 The Iron Curtain Returns with Gas Leaks ...
"This is a globally systemic event" said Timothy Ash, global strategist at Blue Ray Asset Management this week. Reacting to news of the Russian invasion of Ukraine, he added "Putin is redrawing an iron curtain across Europe." The iron curtain is returning, albeit with gas leaks. Gazprom continues to pump gas through Ukraine into Western Europe. Nord Stream 2 it would appear, is lost as an option for the moment. Putin had begun the big move on Ukraine, with formal recognition of the Eastern provinces of Donetsk and Luhansk. The "People's Republics" would fall under the protection of Putin's Duma. Many believed the advance into Eastern Ukraine would stop or at least stall to await the next stage. It was a strategy that had worked well for Putin. The objective, to create a series of buffer states, in defense of the Motherland. The challenge to bolster defenses against the encroachments of NATO. In the South, in Georgia, Armenia, Azerbaijan and Kazakhstan, Russian troops had been installed as peacekeepers. In the West, in Belarus, President Alexander Lukashenko, invited in Russian troops to support his tottering regime. Now the move on Ukraine to complete the line from Crimea to Kalingrad. No wonder the Baltic states of Latvia, Lithuania and Estonia are upgrading their alert status. The CIA had warned of a large scale invasion. The strategy and battle maps were uploaded to social media. It seemed impossible to think Putin would make the move. As kids we were brought up in the cold war era. We had lived through 1956 and 1968, the repression of freedoms in Hungary and Czechoslovakia. In 1962 we had lived on the edge of the Cuban missile crisis. We were warned to white wash the windows and sit under the staircase in the event of a nuclear strike. It was the MAD age in international diplomacy. The concept of Mutually Assured Destruction was rife in international strategy. One strike and everyone would die. Apart from the ruling elite who would be transferred to a five star underground base, with top line catering facilities. It was an expansionist era ended brutally for the Russian Empire by the 1980 move into Afghanistan.. The "great game" was over. It was an era confined to history or so we thought. Now Putin returns with a 1938 playbook. It didn't end well then, it will not end well now. As with Afghanistan, Ukraine could be a move too far for the Russian state. Sanctions imposed. The Russians will be excluded from the Eurovision Song Contest. More significantly, China is distancing itself from Russia. Foreign Minister Wang Yi said this week ... "China has been following the evolution of the Ukraine issue. The present situation is something China does not want to see". Indeed it is something the world does not want to see. Our thoughts are with the people of Ukraine ... the annexation of sovereign territory unthinkable in the era of peace and globalization ... Economic Impact ... A look at the map to the West, explains the fears of the Russian state to the East. Nation states fear encirclement. NATO additions of the Baltic states together with Romania, Bulgaria and Slovakia are cruel reminders to the Kremlin, of the loss of a Russian empire in a bye gone age. The possible additions of Georgia and Ukraine would put Belarus and Kalingrad at risk. The Putin playbook must sit in that context. It is important for the West to understand the mind set. So what will the economic impact be? Economists are seeking to measure the impact of sanctions and trade tensions with the Russian State. The risks are primarily to growth and inflation. Oxford Economics expect world growth to be impacted by just -0.5% over a three year period. In Russia, the damage to growth is most severe. A growth set back of 3% over three years seems in prospect. In Europe the output loss will be around 1.5%, slightly less in the UK at around 1.3%. The U.S. economy will be largely unaffected. One reason why U.S. markets rallied toward the end of the week. The second impact is on inflation. Food and energy costs the prime movers. Oil prices closed up in the week at $96 dollars per barrel, down from $105 the mid week highs. Gas prices were unchanged over the week. Gazprom keeps on pumping through Ukraine into Germany. The Russians seek to grab the "Breadbasket of Europe". Prices may rise. Let's hope a peaceful end to the conflict appears soon as the price of life continues to rise ...
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 Inflation, CPI basis edged higher to 5.5% in January, up from 5.4% in December. It was a modest move, made easier by the slow down in service sector inflation, to 3.2% from 3.4% prior month.
