Thoughts and responses Archives
Wednesday, November 12, 2014
Bank trims growth and inflation forecasts as wages pick up
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

The Bank of England has taken a slightly more downbeat view of growth and a very downbeat growth of inflation over the next few months, with Mark Carney, the governor, warning that consumer price inflation could drop below 1%. If so, this will trigger the first letter from a governor to explain why inflation has undrshot the inflation target by more than 1% - all previous letters have been to explain an overshoot.

Carney, in his opening remarks, was downbeat about the global picture, saying: "Since we last met, indicators across much of the advanced and emerging world have been moribund. A spectre is now haunting Europe – the spectre of economic stagnation, with growth disappointing again and confidence falling back."

But the Bank has only marginally revised down its growth forecast for next year, to 2.9%, though inflation will remain close to 1% over the next year with it "more likely than not" that it will dip below 1% at some stage. That has eased the pressure on the Bank to hike rates, with the first move now not expected until autumn of next year. Though this dovish tone was expected, sterling has slipped in response to the report. The inflation report is accessible here.

One positive factor cited by Carney was the prospect of real wage growth. The latest labour market statistics supported him. Official figures show that total pay in September was 1.4% up on a year earlier, with the numbers for the latest three months showing a rise of 1%. The figures for the private sector were 1.6% and 1.1% respectively, and for the public sector excluding financial services 1.6% and 1.4%.

Regular pay increases were 1.8% and 1.3% respectively, with the private sector up 2.3% and 1.6%. These figures were stronger than expected. The details are here.

Tuesday, September 16, 2014
A different kind of politics - and not in a good way
Posted by David Smith at 03:45 PM
Category: Thoughts and responses

The Scottish referendum campaign has engaged people in politics as never before, it is said, and this is a welcome and different kind of politics. It is, of course, welcome that voters in Scotland are engaged and mainly intend to vote on what is the most important issue they will ever vote on.

But it is also a different kind of politics in another, less welcome, way. In general elections, the political parties are required to come out with detailed manifesto plans. Spending commitments are carefully costed, and holes in their policies are teased out and exposed by the other parties or by the press. This does not stop politicians keeping unpleasant surprises until after they are elected, but it is a good form of scrutiny.

In Scotland we are seeing something very different. The Scottish Nationalists, despite being the governing party, gloss over enormous holes in their policies, and accuse anybody who exposes them as being biased or scaremongering. And, it seems, escape serious scrutiny. If the vote were won on Thursday on that basis, far from being good for democracy would be a terrible advert for it.

Among those holes:

- Scotland has a bigger budget deficit than the rest of the UK now, has averaged a bigger budget deficit for the past 25 years (Government Expenditure and Revenue Scotland). That deficit will have widened relative to the UK in 2013-14, and will widen further in coming years.

- There will thus need to be more austerity with independence, alongside higher taxes, in Scotland compared with the rest of the UK.

- Even with oil, Scotland pays a smaller share of taxation, 9%, than in gets in spending, 9.3%.

- The fantasy of the NHS, already devolved, 'only being safe with independence'.

- There will be no currency union with the rest of the UK.

- If Scotland were to renege on its debts it would be a pariah in the markets and would be unlikely to be admitted to the EU. EU membership will, in any event, be a complex and lengthy negotiation.

These are not small points, but they are glossed over in the SNP's "fact-free" campaign. For sensible views, see the National Institute here, and the LSE's John Van Reenen here.

Wednesday, September 03, 2014
A big day for data revisions
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Today's revised GDP and balance of payments data, taking us up to 2012, confirm what some of us have long suspected, that the recovery in recent years has been stronger than was initially reported.

The new numbers show that the peak-to-trough fall in GDP in 2008-9 was 6% rather than 7.2%, and that pre-crisis growth was somewhat weaker than earlier estimates. So growth in 2004 is revised down from 3.2% to 2.5%, 2005 from 3.2% to 2.8%, while 2006 is up from 2.8% to 3%, and 2007 down from 3.4% to 2.6%.

But the post-crisis recovery is significantly stronger, with 2010 up from 1.7% to 1.9%, 2011 from 1.1% to 1.6%, and 2012 from 0.3% to 0.7%. Some people got badly overexcited over double and triple-dips but we were never close.

The figures imply that when figures up to 2014 are released on September 30, they will show that the pre-crisis level of GDP was exceeded last year, and that GDP is currently some 2.7% above that pre-crisis peak. There is a good summary of the changes here.

We should remember that these are mainly the effect of methodological changes, plus reweightings. There are plenty more data revisions to come. These figures do not solve the productivity puzzle - it is still some 12% below its pre-crisis trend. Later changes may help to do so.

Friday, July 25, 2014
Back to the peak
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

For all the caveats about per capita GDP - not something that usually gets much emphasis in the policy debate - this was another good GDP number, following on from the symbolic uprating of UK growth forecasts by the International Monetary Fund on July 24.

GDP rose by 0.8% in the second quarter and is now 0.2% above its pre-crisis peak in the first quarter of 2008. After falling by 7.2% in 2008-9, the worst post-war recession, GDP needed to rise by 7.8% to get back to that pre-crisis level, which may of course have included an element of unsustainable growth. It has now more than done so.

The economy began to grow, tentatively, in the fourth quarter of 2009, so has taken four and a half years to grow by 8%. It is a long time but, given the headwinds, perhaps growth averaging a little under 2% a year, pending revisions, was the best we could expect.

The latest figures show that the service sector grew by 1% in the second quarter, while production rose by 0.4% and construction fell by 0.5%. The construction number looks too weak against the surveys (the the Q1 flood effect), while the manufacturing rise of only 0.2% may also be revised up over time. More here.

Friday, June 13, 2014
Carney gets a little hawkish
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

It may be that Mark Carney simply likes drawing attention to himself, in which case last night's Mansion House speech was a success. His was not the first hint that rates could rise sooner rather than later - the May monetary policy committee minutes said that the debate on rates was becoming more balanced - but it was surprising coming from him.

Anybody who attended last month's inflation report press conference saw a governor bending over backwards to steer people away from the idea of early rate rises, emphasing the financial policy committee as the first line of defence and the amount of spare capacity in the economy.

What's changed? Maybe the pressure is starting to come from the rest of the MPC which seems on balance more hawkish than him. Maybe it was the strength of recent data, particularly this week's employment figures (though they were balanced by weak pay growth).

Whatever it is, things have changed, and only 10 months after the Bank's forward guidance was launched - pointing households and businsess to a prolonged period of low rates - they are starting to move. The end of the long period of 0.5% interest rates is not here yet, but it is in sight. The speech is here.

Thursday, May 22, 2014
A solid rise in GDP - borrowing blips higher
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

GDP in the first quarter was unrevised at 0.8%, for a rise of 3.1% on a year earlier. Within that, production output rose by 0.7%, construction by 0.6% and services by 0.9%. On the expenditure measure there was 0.8% increase in household spending and a 0.6% increase in gross fixed capital formation (investment), including a 2.7% quarterly rise in business investment. Exports and imports both fell and there was no contribution to growth from net trade.

Interestingly, if we take growth over the past year, gross fixed capital formation contributed 1.5 points of the 3.1% growth in the economy, more than consumer spending (1.3).

Even more interesting is that compensation of employees was up 4.1% on a year earlier in the first quarter, continuing its recent much stronger trend. Though that includes factors such as higher pension contributions by firms, and though part of it reflects rising employment, it is on the face of it hard to square with the weakness of the average earnings data. The GDP figures are here.

What we don't know is how much of a distortion there is because of the unusual pattern of bonuses last year, when many were delayed to April to avoid the 50% top tax rate. On the face of it the public borrowing numbers for April were disappointing, with underlying borrowing of £11.5 billion, £1.9 billion higher than in April 2013. A look at the detail of income tax and National Insurance contributions suggests, however, that the bonus effect - much lower bonuses this year than last - was important.

The public finance numbers are here. The earnings figures will be badly distorted by this bonus effect for the next couple of mnonths and should not be taken too seriously.

Wednesday, May 21, 2014
Something stirring at the Bank of England
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Today's minutes from the Bank of England's monetary policy committee were the most interesting for a long time, largely because of two paragraphs near the end:

These were the two:

"On the Committee’s central view, the pace at which slack would be absorbed was expected to slow from the end of 2014 as GDP growth eased slightly and productivity growth picked up. But there was considerable uncertainty around that central path, and a range of views among Committee members. The evolution of slack would depend on the timing and strength of the rebound in productivity growth, and on other developments in the labour market as the recovery continued, including the ease with which the longer-term unemployed were able to find work and the persistence of people’s desire to work longer hours as their incomes increased."

And, even more interesting:

"The Committee’s February guidance embodied the expectation that when Bank Rate began to rise, it would do so only gradually and to a level materially below its pre-crisis average. Although such a path for policy ran a greater risk of a build up in financial imbalances, particularly in the housing market, the Committee noted that the mitigation of such risks was, in the first instance, the
responsibility of the FPC: monetary policy should be only a last line of defence. The case for moving gradually and cautiously was reinforced by uncertainty over the likely impact on the economy of a rise in Bank Rate. It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy. Against that, if productive potential were in part related to the level of demand, then the earlier policy was tightened the greater the risk of incurring a substantial cost in foregone output. Committee members placed different weights on these considerations and this was reflected in a variety of views on the appropriate path of monetary policy."

There are the beginnings of a strategy there - we are raising rates now so we do not have to raise them so much - but we don't know how much follow through there will be. The big changes due on the MPC, and the elevation to it of two new members whose views on the UK economy are unknown, creates a new uncertainty.

Anybody wanting ammunition to push for a rate hike could find it in the April retail sales figures. Retail sales volumes jumped by 1.3% on the month and were a huge 6.9% up on a year earlier. Trend growth over the latest three months was the strongest for a decade.

Wednesday, May 14, 2014
Bank in no rush to hike rates
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

There were several interesting messages from today's Bank of England inflation report though the message that everybody was looking for - when will Bank rate rise - was pretty fuzzy. The markets are looking for a hike in the first quarter of next year but Mark Carney, the Bank governor, was reluctant to endorse it.

Broadly, this was an optimistic message from the Bank. Growth of 3.4% this year, followed by 2.9% in 2015 and 2.8% in 2016. Inflation will be 1.8% at the end of this year, 1.8% at the end of 2015 and 1.9% at the end of 2016. Unemployment will fall to 6.3% (from 6.8%) by the end of this year, 6% by the end of 2015 and 5.9% by the end of 2016.

On rates, the Bank expects spare capacity - 1% to 1.5% of GDP - to be used up by the end of the forecast period, i.e. by this time in 2017, but will raise rates before that, and indeed its forecast implies it will need to do so to achieve the inflation target. The first half of next year remains favourite, though the Bank is unwilling to guide too precisely. The inflation report is here.

The report came on the day of the latest unemployment figures, which remained healthy, with a drop of 133,000 to 2.21 million, or 6.8% of the workforce, in the January-March period. Employment rose 283,000 to 30.43 million, for a rise of 722,000 over the past year.

Overall earnings growth, 1.7%, was in line with inflation, but the average is dragged down by the squeeze on public sector pay and a drop in earnings for high-paid workers in professional and business services. In the latest three months total manufacturing pay was 2.9% up on a year earlier, construction pay was also up 2.9% and pay in wholesaling, retailing, hotels and restaurants up 3.2%. More here.


Friday, May 09, 2014
Manufacturing grows, trade deficit narrows
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Manufacturing output rose by 0.5% in March, for a strong 1.4% increase in the first quarter, stronger than the overall increase in industrial production, which dipped by 0.1% in March but was up by 0.7% in the first quarter. Some of that was a weather effect, the mild March weather reducing gas and electricity output. More here.

There was also a narrowing of the trade deficit to £1.3 billion in March from £1.7 billion in February. Though the improvement is slow - and both exports and imports are depressed - the trade deficit is narrowing. More here. Goods exports picked up in March, but the service sector - running a surplus of £7.2 billion in the first quarter - is the star performer.

Finally, there was a 0.6% increase in construction output in the first quarter, slightly more than the ONS originally estimated. More here.

These numbers confirm the manufacturing recovery and that there is a degree of rebalancing occurring the economy, though much more of both is needed.

Tuesday, May 06, 2014
PMIs show an acceleration in growth
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

A rise of more than one point in the service sector purchasing managers' index signalled a strong start to the second quarter, and suggested that growth across all sectors has returned to its strong rates of last autumn. Markit, which produces the PMI surveys, says the PMIs are consistent with 0.8% growth, at least.

The official view, interestingly, is that growth will slow. The Office for Budget Responsibility's March forecast was for 0.7% first quarter growth, 0.6% in the second quarter. The first quarter was 0.8%, and the second quarter is heading that way.

Here is more from Markit on the PMIs:

"The April PMI surveys signalled a strong start to the second quarter, signalling an acceleration in the rate of economic growth to the fastest since last November and one of the highest rates of growth seen in the survey history. With the outlook brightening, the pace of job creation hit a record high.

“The three Markit/CIPS PMI™ surveys collectively signalled an expansion of private sector business activity for a sixteenth successive month in April, with the ‘all sector’ Output Index rising from 58.2 in March to a five-month high of 59.4. The latest reading has only ever been exceeded since the survey began in the late-1990s by those seen in the four months to last November.

“Historical comparisons indicate that the April reading is consistent with the economy growing at a quarterly rate of 0.8%. Such a rate of growth in the second quarter would lift gross domestic product above its pre-recession peak, extending further the strongest spell of economic growth that the country has seen since the financial crisis struck.

“The upturn also remains reassuringly broad-based, with strong growth recorded in manufacturing, services and construction. Only construction saw an easing in the rate of expansion, to a six-month low, but recent prior months had seen near-record rates of increase. The survey also showed ongoing strong growth across all construction sectors, not just house-building.

“In services, business activity grew at the sharpest rate seen so far this year, but it was manufacturing which saw the strongest increase, reporting the third-largest monthly rise in production seen since the manufacturing survey began in 1992.

“The data are broadly consistent with services output growing at a quarterly rate of 1.0%, rising to 1.5% in manufacturing and 3.0% in construction. However, although seeing the weakest growth of the three sectors, it’s the services sector which, due to its sheer size, will again provide the main driving force behind the economy in the second quarter.

Record spell of job creation continues: “The April survey also showed that companies took on staff at the fastest rate seen in the 16-year history of the survey, suggesting employment is growing at a rate of approximately 100,000 per month."

Tuesday, April 29, 2014
Scaling the GDP peak
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

With today's gross domestic product figures for the first quarter of 2014 we are very close to the pre-crisis peak. The level of GDP - before revisions - is now just 0.6% below its Q1 2008 level. In time we will probably find that the peak was surpassed earlier.

It already has been for GDP excluding North Sea oil and gas. In the first quarter that measure was 0.4% above its Q1 2008 level. North Sea oil has been a considerable drag on the economy: Scotland please note.

GDP in the first quarter did well, rising by 0.8%, in spite of the floods. The Office for National Statistics decided they were not serious enough to be regarded as a special statistical event, but a rise of just 0.3% in construction and a drop of 0.7% in agriculture suggest some impact.

In the past, healthy rises in services and manufacturing have not been enough to offset construction horrors. There was no construction horror this time, and services growth of 0.9% and industrial production up 0.8% (manufacturing 1.3%) were in line with the overall GDP rise. More here.

Friday, March 28, 2014
A nasty looking current account
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Today's GDP figures - the third take on the final quarter of 2013 - showed a rise of 0.7%, as before, and confirm that business investment contributed significantly to that growth. Overall wages and salaries rose by 3% in 2013 compared with 2012. More here.

The bad news today with in the balance of payments. The first estimates for the third quarter currnet account deficit were awful, a deficit of just over £20 billion. Today's showed that deficit revised up, to £22.8 billion, and only a small fall to £22.4 billion, 5.4% of GDP, in the fourth quarter.

These are big numbers, though they are not mainly driven by the trade deficit, which narrowed to £5.7 billion in Q4 from £10 billion in Q3. The 2013 deficit narrowed from £33.4 billion to £26.6 billion. The damage is being down by a collapse in investment income, traditionally in surplus. It was in deficit by £17.4 billion in 2013, mainly in the final two quarters of the year. More here.

Tuesday, March 25, 2014
Inflation falls - and a puzzle
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The February inflation figures were good, showing a drop in consumer price inflation from a below-target 1.9% to even further below target at 1.7%. If the squeeze on real wage growth had not already ended - as I think it had - it is clearly on the run now.

Inflation has not been this low since the depths of the crisis, and then only briefly. Goods inflation, at 1.2%, is behaving but service-sector inflation, traditionally the driver of above-target UK inflation, has also come down and now stands at just 2.4%.

The drop in inflation is really quite pronounced. Only last June it stood at 2.9% and as recently as September 2011 it was more than 5%. It looked more sticky than it has turned out to be.

There is a puzzle in these figures. RPI inflation slipped, but only from 2.8% to 2.7%, and is a full percentage point above CPI inflation. It has been boosted by rising house prices. But the CPI measure which includes owner-occupiers' housing costs, CPIH, showed a drop in inflation from 1.8% to 1.6%.

The answer may be in the method of calculation. RPIJ, using a different method - Jevons - similar to that used for CPI, has inflation at 2%. The RPI, while widely-watched, is no longer regarded as a national statistic, though it will allow some to claim real wages are still falling.

The broad message is that inflation is falling and has made a rare excursion into below-target territory. The hope has to be that it will last. More here.

Wednesday, March 19, 2014
Osborne's responsible giveaway
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

George Osborne's aim in the budget was to demonstrate that the government's plan is working and to show that he has not given up on rebalancing the economy.

Did he succeed? The Office for Budget Responsibility's numbers are unremarkable - growth of 2.7% this year and 2.3% next - but they help. So does the downward revision of borrowing to £108 billion this year and £95 billion next (2014-15). Borrowing is still a long way above the 2010 projections but the gap is narrowing.

As for individual measures, the chancellor did just about enough to claim this was a budget for exports, investment and, with a £7 billion package, large energy users. Industry should be pleased with all this.

The most eye-catching individual announcement was the doubling of the annual investment allowance to £500,000, extended until the end of 2015. This went further than expected.

The "rabbit" in the budget was the increase in the ISA allowance to £15,000 and the removal of the restriction on cash ISAs. This and far-reaching pension reforms - the budget's most significant announcement - will stay in the memory. They count, unusually, as a responsible giveaway, distinct from the usual pre-election fare.

Tuesday, March 18, 2014
Broadbent steps up
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Today's announcements regarding the Bank of England were not quite as expected but they do the job. Ben Broadbent, like Mark Carney an ex Goldman Sachs employee, will succeed Charlie Bean as deputy governor responsible for monetary policy. Broadbent, a very able technical economist, is like Carney a dove on interest rates.

The appointment of Nemat Shafik as deputy governor for markets and banking means there will now be a woman on the monetary policy committee. She replaces Paul Fisher, who is one of the losers from today's reshuffle. The Bank now looks different compared with the Mervyn King era.

Friday, March 14, 2014
Puzzling export weakness
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

One strong feature of business surveys, for both manufacturing and services, has been the strength of export orders. None of this strength is, however, reflected in the official export numbers, the trend in which remains as flat as a pancake.

There are some compositional factors in this - the widening of the overall trade deficit from £0.7 billion in December to £2.6 billion in January largely reflected erratic items such as aircraft - but you would expect the numbers to be stronger than this.

The UK motor industry, for example, is doing well and exports 80% of its production. The official figures would suggest that this success is offset by weakness elsewhere. The oil deficit widened to almost £1 billion in January, from less than £0.6bn in December.

There is a glacial improvement in Britain's trade position in the latest figures - in the three months to January export volumes rose by 1.2% while import volumes fell by 0.5%.

There also was better news on services. As the ONS says: "Exports of services for 2013 were revised upwards by £1.9 billion to £199.0 billion and imports of services were revised downwards by £1.6 billion to £117.0 billion. Therefore the overall surplus was revised up by £3.5 billion to stand at £82.0 billion." More here.

But there is a long way to go before net trade makes a more decisive contribution to growth. Fortunately there is better news on the domestic front, with construction outout rising by a seasonally adjusted 1.8% in January, as set out here.

Wednesday, February 26, 2014
A healthy GDP number
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The headlines of the second estimate of GDP were unexciting. GDP rose by 0.7% in the final quarter of 2013, in line with the original estimate. GDP growth for 2013 as a whole was nudged down from 1.9% to 1.8%.

