This week the ONS announced a raft of “hard data” about the economy. Inflation is rising, unemployment is falling, government borrowing is down, consumers are continuing to spend. Confidence has bounced back! Has the Bank of England moved too soon to cut rates? Has the Governor jumped the gun?
There has been no immediate impact on the economy as a result of the referendum vote. The maxim for business - business as usual. Better for corporates, to wait until something really happens before reacting to Brexit. It could take years yet before we enact Article 50!
It looks as if the MPC has moved too soon to cut rates. There really is no justification to increase QE and certainly no need to meddle with the corporate bond market. For institutions and investors, the search for yield is tough enough. The current account deficit is increasing, the kindness of strangers is under threat. The Fed is debating a further rate rise before the end of the year placing greater pressure on Sterling. Better for the Bank, to have waited rather than blowing the ammunition dump too soon.
One day we will realise, low rates are the problem. If savings equal investment, and low rates inhibit savings, low levels of investment will ensue, damaging productivity growth. The Bernanke experiment leaves us trapped on Planet ZIRP, drifting closer into the NIRP crevasse with no hope of escape.
Has the power of central banks reached the limit? If it has, it is a limit, a result of the abuse of power. Mis priced capital, distorting markets, is the legacy of monetary policy on Planet ZIRP. Ten year gilt rates at 0.6% are the manifestation of the problem. No provision for real return, Fisher must be turning in his grave.
Impact of Brexit ..
It is true tough negotiations are already taking place as a result of the referendum vote. For the moment they are confined to Inter departmental turf wars between the Brexit trio, Johnson, Davies and Fox. Staff poaching, office filching, difficult days are head in Whitehall, as mandarins get to grips with the enigmatic truth of Brexit means Brexit. When elephants fight, the grass (and policy) gets trampled. Article 50 may be shredded or simply set aside in the process.
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Dimensions of Strategy …
In September, we will be in New York, filming for the IIIL strategy conference to be released in November. The line up includes Tom Peters and Dave Rogerson. Thought leaders in Strategy, it’s a great line up. The Dimensions of Strategy series and case studies, Apple, LEGO, Twitter and Yahoo, are in use around the world.
The series on digital disruption attracted a high degree of interest in the UK and internationally. Our work on the Empires of the Cloud lays down the battle map of the clash of the internet titans. Don’t miss out on our regular updates on strategy …
Back in the UK …
Inflation CPI …
Inflation CPI basis increased to 0.6% from 0.5%. A modest attribution to the weakness of Sterling perhaps as fuel and travel costs increased slightly. Service sector inflation eased back to 2.7% as the rate of goods deflation moderated to -1.4% from -1.6%.
More inflation is on the way as oil prices continue to increase year on year. Producer input costs increased by 4.4% in the month. A clear portend of price increases to follow. In the final quarter of the year, Sterling denominated oil prices will be up by 35% year on year and up by 50% in the first quarter of 2017.
Unemployment is falling … the claimant count figures fell in July to 763,000 a fall of over 8,000 than prior month. The number of vacancies was slightly lower at 741,000.
There were 1.6 million unemployed according to the wider LFS data in June. The rate of unemployment was 4.9%, lower than the pre recession record levels. Average earnings were 2.4%, real earnings adjusted for inflation were just under 2%.
Consumer Confidence …
Confidence among British households has bounced back according to the Markit household finance index. The August reading showed a strong rally following the July lows. Consumers anticipate a broadly stable financial outlook in the year ahead according to Tom Knowles writing in The Times mid week.
Retail Sales increased by 5.9% in volume and by 3.6% in value in July. On line sales increased by 16.7% now accounting for 14.2% of all retail sales volumes. Conventional retail is under pressure as Amazon expands the distribution network in the UK and Asda sales come under pressure.
Public Sector Net Borrowing fell by £3.0 billion in the four months to July. Overall borrowing was £23.7 billion compared to £26.7 billon prior year. In the current year we expect borrowing to be around £65 billion based on the first four months data. This compares with the £75.3 billion outturn in the last financial year. Lower growth may put pressure on forecast revenues. The Autumn statement will reveal any relaxation in spending plans.
Next month we will update our quarterly economic forecast for 2016 and 2017. We remain optimistic in comparison with the consensus views. The full forecast is available to members and sponsors of The Saturday Economist Club. Join us and help us to improve the coverage of the UK and World Economy.
What happened to markets …
Markets, were mixed - The Dow closed up at 18,598 from 18,548. The FTSE closed down at 6,854 from 6,916.
Sterling moved up against the Dollar to $1.3125 from $1.2910 and moved up against the Euro at €1.159 from €1.156. The Euro moved up against the Dollar to 1.132 from 1.117.
Oil Price Brent Crude closed at $50.89 from $46.85. The average price in August last year was $46.52.
Gilts - yields moved up. UK Ten year gilt yields closed at 0.56 from 0.52. US Treasury yields moved to 1.55 from 1.49. Gold closed at $1,347 from $1,350.
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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.