Goods inflation, on the other hand, increased to 7.2%. Food prices were up by 4.5%. Clothing and footwear costs up 6.5%. Furniture and household appliances up 10%. Electricity and gas bills were up by over 20%. Thinking of buying a second hand car? You will be paying almost 30% more than January last year. Filling up the tank will cost 25% more on average. Oil prices to blame. Oil closed down slightly at $92.66 at the end of the week. $92 dollars compares with an average $62 dollars last year, a 50% inflationary impact. Producer output prices increased to 9.9% in the month. Input costs for manufacturers increased by 13.6%. This was down on the 15% hike in November. A hint perhaps cost pressures are set to ease? Oil prices, metals and chemicals feature heavily in the cost burden. Food costs, both home grown and imported, are up by around 6%. Thanks heavens for the moment, we don't have to worry about the exchange rate. Sterling closed at $1.36 against the dollar.$1.35 is our forecast outlook. The Bank of England expects inflation to peak at just over 7% in April. Trending lower thereafter, towards 3% by the end of the year. In the U.S. inflation hit 7.5% in January. Prices are expected to ease to 3.5% by December. In Europe, inflation increased to 5.1% in January. The ECB expects inflation to return to the 2% target by the end of the year. The price surge, is part of the Tsunami after wave, of the seismic pandemic shock. Oil prices reflect constraints to output in Russia, North America and OPEC. Exacerbated by geopolitical tensions on NATO's borders, we still expect prices to soften into the year. The inflation impact then eases into the second half. In our Friday Forward Guidance we discuss the implications for interest rates in the U.S., U.K. and Europe. Interest rates are projected to end the year at 1.25% in the U.S. and the U.K. They may well be higher at 1.50%. We expect some follow me action by the ECB. One of the key issues for the MPC, is just what happens next to wages ... Labour Market Update ... Another incredible set of figures for the UK Labour Market. Unemployment fell to 1.374 million in December. Vacancies increased to 1.298 million in January. The unemployment rate was 4.1%. The UV rate, unemployed to vacancies rate, was just 1.06. The number in employment was 32.5 million. That's down from 33.0 million in the first quarter of 2020. 8.8 million were classified as inactive, compared to 8.5 million in Q1 2020. More in employment, up by 400,000. Fewer self employed, down by 800,000. More working full time, up by 700,000, fewer working part time, down by 300,000. 300,000 more now inactive. It all makes for a challenging recruitment market. Earnings increased by 4.3% in December, down from the peak of 8.8% in June. The trend is tracking our forecast model. We expect earnings to average around 3.5% by the end of the year. The real earnings squeeze in the first half of the year should ease by the final quarter. The Governor of the Bank of England has issued a warning about high wage demands. Higher base rates will be the result of excessive earnings increases. Recruiters are struggling to meet jobs quotas. Turnover rates are increasing. It doesn't make for a modest pay round this year. Central bankers are taking away the punch bowl. Time to pay for your own drinks ...  The First Quarterly Estimate of GDP growth in 2021 was released this week. GDP growth increased by 7.5% compared to prior year. The number was exactly in line with our central forecast. It could well edge higher in subsequent releases.
