follow the path outlined in current market profiles, growth will be a more modest 3.4% this year falling to 2.7% next. A recovery neither balanced or sustainable … No wonder the Bank consider the recovery is neither balanced nor sustainable. The recovery is dependent upon household spending, with a sluggish investment performance to date and a structural trade deficit, exacerbated by weak growth in Europe. Growth of 3.4% is significantly above trend rate and above most forecasts for the year. Consensus forecasts predict growth of just 2.7% in 2014 falling to around 2.5% next. The bank is very bullish on a recovery in earnings, consumer spending and investment. We shall see who is right in due course. For the moment, the Bank looks hot! So what of Forward Guidance … Forward guidance may have been a success but the single point reference to the unemployment rate has been beset with problems. The 7% guideline for unemployment will be breached in the first quarter this year. Hence the single point guideline is on the way out. It was too easy to understand. The Governor will not be allowed to make the same mistake again. The Bank collective has had its way. “To allow others to monitor how the economy is evolving relative to our projections, today we are publishing forecasts of 18 more economic indicators.” Excellent. Yes, now we will have eighteen guidelines to better understand policy. The output gap is back, as is the meandering NAIRU. Eighteen reasons why it will prove more difficult to pin the Governor in difficult interviews on Newsnight in the future. It was never clear why 7% was the correct number to choose anyway. The Americans bagged the 6.5% level first but the Governor admitted the long term NAIRU was more like 5% anyway. It was just a number but at least we could “see it” so to speak. Not so the “Output Gap”. What is the size of the output gap? What colour are the eyes of a Yeti? an equally productive debate. In a service sector economy with limited supply constraints, does it really matter anyway? Forward Guidance is a great step forward. Simplicity, part of the success, made the process just too transparent for some. Forward Guidance USA … Over in the USA, Janet Yellen, as the new Chair of the Fed provided assurances there would be policy continuance following the Bernanke regime. Accommodative monetary policy, with progressive tapering remains on the agenda. The US is expected to grow by almost 3% this year with inflation below 2%. Unemployment will fall below 6.5% through the year. So what of forward guidance, - markets believe a rise in base rates may be possible towards the end of this year or early next. So what happened to sterling? The pound closed up at $1.6730 from $1.6407 and 1.2220 from 1.2030 against the Euro. The dollar closed at 1.3690 from 1.3635 against the euro and 101.82 from 102.31 against the Yen. Oil Price Brent Crude closed at $108.56 from $109.57 The average price in February last year was almost $116. Markets, moved up - The Dow closed at 16,105 from 15,794 and the FTSE closed at 6,663 from 6,571. UK Ten year gilt yields closed at 2.80 from 2.71 and US Treasury yields closed at 2.74 from 2.69. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. Join the mailing list for The Saturday Economist or forward to a friend. The list is growing as is our research team. John © 2014 The Saturday Economist by John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice.
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Economics news – UK recovery continues at pace in January ... According to survey data this week, [Markit/CIPS UK PMI® January], the recovery in the UK economy continues at pace into the New Year. Manufacturing, construction and services all continued to demonstrate strong levels of activity. In the manufacturing sector, the strong rebound continued with improved domestic demand and rising export orders suggesting robust growth in the month. Construction survey data suggests the sector is experiencing the sharpest rise in construction output since August 2007. Housing activity is increasing at the sharpest rate for over ten years. Service activity remains elevated with a headline index rate at 58.3 during January, down slightly from 58.8 in December. Service sector output is still at a very high level, anything above 50 suggests growth. The latest monthly NIESR GDP tracker suggests the economy grew by over 3% in January. This week, NIESR also upgraded UK forecasts for growth this year to 2.5% with projections of unemployment falling, inflation tracking the 2% target level and government borrowing continuing to reduce. In fact on current plans, according to the leading think tank, the public sector finances will be in surplus in 2018-19. So much for fears of prolonged austerity to come. So growth up, inflation down, employment up and borrowing down. Just the trade performance is expected to deteriorate with the external current balance increasing from a deficit of £54 billion in 2013 to £78 billion by 2015. ONS Data on Trade ... ONS data this week for trade was a little surprising. The