The detailed picture is, however, a lot better. Net trade and business investment both contributed significantly to growth in the final quarter, and the business investment numbers, in particular, are looking a lot better. Net trade had a terrible third quarter but contributed 0.4 points to growth in the final three months of the year.

The "consumer-driven recovery" was not so consumer-driven in the final quarter, the 0.4% rise in consumer spending being less than the overall rise in GDP. Overall, a healthier number. More here.

Thursday, February 13, 2014
Treasury pulls the rug from Scottish independence
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

The all-party agreement (in Westminster) on ruling out a currency union with Scotland took some by surprise, but the reasons are now clear. The Treasury has come out strongly, and publicly, against it, and says that Scotland's threat not to take on its share of UK debt is not credible.

This is a bigger blow to independence than Mark Carney's recent speech. The highly unusual letter, from Sir Nicholas Macpherson, permanent secretary to the Treasury, is reproduced below:

'Currency unions between sovereign states are fraught with difficulty. They
require extraordinary commitment, and a genuine desire to see closer union
between the peoples involved. As the Treasury paper points out, the great
thing about the sterling union between Scotland, Wales, Northern Ireland and
England is that it has all the necessary ingredients: political union, economic
integration and consent. What worries me about the Scottish Government’s
putative currency union is that it would take place against the background of a
weakening union between the two countries, running counter to the direction
of travel in the eurozone.

I would advise strongly against a currency union as currently advocated, if
Scotland were to vote for independence. Why?

First, the Scottish Government is still leaving the option open of moving to a
different currency option in the longer term. Successful currency unions are
based on the near universal belief that they are irreversible. Imagine what
would have happened to Greece two years ago if they had said they were
contemplating reverting to the Drachma.

Secondly, Scotland’s banking sector is far too big in relation to its national
income, which means that there is a very real risk that the continuing UK
would end up bearing most of the liquidity and solvency risk which it creates.

Thirdly, there is the problem of asymmetry. The continuing UK would be at
risk of providing taxpayer support to the Scottish financial sector and
sovereign. An independent Scottish state would not face the same risk as
it is inconceivable that a small economy could bail-out an economy nearly ten
times its size. This asymmetry could only cause continuing UK problems unless

Scotland is prepared to cede substantially more sovereignty on monetary and
fiscal matters than any advocates of independence are currently
contemplating.

Finally, Treasury analysis suggests that fiscal policy in Scotland and the rest of
UK would become increasingly misaligned in the medium term. Of course, if
the Scottish Government had demonstrated a strong commitment to a
rigorous fiscal policy in recent months, it might be possible to discount this.

But recent spending and tax commitments by the Scottish Government point
in the opposite direction, as do their persistently optimistic projections of
North Sea revenues, which are at odds not just with the Treasury but with the
Office of Budget Responsibility and other credible independent forecasters.

There is a substantive point here. If the dashing of Scottish expectations were
perpetually blamed on continuing UK intransigence within the currency union,
relations between the nations of these islands would deteriorate, putting
intolerable pressure on the currency union.

If you follow Treasury advice and this week rule out a currency union in the
event of Scottish independence, you can expect the Scottish Government to
threaten not to take on its share of the United Kingdom’s debt. I do not believe
this is a credible threat. First, the sooner an independent Scotland established
economic credibility, the better it would be for its economic performance. An
extensive wrangle about its share of the debt would increase uncertainty and
hence its funding costs. Secondly, the debt is one of a number of issues which
would have to be settled post independence, where the new Scottish state would
require the cooperation of the international community including the continuing UK.

As for the impact of the threat, much will depend on the markets’ assessment
of the probability of a pro independence vote and the likelihood of the Scottish
Government seeing the threat through. In the short run, any uptick in gilt
yields is likely to be small. And in the worst case scenario, it is more than likely
that the increase in funding costs, which the continuing UK would face, would be
smaller than that which would result from an ill thought out currency union
with Scotland.

And so to sum up, I would advise you against entering into a currency union
with an independent Scotland. There is no evidence that adequate proposals
or policy changes to enable the formation of a currency union could be
devised, agreed and implemented by both governments in the foreseeable
future.'

SIR NICHOLAS MACPHERSON
Permanent Secretary to H M Treasury

Wednesday, February 12, 2014
Forward guidance isn't what it used to be
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

What is now called the first phase of forward guidance, linking changes in interest rates to an unemployment threshold, was supposed to last for three years. Now it has been buried after six months. I have followed the twists and turns of monetary policy in the UK for a very long time, but this was a short-lived experiment by any standards.

The rapid drop in the unemployment rate to 7.1% has rendered phase one obsolete. Its replacement, using vaguer measures of spare capacity to offer guidance on interest rates, has been interpreted by some as a return to the pre-Mark Carney days of simply targeting inflation and taking one meeting at a time.

It is not that, though it is also a long way from the straightforward forward guidance the Bank of Engalnd governor had in mind. It implies that interest rates will go up at some stage, though not this year, and when they do we should look for rates of 2%-3% rather than pre-crisis norms.

Other interesting features:

- The Bank does not expect spare capacity to be used up over the next three years but will probably raise rates before it is.

- Quantitative easing (QE) will not be reversed and the coupons will continue to be reinvested in further gilt purchases until after Bank rate has begun to rise.

An interesting moment. The inflation report is here.

Friday, February 07, 2014
Better news on trade
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

We know net trade made a positive contribution to growth in the first and second quarters of 2013 but not (dramatically) in the third. Today's trade figures siggest it will have done so in the final quarter of the year.

These were the details:

The deficit on trade in goods and services narrowed to £1 billion in December 2013, compared with a deficit of £3.6 billion in November 2013. There was a deficit of £7.7 billion on goods, partly offset by an estimated surplus of £6.7 billion on services.

This reflected an increase in exports of 2.1% and a drop in imports of 3.8%. Inevitably there is an erratic element in this. Exports were boosted by oil, chemicals and aircraft, while a drop in aircraft imports also helped narrow the gap. Trade in aircraft is famously volatile, as Harold Wilson discovered 44 years ago.

However, there were signs of an improved trend in the data. As the Office for National Statistics pointed out: "The goods deficit in countries outside the EU has narrowed in each of the last six months. Since July 2013 exports to countries outside the EU have increased 9.3% and imports have decreased 9.6%."

It may be a flash in the pan. But we can hope it is the first glimmer of export-led growth. More here.

Wednesday, February 05, 2014
Never mind the weather
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The three puchasing managers' surveys suggest the economy grew well through the wettest January for very many years. Given the UK's penchant for weather-disrupted growth that is a comfort.

The construction PMI was the star performer of the three. The service sector PMI slipped to 58.3, from 58.8 in December, and is at its lowest since last summer. It remains consistent, however, with strong growth.

This is Markit's assessment:

"The UK economy enjoyed a strong start to 2014, according to PMI™ surveys. Despite unusually wet weather, business activity continued to rise at a robust pace and hiring gathered further momentum to equal the record increase seen in October.

“The three Markit/CIPS PMI™ surveys collectively signalled an expansion of private sector business activity for the thirteenth successive month in January. At 59.1, down from 59.4 in December, the ‘all sector’ output index signalled a slight easing in the pace of growth for a third successive month, down to the weakest since June, but nevertheless remained elevated by historical standards of the survey.

“Comparisons of the PMI with GDP data indicate that the economy is on course to grow by 0.8% in the first quarter (assuming the index remains relatively unchanged in February and March), thereby extending the economy’s buoyant growth run that has been evident since last spring.

“The PMI survey also showed private sector hiring gathering momentum again to equal October’s all-time high, adding to the sense that the mild slowdown in activity in January may reverse in February. The January ‘all sector’ employment index is roughly consistent with business sector employment growing at a rate of 150,000 per quarter. Marked rates of job creation have been evident in manufacturing, services and construction alike in recent months, with rates of increase picking up in both services and construction in January and easing only slightly from December’s robust pace in manufacturing."

Thursday, January 30, 2014
Currency unions old and new
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

Mark Carney, in his interesting speech on the monetary consequences of Scottish independence, drew on the experince of the eurozone. He cited Robert Mundell's theory of optimum currency areas. His conclusion on the constraints an independent Scotland would face if it continued to use the pound has been widely reported.

He said: "The Scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union. All aspects of any such arrangement would be a matter for the Scottish and UK Parliaments. If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place.

"Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty.

"It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK. " His speech is here.

Another potential parallel is Ireland. The Irish pound was created in 1927 and retained its sterling link for half a century. For two decades after the Irish pound was created, Ireland did not even have its own central bank. The sterling link was broken when Ireland joined the European exchange rate mechanism (ERM) and the Irish pound ceased to exist when Ireland joined the euro. The Irish story, which may have some ramifications for Scotland, is here.

Tuesday, January 28, 2014
GDP up 0.7%, business services and manufacturing strong
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Gross domestic product rose by 0.7% in the final quarter of 2013, and by 2.8% on a year earlier. It is now almost back to its pre-crisis peak - now only 1.3% below it - and will be there by mid-year if quarterly growth continues at its Q4 pace.

Manufacturing rose by 0.9% in the final quarter. There is no breakdown at this stage but the monthly figures suggest the strongest component of manufacturing is capital equipment. This and the fact that business services and finance were strong within a 0.8% rise in services (rising by 1.2% after a similar rise in the third quarter) suggests that this is not a recovery driven particularly by consumers.

The surprise is the numbers was a 0.3% drop in the quarter for the construction industry, in which the surveys have been pointing to continued growth. Despite this, construction was up 4.5% on a year earlier.

So a generally good number, although one that was fractionally below some pre-release estimates. The figures, of course, will be revised. More here.

Friday, January 24, 2014
Another way of showing real wages have stopped falling
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The government has claimed that real take-home pay is rising for most workers (in the 2012-13 tax year), when the rise in the personal tax allowance is taken into account. It is a reasonable riposte, and it is likely - given lower inflation - that real take-home pay for most will be stronger this year.

There is another way of demonstrating that the squeeze on real wages has ended. Total wages and salaries, in Table J1 here show 12-month rises of 3.7% and 3.3% respectively in the second and third quarters of last year.

Adjusted for the 12-month rise in employment (0.8% and 1% respectively), that converts into per employee increases of 2.9% and 2.3% respectively, broadly in line with inflation. A different message from the weekly earnings figures, but one that fits in better with the consumer spending and other data.

Wednesday, January 22, 2014
Unemployment tumbles - a nice kind of headache for the Bank
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

We have been used to strong job market figures, but these were corkers. The employment rate, 72.1%, is up by 0.5 points in September-November, compared with July-August. The rise in the latest three months, an astonishing and record 280,000, took the level of employment to 30.15 million.

The unemployment rate, now the most-watched indicator thanks to Mark Carney's forward guidance, fell to 7.1%, down from 7.6% in June-August. Unemployment fell by 167,000 in the latest three months, another huge drop.

If you were looking for bad news in this release it would be that average earnings in the latest three months were up by only 0.9% on a year earlier on both the total and regular pay measures. That may change in the coming months as the labour market tightens.

The Bank of England's monetary policy committee did not know what the figures would be when it held its monthly meeting earlier this month but makes clear in its minutes that when unemployment hits 7% there would be "no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future. Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained."

Some see this as a headache for the Bank and Mark Carney. But it is a nice kind of headache. Inflation is on target and the job market is very strong.

Friday, January 17, 2014
A late surge
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Some figures deserve commenting on and the December retail sales figures, up 2.6% (in volume) and 5.3% on a year earlier, certainly do. Volumes excluding road fuel jumped by 2.8% on the month. Have shoppers gone bananas? No, but they left it late. October and November were subdued, December very strong.

Despite the jump, retail sales in the fourth quarter were only 0.4% up on the previous quarter, though 3.2% higher than a year earlier. Even so, consumer spending will make a positive contribution to Q4 GDP growth. Smaller retailers, gratifyingly, did better in December than their bigger competitors. More here.

Tuesday, January 14, 2014
Back to target
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

After a long period in which it seemed Britain was a 3% inflation economy, rather than the 2% one consistent with the official target, consumer price inflation has come back to target for the first time in four years.

Its fall, from 2.9% in June and 2.7% as recently as September is good news, which eases the pressure for higher interest rates and reduces cost of living pressures. Other measures are also close to 2%. That is the rate for RPIJ, the retail prices index based on the Jevons method, while CPIH, including owner-occupiers' housing costs, is 1.9%.

The exception is RPI inflation, which nudged up to 2.7% in December, from 2.6%, but the relationship between RPI and CPI is broadly what you would expect, the former showing rates 0.5 to 0.75 points above the latter.

CPI inflation fell in December because of downward pressure from food and alcoholic drink, as well as what the Office for National Statistics calls "recreational goods and services". A small rise in petrol prices did not prevent the fall in inflation. More here.

Friday, January 10, 2014
Q4 growth looks good, but not spectacular
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

Since this morning's industrial production and constrcution figures came out, economists have been running through the numbers to come up with estimates of fourth quarter gross domestic product.

Both industrial production and manufacturing were flat in November, while construction output - which is highly volatile - dropped by 4%. The official figures, not for the first time, contrast with the strength of the surveys.

But the official figures are what the Office for National Statistics will use when calculating its estimate of Q4 growth, to be published on January 28. The National Institute of Economic and Social Research projects 0.7% Q4 growth, weaker than the 0.8% recorded in the second and third quarters. Many City economists project 0.6%.

A slight weakening of growth will ease pressure on the Bank of England, and these first estimates by the ONS are typically revised higher. More on industrial production here and construction here.

Friday, December 20, 2013
The revisions start to come through
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

As always, the official statitisticians' early takes on the gross domestic product figures are subject to extensive revisions and this is no exception. What we have now is 0.8% growth in the third quarter, as before, but revisions to most other quarters going back to the beginning of 2012.

The result of this is that 2012's growth rate, originally estimated to be negative, is now modestly positive (0.3%), with further revisions likely. 2013 is on course for 1.8% or 1.9% growth, well above the Office for Budget Responsibility's latest forecast of 1.4%.

Though the current account figures for the third quarter were a shocker - a deficit of £20.7 billion from £6.2 billion in the second quarter - the latest GDP figures suggest growth is rather better balanced than previously thought. In the first quarter, for example, GDP grew by 0.5% and the contribution of net trade to growth was 0.5%. In the second quarter net trade contributed 0.2% of the 0.8% rise in GDP. The revised quarterly national accounts are here.

Alongside the better GDP figures, there were slightly disappointing borrowing figures. Borrowing in November of £16.5 billion was £0.9 billion higher than a year earlier. Borrowing is still on track to at least meet the OBR's downward revised projection.

Wednesday, December 18, 2013
Record employment and unemployment breaks the trend
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

This was another strong set of unemployment numbers. There are a number of features. The first, which will generate much excitement in the markets, is the drop in the unemployment rate to 7.4% in the August-October period, from 7.7% in May-July. This brings it closer to the 7% threshold for the Bank of England's forward guidance, at which point it will consider rate hikes.

The second feature is the strength of employment, up to 30.09 million in the latest three months (the first time it has done so), a rise of 250,000 on the previous three months. This shows a job market on steroids.

The third is the unemployment number itself, down 99,000 in the latest three months to 2.39 million, the first time it has broken decisively below 2.5 million since the crisis.

Finallly, and underpinning this, private sector job creation in the 12 months to September, 537,000, was more than ten times the loss of public sector jobs (52,000). Interestingly, public sector employment showed a small rise in the latest three months. More here.

Tuesday, December 17, 2013
Inflation close to target
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Consumer price inflation dropped to 2.1% in November, from 2.2% in October, within a whisker of the 2% target. Interstingly, the CPIH measure, including owner-occupiers' housing costs, came in at 1.9%.

The fall in inflation is welcome, particularly given that inflation was more than 5% just two years ago. The latest drop benefited from lower food inflation and, perhaps surprisingly, energy. This may not last - recently-announced energy price hikes have yet to affect the figures - but there are good reasons to think other factors could keep CPI inflation close to 2%.

The RPI inflation rate was higher, at 2.6% (unchanged on October). This is the kind of relationship between CPI and RPI inflation (the latter 0.5% to 0.75% higher) you would expect. More here.

Thursday, December 05, 2013
Prudence for a political purpose
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

An initial response to the autumn statement.

George Osborne is a political chancellor and he lost no opportunity in his fourth autumn statement to achieve maximum political capital from the strengthening of the recovery this year.

Though the new forecasts from the independent Office for Budget Responsibility are unspectacular, 1.4% this year, 2.4% next year and 2.2% in 2015, they represent a significant improvement, particularly for the first two years, compared with the OBR's previous forecasts (0.6% in 2013 and 1.8% in 2014). This was, according to the Treasury, the biggest in-year upward revision for 14 years.

And if the OBR has been over-cautious - it predicts a slowdown in quarterly growth to just 0.5% during 2014 (broadly trend growth) from 0.8% in the third quarter - the chancellor will not mind too much. Better to present upward revisions than downward ones.

For similar reasons the chancellor will not be too dismayed by the OBR's cautious short-term forecast for public borrowing. A prediction of £111 billion this year for adjusted net borrowing looks high, though the rolling monthly numbers did benefit from some front-loaded effects.

But the big picture, which is where the politics comes in, is that Osborne has transformed himself from a chancellor struggling to meet his borrowing targets to one who has just shaved more than £70 billion off cumulative borrowing over the next five years, and intends to achieve a budget surplus over the medium-term (the OBR says by 2018-19).

In a year's time, parliament will vote on a tougher charter of fiscal responsibility, intended to enshrine falling debt and tough spending controls. The Treasury has issued a comparison of government debt on the assumption of a 1% budget surplus and a 2% deficit (the average in recent times). On the former, debt gets back down to 40% of GDP over time. On the latter it does not.

There's a lot more in the autumn statement, much of it in the detail. But the broad message is that growth is here to stay and borrowing will never again be allowed to let rip. Time will tell whether that will prove politically popular enough to give Osborne the chance to see it through. The coalition thinks it will. The main autumn statement document is here.

Tuesday, December 03, 2013
Very strong manufacturing and construction
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Many economists expected the purchasing managers' surveys to moderate in the fourth quarter following their very strong third quarter but they remain very strong. We await the service sector number but both manufacturing and construction has surprised on the upside ths month.

This was this morning's contruction PMI: "November data pointed to another strong upturn in the UK construction sector, with output and employment both rising at the sharpest rate since August 2007. Growth of business activity was broad based across the three main areas of construction, with residential building again the best performing category. Higher levels of output were supported by the joint-fastest expansion of incoming new work since September 2007.

"Adjusted for seasonal factors, the Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) registered 62.6 in November, up sharply from 59.4 in October."

It followed yesterday's buoyant manufacturing reading: "November saw the already solid upturn in the UK manufacturing sector gain further momentum. At 58.4, from an upwardly revised reading of 56.5 in October, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) rose to its highest level since February 2011. Moreover, the PMI has signalled expansion for eight months running.

"The improved performance of the sector largely reflected substantial increases in both manufacturing production and new orders, with rates of growth in both at, or near to, 19-year highs."

Good, and surprisingly strong, news.

Thursday, November 28, 2013
The Bank's Financial Stability Report
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

This is the relevant part of Mark Carney's opening remarks in launching today's Financial Stability Report:

"Housing activity has picked up from a low level and prices are 7% higher than a year ago. Price increases are gaining momentum and broadening out around the country. Valuations, while below levels reached in 2007, are high by historic standards and are likely to rise in the near term.

"The immediate threat to financial stability from these developments is mitigated by the higher quality and levels of capital at banks and building societies as well as by material improvements in underwriting standards since the crisis.

"Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness. These risks would be amplified if underwriting standards on mortgage lending were to weaken as has been the case in previous house price cycles.

"As part of a graduated response, the FPC is acting in concert with other authorities to implement a package of measures to guard against these risks. Some of these measures are already in train; others are new. Collectively, they are significant. But they are not exhaustive: in today’s FSR, the FPC outlines a wide range of additional steps that it could take in future, should they be necessary to meet its statutory objective to ensure financial stability."

The message is that the Bank will not allow a housing bubble to develop. The fact that this action has been taken should reduce the need for higher interest rates. The opening remarks are here, and the full report here.

Wednesday, November 27, 2013
Business investment edges higher
Posted by David Smith at 10:28 AM
Category: Thoughts and responses

Business investment rose by a modest 1.4% in the third quarter, within a similar rise in overall investment. A small step in the right direction but investment remains well below pre-crisis levels. Third quarter GDP was unrevised at 0.8%. More on investment here.

Tuesday, November 26, 2013
An award
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

Today I was awarded economics commentator of the year in the Editorial Intelligence Comment Awards. The other short-listed candidates were Tim Harford and Gillian Tett of the Financial Times, both excellent, showing that this was an award worth winning. More here.