Construction growth was up by 12.7% in the year, following a 16% setback in 2021. Service sector growth underpinned the recovery, up by 7.4%. Manufacturing increased by 7% following a 9% downturn in 2020. Output stalled into the second half of the year, as component shortages and supply side difficulties increased. Levels flat lined in the final quarter. There is a problem within the data set. The estimate for manufacturing output will be revised up to 8% or more in later releases, pushing overall GDP growth towards our higher 8% level. We model GDP(O) in our forecasts for the economy. It is the closest comparison to business modeling one can get. No theoretical overlays besetting the expenditure models. We also model trade. The revisions to the trade figures reveal an increase in the trade in goods deficit to £156 billion from £139 billion prior year. At 7% of GDP this of itself is problematic. More concerning, the trade in services surplus fell to £127 billion from £132 billion. Even as the tourism deficit fell. The overall trade deficit increased to £29 billion from the £3 billion surplus prior year. At just over 1% of GDP, that's hardly stuff for a balance of payments crisis. Enough to ensure capital flows will cap any real upside for Sterling. The Benefits of Brexit ... Reading this week "The Benefits of Brexit" it runs to 105 pages. Particularly inspired by the ability to use the crown stamp on pint glasses, moved to tears by the return of the "iconic blue passports". " This marks "A return to their original appearance of the color first introduced in 1921". David Lloyd George was in office, car tax discs were introduced and the PM moved into Chequers. Excellent! Good news Jacob Rees-Mogg has been made minister for Brexit opportunities. It will begin with a trawl through the Benefits of Brexit document to begin with. First having completed the search for the holy grail. Good news, the trade in goods deficit with the EU fell by 20% last year to £70 billion. Not so great really, the deficit with the rest of the world doubled to £80 billion. Truly global Britain offering greater import opportunities around the world. Markets Excite About Base Rate Hikes ... Markets are impressed by the growth data. They now assume the Bank of England will be more aggressive in tightening monetary policy this year. In our Friday Forward Guidance, we plug in a base rate forecast 1.25% by the end of the year. In the US, traders now expect a 50 basis point rise by the Fed in March. Super hawks in the UK now think a similar hike could be possible by the Bank. Base rates would end the year at 2%.. This would seem to be at odds with the statements from Governor Andrew Bailey and Chief Economist Huw Pill. Step by step, steady and sure the mantra. Bond yields failed to hold the 1.50 level at close. Watch our for our Friday Forward Guidance for regular updates. So what of growth this year? Watching the NIESR Economic Outlook update yesterday, the NIESR forecast for growth in 2022 is 4.8% compared to the rather gloomy Bank of England estimate of 3.75%. Analysts are concerned about the cost of living squeeze and the rise in taxation and interest rates. For the moment we still think growth could be around 5% or more this year. The output gap to trend will average 4% through the year. Capacity to be realised. The recovery continues. The Bank will be cautious about killing the bounce back. We will expand on this in greater detail in the weeks to come, no doubt. "The Benefits of Brexit", "The Leveling Up Agenda", "Sound Bites and Sophistry" Tory back benchers are nervous. Two years to go to the next election. Time is running out as tax hikes and rate are brought in ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets steady, Bond Yields Surge, Crypto Rallies, Tech Stocks Tormented, Sterling Higher, Don't Miss that! Have a great weekend, Leveling Up : United Kingdom ... Child Poverty The Missing Metric in the Leveling Up Agenda ...10/2/2022  Writing in the Times this week, David Smith, Economics Editor of the Sunday Times said "I find it hard to disagree with the more robust assessment provided by the Oxford Economics consultancy." The report said: “The leveling-up white paper contains nothing to cause us to revise our forecasts for the UK’s various nations and regions, let alone the UK as a whole. While it contains many fine sentiments, there’s little that is new or significant. “Many of the targets and missions outlined are pre-existing or vague, with little of substance in the scale of resources committed or the delivery mechanisms and projects involved." Child Poverty The Missing Metric in the leveling up agenda ... The government announced 12 missions and 49 metrics in the leveling up agenda. Much on health, education and well being, not much on child poverty. Child Poverty is 40% in Rochdale and 4% in Richmond. Child Poverty really is the Missing Metric In the Leveling Up Agenda. Here are six of the twelve key objectives. SMART Objectives? "Specific, Measurable, Achievable, Realistic, Time bound", you be the judge. Mission 5: By 2030, the number of primary school children achieving the expected standard in reading, writing and maths will have significantly increased. Mission 6: By 2030, the number of people successfully completing high-quality skills training will have significantly increased in every area of the UK. Mission 7: By 2030, the gap in Healthy Life Expectancy (HLE) between local areas where it is highest and lowest will have narrowed. By 2035 HLE will rise by five years. Mission 8: By 2030, well-being will have improved in every area of the UK, with the gap between top performing and other areas closing. Mission 9: By 2030, pride in place, such as people’s satisfaction with their town centre and engagement in local culture and community, will have risen in every area of the UK. Mission 11: By 2030, homicide, serious violence and neighbourhood crime will have fallen, focused on the worst-affected areas. Twelve Missions and Forty Nine Metrics are included in the leveling-up white paper. Child Poverty is the Missing Mission and Metric in the leveling up agenda. An investment in the reduction of levels of Child Poverty across the regions would do much to accelerate the targets for health care, well being, education and skills. Early stage investment in Child Poverty reduces the later costs to the economy in healthcare, social care and education. It may even lead to the great nirvana of higher productivity in later life. 40% in Rochdale and 4% in Richmond, Child Poverty is the Missing Mission and Metric in the leveling up agenda. Why not include Child Poverty? That really is a SMART objective ...   The Bank of England increased base rates by 25 basis points on Thursday. It could have been worse. Four members of the MPC voted for a 50 point increase.