trade deficit in December improved significantly compared to our forecasts. Seasonally adjusted, the UK's deficit on trade in goods and services was estimated to have been £1.0 billion in December 2013, compared with a deficit of £3.6 billion in November 2013. There was a deficit of £7.7 billion on goods, partly offset by an estimated surplus of £6.7 billion on services. Some £2 billion of imports appear to have been lost in the analysis. If domestic demand was as strong as the data suggests, the fall in imports for the month is illogical. In any case, don’t get to excited about the rebalancing agenda - for the year as a whole, the deficit trade in goods was £108 billion. US Payroll data ... Over in the US, payroll data upset the markets as jobs growth proved disappointing for the second month running. US payrolls rose a seasonally adjusted 113,000 in January after gains of just 75,000 in December. The unemployment rate continued to move down, to 6.6% the lowest level since December 2008 and perilously close to the Fed forward guidance hurdle rate. It is thought the latest data is unlikely to change the Fed stance on progressive tapering through 2014. Janet Yellen, the new chair of the Federal Reserve Board, makes her first appearance before Congress next week. Emerging markets will shudder as the adjustment in the stance of QE and tapering continues. Rate rises could be on the US agenda by the end of the year. So what happened to sterling? Sterling closed at $1.6407 from $1.6433 and 1.2030 from 1.2184 against the euro. The dollar closing at 1.3635 from 1.3487 against the euro and 102.31 against the Yen. Oil Price Brent Crude closed at $109.57 from $106.40 The average price in February last year was almost $116. Markets, steadied - The Dow closed at 15,794 from 15,698 and the FTSE closed at 6,571 from 6,5210. UK Ten year gilt yields closed at 2.71 from 2.72 and US Treasury yields closed at 2.69 from 2.65. That’s all for this week. No Sunday Times and Croissants tomorrow or for the rest of this year for that matter. We are taking a break in this pre election year. John Join the mailing list for The Saturday Economist or why not forward to a colleague or friend? The list is growing as is our research and research team. Over ten thousand receive The Saturday Economist each and every week! © 2014 The Saturday Economist. John Ashcroft and Company. Experience worth sharing. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. 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. Ten Predictions for 2014 We begin the year with our ten predictions for the economy in 2014. The professor and his team have dusted off the glass bowl and outlined the benchmark numbers by which we will judge the performance of the UK economy in the year ahead. Slideshare link. Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The UK cannot grow faster than major trading partners in Europe without a deterioration in the inherent structural trade deficit. Forget rebalancing and the new normal, growth will return to trend rate, pushed by the household and consumer recovery with some contribution from investment later in the year. Working with the GM Chamber of Commerce as their Chief Economist provides huge insights into the business sector. We use the influential quarterly economics survey to develop powerful coincident economic indicators for growth, inflation and employment. Significant indicators of trends in the Greater Manchester, North West and national economies as a whole. Our models of the economy are improving year on year with empirical adaptation as a result. Growth We expect GDP growth in 2013 to be revised up to 2% for the year following a robust performance in the final quarter of the year. The influential NIESR GDP tracker suggests growth was up by 2.9% in the final quarter of the year. Our own GM Chamber of Commerce co-incident indicator confirms the strong growth pattern. Following revisions to GDP released at the end of December, the economy grew by 2% in the second and third quarters. We expect the preliminary estimate, later this month, for 2013 as a whole, to be around 1.8% or 1.9% with a final revision to 2% by the end of the quarter. Last week, the ONS released the manufacturing figures for November. Manufacturing slowdown hits recovery - the headline in today’s Times. Hardly! Growth year on year was up by 2.8% following a 2.5% growth in October. We expect the rally in manufacturing to continue into this year. In 2014, the strong growth in service sector activity will continue with support from manufacturing and construction. We expect overall GDP growth of 2.5% in 2014 possibly rising to 2.7% in the following year. Inflation Inflation CPI basis, fell to 2.1% in November. We are forecasting CPI inflation of around 2.3% in the year ahead. Service sector inflation remains a challenge to the 2% target averaging over 2.5% in the final quarter of 2013. International commodity prices, including oil, should be less of a threat to the UK inflation outlook and some improvement in sterling exchange rates will assist. The oil price outlook