Thursday, November 21, 2013
Public borrowing continues to fall
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The latest estimates for adjusted public sector net borrowing for 2012-13 suggest an outturn of £115 billion, £3.5 billion lower than in 2011-12 and a far cry from estimates of £135-140 billion doing the rounds this time last year.

This year seems set to continue the trend. Borrowing in October was £8.1 billion, marginally lower than in October 2012 (the award of Royal Mail shares to employees actually added to borrowing this time) but the trend is downwards. Borrowing for the April-October period, adjusted for special factors, was £64.8 billion, down £5.8 billion on the corresponding period of 2012-13 (£70.6 billion). See Table 2 of the official release, whcih is here.

Stronger revenues are supporting the drop in borrowing. In April-October VAT receipts were up 5.8% on a year earlier, while income and capital gainst tax receipts were up 5.4%. The main weakness was in corporation tax receipts, down 2%. Current government spending over the same period was up by 2.1%.

Public sector net debt at the end of October was £1,207.2 billion, 74.5% of GDP.

Wednesday, November 13, 2013
The Bank gets into an unemployment muddle
Posted by David Smith at 06:30 PM
Category: Thoughts and responses

Read the opening statement by Mark Carney today in presenting the Bank of England's inflation report and this is clearly a man who does not want to raise interest rates for a considerable time.

He said: "A sustained recovery requires confidence that exceptionally stimulative monetary policy will be maintained in the face of weak foreign demand and on-going repair of household, bank and government balance sheets. Our forward guidance means the MPC will not even consider raising Bank Rate at least until the unemployment rate reaches 7%. Through that guidance we are giving businesses and households the confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace."

And: "It is important to remember that the unemployment threshold is a staging post for assessing policy, not a trigger for an automatic increase in Bank Rate. When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment."

He concluded by saying: "We will continue to provide exceptional monetary stimulus so that British households and businesses have, for the first time in a long time, the confidence not just that the glass is half full, but that it will be filled."

Now contrast that with the Bank's new forecasts, which on the same basis as its predictions in August (constant interest rates) have unemployment reaching 7% in late 2014 (not 2016 as in August). Even on the market assumption that rates gradually rise (which seems an inconsistent assumption for the Bank to use) 7% is achieved by mid-2015.

How do we square these two things? The Bank, in specifying forward guidance on the basis of the unemployment rate (albeit a threshold not a trigger) has made a rod for its own back. It should have found an alternative way of saying it would give the economy time to breathe. More on this on Sunday. In the meantime, Governor Carney's opening statement is here, and the inflation report here.

Tuesday, November 12, 2013
A welcome drop in inflation
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Inflation has been stuck at around 2.75% for slo long that today's news of a drop to 2.2% in October (from 2.7% in September) was welcome. A drop in petrol prices and the fact that tuition fees rose by less than last year were the main factors. This is the closest inflation has been to target since Mark Carney took over as Bank of England governor in the summer and provides a nice backdrop to tomorrow's inflation report.

Carney said recenetly that the rise in emergy prices would be broadly offset by other factors. That might allow the Bank to say tomorrow that inflation will be close to the 2% target next year. Michael Saunders at Citi, the investment bank, expects inflation to average 2% next year.

If thta occurs it won't end Labour's "cost of living crisis" but it will take the sting out of it, as does EdF's announcement today that it is raising prices by only 3.9% in January because it expects an easing of so-called green costs from the government.

All measures of inflaton fell in October, with the CPI rate including owner-occupiers' housing costs dropping from 2.5% to 2% and RPI inflation falling from 3.2% to 2.6%. Though inflation may jump around a little in the next couple of months, a return to target no longer seems as distant as it once did. More here.

Friday, November 08, 2013
Trade still becalmed
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

Britain's overall trade deficit (in goods and services) was £3.3 billion in September, the same as in August. There was a deficit in goods trade of £9.8 billion, offset by a £6.5 billion surplus on services. A drop in exports of £0.3 billion to the EU was accompanied by a £0.4 billion rise in imports. Thus, Britain's visible trade deficit with the rest of the EU hit a record £6 billion.

Other highlights included:

- The deficit on trade in goods increased by £3.8 billion to £29.1 billion in Q3 2013 from £25.3 billion in Q2 2013. Exports of goods in Q3 2013 decreased by 3.5% to £75.7 billion and were 0.1% lower than in the same quarter of 2012. Imports of goods increased by 1.0% in Q3 2013 to stand at £104.8 billion and were 2.5% higher than in the same quarter of 2012.

- The deficit on trade in goods was £9.8 billion in September 2013. The trade position reflects exports minus imports. Exports of goods decreased by 0.7% on the month to £25.1 billion for September 2013. Imports for the same period rose 0.2% to £34.9 billion.

And, according to the ONS's overall assessment:

"The value of trade in goods has grown only gently since the beginning of 2007. In that year, and into 2008, there was steady growth as the UK economy and those of our major trading partners expanded. That expansion came to a sharp end during 2008 and, as these economies turned downwards, so did the levels of trade. Growth was not resumed until summer 2009. It was steady for the two years after that, but with the continuing difficulties in many economies in oving out of recession, the value of both exports and imports has remained flat since mid-2011."

So disappointing. Surveys suggest a strengthening of exports for both goods and services but that is yet to show through in the numbers. More here.

Tuesday, November 05, 2013
Surveys point to accelerating growth
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

The service sector purchasing managers' index comfortably exceeded expectations, rising to a record 62.5 in October from 60.3 in September. Activity is expanding at its fastest rate since May 1997. Taken together with the construction and manufacturing surveys, Markit says the numbers are consistent with GDP growth of more than 1% in the final quarter of 2013.

This is their assessment:

Chris Williamson, Chief Economist at survey compilers Markit: “The UK economic recovery moved up a gear again in October, with the PMIs indicating record growth of output and employment. The all-sector PMI, measuring business activity across the UK private sector economy, hit an all-time high of 61.5 in October, up from 60.2 in September.

“Historical comparisons of the PMI against gross domestic product suggest the latest survey data are consistent with a 1.3% quarterly rate of GDP growth, up sharply from previous quarters. The surveys also indicate that the rate of private sector job creation is currently running in excess of 100,000 per quarter.

“Manufacturing, services and construction all continued to see very strong rates of expansion, pointing to an ongoing broad-based upturn. However, it is the services sector which – due to its sheer size – is the major driving force behind
economic growth at the moment.

The service sector PMI is here.

Friday, October 25, 2013
A good-looking GDP number
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

GDP rose 0.8% in the third quarter, in line with expectations, its best quarterly growth rate since Q2 2010. Gross valued added excluding oil and gas also rose by 0.8% but has risen by 6.2% since the mid-2009 trough and is only 1.6% below its pre-crisis peak. It points to an underlying growth rate over the past four years of close to 1.5%.

These are the highlights of the third quarter preliminary GDP figures, according to the Office for National Statistics:

- GDP increased by 0.8% in Q3 2013 compared with Q2 2013.

- Output increased in all four main industrial groupings within the economy in Q3 2013 compared with Q2 2013. Output increased by 1.4% in agriculture, 0.5% in production, 2.5% in construction, and 0.7% in services. Output from services is now slightly above its previous peak in Q1 2008, prior to the economic downturn.

- In Q3 2013 GDP was estimated to be 2.5% below the peak in Q1 2008. From peak to trough in 2009, the economy shrank by 7.2%.

- GDP was 1.5% higher in Q3 2013 compared with the same quarter a year ago. Remember that the Olympics and Paralympics took place during Q3 2012, raising the level of GDP in this quarter.

The ONS makes two points about the numbers. On is that overall production was depressed by a sharp drop in gas and electricity output, which depressed GDP by 0.1 points. This may have been weather-related, though the statisticians are still investigating this.

Service sector output is now above pre-crisis levels, though manufacturing and construction still have ground to make up. More here.

Tuesday, October 22, 2013
Deficit heads for significant undershoot
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Something will have to go wrong in the remaining months of the fiscal year if the Office for Budget Responsibility's prediction of a near £120 billion budget deficit is to be met. In September public sector net borrowing was £11.1 billion, £1 billion below the September 2012 figure of £12.1 billion.

This continued the recent pattern. So far this fiscal year (April-September) adjusted public sector net borrowing is £56.7 billion, compared with £62.6 billion in the corresponding period of 2012-13. Given that the 2012-13 full-year outturn was £115.4 billion, 2013-14 looks to be heading for something closer to £100 billion than the OBR's forecast.

Stronger tax receipts reflect faster economic growth. As last month, receipts are growing faster than spending. All the main receipts are growing and in September were up by 7% on a year earlier. In April-September current receipts were up 8.3%, compared with a 2.4% rise in current expenditure. If this trend persists the omens are very good. More here.

Wednesday, October 16, 2013
Employment strong, pay very weak
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

These are the highlights of the latest labour markets statistics:

- The employment rate for those aged from 16 to 64 was 71.7%, up 0.3 percentage points from March to May 2013 and up 0.4 from a year earlier. There were 29.87 million people in employment aged 16 and over, up 155,000 from March to May 2013 and up 279,000 from a year earlier.

- The unemployment rate was 7.7% of the economically active population, down 0.1 percentage points from March to May 2013 and down 0.2 percentage points from a year earlier. There were 2.49 million unemployed people aged 16 and over, down 18,000 from March to May 2013 and down 40,000 from a year earlier.

- The inactivity rate for those aged from 16 to 64 was 22.2%, down 0.2 percentage points from March to May 2013 and down 0.3 percentage points from a year earlier. There were 8.95 million economically inactive people aged from 16 to 64, down 83,000 from March to May 2013 and down 88,000 from a year earlier.

- Total pay rose by 0.7% compared with June to August 2012. Regular pay rose by 0.8% over the same period.

The big picture is that employment growth continues strong, that the unemployment rate is still some way from the Bank of England's 7% threshold and that pay is strikingly weak. The latest figures, indeed, show falling pay in the public sector. More here.

Tuesday, October 15, 2013
Think of an inflation number - it is 2.7%
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Consumer price inflation was 2.7% in September, the same as in August. The same, in fact, as in seven of the past 12 months. The same, in fact, as its average over the past 12 months. If the Bank of England's inflation target was 2.7%, it would be mightily pleased. It is, of course, 2%.

Does today's 2.7% make any difference to anything? It underlines how sticky the rate is, which eventually might produce a "knockout" forecast of inflation being above 2.5% in 18-24 months time, but not yet. It makes a drop to 2% next year slightly less likely.

There was marginally better news in the retail prices index, which showed inflation slipping from 3.3% to 3.2%. Whichever way you look at it, however, inflation is above average earnings growth.

Input prices fell by 1.2% in September, while output price inflation dropped from 1.7% to 1.2%. Unfortunately the main determinants of consumer price inflation these days are not in these particular pipelines. More on the inflation numbers here.

Also today, the Office for National Statistics released its house price index, showing prices up by 3.8% in the past 12 months and 0.3% on the previous peak. I'm inclined to take this with a pinch of salt. This is a new series and the longer-running Halifax and Nationwide measures still have prices 15% and 8% below previous peaks. The ONS index is here.

In praise of the efficient market hypothesis
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

This is from my book The Age of Instability, written at a time when the efficient market hypothesis was being blamed for pretty much everything.

If economic models failed during the crisis, so according to some of the most vocal critics, did something else central to the macroeconomic and regulatory framework in the period leading up to the crisis. This was the efficient market hypothesis, versions of which had been around for most of the 20th century but which was best defined by Professor Eugene Fama of Chicago University, in a seminal 1970 article, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’, published in the Journal of Finance. Fama’s central concept was very simple, which was that financial markets are efficient in the sense that the price of, say, a company’s stock, reflects all the known information at the time.

There were, according to Fama, various degrees of ‘strength’ with which the proposition could be stated. In the weakest version, the current price only refelcted past information on prices, in the ‘semi-strong’ version – which is what most people have chosen to use – it reflects all publicly available information affecting the company, while in the strongest version, the price reflected all publicly and privately available information. This simple idea was, in its time, revolutionary and drew enormous praise. ‘There is no other proposition in economics which has more solid empirical evidence supporting it than the efficient market hypothesis,’ said the Harvard financial economist Michael Jensen in 1978. It implied, most obviously, that it was hard for investors to claim to consistently beat the market. Today’s price reflected all known information today. Tomorrow’s price would reflect the state of information tomorrow, which might be different but which nobody not in possession of that information in advance could hope to anticipate. Prices followed what Fama described as a ‘random walk’.

It may have been simple but, as the crisis of 2007-9 unwound, it also appeared that the efficient market hypothesis did enormous damage. Lord Turner, chairman of Britain’s Financial Services Authority, carried out a review of the circumstances leading up to the crisis, which was published in March 2009. It poured a large dollop of scepticism on the efficient market hypothesis, effectively blaming it for some of the problems. ‘The predominant assumption behind financial market regulation – in the US, the UK and increasingly across the world – has been that financial markets are capable of being both efficient and rational and that a key goal of financial market regulation is to remove the impediments which might produce inefficient and illiquid markets,’ Turner wrote. ‘A large body of theoretical and empirical work has been devoted to proving that share prices in well regulated liquid markets, follow ‘random walks’, and that it is therefore impossible to make money on the basis of the knowledge of past patterns of price movement, with prices instead changing as new information becomes available and is assessed by a wide range of independently acting market participants… In the face of the worst financial crisis for a century, however, the assumptions of efficient market theory have been subject to increasingly effective criticism, drawing on both theoretical and empirical arguments … Given this theory and evidence, a reasonable judgement is that policymakers have to recognise that all liquid traded markets are capable of acting irrationally, and can be susceptible to self-reinforcing herd and momentum effects.’

The efficient market hypothesis did not just lead regulators astray. Despite a growing body of doubt ‘most of the economics profession continued to swallow the efficient market hypothesis hook, line and sinker,’ wrote Buiterxx. It was embodied in their economic models and it formed the basis for the sophisticated mathematical models that underpinned the financial engineering that clever people undertook on Wall Street, London and elsewhere, creating the instruments that proved to be so dangerous and destructive. ‘It led bankers into blind faith in their mathematical forecasting models,’ wrote Skidelsky. ‘It led governments and regulators to discount the possibility that financial markets could implode. It led to what Alan Greenspan called (after he had stepped down as chairman of the US Federal Reserve) the “underpricing of risk worldwide”.’

On the face of it, Fama’s theory was responsible, nearly 40 years on, for untold economic and financial damage. The implications of this failure were profound. Instead of assuming the markets were always right, it would be safer to assume they were usually wrong. This is turn would open the floodgates to opponents of markets in other areas. The ‘market solution’, whether it be to providing a better deal for consumers, delivering public services in a more efficient way, or any number of other areas in which markets could be extended, could now be called into serious question. It had failed in the financial markets and was probably failing everywhere else. Or probably not. The efficient market hypothesis suffered from excessive interpretation by some of those who seized upon it but its most important element looks to have survived intact. This is that the price of a stock or security on a given day is the best distillation of all the available information relevant to it. That does not exclude what critics of the hypothesis describe as ‘momentum’, or ‘herd’ effects. The knowledge that other investors are buying the stock or security and intend to buy more is part of the available information that helps set the price. The hypothesis does not say anything about what the price will be tomorrow, or even in a few minutes’ time. The information affecting the price can change quickly and drastically. The most important implication of the efficient market hypothesis, moreover, was that professionals could not legitimately claim to consistently beat the markets.

There is no such thing as a free lunch. Long-Term Capital Management (LTCM) came unstuck in 1998, as described in Chapter Two, for believing that it could profitably trade market inefficiencies on the assumption that there would always be a return to equilibrium. Those claiming consistently above-normal returns, whether they were fraudsters such as Bernie Madoff or investment banks claiming to have uncovered news ways of generating high-yielding returns in a low-yield world. The efficient market hypothesis should have told regulators there was something suspicious about this. If they were hung up on an extreme, unrealistic and wrong version of the hypothesis – the markets are always right, both now and in what they imply for the future – more fool them. If Wall Street’s ricket scientists fell into a similar trap, then they were a lot less intelligent than they thought they were. The efficient market hypothesis, interpreted correctly, was unfairly castigated.

Thursday, October 03, 2013
Purchasing managers' surveys suggest strong Q3 growth
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

All three purchasing managers' surveys followed a similar pattern in September: down slightly on August's very high levels but still very strong. The latest, for services, had an index reading of 60.3, and completed the strongest quarter since Q2 1997.

The construction PMI, 58.9 after 59.1 in August, included the strongest rise in housebuilding since November 2003. Manufacturing, 56.7 after 57.1, grew at its best since early 2011, Overall, the surveys point to quarterly GDP growth of more than 1% for Q3, though it remains to be seen whether that is endorsed by the Office for National Statistics.

According to Chris Williamson, Chief Economist at survey compilers Markit:
“Businesses in the vast service sector reported an ongoing growth spurt in September, expanding at a rate just shy of August‟s recent high. The buoyant data follow similar upbeat surveys of the manufacturing and construction sectors, and collectively the surveys suggest the economy will have expanded by as much as 1.2% in the third quarter; its fastest growth rate since the pre-crisis days of 2007.

“Growth is being led by financial services (linked in part to increased housing market activity) and the business sector. Consumer-facing services continue to struggle, reflecting the ongoing squeeze on incomes due to weak pay growth and high inflation.

“There are encouraging signs that the strong pace of expansion will persist in the coming months: September saw one of the largest inflows of new business ever seen by the services survey, business confidence about the year ahead picked up again and other surveys have shown the mood among households to have also improved.

“Not surprisingly, employers are taking on more staff to meet growing demand, which should help bring unemployment down." The surveys can be accessed here.

Saturday, September 28, 2013
Calculating the impact of austerity
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

Many people have been taken with a new paper, The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy, by Òscar Jordà, of the Federal Reserve Bank of San Francisco and University of California, Davis, and Alan M. Taylor, University of California, Davis, the NBER, and the CEPR.

At a time when the debate in Britain is starting to move on, the paper has been seized on in support of claim that the coalition government's austerity programme has been responsible for most of what was a disappointing recovery until this year. The paper, available here, is worth reading.

It compares the economy's performance with that predicted in June 2010 - ahead of George Osborne's first budget (its pre-budget report) by the Office for Budget Responsibility (OBR). The difference amounts to 5.2% of GDP and it estimates that 3 percentage points of that, 3% of GDP, was due to what it describes as the coalition's austerity programme.

There are one or two things wrong in the report's narrative, presumably because it was written before recent data became available. The double-dip it refers to has been revised away, and it uses an earlier forecast for 2013 by the OBR, 0.6% growth, which is likely to be exceeded significantly.

There are, however, two more fundamental problems. The first is that the paper overstates the amount of fiscal tightening that has occurred in the UK. The authors may not have been aware of the distortion to the figures for the public finances in 2012-13, as a result of the Royal Mail pension transfer and Bank of England asset purchase facility transfers. This greatly exaggerates the extent of fiscal tightening in 2012-13, and thus the overall tightening.

The second problem is that the authors use the June 2010 pre-budget report forecast incorporating Labour's planned fiscal tightening. This had growth predictions of 1.3% for 2010, 2.6% 2011, 2.8% 2012 and 2.8% for 2013.

The June 2010 post-budget forecast, incorporating both Labour's planned tightening and that of the coalition was for 1.2% growth in 2010, 2.3% 2011, 2.8% 2012 and 2.9% in 2013.

The key point is that both forecasts, while very over-optimistic, incorporated a big fiscal tightening, and the pre-budget forecast incorporated most of it. To say that the difference between forecasts and outcome was due to the fiscal tightening is to double-count. Yes the OBR has proved itself to be a bad forecaster but to use that as a test of the impact of the fiscal tightening that it did not allow for is a huge stretch. In fact it is a mistake.

Britain's slow growth has been due to a variety of factors, including the fiscal tightening, but also the squeeze on real wages, the impact on trade and confidence of the eurozone crisis, and persistently weak (often non-existent) credit growth. That remains the position.

Thursday, September 26, 2013
A mixed bag of numbers
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

There was something for everybody in today's revised GDP figures and associated releases. Optimists would point to the fact that 0.7% growth in the second quarter was confirmed and Q1 was revised up from 0.3% to 0.4%. Pessimists would point to modest downward revisions for 2012, and the fact that the numbers leave GDP 3.3% below pre-crisis levels. The GDP figures are here. The savings ratio rose from 4.4% to 5.9% in the second quarter, on the back of a bonus-related jump in incomes.