Inflation is expected to peak at around 7.25% in April. The squeeze on incomes will be the most severe since Ed Conway was a lad. Post tax incomes are expected to drop by 2%. Growth in the year is expected to slow to 3.75%. It gets worse next year, the growth rate drops to just over 1%. The Governor is worried about the impact of energy costs. Households are in for a difficult period, he warned. Ofgem announced a huge 50% plus hike in the energy cap. The cap will rise by £693 to £1,971 in April. He needn't have worried over much. Over in the House of Commons, Chancellor Rishi Sunak was explaining how the Treasury will help with household energy bills. National Insurance charges will go up. Council taxes will go down. Every household will be given £200 subsidy in September, to be paid back over four years. It was difficult to know just what to watch on Thursday. The Chancellor in the House. The Governor in The Bank. Or the Sky News live count of special advisers leaving Downing Street. To bolster up support on the back benches, more detail of the leveling up agenda was revealed. Michael Gove is to relocate to Wolverhampton. Andy Haldane, co-author of the report, explained the UK should be like Renaissance Florence. An emphasis on the discovery of new worlds perhaps, the government is accelerating the Medici income inequality gap to match the period, OK. Leveling up will be great. If every area in the country moves above average, the income growth will just about enough to pay for the NHS. Our new report "Truly global Britain, leveling up, in a country that works for everyone, with a balanced economy and a march of the makers, not along the M20 because it's full of lorries stuck in traffic" will be out soon. The Governor announced new tools to fight inflation ... The Governor announced new tools to fight inflation. Rising rates, the end of QE and a request to workers not to ask for a big pay increase. Andrew Bailey wants to see, "Clear Restraint" in the annual wage bargaining process. Ouch! Sharon Graham, the Gen Sec of Unite said "Why is it, every time there is a crisis, rich men ask ordinary people to pay for it". It was a bit of an own goal. Number Ten played the offside rule. The Prime Minister's official spokesman said pay restraint was not something the Prime Minister was asking for. "We want a high wage, high growth economy and we want people's wages to increase". The Governor should butt out and stick to hiking rates. Good to know policy makers are on the same page. The lack of documentation for industrial strategy and energy policy doesn't help. Sound bites and photo ops hardly the solution. Misleading statements on key stats compound the problem. The Prime Minister and Home Secretary were rebuked by the UK stats authority. It may be correct, "We are cutting crime by 14%" as long as fraud and computer crime are not included, small detail. Priti Patel is still fuming, a demand to send our aircraft carrier to the Channel to bomb the migrant dinghies, refused by the Royal Navy. The ship with planes is currently on manoeuvres in the Baltic Sea, the Black Sea and the Taiwan Straits, bit stretched. Over in Beijing China is hosting the Winter Olympics. An expression of peace, co-operation and friendship the theme. Western leaders are absent. Putin holds a starter pistol. A new gas contract in his pocket. Add no foreign policy to the missing documentation for government ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets steady, Bond Yields Surge, Crypto Rallies, Tech Stocks Tormented, Sterling Higher, Don't Miss that! Have a great weekend, John To understand the markets, you have to understand the economics ... Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ... Forward to a Friend of Colleague, the can register for our FREE updates here. It's Only Fair To Share !  The January IMF Update ...