appears benign with US shale oil and a lower Chinese propensity to import, moderating Brent crude prices around $110 dollars per barrel for the year as a whole. Unemployment and base rates Growing employment will push the claimant count down to around 3.8% this year and 3.3% next year. The wider LFS indicator will fall to the 7% level by the middle of 2015. Then and only then will the forward guidance from the MPC come under review. We expect base rates to be kept on hold until the middle of 2015, thereafter rising in line with US base rates. Gilt yields on the other hand, we expect to be trading at fair value 4.5% by the end of the forecast outlook. Earnings Stronger growth and a lower claimant count will lead to an acceleration in earnings and household incomes as a whole. The “new normal” may well appear to be the “same old same old” recovery consumer led recovery by the end of the year. Government Borrowing We expect significant improvements in the borrowing figures for this fiscal year and in the years ahead. Revenues in the eight months to November were up by 7% with spending up by less than 2% over the same period. We expect borrowing for this year to be around £105 billion falling to less than £90 billion in 2014/15. Still much to do but growth will restore equilibrium over the next four years assuming spending plans remain under control. Trade Last week the ONS released the trade figures for November. Nothing changes in the outlook. Our forecast deficit trade in goods remains around £110 billion this year rising to £117 billion in 2014. The service sector surplus will offset (in part) the trade in goods deficit. The bad news, - there will be no “net gain to trade” in the years ahead. The good news, there will be no balance of payments constraint to growth, nor a balance of payment crisis and “run on sterling” either. Ten predictions So there you have it. Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The full forecasts presentation is available below from the Saturday Economist web site or from the new Chamber of Commerce Economics web site. We will benchmark the economy using this forecast outlook as we move through the year. That’s all for this week. No Friday Financials this week and possibly no Sunday Times and Croissants tomorrow. The professor and his team are reviewing the Sunday strategy in this pre election year. Have a Happy New Year in any case. Join the mailing list for The Saturday Economist or forward to a friend John © 2013 The Saturday Economist, #TheSaturdayEconomist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. The good news for policy makers continued this week as inflation and unemployment continued to head in the right direction. The latest revisions to the National Accounts suggest the economy will grow by 2% this year. Inflation CPI ... falling Inflation CPI basis fell to 2.1% in November down from 2.2% in October. Manufacturing output prices increased by less than 1% in the month, unchanged from the prior period. Input costs for manufacturers actually fell by 1% as world commodity prices including metals and oil remained subdued. Overall the inflation outlook is benign with inflationary pressures diminishing. It will take some time for world demand to impact on price levels as long as the recovery in Europe remains protracted. We expect the international inflation outlook to look pretty soft over the next twelve months. Labour Costs ... set to rise On the other hand we expect a reversal in the trend in domestic labour costs by the end of next year. The claimant count fell by 37,000 in November to a level of 1.269 million, a rate of 3.8%. The overall number of claimants, over the past year, has fallen by 300,000 down from a rate of 4.6% in November 2012. 120,000 have found work over the past three months. At the current rate of jobs growth, the claimant count rate will fall to around 2.5%, within twelve to fifteen months. This is a pre recession rate, consistent with significant growth in rates of pay and remuneration. As it is, the rate of private sector earnings increased by almost 1.5% in October. The widely reported “whole economy rate” increased by just under 1% but the warning signs are there for policy makers - domestic inflationary pressures and labour costs will be back on the MPC agenda by the end of 2014. As unemployment falls ... The wider Labour Force Survey Data confirmed the unemployment level fell to 2.388 million in October and a rate of 7.4%. This is a fall of 120,000 over the past year as the overall number of people in employment increased by almost 500,000. The 7% hurdle rate outlined in Forward Guidance could be within reach within twelve months as the rate of economic growth accelerates into the final quarter of 2013 and into next. Interest rates are set to rise, probably after the 2015 election. Bank of England MPC Minutes ... The minutes of the Bank of England Monetary Policy Committee were released this week, explaining why base rates were not increased in the December meeting. The domestic recovery was robust with inflationary pressure diminishing it was