The most disappointing aspect of today's releases was the downward revision to business investment, which is now estimate to have dropped by 2.7% in the second quarter, for a fall of 8.5% on a year earlier. Disappointing and, in the light of other evidence, a bit puzzling. More here.

Optimists will also take comfort from the fact that the current account deficit narrowed to £13 billion in the second quarter. But this was only after a huge £21.7 billion deficit in the first. Details here.

Tuesday, September 24, 2013
Miles guides on guidance
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

When it comes to a very clear exposition of the case for forward guidance on interest rates, the monetary policy committee's David Miles probably does better than Mark Carney. Why doesn't stronger growth weaken the case for keeping rates low? Miles answer is twofold. Growth could falter, though he doesn't think it will, but even if if continues strong, there is a huge amount of spare capacity.

This is the introduction to his speech in Newcastle, setting out the case: "For the first time in some years the news on the outlook for economic activity in the UK over the past month or so has been overwhelmingly positive. Business surveys – of both current and future activity – look stronger and consistent with growth at least as high as what we used to think of as normal. Consumer confidence has moved up sharply. Hardly any indicator has failed to improve.

"This is all encouraging and very welcome. It is likely that the rate of the growth of the economy right now is at – and quite possibly above – the average rate in the 50 years up to the onset of the financial crisis that started in 2007. But this comes after a period of several years of virtually no growth; and those recent low growth years came after a disastrous period in 2009 when output plummeted.

"So it would be spectacularly misguided to think that some signs of more normal growth mean that the economy is back to normal; and it would be equally misguided to think that if growth were to be near trend monetary policy should be quickly returned to a more normal setting. There are two reasons for that – first, the recent encouraging signs of growth might not prove to be durable (though I think they will); second – and more significant – the economy has been operating far short of its potential and the amount of slack is almost certainly large enough to mean that a sustained period of above average growth is needed to remove it.

"I believe that the main reason why it is now useful to offer guidance on the future stance of UK monetary policy is to reduce the risk that people believe that monetary policy would be quickly tightened once output began to rise at more normal rates. The nature of the guidance is simple; the message from the MPC is this: So long as inflation pressures don't start heading in the wrong direction, we will not tighten monetary policy until a recovery is strong enough and sustained enough that it has made a meaningful dent in unemployment so that it at least falls to 7 per cent."

The speech is here.

Friday, September 20, 2013
Better borrowing figures
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Public sector net borrowing in August was £13.2 billion, still very high, but down on the £14.4 billion figure for August 2012. Cumulative figures for the April-August period also suggest borrowing is on the way down: £46.8 billion versus £50.5 billion.

The idea that borrowing was stuck at around £120 billion a year is also challenged by the new figures: the 2012-13 deficit is now put at £115.7 billion, down £2.8 billion on 2011-12.

The figures suggest the public finances are benefiting from stronger activity. In April-August taxes on production (including VAT) were up 3.8% on a year earlier, while taxes on income and wealth were up by 3.3%. Over the same period government current expenditure was up by 2.6%. More here.

Wednesday, September 18, 2013
Growth puts the lid on QE
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

There were several messages from today's Bank of England minutes, with the monetary policy committee voting unanimously for no change in policy. The first was that it will take a slowing of the economy for more quantitative easing (QE) to come back on the agenda. At a time when the Federal Reserve is on the brink of tapering its QE purchases, we may be seeing the beginning of the end of this policy.

The second message is that we should not take too much notice of the monthly single-month labour market statistics. As the minutes say: "Members did not place a great deal of weight on them: the single-month data did not, as yet, meet the statistical standards that the ONS required to qualify as a ‘National Statistic’; they were volatile, being both based on a smaller sample than the three-month headline unemployment figures and scaled up from the survey sample in a more rudimentary way; and they were subject to cohort effects."

The third message is that the recovery is gathering strength, and this is supported by reports from the Bank of England agents. But in both cases, the Bank is keeping its feet on the ground. The minutes are here, and the agents' report here.

Tuesday, September 17, 2013
Inflation slips a little
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The one thing Mark Carney doesn't need is a renewed surge in inflation, so today's news that the rate for consumer price inflation slipped to 2.7% in August from 2.8% in July will have come as a relief. The two other measures of inflation emphasised by the Office for National Statistics, CPIH and RPIJ, were unchanged at 2.5% and 2.6% respectively.

Retail price inflation, however, which many regard as the most representative measure, rose from 3.1% to 3.3%. The ONS's broad verdict is that inflation has continued its broadly stable pattern since early 2012.

There may be better news to come. The ONS also reports that factory gate inflation slipped from 2.1% in July to 1.6% in August. In September and October last year the consumer prices index rose by nearly 1% (combined), so there is the prospect of a fall in the rate as we move into the autumn. More here.

Wednesday, September 11, 2013
Recovery lifts the jobs market
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

These are the highlights from today's labour market statistics:

- The employment rate for those aged from 16 to 64 was 71.6%, up 0.2 percentage points from February to April 2013 and up 0.4 from a year earlier. There were 29.84 million people in employment aged 16 and over, up 80,000 from February to April 2013 and up 275,000 from a year earlier.
- The unemployment rate was 7.7% of the economically active population, down 0.1 percentage points from February to April 2013 and down 0.4 percentage points from a year earlier. There were 2.49 million unemployed people aged 16 and over, down 24,000 from February to April 2013 and down 105,000 from a year earlier.
- The inactivity rate for those aged from 16 to 64 was 22.3%, down 0.1 percentage points from February to April 2013 and down 0.2 percentage points from a year earlier. There were 8.96 million economically inactive people aged from 16 to 64, down 33,000 from February to April 2013 and down 52,000 from a year earlier.

And if there was a downside, it was that total pay rose by only 1.1% compared with May to July 2012. Regular pay rose by 1.0% over the same period.

But these figures were very good, one measure of which is the claimant count: 1.4 million in August, down 32,600 from July and down 168,100 from a year earlier. The claimant rate has dropped to 4.2%.

Dr John Philpott of The Jobs Economist sums up the overall strength of these figuree well: "This is by far the strongest overall set of official UK labour market figures this year and indicates that the summer surge in economic growth was accompanied by a jobs surge. Not only did the number of people in work increase by 80,000 in the quarter, according to the household Labour Force Survey, but the ONS’s alternative quarterly survey of employers shows that businesses added 168,000 jobs between March and June. Moreover, all the net job growth was in full-time employment for employees on permanent contracts – the numbers of people working part-time, on temporary contracts or self-employed all fell."

The question will arise about when the unemployment rate will drop to 7%, the threshold at which the Bank of England's monetary policy committee will contemplate higher interest rates. These figures show that the rate has dropped from 8.1% to 7.7% over the past year, on the back of a 276,000 rise in employment. The figures are here.

Friday, September 06, 2013
Trade disappoints
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Britain's trade lurched sharply into wider deficit in July, in a way that suggests some erratic factors came into play. The overall trade deficit widened from £1.3 billion in June to £3.1 billion in July, including a £9.9 billion deficit in goods.

According to the ONS: "In July 2013, exports of goods to countries outside of the European Union (EU) decreased by £2.2 billion to £11.8 billion. Exports to countries within the EU increased by £0.2 billion over the same period to £13.0 billion."

This suggests the slowdown in emerging economies has hit exports just as exports to the EU are beginning to pick up. A drop in aircraft exports, often erratic, contributed to a 7.6% drop in exports on the month. More here.

Industrial production was also a touch disappointing, with overall production flat in July and manufacturing output up by a modest 0.2%. However, both showed 0.9% rises in the latest three months compared with the previous three months. Industrial production was pegged back in July by weak North Sea oil output and a weather-related 2.2% drop in electricity and gas output. More here.

Wednesday, September 04, 2013
A hot August economy
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

First manufacturing, then construction, then the dominant services sector. All three of the major sectors of the economy were very strong in August, with the trio completed by a rise in the services sector purchasing managers' index from 60.2 to 60.5. It is unlikely that these PMIs will translate directly into the third quarter gross domestic product figure. If they do, it will be a scorcher that will put the 0.7% second quarter rise in the shade.

This is Markit, which prepares the PMIs, on the strength of this week's data:

"August’s survey of UK service providers signalled continued strong growth of activity and new business. Activity rose at the sharpest pace since December 2006, while growth in new work was the best seen since May 1997."

The all-sector PMI, covering manufacturing, construction and services, was the strongest since the series began in 1998. Whatever is causing it, the economy has fired into life. Impressive indeed.

Thursday, August 29, 2013
Reflections on Carney - trying to end the uncertainty
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Mark Carney's first big speech, yesterday in Nottingham, has had a lot of coverage. Some of it is about his battle to convince the markets of his version of forward guidance. Some of it rests on the question of whether the 7% unemployment threshold will be reached sooner than 2016, to which his answer was (a) that's unlikely (b) even if it is, 7% is a threshold, not a trigger.

There's also much comment on whether easing the liquidity requirements of banks and building societies, once their capital ratios have reached 7%, will result in much extra lending in the economy.

Those are debates worth having. For me, however, Carney's message was a very simple one. Uncertainty has been a factor holding back recovery, and anything the Bank of England can do to reduce that uncertainty, notably on interest rates, will help recovery along.

So, he said: "Over the past five years, a pervasive sense of uncertainty has held the economy back. The British people have been through the virtual collapse of the financial system, the worst recession in living memory, large job losses, falls in real wages and a, at times harrowing, crisis in the euro area, our most important trading partner.

"Households have been worried about their savings, jobs, earning power and their homes; companies have been concerned about the availability of credit, the health of their suppliers, the viability of their markets and the prospects for their investments. Uncertainty has reduced confidence, dampened spending, and slowed growth ...

"The Bank of England’s task now is to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth. We aim to get there in part by reducing the uncertainty that has held back growth. And we are using our full suite of policy tools to help rebuild confidence so that we all can move forward in a sustainable manner."

It is a laudable aim, despite all the quibbles. The question remains whether he can make it work. The full speech is here.

Friday, August 23, 2013
Growth stronger, better balanced
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Gross domestic product rose by 0.7% in the second quarter, up from an initial estimate of 0.6%, and the figures suggest that growth was well-spread, with an increase in all the main expenditure components of GDP, including exports and investment. GDP was up 1.5% on a year earlier.

Contributions to the 0.7 point rise in the expenditure measure of GDP included a 0.2 point contribution from consumer spending (financed out of a strong bonus-related rise in income), 0.2 from investment, 0.3 from net trade and 0.2 from government. Other components subtracted marginally from growth.

By output category, services rose by 0.6% on the quarter, manufacturing by 0.7% and construction by 1.4%. More details on this encouragingly balanced growth here.

There was also a rise in investment, including business investment. According to the ONS: "In volume terms gross fixed capital formation increased by 1.7% when compared with the previous quarter to £52.4 billion and business investment increased by 0.9% to £29.5 billion." There is still a long way to go for any kind of investment-led growth but it is a start.

Wednesday, August 21, 2013
Public finances - marginally disappointing
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

A year ago, a rare July budget deficit strong (tax receipts normally lead to a surplus) was taken as firm evidence of George Osborne's strategy going way off track. In the event, that deficit was revised away and adjusted public borrowing in 2012-13 came in at £116.5 billion, slightly (£2 billion) lower that 2011-12.

The chancellor will be hoping history repeats itself. July saw a £0.5 billion deficit, compared with a surplus now estimated at £0.8 billion for July 2012. Borrowing for April-July is estimated at £36.8 billion, after all the adjustments, compared with £35.2 billion for the corresponding period a year earlier.

The Treasury emphasizes special factors in the data for the early months of the fiscal year, and that tax receipts are rising well. It will be hoping stronger growth leads to a better second half.

Wednesday, August 14, 2013
Carney does not get it all his own way
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The monetary policy committee was almost unanimous on forward guidance at its August meeting, but not quite. Martin Weale clearly did not think one of the "knockouts" on inflation was tough enough, and wanted it to apply over a shorter time period. In other words, it should take more than an 18-24 month forecast of inflation above 2.5% to make the Bank consider a rate hike. If inflation was running above target over a shorter period - or was expected to do so - the knockout should apply. He did, however, agree to make his future decisions on the framework agreed by the majority.

Also at the August meeting it appears that the two members most enthusiastic about quantitative easing - Paul Fisher and David Miles - look to renew their campaign. both thought the case for more QE remained "compelling" though were happy to give forward guidance a bit of extra time to work. More here.

Also today, the unemployemnt figures were better than expected, given the pattern of the monthly data. The unemployment rate remained at 7.8% for April-June, against fears of a rise. In the latest three months there was a 4,000 fall in unemployment and a 69,000 rise in employment. The claimant count fell by 29,200 to 1.44 million in July, suggesting unemployment overall is on a downward trend. More here.

Tuesday, August 13, 2013
Inflation falls - better news ahead?
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Consumer price inflation edged down from 2.9% in June to 2.8% in July. The fear that one of Mark Carney's first tasks as govenor would be to write a letter explaining why inflation was more than 3% is subsiding. Figures for RPI inflation also showed a fall, from 3.3% to 3.1%.

This was quite a tough month to get inflation down. In July last year the consumer prices index rose by just 0.1% on the month. This time there was no change, hence the fall in inflation. There is a good chance of better falls in the months ahead: comparative monthly CPI rises last year were 0.5% August, 0.4% September and 0.5% October. More here.

Friday, August 09, 2013
A glimmer of hope on trade
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Much better news on trade, with the monthly goods and services deficit falling to £1.5 billion in June from £2.6 billion in May on the back of a stronger performance in exports. Exports of goods in the seond quarter reached the highest level on record, Export volumes rose by 3.7% in the second quarter, against ba 2.2% increase in import volumes.

We have had dips in the monthly deficit before but there is evidence in these figures of a trend decline in the trade deficit. In the first half of 2012, the overall deficit was £18.4 billion. In the first half of 2013 it dropped to £12.1 billion. This is welcome. More here.

Wednesday, August 07, 2013
To boldly go forward
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The Bank of England's unveiling of forward guidance, under its new governor Mark Carney, was not as exciting an event as some had predicted - the man himself was understated and softly-spoken - but it was far from being a non-event either.

Most will by now know the basics - a 7% unemployment threshold, which when reached will encourage the monetary policy committee to start thinking about whether policy should be tightened (though won't necessarily result in them doing so), with three "knockouts" by which this threshold may be overrode.

So if the MPC is predicting inflation above 2.5% 18-24 months ahead, it might tighten policy earlier, though not if factors outside its control are pushing up inflation. Or, if the Bank determines that inflation expectations are no longer well-anchored. Or, if the Bank's new financial policy committee deems that continued low rates are threatening stability, perhaps by encouraging excessive borrowing.

Any or all of these three could result in policy being tightened before the unemployment rate, currently 7.8%, gets down to 7%. But if all goes well, the implication of the threshold, and the Bank's new unemployment forecast, is that Bank rate will remain at 0.5% until 2016.

Does this make any difference? Yes, according to the Bank's forecast. Predictions for both growth and inflation are higher with guidance than without it, because rate rises the markets are pricing in are removed from the equation. Is forward guidance a good idea? We will see. But anybody who thought it would be straightforward would do well to look at the Bank's explanatory document, here, and the new inflation report, here.

Thursday, July 25, 2013
GDP up 0.6%, and growth across the board
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The second quarter rise of 0.6% in gross domestic product was bang in line with expectations, including those of the Bank of England. There was a rise in output in the quarter in all the main sectors of the economy, with services up 0.6%, production also 0.6% (and manufacturing 0.4%), construction a healthy 0.9% and even agriculture - despite the poor spring - up 1.1%.

This is, of course, a day to roll out all the cliches about there being a long way to go - GDP is still 3.3% below pre-crisis levels pending revisions - and the economy not being out of the woods yet. But given where expectations were just a few months ago and the optimistic noises coming out of the surveys, these figures should be welcomed. More here.

Wednesday, July 24, 2013
Manufacturing - turning the corner?
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

The latest CBI quarterly industrial trends survey is encouraging, pointing to a recovery in all measures of activity in the latest three months, a rise in confidence and the strongest employment growth for a year. The new orders balance +5%, was the highest since April 2012, and the balance for export new orders was the best since April 2011. Coming at a time of improved optimism for the eurozone economy - its purchasing managers' index for July rose from 48.7 to 50.4 signalling a return to growth - the survey suggests better times are ahead for manufacturers. More here.

Friday, July 19, 2013
The deficit carries on falling
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

A month ago everybody, including the Labour party, got terribly excited about the fact that public sector net borrowing in 2012-13 was fractionally higher than in 2011-12. This was despite the fact that the latest year's numbers almost always get revised lower.

So it has proved again, and sooner than you might have expected. Borrowing for 2012-13 is now put at £116.5 billion, down from £118.5 billion in 2011-12. The deficit isn't tumbling, but it is falling. Expect that 2012-13 figure to be revised down again.

The picture for June is slightly more complicated. Stripping out distortions, June's borrowing looks to have been £0.5 billion higher than in June 2012. For April-June, public sector net borrowing excluding the distortions was £35.9 billion, unchanged on a year earlier. This was despite a sharp downward revision of receipts from the Swiss tax deal.

There are signs in the data of a stronger rise in tax receipts, particularly income tax and National Insurance. This, if maintained, could bode well for borrowing later in the year. More here.

Wednesday, July 17, 2013
Labour market improves and MPC unanimous
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Another generally good set of labour market statistics, with employment in the March-May period up by 16,000 to 29.71 million compared with December-February, and 336,000 up on a year earlier.

The unemployment rate fell by 0.2 percentage points to 7.8%, with the level, 2.51 million, down 57,000 on December-February and 72,000 on a year earlier. We should not, however, get carried away. Unemployment is stuck at around 2.5 million (and may rise next time when a low March figure drops out of the comparison), though the claimant count dropped by 21,200 in June to 1.48 million.

The worries are about long-term unemployment, which is rising, and depressed earnings growth. Total pay has been boosted by rising bonuses but is still only up by 1.7% on a year earlier, and thus below inflation (2.9%). More here.

The Bank of England's monetary policy committee, in its first meeting under Mark Carney, voted unanimously to keep policy on hold, the new governor thus avoiding being outvoted at his first meeting. This may not mean the end of quantitative easing, though it probably should. August's big announcements on forward guidance are keenly awaited. The minutes are here.

Tuesday, July 16, 2013
Inflation - bad and good news
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

It was bad news that consumer price inflation rose from 2.7% in May to 2.9% in June, though it was good news that it remained below the 3.1% level that would have triggered a letter of explanation from Mark Carney, the new Bank of England governor.

All measures of inflation rose in June, mainly reflecting so-called base effects. So, while prices overall fell by 0.2% during the month, they fell by more (0.4%) in June 2012. It will be touch and go whether inflation falls much in July - the comparator in July last year was a rise of 0.1% - but there are good reasons to expect inflation to come down in the second half of the year.

You have a big choice of inflation measures these days. CPIH, including owner-occupiers' housing costs, showed inflation up from 2.5% to 2.7%. RPI inflation rose from 3.1% to 3.3%, while the new RPIJ measure increased from 2.5% to 2.7%. All these inflation measures are available here.

There was more inflation news today. Outout price inflation in the 12 months to June was 2%, up on the 1.4% recorded in May, while input prices rose by 4.2%. There is still some inflation in the pipeline. Meanwhile, the Office for National Statistics' house price measure showed a 2.9% rise in the latest 12 months, the same as consumer price inflation.

Tuesday, July 09, 2013
A dampener from the ONS
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

After strong survey data from the purchasing managers and the British Chambers of Commerce, official figures from the Office for National Statistics provided a dampener, not for the first time. Overall industrial production was flat between April and May, while manufacturing output recorded a surprise fall of 0.8%.

The figures remain consistent with modest rises in output in both overall industrial production and manufacturing output in the second quarter, of 0.3% and 0.1% respectively, but have taken the edge off prospects for a big second quarter gross domestic product increase. More on the figures here.

Alongside the industrial production figures, Britain's trade deficit widened to £2.4 billion in May, from £2.1 billion in April. While both exports and imports have picked up since early 2013, the deficit looks becalmed. More here.

Thursday, July 04, 2013
Bank holds - and guides
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

The new era at the Bank of England has begun without a change in Bank rate or in the amount of quantitative easing - £375 billion - but a change of tone reflects the arrival of the new governor, Mark Carney.

The Bank is concerned about the rise in market interest rates, which it says is not warranted by anything it has in mind on rates, so it issued a statement which may be seen as its first stab at forward guidance.

This is the statement:

"Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August."