The IMF released the latest World Economic Outlook this week. Growth is expected to moderate this year to 4.4% from 5.9% last year. The revision is a downward adjustment of 0.5%. In the earlier October forecast, growth of 4.9% was expected. Weaker growth is expected. The shadow of the Omicron virus overhangs activity. Countries have reimposed mobility and work restrictions. Supply disruptions have continued into the new year. Rising shipping charges, energy prices and metal costs have resulted in higher and more broadly based inflation than anticipated. Interest rates are set to rise in the U.S. and the West to offset the inflation surge. China seeks to alleviate monetary policy in the East. Next year, world growth is expected to slow further to 3.8%. This is slightly better than the 3.6% forecast in October. The IMF cautions, the forecast is conditional on an alleviation of health conditions and restrictions. Faster and wider vaccination would be of assistance. Better health therapies would also help. World Trade and Inflation ... World trade is forecast to increase by 6% in 2022 and by 5% in 2023. A strong background for international activity set to continue. World shipping rates are set to fall back to trend average towards the end of the year. Inflation pressures are set to ease. The IMF expects inflation to average 3.9% amongst the advance economies in the year slowing to just over 2% next year. In emerging markets, inflation will rise to 5.9% this year up from 5.7% last year. Headline inflation will moderate (but not by much) to 4.7% next. Oil and gas prices are key to the inflation outlook. The IMF assumes an oil price of around $80 dollars per barrel Brent Crude basis. Oil traded at $90 dollars at the end of last week. Geo political tensions pushing prices higher. $75 - $80 dollars remains our benchmark call for the year. Risks to the global baseline are tilted to the downside, the IMF warns. The pandemic, supply chain disruptions, energy prices, rising wage costs may impact on growth. Risks to currencies, capital flows and asset prices may result from tighter monetary policies to combat inflation. Geopolitical tensions remain high. Russia on the borders of the Ukraine. China on the edge of the South China sea. China US decoupling. We monitor fifteen world hot spots with ten conflicts to watch. Rising tensions between the UK and France should not really have to figure in our International Relations Review. Growth Projections by Region ... The outlook for the two largest economies in the world largely explains the change in forecast outlook. In the U.S. Biden's build back better deal has been removed from the stimulus package. Tighter monetary policy and continued supply side shortages has resulted in a downgrade of 1.2% in US forecasts. In China, retrenchment in the real estate market and a sluggish recovery in personal consumption has led to lower growth forecast of almost 1%. Growth of 4% in America and 4.8% in China the revisions. In Europe, growth is expected to slow to 3.9% in 2023 then 2.5% next. In Germany, France and Italy growth of 3.7% is expected. In the U.K. the IMF forecasts growth of 4.7% this year and 2.3% next following a recovery of over 7% growth last year. We think the estimates are a tad pessimistic over the forecast period. For the moment our Forecast Update Remains Unchanged. You can access the UK chart set on our Flipsnack channel by clicking on the link. Don't forget, every day we undertake our "What The Papers Say Review". We check economics and business news from over twenty titles around the world. This feeds into our social media channels on Twitter, Facebook and LinkedIn. One of the many ways, we always keep you in the picture. For our "International Relations Review", we follow "Foreign Policy" "Foreign Affairs" and "Geopolitical Futures". International relations featured in our LSE training. The Cuban Missile Crisis became featured in my third year at Grammar School. Mutually Assured Destruction was the MAD option for foreign policy then as now ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets down, Bond Yields Up, Crypto Crashes, Tech Stocks Tormented, Sterling Lower, Don't Miss that! Have a great weekend, John To understand the markets, you have to understand the economics ... Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ... Forward to a Friend of Colleague, the can register for our FREE updates here. It's Only Fair To Share !  Goods Inflation Rises to 6.9% ...
