the recovery is not yet secure ... or is it?

Economics news –  "The recovery is not yet secure" says the Chancellor  ...

The recovery is not yet secure and our economy is still too unbalanced.

The Chancellor made use of a visit to Hong Kong this week to warn on the perils of the recovery. Just as well the Governor Mark Carney has stated the MPC will not take any risks with the rally. The Chancellor is concerned about the strength of the recovery. It is not yet secure, we are not making enough and we are not exporting enough, the continued claim.

Hence in four weeks time George Osborne will deliver a budget that supports investment, manufacturing and exports. “A budget that ensures around the world, you can't help but see “Made in Britain”. A budget that lays the foundations for long term economic security". Excellent.

Investment incentives and export support are both welcome. But we must ensure policy is founded on economic reality. We don’t need subsidies for the Spinning Jenny and a ban on homespun cotton from ancient empire. A strategy for investment and manufacturing, has to be grounded on firm foundations, fit for the 21st century.

Christine Lagarde - the age of multilateralism
As Christine Lagarde, pointed out in the Dimbleby lecture earlier this month, we live in the age of multilateralism. A world of integrated supply chains, where more than half of total manufactured imports and more than 70 percent of total service imports, are intermediate goods or services. “A typical manufacturing company today uses inputs from more than 35 different contractors across the world” according to the leader of the IMF.

It is not so much as “Made in Britain” as assembled in Britain. It is not so much a question of exporting but “re-exporting”. Manufacturing exports are dependent on imports for raw materials, energy, processed goods, semi manufactures and finished components. The good news a strong currency will improve cost inputs, mitigating any re sale price effect. The bad news, any improvement in net trade in goods will be elusive.

The Chancellor claimed “We cannot rely on consumers alone for our economic growth and we cannot put all our chips on the success of the City of London.”

The fact is the recovery is driven by growth in the service sector, accounting for 80% of total output. Leisure, retail and financial services are leading the recovery, meeting the needs of an ambitious household sector accounting for two thirds of demand in the economy.

We need a successful city of London, to generate the service sector surplus to offset the trade in goods deficit. As the Chancellor announced in Hong Kong, the UK is the first country in the G7 to agree an Renminbi swap line with the People’s Bank of China. London investors will have the confidence to expand their RMB activities. We may have in due course a RMB clearing bank in London. Chinese banks will be able to set up wholesale branches in the UK. This is all good news for the Banking, Financial and Professional services sector - essential for growth in the age of multilateralism. A policy dependent on the “March of the Makers” rebuilding the workshop of the world is neither balanced nor sustainable in the 21st Century. We shall see, just what the budget delivers next month.

So what happened in the economy this week …
A raft of economic data, confirming the recovery is on track for growth this year. Inflation, CPI basis, fell to 1.9% in January, pushed lower by a fall in goods inflation (1.4%) as service sector inflation remained steady at 2.4%.

Unemployment fell, with a strong fall in the claimant count to 1.2 million, a rate of  3.6%. The wider LFS unemployment count, also fell in the month, albeit with a rate slightly up in the month to 7.2%. Earnings increased towards the end of the year. Retail sales were up in January by 4.3% in volume terms and 4.5% in value.

The government borrowing figures for January at first sight, were a little disappointing with repayment in the month at £4.7 billion down from £6.3 billion last year. Tax receipts were significantly lower in the month, which is surprising given another 400,000 are in work with earnings are increasing. The figures will look better by the end of the financial year. We still think borrowing will be around £105 billion for the year as a whole. Heading in the right direction to eliminate the deficit in due course.  

So what does this all mean? The recovery may be unbalanced but probably is secure. Growth up, inflation down, employment up, borrowing down, just the trade figures will continue to disappoint, as we have long pointed out.

So what happened to sterling?
The pound closed down at $1.6640 from $1.6730 and at 1.210 from 1.222 against the Euro. The dollar closed at 1.3740 against the euro and 102.499 against the Yen.

Oil Price Brent Crude closed at $109.67 from $108.56. The average price in February last year was almost $116.

Markets, moved up - The Dow closed at 16,143 from 16,105 and the FTSE closed at 6,838 from 6,663.

UK Ten year gilt yields closed at 2.79 from 2.80 and US Treasury yields closed at 2.75 from 2.74.  

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

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