Tuesday, July 02, 2013
Better news on growth
Posted by David Smith at 08:30 AM
Category: Thoughts and responses

After Monday's rise in the manufacturing purchasing managers index from 51.5 to 52.5, there is more good news in the Britihs Chambers of Commerce quarterly survey, covering both manufacturing and services.

It showed that in the service sector domestic sales and orders in the second quarter were growing at the fastest pace since the fourth quarter of 2007. Export sales, impressively, grew at the fastest rate since the survey began in 1989.

Among manufacturers, domestic sales growth was the strongest in two years and growth in export orders the best in a year.

"The strength of the export balances, particularly in the service sector, confirms the existence of huge untapped potential that must be unleashed," said David Kern, economic adviser to the BCC.

The BCC suggests its survey is consisent with growth of 0.6% in the second quarter. If this is correct, the economy will have achieved 0.9% growth in two quarters - achieving what many forecasters were predicting for the full year.

Also encouraging - the purchasing managers index for UK construction rose from 50.8 in May to 51 in June, boosted by housebuilding.

Friday, June 28, 2013
The Man who Was King
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

Sir Mervyn King has his last day at the Bank of England today, so it is an ideal time to launch The Man Who Was King, a cleverly-titled (I thought) e-book, pulled together by Iain Dey of The Sunday Times and with an introduction by me. It includes many of our pieces on the outgoing governor and is available here.

Thursday, June 27, 2013
GDP revised extensively
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The headline news from today's gross domestic product revisions is that the "double-dip" of late 2011 and early 2012 has been revised away. GDP is now thought to have fallen by a tiny 0.1% in Q4 2011 and to have been flat in the first quarter of 2012.

So no double-dip, and some of the other negative quarters since 2009 look likely to be revised away. The snow-affected fourth quarter of 2010, for example, is now down by only 0.2%.

But hopes that the Office for National Statistics would solve some of the puzzles about the economy have been dashed. It now thinks the 2008-9 recession was deeper than it first thought - 7.2% versus 6.4% (that 7.2% is actually a return to an earlier estimate) and that the level of GDP is now 3.9% below pre-crisis levels, rather than 2.6%.

In truth, the big revisions for 2008-13 are probably a few years away, by which time we may get a picture that fits more closely with employment and other economic magnitudes. For now, however, we will have to carry on puzzling. More here.

Wednesday, June 26, 2013
The spending round
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The Treasury insists it is a one-year spending round but many websites are calling it a review. Round or review, the least surprising part was George Osborne's announcement of £11.5 billion of additional cuts for 2015-16.

Of more significance were three other announcements. The first, a cap on overall welfare spending, excluding the basic state pension, will take effect from April 2015 and be policed by the Office for Budget Responsibility. It is intended to prevent welfare spending - part of annually "managed" expenditure - growing in an unplanned way. Time will tell whether it is achievable.

The second, the planned integration of health and long-term care, is seen by ministers as a logical response to the ageing population and the fact that the two parts of the service do not often work well together, so old people often block NHS beds, and some in care should really be in hospital.

Third, Osborne announced plans to end automatic pay increases for certain public sector workers. These increases have contributed to the fact that, despite a freeze on headline public sector pay increases, overall rises in public sector pay have outstripped those in the private sector in recent years.

Three potentially important reforms, though we won't know their impact for some time. The main spending round document is here: https://www.gov.uk/government/publications/spending-round-2013-documents

Friday, June 21, 2013
Better public borrowing figures
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The numbers for public borrowing are looking better, though there is a long way to go. Borrowing for 2012-13 is now put at £118.8 billion, £2.1 billion lower than predicted by the Office for Budget Responsibility at the time of the March budget. Borrowing for 2011-12 has been revised down even more, by £2.5 billion to £118.5 billion, and is now quite close to the original OBR forecast of £116 billion made in June 2010.

The big picture is, of course, that borrowing has stalled at a slightly lower level than before, though that could change in time. 2012-13 borrowing may, on previous patterns, be revised down. The official figure for 2011-12 borrowing has been as high as £128 billion (in the June release last year).

The news for May is difficult to interpret because of special factors, notably a receipt by the Treasury of a transfer from the Bank of englanbd's asset purchase facility, and the proceeds of a tax deal with the Swiss authorities. Allowing for these factors, borrowing was similar to a year ago, though April and May taken together are around £3 billion down. More here.

Thursday, June 20, 2013
Retail sales leap in May
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Retail sales had a very good month in May, breaking a sequence of disappointing numbers. Volumes and values both rose by 2.1% compared with April, largely on the back of a jump in food sales, which had been suspiciously weak. Sales volumes overall reached a record level.

So in volume terms food sales jumped by 3.5% in May compared with April. The overall volume of sales in the latest three months was up by 0.7% on the previous three, suggesting consumer spending will make another contribution to growth in the second quarter, in line with recent quarters. More here.

Tuesday, June 18, 2013
Inflation disappoints again
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The drop in inflation to 2.4% in April was, it seems, a blip. The rate rose to 2.7% in May, in line with its remarkably stable rate between October and March. This is disappointing, given that it is the last inflation number to be published in Sir Mervyn King's tenure as governor. The pattern of above-target inflation of the past few years persists and it will be some time before the 2% target comes back into sight.

I have noticed petrol and diesel prices creeping back up and so has the Office for National Statistics. This, together with higher air fares and clothing prices pushed up inflation, which rose on all measures.

CPIH (the consumer prices index including housing costs) rose from 2.2% to 2.5%. RPI inflation rose from 2.9% to 3.1%, while the new RPIJ measure - J is for Jevons - went up from 2.3% to 2.5%.

The key question for June is whether CPI inflation can remain below the "letter-writing" range (i.e. below 3.1%, sparing Mark Carney the embarrassment of having to explain an overshoot. More details on today's numbers here.

Britain does not have much of an inflation problem, if the output price data are anything to go by. Factory gate prices rose by just 1.2% in the 12 months to May. But consumer price inflation remains uncomfortably high.

Saturday, June 15, 2013
The myth of peak oil
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

A few years ago, I was regularly ambushed by peak oil enthusiasts, who inisted that global oil production was either at or beyond its peak. That peak, it was said, either occurred in 2005 or in 2008-9. My response was that, while it might be possible to think of a peak in global oil production in 20-30 years' time, it was not imminent. Not only that but high oil prices would encourage more exploration, and make marginal oil provinces viable.

That process is still continuing but the myth of the oil peak is proved by the data. The latest BP Statistical Review of World Energy shows that global oil production rose 2.2% to 86.15 million barrels a day in 2012, from 84.2 million barrels a day in 2011 and 83.27 million in 2010. Each of those represented a new high. Rising shale oil production in America was part of the story but non-OECD output also hit a new record in 2012. The relevant section of the Statistical Review is here. Peak oil in the 2000s was a much talked about myth.

Wednesday, June 12, 2013
Labour market improves modestly - interesting pay developments
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Two months ago, after we saw a big jump in unemployment in the numbers published in April, I suggested that it should stabilised or fall in a couple of months' time, when a big jump over the winter dropped out of the figures. So it has done.

Unemployment fell by 5,000 to 2.51m, 7.8% of the workforce, in the February-April period, while employment rose by 24,000 to 29.76 million, 71.5% of the workforce. So the job market has stabilised/improved, though the figures could have been better. The claimant count dropped 8,600 to 1.51 million in May.

Something interesting may be happening on pay. The February-April picture remained subdued, up 1.3% on a year earlier for total pay, 0.9% for regular pay. But for April alone total pay was up 3.3% on a year earlier, or 4.2% in the private sector. That may suggest some significant shifting of pay/bonus payments into the new tax year to avoid the 50% tax rate, and could help the public finances. More here.

Tuesday, June 11, 2013
Industrial production edges higher
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The April industrial production figures do not look up to much but are probably better than they seem. Overall industrial production edged up by 0.1% between March and April, while manufacturing slipped by 0.2%. However the previous two months had been strong, particularly for manufacturing, so these figures show a rise of 0.8% in industrial production in the latest three months compared with the previous three, with manufacturing 0.5% higher.

In terms of the second quarter GDP arithmetic, April industrial production was 0.9% higher than its Q1 average, while manufacturing was 0.7% up. Not a bad start. More details here.

Wednesday, June 05, 2013
Services complete trio of good PMIs
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Good news from Britain's service sector completed a trio of good purchasing managers' surveys, following construction and manufacturing PMIs that were both above the key 50 expansion-constraction level. The service sector PMI jumped from 52.9 in April to 54.9 in May, with new business rising at its fastest pace for three years. The survey also suggested a welcome easing of inflationary pressures.

According to Markit, which prepares the data: "UK service sector activity rose at an accelerated rate during May as new business increased at the sharpest pace for over three years. Amid evidence of marginal capacity pressures and with positive expectations for the coming year, companies added to their payroll numbers for the fifth consecutive month.

"Meanwhile, latest price data showed that cost inflation maintained a downward trend, hitting a one-year low. Competitive pressures led to a slight fall in average output charges.

"The headline seasonally adjusted Business Activity Index remained firmly above the 50.0 no-change mark during May to signal a fifth consecutive month of service sector growth. Moreover, reaching 54.9, up from April’s 52.9, the index signalled a rate of growth that was the sharpest since March 2012."

The composite PMI rose to its strongest since March 2012, according to Markit, signalling an acceleration in growth in the second quarter from the first quarter's 0.3% pace. More details here.

Thursday, May 23, 2013
GDP confirmed at 0.3% - detail disappoints
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Gross domestic product rose by 0.3% in the first quarter, in line with the preliminary estimate, but the economy is still in need of some serious rebalancing. Both net exports and investment subtracted from GDP by 0.1 points in the first quarter.

Investment was particularly disappointing. The 0.8% quarterly fall (including a 0.4% drop in business investment) was the largest for eight quarters, though the business investment numbers have been subject to considerable revision in the past.

There was a small rise in consumer spending, up 0.1%. This, surprisingly in the light of the continued drop in real wages, was the sixth quarterly increase in consumer spending in a row. Today's figures did not include any revisions to earlier quarters. If they occur, it will be on June 27. Details here.

Wednesday, May 22, 2013
Something for everybody in the IMF
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

If diplomacy is the art of not causing offence, the IMF's annual Article IV assessment of the UK economy is a master-class in diplomacy. It allows the government to say it is already doing the things the IMF recommends and the opposition to attack ministers for not doing enough of them.

The IMF report, coming on the day of a sharp weather-related 1.3% drop in retail sales in April, is an antidote to some of the recent growth optimism. It notes that the recovery remains weak by past standards, and that per capita GDP is still 6% below pre-crisis levels.

Most of its recommendations are familiar - bring forward infrastructure spending, do more to get credit flowing, and so on. Buit as it concedes:

"Policy remedies to restore growth and rebalance the economy are not straightforward. Monetary policy is at the zero bound; bank balance sheets are impaired; and public debt is rising, but the consolidation to address this is also a drag on growth. This implies the need for a coordinated multi-pronged strategy to guide the economy to greater and more balanced growth. Such a package would bring growth benefits not merely to the UK, but would also have positive spillovers to the rest of the world, especially those who trade most with the UK."

So press lots of small buttons, but don't expect miracles. There is no magic bullet. The report is here.

The other significant announcement today was a downward revision of 2012-13's public sector net borrowing to £119.5 billion, implying a bigger margin of reduction over the 2011-12 figure of £120.9 billion.

Tuesday, May 21, 2013
Inflation falls across the board
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Inflation has been remarkably steady at 2.7% or 2.8% in recent months so the drop in April to 2.4% was a surprise, and a very welcome one. Lower petrol prices and air fares contributed most to the fall, which reduced inflation to its lowest since September.

As Sir Mervyn King prepares to hang up his governor's boots, inflation is now agonisingly close to target. It may head up a bit in the short-term, but not by enough to force Mark Carney, his successor, to have to write a public letter of explanation to the chancellor.

Other measures of consumer inflation also dropped. The new CPIH measure, including owner-occupiers' housing costs, had inflation down from 2.6% to 2.2%. RPI inflation fell from 3.3% to 2.9%, while RPIJ (don't ask) came down from 2.7% to 2.3%. More here.

There was also good news on so-called pipeline inflation pressures. Output prices rose by only 1.1% in the 12 months to April, down from 1.9% in March, while core output price inflation dropped from 1.3% to 0.8%. Input prices, fell by 0.1% over the 12 months to April - in March they were up 0.8%. More here.

The only price strength, interestingly, was in house prices, up 2.7% in the 12 months to March, from 1.9% in February, as detailed here.

Wednesday, May 15, 2013
King's last bow: a more upbeat forecast
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Today was unusual in two respects. The first was that it was Sir Mervyn King's last inflation report press conference, after more than 80, ahead of his retirement next month. The second was that the Bank's new forecast is slightly more upbeat than the one issued three months ago, which according to him is the first time this has happened since before the global financial crisis.

There is lots of good detail in the report. So, for example, the Bank expects a 0.5% rise in GDP in the second quarter, a steady recovery in consumer spending, a pick-up in business investment, a small increase in employment over the coming year and an increase in mortgage approvals. These and other assumptions/expectations are set out in a new feature of today's report, intended to show greater transparency, on p.42.

King said the biggest risks to the UK economy were external, particularly the eurozone, where today's Q1 GDP figures were mixed but overall on the weak side. However, the big picture, according to the report, is that: "Taking those risks into account, the [Monetary Policy] Committee’s best collective judgement is that the economy is likely to see a modest and sustained recovery over the next three years."

Inflation will come down gradually to the 2% target, but will remain above it for most of the next two years. It needs to, given that pay growth in the year to the first quarter was just 0.4%. The Bank noted that the markets do not expect a rate hike until 2016. The inflation report is here.

How do we square the Bank's cautious optimism with the latest labour market numbers, which as well as weak pay growth showed a rise in unemployment and a fall in employment? The short answer is that, while these figures were not strong, they were not particularly weak either.

Unemployment rose by 15,000 in January-March to 2.52m (a lower level than reported a month ago for December-February). The unemployment rate was 7.8%. Employment fell by 43,000 to 29.71m, though this appears to reflect particular weakness at the start of the quarter. The claimant count fell by 7,300 to 1.52m. The big picture is that the really strong rise in employment has abated, but that the job market has not gone into reverse. More here.

Friday, May 10, 2013
Trade improves
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Britain's overall trade deficit narrowed to £3.1 billion in March, from £3.4 billion in February (originally reported at £3.6 billion). The value of exports increased by 3.5% between February and March, while imports rose by 2.6%. Britain's EU trade deficit widened to £5.6 billion from £5 billion, while the non-EU deficit narrowed from £4.2 billion to £3.5 billion.

The performance of non-EU trade, discussed by me last Sunday, is particularly interesting. The volume of non-EU exports has risen by 36% since 2009, the trough of the recession, while the volume of exports to the EU is up by 5%. But there is a long way to go. The trend in the trade deficit is flat. More here.

Thursday, May 09, 2013
Bank on hold as manufacturing perks up
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

The Bank of England left monetary policy unchanged at its May meeting, as expected, Bank rate remaining at 0.5% and the size of the asset purchase programme at £375 billion. No statement was issued, though the Bank will publish its quarterly inflation report on Wednesday May 15.

Assuming Sir Mervyn King continued to vote for more quantitative easing, he appears to have been outvoted again, which may also be the case next month, his final monetary policy committee meeting as governor.

The majority on the committee looks to have been persuaded to stay its hand by two factors. Members are waiting on the success of the Funding for Lending scheme, and recent economic data has been stronger than expected, including the 0.3% rise in first quarter gross domestic product.

Industrial production figures today showed a 0.7% rise in overall industrial production in March, and a welcome 1.1% bounce in manufacturing. The 0.2% first quarter rise in industrial production was consistent with the GDP figure. More here.

Friday, May 03, 2013
Some spring in the economy's step
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

The service sector purchasing managers' index completed a trio of better than expected surveys, and suggested the economy had some momentum going into the second quarter after the 0.3% first quarter rise in gross domestic product (which was also better than expected).

The service sector PMI rose to an eight-month high of 52.9 in April, from 52.4 in March. According to Markit, which complies the data: "The steady improvement in UK service sector performance seen since the start of the year was maintained in April. Growth of business activity was solid and the sharpest for eight months, supported by the strongest rise in new work since last May. A modest increase in staffing levels was also recorded as capacity showed signs of coming under pressure."

The services PMI supports the message of the first quarter, which was that it is the sector driving the recovery. Both the construction and manufacturing PMIs also rose but remained below the 50 expansion-contraction divide. But the strength of services probably rules out an extension of quantitative easing when the Bank of England's monetary policy committee meets next week.

This is Markit's summary of the three PMIs: "The upturn is being led by the service sector, but it has been accompanied by signs of activity stabilising in manufacturing and construction in April. The weighted PMI from the three surveys rose from 51.0 in March to 52.1, its highest since last August and signalling an increase in business activity for the fourth month running. The data suggest that the return to growth enjoyed by the economy in the first quarter persisted and may have gained momentum at the start of the second quarter." The release is here.

Thursday, April 25, 2013
GDP up 0.3% - no triple-dip and a good start to 2013
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

A strong performance from the service sector - partly offset by continued weakness in construction - meant gross domestic product grew by 0.3% in the first quarter of 2013, which was better than the 0.1% consensus. The risk was always there that the Office for National Statistics would have surprised us with a really bad number.

That 0.3% rise was made up of a 0.6% increase in services, a 0.2% rise in production (helped by a bounce-back in North Sea output) and a 2.5% drop in construction. Service sector output is now above pre-crisis levels, while manufacturing and construction remain well down.

Cold weather had no overall impact on the numbers, according to the ONS, weaker retail activity in January and March being offset by higher consumption of electricity and gas as we shivered.

The 0.3% rise makes the arithmetic for 2013 growth look interesting, following recent downward revisions to forecasts. If GDP stays at its Q1 level, the economy will have grown by 0.5% (2013 over 2012). Even modest GDP rises over the remaining quarters will give higher growth. And now, the triple-dip having been avoided, the next point of interest will be if and when the ONS revises away the double-dip. It has already gone from the data on the expenditure measure of GDP. More here on today's data.

Tuesday, April 23, 2013
Borrowing scrapes lower - Treasury warns Scotland on sterling
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Nobody would describe the latest figures for the public finances as good but the fact that for 2012-13 public sector net borrowing scraped in at £120.6 billion (after many adjustments), just below 2011-12's outturn of £120.9 billion, was better than it might have been.

Even relatively recently it looked likely that borrowing in 2012-13 would be up by £10-15 billion on 2011-12. The fact that it is down shows what can be achieved when the chancellor, chief secretary and Treasury officials put their minds to achieving something, moving heaven and to earth to ensure a borrowing reduction. A similar effort directed to getting borowing down more significantly would not go amiss.

These numbers will be revised over time. The current outturn for 2011-12 has jumped about a lot. The big picture is that deficit reduction has stalled for now. The underlying public sector current budget deficit, £98.5 billion in 2012-13, was up on £92.2 billion in 2011-12.

There's evidence, however, of some stabilisation in the numbers. Total receipts and current expenditure were both up by 1.8% in 2012-13. Of course receipts, being smaller, need to rise faster than expenditure. But this is better than it was. More here.

Meanwhile the Treasury has published its latest analysis on Scottish independence, relating to currency arrangements, and George Osborne has gone up to Scotland to present it. It is interesting, and has already sparked a debate.

For Scots, the big question is whether you agree with this: "The UK is one of the most successful monetary, fiscal and political unions in history. It is a union that has brought economic benefits to all parts of the UK because taxation, spending, monetary policy and financial stability policy are co-ordinated across the whole UK. This has helped us weather the recent global economic crisis because governments that are able to borrow in their own currency, and make their own political and economic decisions, are able to borrow more cheaply. And with clear political accountability, a government can quickly respond to a financial crisis."

It sets out the options for an independent Scotland:

"An independent Scottish state would have four main currency options. It could:
• continue to use sterling with a formal agreement with the continuing UK (a sterling currency union);

• use sterling unilaterally, with no formal agreement with the continuing UK
(“sterlingisation”);

• join the euro; or

• introduce a new Scottish currency."

"Each of these options would affect transaction costs, fiscal and monetary policy and financial stability in an independent Scottish state. All options would involve the establishment of new independent monetary institutions. New frameworks for fiscal and financial stability would also be necessary."

The implicit warning is that this would be a leap in the dark for Scotland: "The current currency and monetary policy arrangements within the UK serve Scotland well. A move away from the current arrangements would require a set of decisions that would affect the wider management of the economy – not only the currency but also the setting of monetary and fiscal policy. The status quo would not be one of the options. The analysis in this paper concludes that all of the alternative currency arrangements would be likely to be less economically suitable for both Scotland and the rest of the UK." The report is here.