said. The GDP figures had confirmed the rapid pick up in consumption growth. Strong contribution from stock building had been offset by a large drag from net trade. The overall divergence between domestic demand and net trade had been larger than expected. Any significant narrowing of the current account deficit in the near term seemed unlikely! Rebalancing ? Does this mean the MPC had got the message about the rebalancing agenda? Sadly not. The minutes went on to claim that a sustained recovery would require some rebalancing from domestic to external demand! Some hope, the UK is set for a classic consumption rally with domestic demand growth of significant proportions. Fears about the appreciation of sterling are misguided. Higher sterling will alleviate inflationary pressures and de facto improve margins and competitiveness of exports. For exporters, demand (not price) conditions are dominant. The sluggish recovery in Europe will be the real obstacle to export growth over the next twelve months. And what of Investment ... Better news for investment however. The minutes claimed that beyond the near term, it seemed likely that a pick up in business investment spending would be necessary, Business and Dwellings investment had been weaker than expected to date. Weaker than expected in the Bank of England model, perhaps. The good news is that, we expect a strong rally in investment spending in 2014 as capital expenditure projects are brought back to the board room on the back of stronger domestic demand. Just 20% of total investment is determined by plant and machinery and our models suggest the four year capital stock has fallen to £163 billion down from an average £183 billion in the three years prior to recession. That represents a fall of 12%. Our less aggressive ten year Capital Stock Model suggests the overall level of productive investment has fallen by just 2%. No threat to the output capacity of UK PLC. The shortfall will be addressed by additional investment over the next three years to restore capacity equilibrium. Investment in transport equipment is set to rally on the back of a a 10% increase in commercial vehicle sales this year. Intangibles “investment” is set to rise on the back of a healthier M & A and corporate finance market in 2014. Together transport equipment and intangible investments account for a further 20% of total investment. Why has investment been subdued ... ? Why has investment been subdued post recession? Well in general businesses will invest in response to rising demand not a fall in the cost of capital. More specifically, 60% of investment identified in the national accounts is linked to property, either dwellings or commercial real estate. No policy maker should be surprised by the lag in investment intentions in this sector. Significant price collapse has left almost half the banked commercial real estate under water on a conventional 65% LTV (loan to value) test. A significant recovery in prices is required to restore equilibrium in the commercial real estate sector. The recovery in property and real estate may be a little more protracted, than “other investment classes”. Nevertheless we expect strong investment growth in 2014 and 2015 with investment in “dwellings” staging a marked recovery. So what of the revisions to the National Accounts? The latest revisions to the National Accounts confirm the economy grew by 2% year on year in Q3. We now expect the economy to grow by 2% for the year as a whole and by 2.5% in 2014 rising to 2.7% in the following year. And what of tapering? The Fed announced the beginning of tapering with a reduction in the rate of asset purchases by $10 billion from January 2014. What is that all about? The Fed said, “The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.” Oh dear? The link between longer term rates and growth has never been fully explained as neither has the linkage between domestic asset price inflation and international deflationary pressures. Nevertheless, it is time to buckle up, we are leaving Planet ZIRP - This week, the US growth rate was revised up to 2% year on year in Q3, Fed rates will also be on the rise in 2015. What happened to sterling? The pound closed at £1.6351 from £1.6294. Against the Euro, Sterling closed at €1.1950 from €1.1856. The dollar moved up against the yen closing at ¥104. from ¥103.6 and closing at 1.3678 from 1.3740 against the Euro. Sterling is on a rally which has led to a break out above £1.60, but €1.20 still presents significant overhead resistance. Oil Price Brent Crude closed at $111.58 from $108.53. The average price in December last year was almost $110, so no real threat to inflation. Markets, US moved higher - The Dow closed at 16,275 from 15,755. The FTSE closed at 6,606 from 6,434. 7,000. UK Ten year gilt yields closed at 2.94 from 2.90 US Treasury yields closed at 2.89 from 2.87. Yields will test the 3% level as tapering accelerates. Gold closed at $1,207 from $1,239. That’s all for this week, and for this year. No Sunday Times and Croissants tomorrow or for the next few weeks. The professor and his team are away for a short break. Have a great Christmas of Holiday Break and have a Happy New Year. Join the mailing list for The Saturday Economist or forward to a friend John © 2013 The Saturday Economist, by John Ashcroft and Company, Dimensions of Strategy and The Apple Case Study. