So what exactly does take place in cabinet? Do we have a policy towards the European Union? We are leaving the EU customs union but may join a customs union with the EU. We will pay for access to the single market but will not pay for access to the single market. This week Phillip Hammond affirmed we will pay for access to the single market to protect the banking sector. By the end of the week Number Ten explained there will be no payments made for access to the single market whatsoever.
In and out, paying not paying, the singularity of a simple solution is best explained by the Schrödinger's cat duality. But what of perception? Theresa May's administration is perhaps best understood by accepting the Riddle of Rashomon.
Better known as the Rashomon Effect, the Rashomon effect occurs when the same event is given contradictory interpretations by different individuals involved. The effect is named after Akira Kurosawa's 1950 film Rashomon, in which a murder is described in four mutually contradictory ways by four witnesses.
No one gets murdered in the May cabinet. [The Prime Minster struggles to kill someone off in a cabinet reshuffle.] It would appear decisions are made in Cabinet and then everyone walks away with a contradictory interpretation. Brexiteers v Remainers. Eurosceptics versus Europhiles. Hard right versus soft left. Resolutions are constructed to appease all parties. Cabinet members walk away happy in the knowledge their specific "App Group" members will have a great week end. Safe in the understanding no one has been offended. The Riddle of Rashomon Rules OK.
Meanwhile in the real world, industry pleads for an explanation of policy and strategy towards the EU negotiations. Nowhere is this more true than in the Automotive sector. As Mike Hawes Chief Executive of the SMMT explained this week. "We face perhaps more challenges – simultaneously – than any other sector. We need the Industrial Strategy and our sector deal to be supported across government, with all departments recognising the importance of a healthy automotive industry to deliver technological, environmental and economic change."
A not unreasonable request. At the Consumer Electronics Show in Las Vegas this week, Vauxhall motors revealed their future vehicles will be fitted with accelerated "Level 4" autonomy. Yes in the future, the Prime Minister's car will sit outside Number Ten without plastic, pedals and a driving wheel, talking to 30 million vehicles on the road mapping the way to move forward in the short term ...
Is this a vision of the future? Or is it just an apt metaphor for the current state of government in the UK ...
Economics prospects in 2018 ...
This week NIESR upgraded their forecast for growth in 2017 to 1.8% from 1.6% in the November publication. A reasonable move given the release of the ONS data just before Christmas. It seems reasonable to expect growth just under 2% in 2017 and 2018 as we explained last week.
This week, the ONS released the latest information for manufacturing. Growth in November was up by 3.5% year on year, following growth of just under 5% in October. For the year as whole we now expect manufacturing growth of 3.6% slowing to 2.5% in 2018. Is this a manufacturing miracle? Not really. By the end of 2017 growth will be back to the levels last seen in the first quarter of 2008. A ten year recovery following the big shock to output in the recession.
The march of the makers appears to be rebuilding the workshops of the world with a six per cent surge in capital goods largely for the export market. Manufacturing export activity is stimulated in part because of sterling depreciation but is largely fueled by the growth rates in Europe, Asia, North America and the rest of the world.
The impact is reflected in the latest balance of payments data for the month of November. For the year 2017, we now expect the deficit trade in goods to be £135.6 billion, pretty much unchanged from the same level last year. Exports will have increased by 14% in value terms, as imports increased by 10%. The export surge is partly a reflection of depreciation and translation effect. Values are up by 14%, volumes are up by 8%. Import volumes are up by 4% compared to a 10% increase in values. [A large proportion of exporters price to market in currency].
The overall current account deficit will fall to £28 billion in 2017 compared to £41 billion in 2016. Good news on output and good news on trade. Not quite so good for construction. Despite growth in housing and commercial real estate, the sluggish performance of industrial and central government infrastructure spending limited growth to less than 1% in November.
So what of rates? Central bankers are in a slow sack race to hike rates and put an end to more QE. The quest to normalise rates within a three year period is underway. Strong growth in the world economy will provide the rationale despite the apparent subdued levels of inflation around the world ... For the moment we still expect at least three rate hikes in the USA this year with bond yields already at 2.6% set to move higher.
In the UK, ten year gilts closed at 1.35% up eleven basis points on the week. At least two rate rises are expected in 2018, with a hike in gilt yields of 50 to 100 basis points in prospect. The implication for gilt prices is evident ...
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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.