Wednesday, April 17, 2013
Employment holds up but unemployment jumps
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

This was a weaker set of labour market statistics, in three important respects. The growth in employment stabilised, slipping by a modest 2,000 in the latest three months. Unemployment rose, by 70,000 over the latest three months to 2.56 million. Pay growth was extremely weak, with total pay up 1% (the lowest since records began in 2001) and total pay, including bonuses, up by just 0.8%.

The jump in unemployment appears to have been due to big monthly rise in January, but will remain in the figures for a couple more months, after which unemployment could stabilise or fall.

Better news in the figures included the lowest inactivity rate for 16-64 year-olds (22.2%) since 1991 and a fifth successive monthly fall in the claimant count. It dropped by 7,000 in March to 1.53 million. But overall, weaker numbers. More here.

Meanwhile, the Bank of England's monetary policy was split again on quantitative easing, with three members (Sir Mervyn King, David Miles and Paul Fisher) again voting for an increase from £375 billion to £400 billion but the rest happy to stay put. The majority may yet be persuaded, though at present they see the best route to stronger growth through improving the working of credit markets. More here.

Tuesday, April 16, 2013
Better news on inflation
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Consumer price inflation held steady at 2.8% in March, continuing a remarkable period of stability, albeit one above the 2% target. The latest 2.8% rate was the same as in February, and for four months before that it was 2.7%. Sir Mervyn King will hope this persists, sparing him the duty of writing a letter to the chancellor before he steps down at the end of June. Such a letter would have to be written if inflation goes back above 3%.

Some analysts think this will happen, largely because of base effects - the consumer prices index was relatively flat a year ago, right through to the summer - though lower petrol prices will help this time. They helped a little in March.

The Office for National Statistics now produces an array of inflation measures. CPIH, including owner-occupiers', also held steady, but at 2.6%. RPI inflation edged up from 3.2% to 3.3%, while the new RPIJ measure (don't ask) rose from 2.6% to 2.7%. More here.

If you're looking for good news, it may be in the producer price index, published at the same time. Output price inflation in March edged down from 2.3% to 2%, with core output price inflation at just 1.3%. Input price inflation was a modest 0.4%, down from 2.1% in February. More here.

Tuesday, April 09, 2013
Industrial production bounces back
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

The February induistrial production figures, showing a rise of 1% in overall production and 0.8% in manufacturing, show that this part of the economy is not dead yet, and may not be the drag on Q1 GDP that was feared. Specifically, overall industrial production showed a rise of 0.3% in the latest three months compared with the previous three, while manufacturing was down by a modest 0.2%. The figures are consistent with a small rise in Q1 GDP. More here.

The trade figures were, however, disappointing, showing a widening of the trade deficit in goods and services from £2.5 billion in January to £3.6 billion in February, as exports fell and imports rose. There isn't, however, much of a trend evident in the numbers. Exports continue to disappoint, however. EU exports are down by 5.2% on a year ago but non-EU exports are up by only 0.6%. More here.

Thursday, April 04, 2013
Services keep the economy growing
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Though the manufacturing and construction purchasing managers' indices edged up in March, only the service-sector PMI is in expansionary territory (above 50). It rose from 51.8 to 52.4 in March. Though this is no guarantee that overall GDP will rise in the first quarter, it is mildly encouraging.

The deatils were also encouraging, specifically:

"Business activity in the UK service sector continued to increase during March. Growth was solid and the strongest since last August as incoming new work also rose at an accelerated rate. Payroll numbers increased, albeit at a fractional pace, while confidence in the outlook improved to the highest for ten months.

"The headline seasonally adjusted Business Activity Index registered 52.4 in March. That was up from February’s 51.8 and the best reading for seven survey periods. Solid growth was achieved despite a number of reports that poor weather had weighed on activity.

"Increased service sector output was supported by a marked rise in new business. Latest data showed growth was the steepest since May 2012, with companies commenting on an underlying strengthening of market demand."

This is the verdict of Chris Williamson of Markit: "With growth of the service sector offsetting contractions in manufacturing and construction, the PMI survey data collectively point to the economy having grown by a mere 0.1% in the first three months of the year. This is clearly a far from satisfactory pace of growth, although it is likely that the poor weather caused disruptions to many businesses in recent months, meaning the underlying recovery trend is likely to be stronger than the recent data suggest."

Forward-looking indicators point to a stronger growth picture in the second quarter, Markit added.

Wednesday, March 27, 2013
Doubles or triples all round?
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

Today's second revision to gross domestic product in the final quarter of 2012 left the quarterly change unchanged at a fall of 0.3%. Consumer spending was revised up, to show an increase of 0.4%, from 0.2%, but overall investment fell by 0.2% and the deficit on net trade rose to £6 billion, from £5.3 billion in the third quarter.

As always, there is interest in the revisions. Most people are aware that GDP figures get revised over time, though there are always one or two "revision deniers" around. The latest revisions show that the double-dip recession at the end of 2011 and into 2012 is now close to being revised away. A year ago we had GDP falls of 0.3% in the final quarter of 2011 and 0.2% in the first quarter of 2012. Now they are each 0.1% and the small fall in the first quarter of 2012 is very close to being revised to zero - it already has been for GDP excluding North Sea oil and gas.

None of this changes the fact that growth is disappointing, or that the economy is failing to rebalance. The current account deficit widened alarmingly last year to £57.7 billion, from £20.2 billion in 2011. The fourth quarter deficit was £14 billion, 3.6% of GDP, slightly down from £15 billion in the third quarter.

The GDP figures are here, the balance of payments data here.

Thursday, March 21, 2013
Maybe deficit reduction wasn't such a tall story
Posted by David Smith at 10:55 AM
Category: Thoughts and responses

There are so many adjustments in the public borrowing figures these days that getting to the underlying picture is not easy. But on an underlying basis, the February borrowing numbers - inconveniently published on the day after the budget - look like good news.

Specifically, net borrowing in February was £2.8 billion, a huge £9 billion down on a year earlier. Some of this was due to special factors but stripping them out, borrowing was still £4 billion lower. Cumulative borrowing excluding the Royal Mail pension transfer and the shifting of asset purchase facility money from the Bank of England to the Treasury was £101.3 billion, compared with £104.2 billion in the corresponding period of 2011-12. Maybe talk of a borrowing undershoot is not so far-fetched. More here.

Also today, retail sales jumped by 2.1% in February, which was far stronger than expected, though volumes over the latest three months were still down by 0.2% on the previous three. More here.

Wednesday, March 20, 2013
A budget to take your eyes off the deficit
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

There were so many measures unveiled by George Osborne today that it will take teams of accountants some weeks to go through them all. In the absence of that, it can be said that the chancellor was imaginative, listened and acted on pretty well every idea coming from his backbenches (and at least one from the opposition) and produced plenty to think about.

This was not the dull "holding" budget we had been led to expect. The raising of the personal allowance to £10,000 next year was not a big surprise, and neither was the freezing of fuel duty in September. Perhaps the 2015 cut in corporation tax to 20% wasn't either.

But the cut in beer duty was a good populist measure for a chancellor under political pressure, the Help to Buy scheme went further than most expected on housing, and the new employment allowance looks good. As a growth package this was less of a damp squib than Osborne's earlier efforts, suggested quite a lot of thought had gone into this budget and was so much better than the March 2012 budget you would not have thought the same team was responsible.

There were, of course, disappointments. Growth was revised down further than had been expected - 0.6% this year is half the December forecast - and deficit reduction has stalled.

As the Office for Budget Responsibility's new forecasts, here, show, deficit reduction has come to a halt. The figures for 2011-12, 2012-13 and 2013-14 are, on an underlying basis, £121bn, £120.9bn and £120bn. Borrowing could easily rise, this year and next. As it is, debt won't be falling as a percentage of GDP until 2017-18.

Easily the most confusing part of Osborne's speech was when he dealt with the Bank of England's remit. The inflation target stays at 2%, but the Bank is being encouraged to use forward guidance and other measures to boost the effectiveness of monetary policy. It will also be required to set out the growth-inflation trade-off in its decisions. Interesting, if potentially confusing. The budget document is here.

Job market still strong
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

Though there was a small, 7,000, rise in the Labour Force Survey measure of unemployment in the November-January period, to 2.52 million, these were still strong numbers.

Employment rose by 131,000 in the latest three months and was up 590,000 on a year earlier. Full-time jobs rose by 195,000 in the latest three months (there was a 64,000 drop in part-time) and private sector jobs by 151,000 (there was a 20,000 drop in public sector employment). The claimant count fell in February.

Pay, however, continued weak, up just 1.2%. More here.

Tuesday, March 19, 2013
Inflation - take your choice
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Inflation edged up from 2.7% to 2.8% last month, or rather it did on one measure, the consumer prices index. The 2.8% rate in February was the highest for nine months and pushed up by gas and electricity bills, petrol and diesel and air fares. It may go higher in the coming months.

On another measure, the new CPIH, consumer prices including housing (owner-occupiers) costs, inflation also edged up, from 2.5% to 2.6%. Keep an eye on CPIH - it may eventually evolve into a new target measure of inflation.

What about the retail prices index? The RPI is now so poorly regarded by the Office for National Statistics that it is no longer designated as an official statistic, though it will continue to be published. It actually edged down last month, from 3.3% to 3.2%.

The ONS prefers its new measure, RPIJ, using the Jevons method of calculation. It showed an inflation rate of 2.6% last month, from 2.7% in January. More here.

Friday, March 15, 2013
Bank fights back on inflation
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

Suggestions that the Bank of England has gone soft on inflation, including mine, appear to have hit home. Sir Mervyn King's observation that sterling has fallen far enough - which has lifted the pound - can be seen in that light.

So, more explicitly, can the line taken by Spencer Dale, the Bank's chief economist, in this speech. Talking about the consensus that low inflation is beneficial for growth, he said:

"More recently, though, there have been some worrying signs that cracks may be appearing in that consensus. A sense that inflation is somehow yesterday’s war. That central banks should focus more on growth. That a period of higher inflation may even aid the recovery. This is dangerous talk.

"It sometimes feels like we’ve been here before. One of the mistakes made by policymakers in the late 1960s was to allow inflation to get out of control after nearly two decades of price stability. Intellectual ideas pop in and out of fashion. The inflation target and the MPC are the result of a long and painful search for a credible money anchor. They provide the memory to ensure that we don’t return to the inefficiency and inequity of the 70s and 80s. They provide the memory that underpins the consensus that low and stable inflation is a perquisite for economic prosperity. And they provide the memory that guards against some of the dangerous talk of late."

He goes on to say:

"The argument that it’s possible to grow the economy without much increase in inflation is, of course, seductive and enticing. It’s like being offered a free lunch. And yes, there are some grounds for thinking that the trade-off between growth and inflation may well be unusually favourable. But how strong those mechanisms actually are is far from clear. And it seems particularly optimistic to assume that the financial crisis and the near crippling of our banking system has played little role in the recent limp supply-side performance of our economy.

"Taken to its limit, the argument that monetary policy can be used to expand demand with little or no implications for inflation challenges the consensus that the best contribution that monetary policy can make to the long-term health and prosperity of the economy is to deliver price stability. That consensus is based on painful experience that monetary policy can’t affect the level of output in the long run. That we can’t generate permanently higher output and permanently higher employment simply by printing more money. We should be nervous about how quickly we overturn that consensus."

Tuesday, March 05, 2013
Services to the rescue
Posted by David Smith at 12:45 PM
Category: Thoughts and responses

After notably weak purchasing managers surveys for manufacturing and construction, the service sector PMI showed a welcome (and unexpected) rise to 51.8 in February, from 51.5 in January. Though the read-across from the PMIs to gross domestic product is not always great, Markit, which produces the figures, said the PMIs were consistent with modest growth.

This is what Markit said about the service-sector PMI: "Business activity in the UK service sector increased for a second consecutive month in February. New business also increased, leading to a further expansion of payrolls. Confidence also continued to improve, with optimism regarding future activity at a nine-month high.

"The headline seasonally adjusted Business Activity Index posted 51.8 in February, slightly above January’s 51.5 and a five-month high. Modest growth of activity has now been signalled for two successive months. More than 23% of respondents recorded increased activity since January, with anecdotal evidence suggesting stronger client demand led to the development of new projects and larger client bases."

And this is what it said about the broader picture: "So far, the PMIs suggest that the economy will have grown by 0.1% in the first quarter, barely making up for any of the 0.3% decline seen in the final quarter of last year. However, growth could turn out stronger than this as there is good reason to believe that at least some of the weakness in manufacturing and construction was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March."

Earlier, the British Retail Consortium said retail sales in February were their strongest for more than three years, with a 2.7% like-for-like increase in sales value compared with a year earlier, and a 4.5% rise in total sales.

Wednesday, February 27, 2013
GDP starts to look a little better
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

Gross domestic product in the fourth quarter of last year was unrevised, with the fall of 0.3% initially reported left unchanged, even though the detail on manufacturing and construction was a little better, though services slightly worse.

Household spending rose by 0.2%, its fifth successive quarterly rise but gross fixed capital formation - investment - fell by 0.4%, after a 0.6% drop in the third quarter.

The good news was in past quarters. Growth in the third quarter was revised back up to 1%, while the contraction in the first quarter of 2012 has been revised down to 0.1%, as foreshadowed here. It will only take a small upward revision now for the "technical" recession, the double-dip, to be removed from the statistical record. More here.

Simon Ward of Henderson points out that the "onshore" double-dip has already been revised away. His note is here.

Sunday, February 24, 2013
Triple-A no more - and it matters
Posted by David Smith at 06:00 AM
Category: Thoughts and responses

moody.jpg

No normal column this week, as a result of holiday, but a comment on the ratings downgrade I did for the Sunday Times News section

Make no mistake, the loss of Britain’s Triple-A sovereign debt rating matters. It is symbolic, has implications for Britain’s future borrowing costs and is a judgment on the credibility of the government’s deficit reduction plan. It should also have put paid to the idea that George Osborne has room for big spending increases or tax cuts to stimulate growth.

The credit rating agencies have been around for more than a century, dominated by the big three of Moody’s (which downgraded Britain on Friday), Standard & Poor’s and Fitch. They came into existence to provide independent assessments of American railroads and other investment propositions for investors. But their prominence has grown in recent years, both because of their award of maximum Triple-A ratings for the dodgy “sub-prime” securities that dragged the world into the financial crisis, and because of their rating downgrades of “sovereign” debt, for countries in the Eurozone but also, 18 months ago, America.

Why does their judgment on countries matter if they got it so wrong before the financial crisis? The agencies argue that different methods and different staff are used to assess sovereign debt than financial securities. And, perhaps surprisingly, their role and importance has grown since the crisis. Ratings are used by financial regulators and by investors.

Do not the markets make their own minds up, and is not that the most important judgment? Markets do cast their verdicts on economies, and the weakness of the pound and the rise in the interest rates the government pays on its debt this year (though they remain at low levels) reflects that. But markets can turn on a sixpence, quickly casting of their worries about an economy. Rating downgrades take a lot longer to reverse and usually are never reversed. So, even though Friday’s downgrade reflected many of the concerns markets have been expressing, and though it was widely anticipated, it was still an important event. There is some comfort from the fact that America and France did not suffer in the aftermath of their downgrades, but it is small comfort.

Will the chancellor rip up his plans in response? No. The worry expressed by Moody’s is that the government has slowed the pace of deficit reduction too much. It is concerned that government debt will not be falling as a percentage of gross domestic product until the next parliament, after Osborne abandoned one of his fiscal rules last year. It is also worried that, while the current government will continue to seek to reduce the budget deficit, there is no guarantee that will be the case after the next election, when another government may be in charge.

With two more rating agencies yet to give their judgment, we may not yet have seen end of Britain’s downgrades. The challenge will be prevent the loss of Britain’s international status going down even more notches in future.

Friday, February 22, 2013
A UK ratings downgrade
Posted by David Smith at 11:30 PM
Category: Thoughts and responses

It was only a matter of time before the UK lost a Triple-A credit rating that has been held since Moody's first assigned it in 1978. The loss of the Triple-A by one of the three main rating agencies has been on the cards since America lost hers in August 2011 and was predicted by many (including me) for this year.

The trigger for the downgrade was George Osborne's December move, endorsed by the Bank of England the International Monetary Fund, to ditch his target for debt to be falling as a percentage of GDP by the end of the parliament. Moody's saw this as a softening of the commitment to fiscal consolidation.

The loss of the Triple-A would have been more serious in 2010, ahead of the US downgrade, and was a serious possibility had not the coalition, or a re-elected Labour government, beefed up the fiscal consolidation strategy. As it it, the best that can be said is that Osborne & Co delayed the downgrade. Their target now, like a relegated football team, is promotion back to Triple-A.

Does it matter? On its own, no. But the state of British politics in general, and Tory politics in particular, is pretty fractious. Coming alongside uncertainty about the Bank of England and monetary policy, and its wavering commitment to low inflation, which has weighed heavily on sterling, it is not good news.

It is a reminder that the UK needs genuine, supply-side led growth. And that UK policymakers need to get a grip. The Moody's statement is here.

Wednesday, February 13, 2013
The Bank of England - our flexible friend?
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The February inflation report was Sir Mervyn King's penultimate as governor, and it was also the 20th anniversary of the first such report, which he created as the Bank's chief economist. He used the comparison to strike an optimistic note:

"When I sat in front of you in 1993, unemployment had just reached its peak of 3 million. But, although we did not know it at the time, a recovery was underway. Twenty years later, after a financial crisis and deep recession, unemployment is again much too high, and output is still below its level 5 years ago. Yet there is cause for optimism. Today too, a recovery is in sight."

He made the good point that the bulk of the economy - manufacturing and services - has continued to grow, and indeed grew by 1.2% even on pre-revised figures, last year. He also offered hope of a gradual building of the recovery, which won't be normal, but: "Further out, a continued easing in domestic credit conditions – supported by the Bank’s asset purchase programme and the Funding for Lending Scheme – together with a stronger global backdrop, underpin a slow recovery in output."

King stressed the exceptional support monetary policy has provided for the economy, but also the limits about what it can do. As he put it: "Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required." The same is true, of course, for short-term stimulus through fiscal policy.

Inflation is above the 2% target because of factors the Bank says are largely outside its control, including administered prices such as university tuition fees. That will "make the challenge of bringing inflation back to 2% more difficult". In the meantime, the Bank will continue to "look through" the inflation overshoot, as long as inflation expectations remain well-anchored, applying monetary policy flexibly.

We will hear a lot more about 'flexible' inflation targeting. The inflation report is here.

Tuesday, February 12, 2013
Stuck above target
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Consumer price inflation remained at 2.7% in January, which is a stability of sorts: CPI inflation has never before remained unchanged for four months in a row. RPI inflation, by contrast, is still moving around. The January rate of 3.3% was up from 3.1% in December. Indeed, you have to go back 18 months for a time when RPI inflation was stable for two months in a row.

There wasn't much bad news in these inflation numbers but there wasn't much good either. Every measure of inflation is stuck above 2%. The big change from the past is that goods prices are not offsetting service sector rises. In the latest numbers goods price inflation is 1.9%, service sector inflation 3.7%.

"Core" inflation, excluding energy, food and alcohol, did edge down from 2.4% to 2.3%, but with higher food and energy prices likely to put upward pressure on inflation in the coming months, that is small comfort. More here.

Thursday, February 07, 2013
Bank of England has a lot to say
Posted by David Smith at 12:45 PM
Category: Thoughts and responses

The Bank of England does not normally say anything when there is no change in policy. This time, perhaps influenced by the presence of its new governor Mark Carney in London, it has issued a long statement. Bank Rate stayed at 0.5% and quantitative easing at £375 billion (though £6.6 billion of maturing gilts will be reinvested).

But the Bank has provided a long statement, part of which says it is "appropriate to look through the temporary, albeit protracted, period of above-target inflation. Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term". The statement is here.

Carney sets out his stall
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Mark Carney, who will take over as Bank of England Governor on July 1, is giving evidence to the House of Commons Treasury committee. In the meantime, the Bank has published his written evidence, which is interesting.

Does he favour a change in the inflation target? He says the UK's (and Canada's) flexible inflation target has proved to be be "the most effective monetary policy framework implemented so far". He says the bar for change is very high but review and deb ate can be positive. His detailed evidence is here.

Carney's approach - so far - suggests he will be looking for consensus and will not be seeking to tear anything up too rapidly when he arrives at the Bank.

