on the road to prosperity and open for business

On the road to prosperity
Chancellor Osborne greeted the GDP figures this week with the confident claim we are on the road to prosperity. “Britain’s hard work is paying off, we see that in the economic numbers today”. Indeed we do. Growth in the third quarter increased by 1.6% year on year, exactly as we had expected.

Service sector growth continues to underpin the recovery, increasing by 1.9% with particularly strong growth in the distribution, hotels and leisure sector (3.8%). Construction output, boosted by developments in the housing market, increased by almost 5%. Manufacturing output was flat in Q3 up by just 0.1%. Of itself this is a measure of recovery. Output (goods) fell by almost 3% in the first quarter of the year.

We expect the recovery in manufacturing to continue with strong growth of over 2% in the final quarter of the year. Our forecast for growth in the year as a whole is unchanged at 1.5%. We expect the economy to be running at trend rate (around 2.5%) in the final quarter. We are on the road to recovery, with prosperity for some, but not all, as growth will continue at 2.5% into 2014.

Open for Business
Open for business was the theme of a Mark Carney speech this week. The Governor of the Bank of England is shaking up the Bank of England significantly. Last week, Spencer Dale Chief Economist was on Twitter, in an online Agony Aunt economics session.

This week, the Governor hired McKinsey and Deloitte to review the central bank's resources and identify cost savings. There will be blood, sweat and tears in Threadneedle Street, as the Old Lady sheds a few layers.

The UK is at the heart of a renewed financial globalisation the headline of the Governors speech to celebrate the 125th anniversary of the Financial Times in London. The UK has a strong financial services sector which is to be sustained and developed. [Don’t kill the Golden Goose just because it bit the postman? is the message, if not the exact central bank wording on the subject.]

To help the process, the Bank of England is open for business in supporting the banking sector. Facilities will be made available at lower coupon rates and covering a wider risk profile. “The Bank of England today is the friend of resilient banks, continuous markets, and good collateral”. Hurray!

Now we have a sensible grasp on economics strategy from the Chancellor and a central banker who talks to the bankers. Whatever next?

Borrowing Figures
Well lower borrowing figures for one thing. This week, the ONS released the PSNBR figures for the month of September. In September 2013, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £11.1 billion. This was £1.0 billion lower than in September 2012, when it was £12.1 billion. There is more good news to come.

Public Sector borrowing is set to fall to £104.5 billion in the current financial year compared to £115 billion in 2012/13. Given the acceleration of growth in the economy into the second half of the year, we believe borrowing could possibly fall below the £100 billion threshold for the year as  a whole and below £90 billion in the following year.

Good news for the Chancellor as tax receipts including VAT, capital gains and income tax increased by almost 5% in the first six months of the year. Spending on the other hand was up by just 2.4%. Public sector debt was £1.2 trillion at the end of September, equal to 76% of GDP. Of itself a prosperity challenge for the grandchildren.

So what does this all mean?
The economy is recovering and growing at a much faster rate into the final quarter. Base rates are now more likely to rise by around 50 basis points in 2015 rather than 2016. A short rate rise by the end of 2014 still has low odds given the prevarications in the USA.

What happened to sterling?
Sterling steadied against the dollar and moved down against the Euro. The pound closed at £1.6166 from £1.6174. Against the Euro, Sterling closed at €1.1713 from €1.1816. The dollar moved down against the yen closing at ¥97.4 from ¥97.7, closing at 1.3803 from 1.3682 against the Euro.

Oil Price Brent Crude closed at $106.93 from $109.94. The average price in October last year was almost $112. We expect oil to average less than $110 in the month, with no real inflationary impact.

Markets, pushed higher - The Dow closed at 15,570 up from 15,399. The FTSE closed at 6,721 from 6,623. The US debt deal is done. The rally is on.   

UK Ten year gilt yields closed at 2.63 from 2.72, US Treasury yields closed at 2.51 from 2.58.  

Gold closed at $1,352 from $1,313. The bulls have it, at least for last week.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon.

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