Headline CPI hit 5.4% in December, up from 5.1% prior month. Goods inflation increased to 6.9% from 6.5%. Service sector inflation was up just 0.1% to 3.4%. Fears are increasing for the hike in energy bills to be expected in April. The reality of rising energy costs is already with us. Fuel prices were up 23% in the month. Electricity bills were up 19%. Gas prices were up by 28%. Petrol prices were up 27%. Flight costs were up 29%. Thinking of buying a second hand car? You will be paying 29% more than December 2020. Inflation pressures are increasing. Oil prices moved higher last week. The Houthi attack on Abu Dhabi spooked oil prices. The prospect of a Russian invasion of Ukraine rattled gas prices. Even so, gas prices fell 10% in the week, down by almost 50% from peak last year. The Bank of England expects inflation to peak around 6% in April. The more pessimistic think the high could be around 7%. We still expect prices to peak in the first quarter of the year, easing to around 3.5% by the end of the year. The Governor of the Bank of England, Andrew Bailey now expects prices to remain above the 2% target into 2023. Really? Producer Prices Easing ... Manufacturing output prices (PPOs) eased to 9.3% from 9.4%. Input costs (PPIs) eased to 13.5% from 14.2%. Oil prices and metal prices featured in the cost mix along with chemicals. Oil prices Brent Crude averaged $50 dollars on December prior year, compared to $74 dollars in 2021. The inflation impact eases by the second quarter this year and is eliminated into the second half, assuming oil trades between $75 - $80 dollars over the period. OK, Oil traded higher last week closing at $87.63 but this was down from the mid week freak. International shipping costs are easing. The Baltic Dry Index fell to 1,415 last week. The index peak hit 5,500 in October last year. Shipping costs from China to the East Coast USA are also easing, down 20% from peak last year according to Freightos. The big fear for the UK central bank is wage costs will respond to the cost of living squeeze in a tight labour market. The latest jobs data will have done little to alleviate concerns. Want to know more about our forecasts for inflation and our models used in the process? You can access our twenty page TSE Inflation Chart Book on our Flipsnack Channel. It's a bit geeky but worth a look. Unemployment Rate Falls to 4.1% ... The latest jobs data made for incredible reading. The unemployment rate fell to 4.1%. The number unemployed fell to 1,382,000. The number of vacancies in the economy increased to 1,247,000. There were 32.5 million in employment, compared to 32.2 in November 2020. Whole economy earnings eased to 4.2% from 4.9% prior months. Real earnings adjusted for inflation CPI were negative -0.9%. We expect earnings to slow further to 3.5% towards the end of year. Assuming our projections for inflation are correct, the cost of living pressures will ease into the second half of the year. Over half of the vacancies in the economy are in health and social, retail, accommodation and food. The correlation between vacancies and unemployment by sector is significant. The anomaly is in health and social. There are over 200,000 vacancies in the sector with a relatively smaller number out of work compared to the overall sector average. Will our wage forecasts hold in a tight labour market? This week, MPC member Catherine Mann warned of a "self perpetuating cycle of pay and price rises". We must "lean against stronger for longer inflation." The 25 point base rate rise could happen when the MPC meets again in February. Want to know more about our forecasts for jobs and wages used in the process? You can access our ten page TSE Labour Market Charts on our Flipsnack Channel. It's a not quite so geeky but worth a look. That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets down, Bond Yields Up, Crypto Crashes, Tech Stocks Tormented, Sterling Back in Place, Don't Miss that! Have a great weekend, John John Ashcroft : Much More Than Economics ... Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...  Economic output exceeded pre-pandemic levels for the first time in November. GDP increased by 0.9% compared to prior month. Compared to prior year output increased by 8.1%. Despite an assumed setback in December, we now think the economy will have grown by 8% for the year as a whole.
In our forecasts for 2021 we model growth at 7.5% with an upside of 8%. We attached greater uncertainty at that time to the outlook for manufacturing and construction. Construction output was up by almost 7% in the month. Manufacturing growth slowed to just 0.4% year on year. Service sector growth was up by 9.5% in November. We expect growth of 8% in the final quarter and 8.3% for the year. To some extent more clarity is provided on the direction of travel. Our low growth scenario for construction and our high growth scenario for manufacturing, have been eliminated. We expect growth of around 5.5% in 2022, slowing to the trend rate of growth of 2.1% thereafter. This means the economy will enjoy a period of nominal growth of the three year period of almost 25%. A great opportunity for debt absorption in relation to GDP or revenues on a national or corporate level. You can access our updated 30 page chart book on our Flipsnack Channel The Saturday Economist Forecasts for 2022 by clicking on the link. We model GDP(O) output as we would with our conventional