What kind of economy will he be presiding over? Manufacturing output rose by 1.6% in December, with overall industrial production up 1.1%. Though this did not change the GDP picture for the fourth quarter - down 0.3% - it left both above their fourth quarter average, by 0.8%-0.9% More here.

Meanwhile, the trade deficit narrowed from £3.6bn to £3.2bn in December.

Wednesday, February 06, 2013
IFS underlines the scale of the fiscal task
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

The Institute for Fiscal Studies Green Budget is always a big event, and this year's is no exception. It underlines the scale of the fiscal challenge remaining, after George Osborne has allowed the automatic stabilisers to operate in the context of a weaker-than-exepcted economy - allowing "borrowing to take the strain".

Highlights from this year's Green Budget are:

On current plans public service spending in “unprotected” Whitehall departments - that's everything except health, education and overseas aid, could fall by a third between 2010–11 and 2017–18.

If departments continue with trajectories implied by current plans public sector employment will have fallen by 1.2 million by 2017–18. This is because the public sector is responding to the squeeze by cutting jobs rather than real pay.

George Osborne will be borrowing £64 billion more in 2014–15 than he planned just two years ago. This is because he is choosing not to offset the forecast deterioration of £65 billion driven by a worse economic outlook.

Social security spending is rising from 28.5% to 32.5% of all public spending between 2010-11 and 2017-18 - cuts to working-age benefits are offset by more generous payments to pensioners.

Taking all the tax and benefit changes introduced between the start of 2010 and 2015–16 the richest households will be hit hardest.

The big increase in the personal tax allowance, at a cost of £9 billion, is "remarkable" given the fiscal climate - but doesn't really take many out of tax because of National Insurance. There is a lack of a coherent tax policy. The IFS press release is here.

Return to growth?
Posted by David Smith at 08:00 AM
Category: Thoughts and responses

Tomorrow's industrial production figures will provide further information on how the economy ended 2012. Meanwhile, yesterday's service sector purchasing managers' index, which showed a jump back above 50 to 51.5 in January, suggested that, taking manufacturing, construction and services together, the economy expanded in January. This was Markit's assessment:

"Companies reported the strongest rise in services activity for four months, building on the promising news from manufacturers last week, where output was reported to have grown at the fastest rate for 16 months in January. Although construction remains a worry and continues to contract, the PMIs collectively point to the UK growing marginally again in January."

“Stronger growth would inevitably have been recorded had the country not suffered the heavy snowfall, suggesting the underlying trend is even stronger than these numbers indicate." Its release is here.

There are, of course, two points to make. January is only one of the first quarter's three months and the read-across from the PMIs to Office for National Statistics data is often not perfect.

Monday, February 04, 2013
Osborne and the banks
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

George Osborne's speech on the banks, delivered at J.P. Morgan's offices in Bournemouth, is longer on rherotic than detail, but did contain two new things, strengthening the ring-fencing of high street and investment banking and allowing new entrants access to the payments system.

The question about policy on the banks, as before, is whether it helps or hinders the supply of credit into the economy. The jury is out but it is hard to see it helping. These are the two key points from Osborne:

"Today, we will go further than previously announced, enshrining in law these simple principles. I can announce that your high street bank will have different bosses from its investment bank. Your high street bank will manage its own risks, but not the risks of the investment bank.

"And the investment bank won’t be able to use your savings to fund their inherently risky investments. My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence."

He goes on to use the phrase "electrify" the ring fence. The speech is here. This was his second point:

"Payments systems sit at the heart of the banking system. They are the hidden from view wirings that operate every time you get wages paid into your bank account, deposit a cheque or withdraw money from an ATM. It’s how the money flows around the system.

"And it’s a bit like the electricity grid, every person and every business needs to be plugged into them to enter the banking market. At the moment, a new player in the industry has to go to one of the existing big banks to use the payment system.

"Asking your rival to provide you with the essential services you need at a reasonable price is not a recipe for success. And it other walks of life, like telecoms, we don’t operate like that. There are no incentives on the big banks to deliver new and better services for users – like saving the cheque or creating new services like mobile payments.

"Why, in the age of instant communication, do small businesses have to wait for several days before they get their money from a credit or debit card payment? It should be much quicker. Why do cheques take six days to clear?

"Customers and businesses should be able to move their money round the system much more quickly. Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days? The system isn’t working for customers, so we will change it.

"I can announce today that the Government will bring forward detailed proposals to open up the payment systems. We will make sure that new players in the market can access these systems in a fair and transparent way.

"The last Government let the established players off the hook by failing to implement the conclusions of the review they themselves commissioned, and allowing the big existing banks to regulate themselves. This Government will make sure payment systems serve the needs of consumers, not the needs of the established banks."

Friday, February 01, 2013
Manufacturing looking better
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Manufacturing has started the year promisingly in both the UK and the eurozone. In Britain the headline manufacturing purchasing managers' index slipped from 51.2 in December to 50.8 in January but the production component was at a 16-month high. More details here.

In the eurozone, the level of the PMI is lower at 47.9, but this was a big improvement on December's 46.1 and represented an 11-month high. More here.

Friday, January 25, 2013
GDP disappointing - but not surprising
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Given the information we had on industrial production in October and November, there has to be some relief that the quarterly fall in gross domestic product (GDP) was not even larger. As it was GDP fell by 0.3%, while industrial production dropped by a hefty 1.8%.

Construction industry output rose modestly, by 0.3%, for the first time in a long while, in spite of an assumption by the Office for National Statistics that there was a non-seasonally adjusted slump in the sector's output of 16% in December. Service sector output was flat.

The big picture is that these preliminary figures show that the economy showed no growth in 2012 (actually marginally better than the Office for Budget Responsibility's December estimate of a 0.1% fall) and was broadly flat in the fourth quarter compared with a year earlier.

Those employment figures, showing a 552,000 rise over the past 12 months, look even harder to explain in the context of zero growth.

Taking out North Sea oil from the picture doesn't help much either. Though this reduces the Q4 fall to 0.1%, it still leaves 2012 growth at a modest 0.2%, and growth in the fourth quarter compared with a year earlier at 0.4%. The question is whether the third and fourth quarters should be taken together to show modest quarterly growth or, as justified, whether GDP genuinely is as flat as these figures suggest. More here.

Wednesday, January 23, 2013
The good news on jobs continues
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Would the government be getting more or less flak if the GDP figures were OK but the employment/unemployment figures were not? We will never know, though people will always tend to gravitate towards bad news.

As it is, the news on jobs continues to be very good. Comparing September-November 2012 with June-August there was a rise of 90,000 in employment, to 29.68 million, and a 37,000 drop in unemployment to 2.49 million, or 7.7% of the workforce.

The claimant count in December 2012 was 1.56 million, 4.8% of the workforce, down 12,100 from November and 40,500 lower than a year earlier.

The composition of the latest rise in employment was also good, with a rise of 113,000 in full-time employment and a drop of 23,000 in part-time employment. Compared with a year earlier, employment was up by an astonishing 552,000, while unemployment was down by 185,000.

Was there any bad news in this release, available here? Total pay in the lates three months was up by only 1.5% on a year earlier, while pay excluding bonuses was up by only 1.4%. People are pricing themselves into jobs but real earnings continue to fall.

Tuesday, January 22, 2013
King: Flexible inflation targeting is best
Posted by David Smith at 10:30 PM
Category: Thoughts and responses

In his speech in Northern Ireland this evening, Sir Mervyn King has set the cat among the pigeons with this: "It would be sensible to review the arrangements for setting monetary policy."

Was he arguing for dropping the 2% inflation target? No, but he was arguing that it should be interpreted flexibly. He went on to say:

"Our current remit does not specify how the MPC should strike a balance between growth and inflation in the short run. The horizon over which inflation should come back to target is effectively delegated to the MPC.

"But should the MPC itself choose how quickly to bring inflation back to target, or should the government use its annual remit to set that horizon? Is there a gain from trying to quantify how the MPC should manage the trade-off between growth and inflation in the short run? The recent guidance by the Federal Reserve about the conditions under which it would continue to hold interest rates at close to zero is a way of quantifying the “flexibility” in flexible inflation targeting. It describes how the Federal Reserve will interpret its freedom to balance its twin objectives for employment and inflation. How much discretion to give to the MPC and how much should remain with the Chancellor is an interesting question that was raised, but not fully resolved, in 1997 with the system of open letters which gives the Chancellor the opportunity to comment on the horizon over which the MPC plans to bring inflation back to target. So there are certainly aspects of the inflation targeting regime to consider."

But then he said: "To drop the objective of low inflation would be to forget a lesson from our post-war history. In the 1960s, Britain stood out from much of the rest of the industrialised world in trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation. The painful experience of the 1970s showed that this illusion on the part of policy-makers came at a terrible price for working men and women in this country. The battle to bring inflation expectations down was long and hard, and involved persistently high levels of unemployment. Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2% inflation should be an essential part of our macroeconomic framework."

So keep the inflation target but allow policymakers flexibility. The speech is here.

Public sector debt tops 70% of GDP
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Today's public finance figures were marginally disappointing, with £15.4 billion of net borrowing in December compared with £14.8 billion a year earlier. The current budget deficit was £13 billion, up from £12.5 billion in December 2011.

The cumulative figures were helped by revisions to earlier data, though there's still an overshoot compared with 2011-12. The current budget deficit, for example, is running at £95.2 billion in the April-December period, up from £85 billion in the corresponding period of 2011-12. Adjusted public sector net borrowing was £108.8 billion, £9.5 billion up on 2011-12.

Though the gap is narrowing, it appears borrowing is heading for an overshoot, which will be an embarrassment for George Osborne and the Office for Budget Responsibility. The ONS release is here.

Today's release was notable for the fact that public sector net debt rose to £1,111.4 billion, 70.7% of gross domestic product. It thus rose above 70% of GDP, from 69.3% in November.

Friday, January 18, 2013
Retail sales slip back
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Retail sales slipped by 0.1% in volume terms in December, according to the Office for National Statistics, while excluding automotive fuel they dropped by a slightly larger 0.3%. Year-on-year the two measures showed rises of 0.3% and 1.1% respectively.

These were disappointing figures, confirming the absence of a meaningful consumer recovery as above-target inflation squeezes real incomes. The ONS says that the 12-month rise in overall sales volume was the weakest for a December since 1998 if you exclude snow-affected December 2010.

Many will see this as predictable in the light of the recent spate of high-profile high street closures, though there continue to be areas of considerable strength. John Lewis department store sales in the week to January 12 were up by 18.7% on a year earlier, for example.

But an across-the-board recovery in retail sales requires improved consumer confidence and real-income growth. The release is here.

Tuesday, January 15, 2013
Inflation at 2.7% - the new norm?
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Consumer price inflation came in at 2.7% in December, the same as in November and October. Though this shows a very sticky inflation rate, there was some relief that it was not a bit higher. RPI inflation edged up from 3% to 3.1%. For those who are interested, the new RPIJ inflation measure, were it published, would also have shown inflation edging up, from 2.1% to 2.2%.

There isn't an enormous amount of inflationary pressure in the economy - producer output price inflation in the 12 months to December was just 2.2%, while input price inflation was a mere 0.3% - but a return to the 2% inflation target seems as remote as ever. If it isn't the threat of higher food prices, administered prices or university tuition fees, or other factors, can be relied on to keep inflation high.

Should we expect anything better? The December figures completed a year in which the average CPI inflation rate was 2.8%. The average rate for the past eight calendar years (2005 to 2012) was 2.9%. Only for a relative brief period in recent years (1997-2004) has CPI inflation been consistently below the 2% target. More on today's numbers here.

Friday, January 11, 2013
Weak industry will drag on GDP
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Industrial production in Britain is weak, down 2.4% in November compared with a year earlier, with manufacturing down 2.1%. The details are here. The question is whether it is weak enough to produce a negative reading for gross domestic product in the fourth quarter.

In November alone, industrial production rose by 0.3% month on month, thanks to a recovery in North Sea oil and gas output but manufacturing was down by 0.3% and domestic energy supply by 4.1%. This leaves the arithmetic for industrial production in the fourth quarter looking very tricky.

Taking October and November together, industrial production is a huge 2.3% down on the third quarter average. It would take an implausibly large rise in December for industrial production, 15.6% of GDP, not to be a drag on GDP.

There is slightly better news for construction, which may make a small contribution to growth in the fourth quarter. Though output fell by 3.4% in November, according to figures also released today, a strong rise in October means the two months together are 4.2% above the third quarter average on a non-seasonally adjusted basis. More on that here.

Even so, the onus will be on services to prevent a fourth quarter GDP fall. Here, we're more or less in the dark. The only hard number we have is for October, which was very similar to the third quarter average. We won't know more until January 25, when the GDP first estimate is released.

Thursday, January 10, 2013
The RPI is not up to scratch, long live the RPI
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The Office for National Statistics, in the person of the official statistician Jil Matheson, has come up with a curious compromise following a consultation on the RPI.

This is the ONS's summary, available here:

"Following a consultation on options for improving the Retail Prices Index (RPI), the National Statistician, Jil Matheson, has concluded that the formula used to produce the RPI does not meet international standards and recommended that a new index be published.

"The National Statistician’s consultation was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI). The ONS research programme found that use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and that this formulation does not meet current international standards. Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

"In developing her recommendations the National Statistician also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.

"Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged."

This is what I wrote on November 18:

"Dropping Carli would mean the Bank would surely have to decide this was a “fundamental and detrimental” change affecting holders of index-linked gilts and National Savings. The ONS might produce a parallel RPI, using the existing method, for investors, though that cannot be a permanent solution. The longest index-linked gilts stretch half a century into the future.

"What should happen? It is daft for the ONS to carry on using an RPI formula that comes up with obviously suspect results. From a statistical and economic perspective, the case for change is overwhelming.

"The politics, however, are trickier. Unemployment figures have never regained the public confidence there was before the Tories introduced repeated changes to them in the 1980s. The Osborne £35 billion QE "grab" has had less public impact but has a whiff of something dodgy about it.

"Anything like that has to be avoided for the RPI. If the public and the markets sense trickery, trust in the inflation numbers will disappear. Like the boy who cried wolf, once you get a reputation, it can be hard for people to believe you."

What I suggested would be unworkable in the long run has happened. So we have a very messy compromise. We will have RPI, RPIJ, not to mention RPIX (the RPI excluding mortgage interest payments). We'll also have CPI, CPIH (a new index including housing costs) and, for those who are so inclined, CPIY (excluding indirect taxes). There are others too numerous to mention.

Friday, January 04, 2013
Purchasing managers' surveys suggest disappointing Q4 GDP
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Much of the time the purchasing managers' surveys have presented a rosier picture of the economy than official data. The hope is that this time it is the other way round.

With a drop in the service sector purchasing managers' index from 50.2 in November to 48.9 in December, the all-sector PMI for the fourth quarter came in at 49.9, its weakest since 2009. Part of that weakness may be weather-related, though growth has softened on an underlying basis as well.

Though in theory this suggests a flat fourth quarter, Markit, which compiles the data, says it is consistent with a 0.2% fall, following the 0.9% rise in the third quarter. More details here.

Wednesday, January 02, 2013
Welcome jump in the manufacturing PMI
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Nobody really expected 2012 to end with good news for manufacturing but, according to the Markit-CIPS purchasing managers' index, it did. Manufacturing expanded at its fastest rate for 15 months in December, which was welcome after a difficult few months.

This is Markit's summary: "The UK manufacturing sector ended 2012 on a positive note, with levels of production and new orders rising at faster rates in December. The labour market also showed signs of stabilising, with employment broadly unchanged over the month.

"The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) rose back above the 50.0 no-change level in December, recording a 15-month high of 51.4. The average PMI reading in Q4 (49.5) was above that in Q3 (48.1), while the average over 2012 as a whole was only 49.2.

"Manufacturing output increased for the second month running, with the rate of growth accelerating sharply to a 20-month high. The sharpest gains were reported by consumer and intermediate goods producers."

Friday, December 21, 2012
GDP - the picture evolves
Posted by David Smith at 05:30 PM
Category: Thoughts and responses

The second revision of the third quarter GDP figures showed a downward revision from 1% to 0.9% but upward revisions to earlier data. So growth is now flat on a year ago, compared with a drop of 0.1% in the earlier data. Two of the "double-dip" quarters, Q4 2011 and Q1 2012 have been revised higher though still show small negatives.

The detail in the numbers is quite interesting. They point to a household sector which, while still constrained by the high-inflation squeeze on earnings, has adjusted significantly. The saving ratio has risen from 7.4% to 7.7% and real household disposable income, after an odd looking 2.3% jump in the second quarter, rose by 0.4% in the third. There is much more here.

Also today, the current account deficit narrowed to £12.8 billion in the third quarter from a downward-revised £17.4 billion in the second. It remains on course for a 2012 deficit of more than £50 billion, however. Details here.

Finally, the public finances were a touch disappointing, with public sector net borrowing of £17.4 billion in November and underlying borrowing running about 10% above 2011-12 levels. This is the Office for Budget Responsibility's take on the figures. It points out that two one-off factors, the 4G spectrum sale and the transfer of £11.5 billion of gilt coupons from the Bank of England to the Treasury will benefit the figures. But it is also relying on stronger VAT and self-assessment receipts.

Thursday, December 20, 2012
Retailers need a late rush
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

November's retail sales disappointed, with volumes flat on the month including automotive fuel and up a modest 0.1% excluding it. Year-on-year the figures were 0.9% and 2% respectively. Following a downbeat CBI survey on Wednesday, retailers need a late rush.

So does the economy. On both measures, retail sales volumes are down on their third quarter average, and threaten to be a drag on fourth quarter gross domestic product. It is instructive that retail sales have disappointed in October and November as higher inflation has squeezed real incomes. More here.

Tuesday, December 18, 2012
Mixed news on inflation
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

A clutch of inflation data today, which require some interpreting. Consumer price inflation was unchanged at 2.7%, which suggests calm but disguises a huge amount going on beneath the surface. So food, non-alcoholic beverages and domestic fuel bills were up, while petrol and diesel were down. RPI inflation fell from 3.2% to 3% on the back of lower motoring costs, housing and household goods.

Underlying CPI inflation, excluding food, energy and other volatile elements was 2.6%, so close to the headline rate. Inflation at constant tax rates was 2.4%. Whichever way you look at it, inflation was above the 2% target. More here.

Producer price numbers were relatively reassuring, with output prices for manufactured products up 2.2% on a year earlier in November, from 2.6% in October, while input prices were down 0.3%. Inflation is not, however, being driven by manufactured goods. More here.

Also today, the Office for National Statistics reports that house prices in the 12 months to October were up 1.5% on a year earlier, with prices stable in most of the country, rising in London and falling in Northern Ireland. Details here.

Friday, December 14, 2012
Money GDP - no panacea
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

Britain's inflation target has had a good innings - it is now more than 20 years old. Long before it was adopted there wre prominent campaigners for a money or nominal gross domestic product target. Now, thanks to a speech my Mark Carney, Bank of England governor-designate, and an apparently open mind from George Osborne, it is back on the agenda.

Maybe, though the test is whether anything would have been different before the crisis with a money GDP target. Say the target was 5%. This was the kind of growth rate that was being achieved for money GDP in the run up to the global financial crisis.

Money GDP weakened in 2008, though only when real GDP collapsed. It would not have given any advance warnings of trouble, particularly as the originally GDP readings from the Office for National Statistics for the first half of 2008 were misleading.

The problem in the run-up to the crisis was not that money GDP was ignored. It was that other things were played down, including sharply rising asset prices and a sharp rise in bank lending to other financial institutions. The financial sector lent to itself, and the authorities did not respond.

Wednesday, December 12, 2012
Falling unemployment, weak earnings
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Another generally good set of labour market statistics, with unemployment down by 82,000 in the August-October period compared with May-July to 2.51m, and down by 128,000 on a year earlier. The unemployment rate, 7.8%, compared with 8% in May-July and 8.3% a year earlier. The resilience of the labour market in the fact of apparently weak growth continues to be striking.

In the latest three months employment rose by a modest 40,000, though this was enough to take it to a record 29.6m (though the composition has changed compared with the previous high). More impressive was the rise compared with a year earlier, a very strong 499,000.

The private sector continues to drive the rise in employment, with a rise of 65,000 in the third quarter, compared with a drop of 24,000 in public sector employment. Between September 2011 and September 2012 private sector employment rose by an astonishing 823,000 (though 200,000 is due to classification changes), while public sector employment fell by 324,000. Leaving out the classification changes (mainly affecting further education colleges), the figures would be roughly 623,000 and 124,000 respectively.