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. Economics news – fixing the roof whilst the sun is shining ... “Britain’s economic plan is working but the job is not done”, said Chancellor Osborne in the Autumn statement this week, “we need to secure the economy for the longer term”. Yes the Chancellor is intent on fixing the roof despite the sunny OBR outlook. The office for Budget Responsibility has revised up forecasts for the economy with growth of 1.4% expected this year and 2.4% next. Better still, borrowing is expected to fall significantly. The government is expected to borrow £111 billion this year, falling to to £96 billion next year, then down to £79 billion in 2015-16. By 2018-19, the OBR forecast the government will not have to borrow anything at all. Back from the brink of bankruptcy indeed. Growth is up, the deficit is down, unemployment is down, inflation is falling, spending will be kept under control, the government has an economic plan that is working. Who said the pasty tax was such a bad move? We even expect a much stronger performance from investment over the next two years. Just the trade figures alone will continue to disappoint. “Britain is currently growing faster than any other major advanced economy”, [which of itself will create a significant balance of payments problem for the UK economy]. "Exports are growing but they are not growing as fast as we would like", said the Chancellor. The Prime Minister’s visit to China this week is the latest step in this government’s determined plan to increase British exports to the faster growing emerging markets. We are even offering pig semen, to boost pork output in the Chinese economy apparently. So this Autumn Statement is fiscally neutral across the period. No giveaways. Government will ensure that debt continues to fall as a percentage of GDP. This means capping welfare to keep it under control and extending the working life to limit pension payments over the longer term. Business rates are to be capped, with some reduction in department spending to offset the revenue loss. The Bank levy will be increased slightly and the troops will be brought back from Afghanistan, saving lives and money in the process. All in all, this is a play it safe spending review, with a strong recovery in process. Fixing the roof, whilst the sun is shining. Yes, the sun has got his hat on and the Chancellor has a smile on his face” PMI Markit Surveys The good news continued from the PMI Markit Survey data this week, with manufacturing, construction and services all continuing to show strong growth. The recovery is extending across all sectors. Even the slow march of the makers will begin to pick up some speed this quarter. Over in the USA In the USA, growth figures for the third quarter reveal the economy grew by 1.8% year on year in real terms. The US economy will grow by around 1.8% this year, that’s actually faster than the UK but who would want to trouble an Autumn statement with facts. In the USA, more good news, unemployment data in the US fell faster than expected last month. 203,000 jobs were created in November pushing the unemployment rate down to 7%. Tapering is back on the agenda, with some speculation the cut back could begin this month. Courtesy would suggest the decision should await the move to Planet Janet in the New Year. Either way, tapering will begin soon and US base rate rises may be in prospect in 2015. What happened to sterling? The pound closed at £1.6346 from £1.6360. Against the Euro, Sterling closed at €1.1922 from €1.2045. The dollar moved down up the yen closing at ¥102.8 from ¥102.4 and closing at 1.3700 from 1.3582 against the Euro. Sterling is on a rally which has led to a break out above £1.60, but €1.20 still presents significant resistance. Oil Price Brent Crude closed at $111.61 from $109.65. The average price in December last year was almost $110. Markets, were tapered - The Dow closed at 16,020 from 16,086. The FTSE closed at 6,552 from 6,650. 7,000 FTSE now a tough call before Christmas. The markets are nervous until tapering begins. UK Ten year gilt yields closed at 2.91 from 2.78 US Treasury yields closed at 2.86 from 2.75. Yields will test the 3% level over the coming months but this may await the New Year. Gold closed at $1,231 from $1,252. 