business models. No theory, just pragmatic, empirical analysis. Rates Set To Rise ... Markets are bracing for the escape from Planet ZIRP. Our Friday Forward Guidance outlines the pattern of rate hikes. Base rates in the U.S. and the U.K. will end the year around 1%. Bond yields are set to rise to 2.5% in the U.S. and 1.5% plus in the U.K. The outlook for pension fund deficits will look much better this time next year. Market volatility is expected in the current year. Equity markets took a hit last week. Our Monday Morning Markets update will assess the damage and try to explain the Sterling rally! Our Labor Market and Inflation outlook will be updated next week. The Fed is reacting to the 7% rise in December's headline rate in the U.S.. The Bank of England may not have to wait until April for the 6% CPI spike in the U.K. Trade Deficit Set To Increase ... The latest data suggests the deficit trade in goods will increase to £155 billion this year from £129 billion last year. Exports increased by 4.6%. Imports increased by just over 9%. The pattern of trade is moving away from the EU, more in terms of imports rather than exports. The EU share of imports fell to 47% in 2021 compared to 53% in 2020. Truly global Britain is becoming an open market to container shipments from around the globel as the workshop of the world continues to lose share of trade, The trade deficit in goods was offset by the service sector surplus of some £135 billion last year. Combined exports (goods and services) of just over £600 billion, still leave us some way short of that £1 trillion Pound export target. Forecasts for 2022 ... That's all for this week. Have a great weekend and a great week ahead. You can access the chart book The Saturday Economist Forecasts for 2022 by clicking on the link. Forward to a friend or colleague, encourage them to sign up for our FREE updates. My thanks to every one for their support during the past year. We continue to work with a number of private clients including Protiviti and Robert Half this year. If you would like to join our Private Client Group just drop me a line. "Great Research dies in darkness." The reaction to our Monday Morning Markets and Friday Forward Guidance has been great. We look forward to a great year ahead as we extend the coverage of economics, strategy and financial markets. The Saturday Economist, we always keep you in the picture ... John John Ashcroft : Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...  Forecasts for 2022 ...
This is our first Saturday Economist publication for 2022. Yesterday we released our Friday Forward Guidance. On Monday we published our Monday Morning Markets Review of past year. Today we update our forecasts for the UK economy for the year ahead. You can access the full chart set on our Flipsnack channel using the link or clicking on the photo. We use the word "forecast" cautiously. It is a best guess scenario. A benchmark at best. Lot of caution and uncertainty surround the outlook for growth, inflation and monetary policy. So what's new about that. World Growth ... In October, the IMF released their forecasts for the world economy. Growth of 4.5% was then expected for the year ahead. Our good friends at CEBR have adjusted their outlook for the year down to 4.0%. Economies are currently hampered by supply side shortages and the impact of the omicron variant. Growth of 4% - 4.5% would remain a fair call for the twelve months ahead. We outline in detail our expectations for major markets in our Saturday Economist Live updates. World trade expanded by around 12% last year, leading to supply side shortages and delivery issues especially in container freight. Growth in the second quarter was up by 22% slowing to 8% in the third quarter. We expect growth to slow to around 4.5% this year. It may take some time for container congestion to unwind. UK Growth ... Economists have penciled in growth of 7% in 2021, slowing to 4.7% in 2022 according to HMT Forecasts for the UK Economy published in December. Our outlook is a slightly more optimistic scenario. We expect growth of 7.5% in 2021, slowing to just over 5% in 2022. We attach greater uncertainty to the outlook for manufacturing and construction. We assume a short term setback in the first quarter for leisure, hospitality and travel. Inflation ... CPI inflation is expected to average 5% in the final quarter for 2021. The Bank of England expects the level to peak at around 6% in April. 7% could be the level attained, without some intervention to moderate the energy price cap. Thereafter inflation is expected to slow towards 3.5% by the end of the year. The inflationary impact of the rise in oil prices last year fades into the second quarter of the year and is eliminated into the second half. Greggs are warning of price increases to come in the year ahead. Sainsburys have announced an increase in minimum wage. The big fear is price transmission into earnings as domestic household costs rise. We expect earnings to slow to a trend rate 3.5% by the end of the year. The cost of living squeeze, acute at the start of year, eases by close. Labour Market ... In October, the unemployment rate fell to 4.2%. There were 1.4 million unemployed. The number of vacancies in the economy was 1.2 million. Earnings growth had slowed to 4.9%. There were 32.5 million in work. The numbers on furlough had been largely absorbed into work or so it would appear. In