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. Economics news – import drive and the march of the makers ... Import Drive ... “Sales of European cars drive trade gap wider” is the headline in the Times today as Britons “flocked” to buy cars built on the continent. The trade figures released this week, reveal the September deficit (trade in goods) increased to £9.8 billion from £9.6 billion last month. The trade deficit with the EU reached a record £6.0 billion as imports increased by £0.4 billion to £18.6 billion. “Half of the increase is attributed to cars”, according to the ONS, hence the slightly unbalanced headline from the Times. In reality, Britons have been flocking to the showrooms since the start of the year. Car sales are up by 10% this year. The deficit was offset as usual by a trade in services surplus of £6.5 billion. This is a familiar pattern which should come as no surprise to readers of The Saturday Economist. The trade deficit will deteriorate further especially if the UK continues to grow at a faster rate than major trading partners in the EU and USA. We are forecasting an overall trade deficit this year of £110 billion offset by a service sector surplus of almost £80 billion. The residual overall deficit easily financed. The September figures are confirmation of the trends within our well established trade model. Depreciation damages UK trade in goods performance. Imports do not react significantly to price changes. There will be no rebalancing of the economy. March of the makers picks up pace ... Did the march of the makers pick up the pace in September? Not really. According to the latest figures from the ONS. Manufacturing output increased in the month by just 0.8%. Output for the quarter was flat as signaled in the Markit/CIPS PMI® survey data last week. Nevertheless we still expect manufacturing growth of almost 2.5% in the final quarter of the year. Last year was such a dismal quarter, even the stumbling marchers will make progress. Watch out for the headlines heralding the rebalancing over the next few months and tie me to a chair. Other survey news ... The service sector continues to drive growth in the economy according to the Markit/CIPS UK Services PMI® for October. The headline Business Activity Index reached a level of 62.5 in October. “The UK service sector maintained its recent run of strong growth during October, with activity expanding at the fastest pace since May 1997 as levels of incoming new business rose at a survey record rate”. The construction rally also continues according to the Markit/CIPS UK Construction PMI® index. The sharp rebound in UK construction output continued in October. The lead index posted 59.4, up from 58.9 in September, above the 50.0 no-change threshold for the sixth consecutive month. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The pick up in manufacturing output will add to the growth in services and construction. Higher growth, more jobs, lower borrowing, inflation falling, investment will pick up in the second half of next year, it’s all looking pretty good for the Chancellor. Just the trade figures will continue to disappoint. We now think base rates are now more likely to rise by around 50 basis points in 2015. Higher growth will result in unemployment hitting the 7% hurdle rate in the third quarter of 2015, several months after the election. What happened to sterling? The Euro rate cut weakened the hybrid and Sterling strengthened as a result. The pound closed at £1.6018 from £1.5912. Against the Euro, Sterling closed at €1.1982 from €1.1814. The dollar moved up against the yen closing at ¥99.1from ¥98.7 and closing at 1.3368 from 1.3484 against the Euro. Oil Price Brent Crude closed at $105.12 from $105.91. The average price in November last year was almost $110. We expect Brent Crude to average $110 in the month, with no material inflationary impact. Markets, pushed higher - The Dow closed at 15,762 up from 15,616. The FTSE closed at 6,708 from 6,721. The rally continues with a stronger Santa rally in prospect over the next five weeks. UK Ten year gilt yields closed at 2.77 from 2.66 US Treasury yields closed at 2.75 from 2.62. Yields will test the 3% level over the coming months. Gold closed at $1,284 from $1,312. The bulls may have it may just have to wait for now. That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon. John Join the mailing list for The Saturday Economist or please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. © 2013 The Saturday Economist. John Ashcroft and Company, Dimensions of Strategy. The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist. Economics news – news from Washington and Beijing ... Washington Good news from across the Pond, a Washington truce has been achieved. The US government has returned to work, Yosemite National Park is open, international creditors will be paid. The debt crisis is over. A twenty week truce has been secured. Markets rallied, the dollar slipped, Google shares breached the $1,000 level and the S&P 500 hit a new high. What more could we ask? Beijing In China, growth continued at 7.8% into the third quarter up from 7.5% in the second. For those fearing a hard landing, crash landing, soft landing, end of the world scenario, it is time to stop shorting the markets and buy in, the world is not coming to an end any time soon. London - Mortgages In the UK, mortgage lending increased by 32% in the third quarter compared to Q3 last year. FLS and Help to Buy are boosting the market. We expect house prices to rise by 5% this year and almost 8% next year before a normalized escalation