the US, the unemployment rate fell to 3.9%. So what to make of our projections into 2022? We model out with an unemployment rate of 4.5% through 2022. The number of vacancies expected to fall to 750,000 by the end of the year but then again? Twin Deficits Borrowing and Trade ... In the chart set we forecast the outlook for the twin deficits of Public Sector Borrowing and Trade. We also provide a first look at the impact of Brexit on trade. No discernible impact on the volume and pattern of exports, share of imports increasing from the rest of the world. Markets and Interest Rates ... Our Monday Morning Markets and Friday Forward Guidance provide weeky updates on trends in financial markets. Last week, bond yields moved higher, the Nasdaq slipped 4%. The S&P closed down in the first week of trading. This is a bad omen for performance in the year ahead as we will explain on Monday. That's all for this week. Have a great weekend and a great week and year ahead. This is the first in our series for 2022. The Forecasts will provide a benchmark during the year. My thanks to every one for their support during the past year. My special thanks to everyone with whom we have been able to work this year. Thanks also to our Premium Subscribers. Your support is invaluable to be able to develop the product offer. The reaction to our Monday Morning Markets and Friday Forward Guidance has been great. We look forward to a great year ahead as we extend the coverage of economics, strategy and financial markets. The Saturday Economist, we always keep you in the picture ... John John Ashcroft : Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...  It was a week which started off pretty well. The PMI Markit Flash Forecast for December, suggested the rate of growth was slowing towards the end of the year. The headline index closed at 53.2 from 57.6 prior month.
A slowdown, yes but still well into positive territory. Concerns were rising about tighter pandemic restrictions and greater business uncertainty. Manufacturing activity appeared to be the better performer, compared to the challenges in the service sector. On Tuesday, the Labour Market Statistics were released. Concerns had been expressed about the shock to the jobs market once the furlough scheme came to an end. Fears were, of an increase in redundancies and job losses, with an escalation in the unemployment rate towards 5%. The Chancellor planned a trip to California, just in case the headlines were too intense. The reality was quite different, Vacancies in the economy increased.. The unemployment rate fell. The number of people unemployed fell to 1.4 million. There were 1.2 million vacancies in the economy. In the Goldilocks scenario, average earnings, excluding bonus pay, slowed to 4.3%. Goldilocks' three bears might suggest the economy is in danger of over heating. It was a message the Bank of England could not ignore. On Wednesday, the inflation data for November was released. Producer output prices increased to 9.1%. Manufacturing input costs increased to 14.3%. The largest contributor to the price hikes was petroleum costs. Chemicals, metals and machinery also featured. Oil prices Brent Crude basis averaged $81 dollars in the month, compared to $43 dollars last year. Petroleum products (excluding duty) were up 86% in November. No real surprise there. CPI inflation jumped to 5.1%. Consumer goods inflation increased to 6.5%. Electricity, gas and other fuels increased by over 23%. Second hand car prices leapt by 27%. Furniture prices were up by 11%. Household appliances were up by 6%. Central bankers became less convinced that inflation is always and everywhere a transitory phenomenon. In the U.S., the Fed determined to stop buying bonds and mortgage backed securities in March next year. In the U.K., the MPC voted to increase base rates by 15 basis points. The rate hike in December was a surprise. The first increase pre Christmas for over fifty years at least. So what happens next? In our Friday Forward Guidance we outline the possibility of two or three rate hikes next year in the U.S. and the U.K. Inflation pressures will ease into the second half of the year as oil price comparisons dissipate. Concerns will rise about the ability to develop monetary policy to curb inflation without creating a recession. Larry Summers writing in the Washington Post has already begun the process. "There have been few, if any, instances, in which inflation has been successfully stabilized without recession" he warns. Concerns are rising about the impact of the Omicron variant. Despite assurances from the Prime Minister, the possibility of a lock down may gather momentum into the New Year. The hospitality sector is already feeling the impact of Chris Whitty's warnings to cut back on social events and think about with whom they would like to spend the time. So a week of surprises to end the year. Tories lost the North Shropshire by-election. Boris Johnson is drinking in the last chance saloon, according to Sir Roger Gale, the MP for North Thanet. Perhaps the Prime Minister will get more time to spend in Peppa Pig World next year. Senior backbenchers believe he has a year to sort himself out ... or dig deeper ... |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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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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