returns. Prices are beginning to rise across the UK. Yes Prices will move across the UK, like a tidal wave across the flood plain. Check out The Saturday Economist Housing Market Review for more information. Inflation Tuesday, the ONS released the latest inflation figures for September. CPI inflation was unchanged at 2.7% as RPI moved down slightly to 3.2% from 3.3%. We expect a further fall in CPI inflation around 30 basis points next month, as education fees drop out of the data series. Thereafter prices will be pretty sticky around 2.5%. Energy costs are set to rise and service sector inflation at 3.4% up from 3.0% last month will create problems for policy makers. As we have long pointed out, service sector inflation has averaged 3.7% for the last twenty years. Manufacturing prices Manufacturing Prices, on the other hand, have averaged around 1% over the same period, boosted by falls in clothing and footwear specifically. The immediate outlook for manufacturing prices is pretty benign, Output prices increased by just 1.2% in September and input costs increased by 1.1%, down from 5% in July. Retail sales Retail sales were also released this week. Retail sales volumes were up by 2.2% in September and by 2.4% in the third quarter. Sales values increased by almost 4% in the three months boosted by on line sales and department store sales. Is the housing market stimulating footfall? Quite probably. We expect the volume of housing transactions to increase significantly this year, boosting sales of carpets, furniture durables and DIY goods in the process. Employment The employment figures were also released this week. The claimant count fell by over 40,000 in September to a rate of 4% compared to 4.2% last month. The wider FLS count fell in the three months to August, to 2.87 million, a rate of 7.7% from 7.8% last month. Lagging as it does, the broader unemployment rate could fall to around 7.5% by the end of the year. The Bank of England “knock out rate” under forward guidance at 7% could be in sight by the end of 2014. So what of base rates? Interesting Spencer Dale the Bank of England’s chief economist was on Twitter this week in a hashtag #AskBoE “open hour” adventure. The telling tweet - a rate rise in 2014 was unlikely. Just as unlikely as a rate rise in 2016 no doubt. The markets expect a move in 2015 but will it wait until after polling day? We will have to ask next time the bank is online, perhaps using Facetime or Skype? What would Governor King have made of it all! So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. The first estimate of GDP in Q3 will be released next week. We expect growth year on year to be over 1.5% rising to trend rate in the final quarter of the year. Inflation is falling, employment is rising, even the debt figures due next week will look much better. Energy costs may provide a problem for households but “wear a jumper”, the ministerial advice could keep bills down and boost retail sales in the process. What happened to sterling? Sterling moved up against the dollar and against the Euro as the dollar slipped. The pound closed at £1.6174 from $1.5954. Against the Euro, Sterling closed at €1.1816 from €1.1772. The dollar moved down against the yen closing at ¥97.7 from ¥98.5 and closing at 1.3682 against the Euro. Oil Price Brent Crude closed at $109.94 from $111.28. The average price in October last year was almost $112. We expect oil to average less than $112 in the month, with no inflationary impact. Markets, pushed higher - The Dow closed at 15,399 up from 15,237. The FTSE closed at 6,623 from 6,487. The US debt deal is done. The rally is on. UK Ten year gilt yields closed at 2.72 from 2.74, US Treasury yields closed at 2.58 from 2.69. Gold closed at $1,313 from $1,270. The bulls have it, at least for the week. 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 please forward to a colleague or 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. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below. If you enjoy the content, why not forward to colleague or friend. Economics news – Building recovery one brick at time .. Construction data Good news this week from the construction sector. Output in August was up by 4% compared to August last year. New work increased by almost 6% driven by developments in the housing market. FLS and Help to Buy are stimulating new mortgage activity on a really significant scale. The Council of Mortgage Lenders announced home-owner house purchase lending was up by 15% on August last year. First-time buyers took out 27,100 loans in August, an increase of 33% compared to August 2012. The house market is on the move. We expect the surge in housing activity to continue into the final quarter of the year and into 2014. Do we really need “Help to Buy Phase 2” probably not. No need to pay for a landslide, the economic recovery secured. We have increased our forecasts for GDP growth this year to 1.5% increasing to 2.5% next year. NIESR monthly GDP data Our estimates are in line with the NIESR monthly GDP tracker for September, released this week. The (NIESR) GDP rate of growth in the third quarter was 1.6% year on year. We expect the rate of growth to accelerate further into the final quarter towards trend rate of 2.4%, driven by a steady recovery in the service sector and a big push in construction output. Monetary Policy No surprise this week the MPC voted to keep interest rates and QE on hold. Forward Guidance is the new mantra. UK base rates will not rise until the U rate falls to 7%, assuming no shocks to the monetary system and the inflation outlook. In the USA, the Fed continued with the monthly asset purchases of $85 billion. What is it about the USA? The Fed might as well commit dollars to a NASDAQ tracker fund to sustain confidence in the markets. “Tapering will not begin until the DOW hits 17,000 could be the new forward guidance. Janet Yellen is to replace an exhausted Bernanke. Such a dove, they should “paint her white and give her wings”, the markets will love Planet Janet orbiting, as it will, around Planet ZIRP. So what of the UK recovery? The trade figures and manufacturing data were also released this week. Remember, "the march of the makers, rebuilding the workshop of the world, rebalancing the UK economy away from domestic consumption with an improvement in net trade"? Well forget that. The professor (Milton Keynes) invested in a sandwich board and spent his summer holidays in Cornwall this year. Stationed at Land’s End, facing Western traffic, the sign read “sail on - the earth is not flat”. “We get the message” shouted a wise cracking grockle. The professor turned to reveal the message on the other side, “Exports will not lead a UK recovery”, “yeah but how long did it take”, replied the perspicacious prof. Trade Data And so it proved with the trade data this month. The trade in goods deficit was £9.6 billion in August. We expect a deficit of £29 billion in the quarter compared to £26 billion last year. Our forecast for the year, is now at the top end for the year as a whole around £110 billion. The UK recovery will exacerbate the deficit. Monthly data can be erratic but fifty year trends provide a certain guide. The UK cannot grow faster than Europe and the USA without a significant deterioration in net trade in goods. Is this such a problem? Not really. The surplus on services will mitigate the deficit to around £30 billion. At 2% of GDP this is neither a threat to sterling nor a constraint to growth. Manufacturing The march of the makers skipped a drum beat in August as output fell by -0.2% compared to August last year. Consumer goods output fell by just over 2% as capital goods growth slowed to a similar level. We expect a better performance in September and in the final quarter of the year. Housing new build and a higher level of transactions will stimulate direct related construction output, (bricks & mortar). Housing related spending on products including furniture and carpets will also stimulate growth. So what does this all mean? The economy is recovering and growing at a much faster rate into the final quarter. Will US debt intransigence derail recovery? We assume not. If you lived through the Cuban missile crisis and the era of an international nuclear strategy underwritten by the concept of Mutually Assured Destruction, (They call it MAD), You assume sooner or later, the Republican ships will turn around and avoid the disaster that could unfold. Failing that, the President can always mint a few Trillion Dollar Platinum coins, develop section four of the fourteenth amendment or invoke the 1861 Feed and Forage Act. Union soldiers were allowed to “eat your crops, kill your chickens and water their horses”. The Act ensured, sooner or later, Congress would enact the necessary appropriation. The troops had to eat even though the deficit had not been approved. And so it is with debt markets, “let them eat noodles” is no message to send to international creditors. What happened to sterling? Sterling moved down against the dollar and against the Euro. The pound closed at £1.5954 from $1.6012. Against the Euro, Sterling closed at €1.1772 from €1.1816. The dollar moved up against the yen closing at ¥98.5 from ¥97.4.The dollar euro cross rate at 1.3542 was largely unchanged from 1.3556 Oil Price Brent Crude closed at $111.28 from $109.46. The average price in October last year was almost $112. We expect oil to average $112 in the month, with no real inflationary impact. Markets, rallied - The Dow closed at 15,237 from 15,073. The FTSE closed at 6,487 from 6,454. The markets sense a deal on the deficit is in sight. UK Ten year gilt yields closed at 2.74 from 2.75, US Treasury yields closed at 2.69 from 2.64. Gold closed at $1,270 from $1,310. The bulls have it or do they? 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 please forward to a colleague or friend. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. John © 2013 The Saturday Economist. 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. 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. |
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
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