Rising employment/falling unemployment and subdued wages are all part of the same story and so it continues. In August-October total pay, including bonuses, was up by 1.8% on a year earlier, so still falling in real terms. More here.

Friday, December 07, 2012
Bad month for industry
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

October was a bad month for industry. Britain's 0.8% drop in overall industrial production was bad enough, including as it did a 1.3% drop in manufacturing outout, though it was not as dire as Germany's 2.6% slump.

The UK figures have already got analysts on triple dip alert, despite an encouraging rise in third quarter construction orders, also announced today. The arithmetic for industrial production is pretty horrible - in October it was 2.4% below the third quarter average.

It will need something special, such as a rebound in food production (down 3% month-on-month in October) and a turnaround in North Sea production, assuming some of the slump is shutdown related. In October mining and quarrying, most of which is the North Sea, was 15% below its third quarter average and 21% down on a year earlier. Not so much a decline as a collapse. More here.

Wednesday, December 05, 2012
Osborne lives to fight another day
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

Losing one of his fiscal rules would have been bad enough, seeing a deficit-reduction programme turn into a deficit-increasing programme quite another thing. So George Osborne got away with it today.

Nobody was surprised by the Office for Budget Responsibility's judgment that his secondary fiscal rule - debt falling as a percentage of GDP by the end of the parliament (2015-16) - will probably now not be met, though it should still be achieved in 2016-17 according to the OBR.

However most people were surprised by the borrowing numbers for this year, and the fact that the OBR has concluded that deficit reduction is still in prospect even without the special factors being taken into account.

Those special factors - the transfer of QE coupons from Bank of England to Treasury (worth £11.5 billion this year), changes affecting a couple of the smaller state-owned banks - help bring down borrowing, excluding another special factor (the transfer of £28 billion from the Royal Mail pension fund), to £108.5 billion, from a prediction of £120 billion at the time of the March budget.

However it is another factor, this one a one-off, the expected £3.5 billion of assets from the forthcoming sale of the 4G mobile phone spectrum, which got Osborne off the hook. In underlying terms, borrowing this year would be £123.3 billion without these changes - up on 2011-12's £121.4 billion - but the spectrum sale gives a small borrowing reduction. Whether that reduction survives until March remains to be seen, but Osborne lives to fight another day.

Osborne used that time pretty well. A £235 increase in the already big rise in the personal tax allowance from April was unexpected, two years of generous capital allowances for SMEs should boost investment and a planned cut in the main rate of corporation tax to 21% was unexpected, particularly in the light of the row over big multinational firms not paying any.

The 3p a litre fuel duty hike, due in January, has been abandoned, which will guarantee good tabloid headlines. Many will see the squeeze on working-age welfare and the reduction in pension tax relief as unfair. But for benefits to be rising at twice the rate as average earnings over the past three years - 20% versus 10% - was unsustainable. The pension raid was Osborne's "we're all in it together" moment.

Much of the Autumn Statement had dribbled out beforehand, some deliberately, notably the helpful £5 billion shift from current to capital spending over the next three years. The only problem with that, politically, is that some of it looks like a squeeze on departments to pay for a Tory party pet project, free schools.

Even so, it was a grievous error by Labour to plan for big cuts in capital spending - that part of tax and spend which has the biggest multiplier - and a mistake for the coalition to endorse most of those cuts. Cutting current spending is always politically more difficult, so capital is an easy target. Slowly, very slowly, that mistake is being corrected.

Tuesday, November 27, 2012
What's up, what's down?
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

Today's gross domestic product figures, as always, contained a lot of detail. They confirmed the 1% third quarter rise in GDP, which in turn confirmed that the economy has some way to go to regain its pre-crisis peak. The latest numbers show GDP is 3.1% down on its level in the first quarter of 2008.

But how have individual sectors and components of spending fared within that bigger picture? The services sector has done best, with output 0.4% higher than pre-crisis levels, in contrast to manufacturing, down 8%, construction, down 18.3%, and mining and quarrying, which includes the shrinking North Sea oil and gas sector, down 34.5%.

Business services and finance are a mere 1.2% down on pre-crisis levels but the undoubted star of the services sector is "government and other services", up 6.7%.

In terms of expenditure, consumer spending is 4.9% below pre-crisis levels, while investment - including public investment - is a huge 18.8% down. Government consumption, however, is up by 4.5%. Exports are up 2.3%, while imports are down 3.9%, so there's been a little bit of rebalancing. All the numbers are inflation-adjusted.

The GDP release is here, as is a link to the database.

GDP unrevised at 1%
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

There was some relief that the gross domestic product figures for the third quarter were unrevised, the preliminary rise of 1% having taken people by surprise. Though it is hard to draw any meaningful conclusions from these numbers, on their own they were encouraging.

So consumer spending rose by 0.6% in real terms, its best for nine quarters, and was up by 0.9% on a year earlier. Some of this was a clear Olympics effect, though there was also a large - 1.4% - rise in compensation of employees, its biggest for 11 quarters.

If you were looking for rebalancing, there was some of it too, exports rising by 1.7% on the quarter, while imports fell by 0.4%. Overall investment rose by 0.5%, while business investment jumped by 3.7%.

It was, of course, a distorted quarter, and we will know more about what will undoubtedly be a more muted performance in this and subsequent quarters. There were no revisions to earlier quarters in this release. More here.

Monday, November 26, 2012
Carney takes us by surprise
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

carney.jpg

At a time when everybody was expecting Paul Tucker to be announced as Bank of England Governor, including me, I can draw two modest crumbs of comfort from this afternoon's announcement that it will be Mark Carney, Governor of the Bank of Canada.

The first is that in my piece on November 11 I said that Carney was still in the frame. The second was the conclusion of that piece: "The bookies are probably right to have Tucker as favourite. He remains the one to beat. But a credible dark horse, a genuine outsider, might be better."

Having said that, it is hard not to feel sorry for Tucker. To be a defeated favourite in such a public contest is hard. As for Carney, the key question will be whether his success as Bank of Canada Governor will translate into the much bigger job at the Bank of England. There are more differences than similarities.

Carney is who the Treasury wanted, and they pursued him doggedly. Sir Mervyn King said: "He represents a new generation of leadership for the Bank of England, and is an outstanding choice to succeed me. Since Mark became Governor of the Bank of Canada, I have worked closely with him and admired his contributions to the world of central banking, in which he is widely respected." He may have preferred an outsider to succeed him.

Charlie Bean will stay on as deputy governor with responsibility for monetary policy for another year, until mid-2014.


Wednesday, November 21, 2012
Public borrowing - a little disappointing
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

October's public borrowing figures, £8.6 billion for public sector net borrowing compared with £5.9 billion a year earlier, were disappointing. However, downward revisions to earlier months meant that the underlying overshoot so far this fiscal year - £5 billion - was not as bad as it could have been.

The big picture is that public sector net borrowing is heading for a modest overshoot compared with last year, mainly because of weak tax revenues (particularly corporate tax revenues, which were down 9% on a year earlier). Given that that 2011-12 borrowing figure came in £4.6 billion below Office for Budget Responsibility projections, that is disappointing but not disastrous. More here.

Meanwhile, the Bank of England's monetary policy committee, appeared to rule out any cut in Bank Rate: "The Committee also discussed the likely effectiveness of reducing Bank Rate to below 0.5%. Over the past few months, Bank staff had consulted with the FSA and the Building Societies Association on the possible consequences. In the light of that, the Committee had re-examined in detail the desirability of such an option. While it would be beneficial for some existing borrowers, there were concerns that a cut in Bank Rate might prove counterproductive for aggregate demand as a whole. Staff analysis had concluded that a further cut in Bank Rate would be likely to cause a reduction in the profitability of some lenders, especially building societies, because of the prevalence of loans with interest terms contractually or closely linked to Bank Rate. That would weaken their balance sheets and they might have to respond by increasing other loan rates or restricting lending. Viewed against the backdrop of the Funding for Lending Scheme (FLS), and the potential for building societies to play a material role in increasing lending, the Committee judged that it was unlikely to wish to reduce Bank Rate in the foreseeable future."

There was one vote for more quantitative easing, from David Miles. The MPC also said it would review its tactics once the existing portfolio of gilts began to mature in March 2013. More here.

Monday, November 19, 2012
Scottish independence: more fiscal questions than answers
Posted by David Smith at 09:05 AM
Category: Thoughts and responses

The Institute for Fiscal Studies has undertaken a useful exercise in the fiscal consequences of Scottish independence. Anybody who was expecting a clear-cut answer, however, will be disappointed.

The broad conclusion is that Scotland could finance its higher public spending (£1,200 a head higher) in the short-term if it has a geographical share of North Sea revenues - i.e. most of them - but would face hard choices in the longer term as these revenues decline.

That assumes an independent Scotland would get a geographical share of those revenues, which is far from guaranteed. The IFS also concedes that the future state of the UK's public finances are far from certain. Its report is here.

Thursday, November 15, 2012
Downbeat retail sales in October
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

The CBI had suggested quite perky retail sales in October in its distributive trades survey, while the British Retail Consortium had a much more subdued picture. On this occasion the BRC was the best guide.

Retail sales in October were disappointing, volumes falling by 0.8% compared with September, or 0.7% excluding automotive fuel. Volumes were up by a modest 0.6% on a year earlier, or 1.1% excluding fuel. The fact that October's volume index was below the third quarter average shows that the sector has work to do in the fourth.

That might be made easier by the timing of half-term holidays for many schools, which traditionally boost spending. The cut-off for the October numbers was October 27, many half-term holidays coming later than that. Nevertheless, downbeat figures. More here.

Wednesday, November 14, 2012
Bank throws in the towel
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

I wasn't at the Bank of England's Inflation Report press conference, but most of the good lines appear to have been contained in Sir Mervyn King's opening statement. All the Bank's earlier optimism about recovery appears to have evaporated - it now takes the view we are stuck in a low growth era. The following is a textual analysis of the main points in that opening statement.

"Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply. Despite a resilient labour market– as we saw again in today’s figures – the economy has barely grown over the past two years."

Which means: The economy's still flat and I'm not going to get caught out again if GDP falls in the fourth quarter.

"That unexpected weakness reflects the impact of the euro area crisis and its effect on confidence and bank funding costs, and the sharp squeeze on real incomes from higher than expected world energy and food prices. As some of these headwinds abate – as they look set to do – a slow recovery is in prospect, supported by a fall in bank funding costs brought about in part by the Funding for Lending Scheme."

Which means: I wasn't wrong to back George Osborne's fiscal tightening - the weakness is due to other factors - and we're doing our best (belatedly) to get credit growing again.

"GDP growth is more likely to be below than above its historical average rate over the entire forecast period. The subdued recovery reflects a judgement that the global environment will remain unfavourable. In addition, the Committee believes that the effective supply capacity of the economy is likely to continue to grow slowly over the forecast period."

Which means: The economy's damaged and it is going to stay damaged. Even if we could get growth going, the supply-side's been badly weakened.

"Inflation is likely to remain above target for the first part of the forecast period, and is higher than in August, reflecting recent outturns and the announcement of large increases in household energy prices. Further declines in inflation are being checked by price increases in sectors where market influences are weak – the rise in student tuition fees alone added over 0.3 percentage points to yesterday’s inflation figure, and domestic gas and electricity prices are rising faster than wholesale energy prices. Such factors are pushing up inflation by over 1 percentage point a year, and the rate of inflation in those sectors influenced more by market pressures would have to be unusually low for inflation overall to be close to the 2% target. Nevertheless, the Committee judges that inflation is likely to fall back in the second half of
next year, as the impact of short-term pressures wears off and slack bears down on pay growth. Towards the second half of the forecast period, the risks to inflation are broadly balanced around the target."

Which means: Damn, we've got it wrong on inflation again, but it isn't our fault. We won't see 2% inflation again on my watch.

"For a country like the United Kingdom attempting to rebalance her economy such an outlook poses real challenges. If that unfavourable world environment persists – and there is little sign of any change to the underlying problems in the euro area – it may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate. In such an environment, there are limits to the ability of domestic policy to stimulate
private sector demand as the economy adjusts to a new equilibrium. But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."

Which means: Despite the absence of any evidence that sterling's 2007-8 fall did any good, I'd like to see another fall in the exchange rate. And all this QE we've been doing hasn't been a waste of time and money - honest.

The inflation report is here.

Slightly softer jobs numbers
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The latest unemployment figures were encouraging, though suggest some softening in employment growth, possibly as a result of an unwinding of the Olympic boost. Employment rose by 100,000 in the July-September period compared with April-June, reaching 29.58m.

Though this was good news, it pointed to a slower rate of employment growth than recent quarterly numbers of 200,000 or more. Unemployment fell by 49,000 to 2.51 million in the latest three months, though the claimant count rose by 10,100 to 1.58 million in October alone.

Earnings growth remains sub-2% - 1.8% for total pay - at a time when inflation has pushed higher to 2.7%.

Good news, then, overall, but tempered by one or two softer touches and the squeeze on real earnings. More here.

Tuesday, November 13, 2012
A disappointing inflation jump
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Inflation came very close to the 2% target in September, falling to 2.2%. But now it has moved further away again, rising to 2.7% in October. RPI inflation increased from 2.6% to 3.2%. University tuition fees were the main reason.

Inflation measures adjusted for tax changes also rose - CPI inflation excluding indirect taxes rose from 2.1% to 2.7%, while CPI inflation at constant tax rates went up from 2% to 2.4%. It may be some time before we see inflation back to target.

According to the Office for National Statistics:

•The Consumer Prices Index (CPI) annual inflation stands at 2.7 per cent in October 2012, up from 2.2 per cent in September. The main upward pressure came from the education sector (university tuition fees) with smaller upward contributions from food & non-alcoholic beverages and transport. These were partially offset by downward pressures from the housing & household services, recreation and miscellaneous goods & services sectors. The CPI stands at 124.2 in October 2012 based on 2005=100

•The Retail Prices Index (RPI) annual inflation stands at 3.2 per cent in October 2012, up from 2.6 per cent in September. The largest upward pressure came from university tuition fees, followed by food and housing. Fuel & light provided the largest downward pressure. The RPI stands at 245.6 in October 2012 based on January 1987 = 100

More here.

Friday, November 09, 2012
Osborne raids the pot of QE gold
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

The City is all a flutter over today's announcement that the Bank of England is to transfer the coupon, or interest, on the gilts it has been buying under the £375 billion quantitative easing programme back to the Treasury. At a stroke, it seems, government debt will be reduced by £35 billion and the public finances will have received a much-needed fillip.

Three points can be made on this:

- the Bank of England did not want this change. It regarded the accumulated coupons as insurance against the likely capital losses it would make on selling back the gilts it has bought, some probably at the top of the market.

- Other countries adopt the practice of automatically transferring interest back to their treasury departments though this does represent a rule change in the UK, and will be seen as a reflection of official concern about the public finances.

- To the extent these coupons were accumulating at the publicly-owned Bank, it amounts to a clever accounting change.

This is from the initial assessment of the change from the Office for Budget Responsibility:

* Public sector net borrowing will be lower in the near term than it otherwise would have been, as the Treasury receives the coupon payments on the gilts held by the APF (Asset Purchase Facility), minus the interest that the APF has to pay the Bank for the loan that allowed it to purchase them.

* Net borrowing is then likely to be higher in future years as the APF moves into deficit and the Treasury has to cover this. The APF's interest payments will increase when Bank Rate starts rising. And the sale or redemption of gilts is likely to leave it facing capital losses, as the amounts received will probably be smaller than the amounts paid for them.

Trade improvement
Posted by David Smith at 11:41 AM
Category: Thoughts and responses

Britain still has a very large trade deficit but at least, for now, it is heading in the right direction. The overall deficit on goods and services narrowed to £2.7 billion in September, from £4.3 billion in August, and to £8.5 billion in the third quarter from £10.1 billion in the second. Moderately encouraging. More here.

Tuesday, November 06, 2012
North Sea hits industrial output
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

A 1.7% fall in industrial production between August and September was bad news, though it was accompanied by a 0.1% increase in manufacturing output, which was better than expected. Falling North Sea output, down more than 15% on the month, was to blame for the difference.

There will be some relief that this September drop in industrial production will not impact on the third quarter GDP figures. The 0.9% rise in the third quarter was smaller than the 1.1% estimated in the GDP release but the difference is not large enough for a GDP revision. Given that the North Sea slump appears to reflect summer shutdowns lasting longer than usual, this could, paradoxically, help the October figures along. More details here.

Elsewhere, the Society of Motor Manufacturers and Traders reported a 12.1% increase in new car registrations in October compared with a year earlier. Private registrations were up a very strong 23.9%.

The Halifax said house prices fell by 0.7% in October, for a drop of 1.2% over the latest three months and 1.7% on a year earlier.

Monday, November 05, 2012
Service sector PMI falls
Posted by David Smith at 01:10 PM
Category: Thoughts and responses

The service sector puchasing managers' index might have come to the rescue following weak manufacturing news but it was not to be. It dropped to 50.6 in October, from 52.2 in September. The composite PMI, made up of construction, manufacturing and services, dropped to 49.7, suggesting a modest overall contraction in economic activity.

"Further growth of UK services activity was recorded during October, although the rate of expansion slowed to a marginal pace. Growth of new business also eased during the month, leading companies to deplete backlogs of work. Meanwhile, staffing levels were reduced for the second month running.

"On the price front, a further solid increase in input costs was recorded in October, but companies were still reluctant to fully pass on higher cost burdens to their clients and output prices rose only marginally.

"The headline seasonally adjusted Business Activity Index posted 50.6 in October. Although this reading still signalled an expansion in services activity during the month, it was below the mark of 52.2 in September. Moreover, the rate of growth was the slowest in the current 22-month period of rising activity.

"Those respondents that recorded an increase in business activity linked this to signs of improving underlying demand and client confidence. However, other panellists reported that these improvements remained only tentative. Strong competitive pressures were also mentioned."

The PMIs show that the fourth quarter has started on a weak note. The only crumb of comfort may be that they are not always well correlated with official data.

Thursday, October 25, 2012
1% GDP bounce beats expectations
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Whatever the distortions and special factors, the 1% rise in GDP in the third quarter was welcome. It suggested that there has been underlying growth in the economy, not just in the third quarter but in the second as well, so that "longest double-dip recession in 50 years" should be put to bed.

The best way to look at the figures, according to the statisticians, is to take the second and third quarters together. GDP fell by 0.4% in the jubilee-affected second quarter and rose by 1% in the third, making for a 0.6% rise over the two. 0.2% of this was Olympic ticket sales, leaving 0.4% underlying growth, 0.2% in each quarter. Not strong by any measure, but the right side of zero.

The 1% GDP rise compared with expectations of a rise of between 0.4% and 0.8%. Is it a little toppy? The Office for National Statistics has pencilled in a small 0.5% fall in service sector output in September, though it doesn't yet have the data. The 2.5% quarterly fall in construction sector output looks a bit too pessimistic.

It makes a change, however, for the ONS to produce figures that surprise on the upside. More here.

Wednesday, October 24, 2012
Downbeat King rejects the helicopter
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

Three things were notable from Sir Mervyn King's speech to the South Wales Chamber of Commerce in Cardiff. The first, which is not unusual, was the sombre tone and the admission that there are limits to what monetary policy can do in this situation.

The second was his concern about the banking system. The £80 billion Funding for Lending Scheme should get more credit into the economy, he said, but also: "The window of opportunity which it provides must be used to restore the capital position of the UK banking system." This appears to be giving the banks a green light to use the scheme as much to help themselves as the economy.

He also rejected an array of alternatives that have been suggested, including the writing off of the gilts the Bank has acquired under quantitative easing and a so-called helicopter drop of money onto the economy. He said: "There has been some talk about the possibility that money created by the Bank could be used directly to finance additional government spending, or even that money could be given away. Abstracting from the colourful metaphor of “helicopter money”, such operations would combine monetary and fiscal policies."

And concluded: "Not only is combining monetary and fiscal policies unnecessary, it is also dangerous. Either the government controls the process – which is “bad” money creation – or the Bank controls it and enters the forbidden territory of fiscal policy. It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when that becomes necessary. Otherwise, we run the risk of losing control over monetary conditions."

That's the strongest defence of the Bank's QE model I have seen. Given that some of these more unconventional ideas, rightly or wrongly, have been associated with Lord Adair Turner, a candidate to succeed King as Governor, it must also be seen as a slapdown for him. The speech is here.

Friday, October 19, 2012
Borrowing starts to move back in line
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

One of the the regular themes here has been that it was premature to talk about a big borrowing overshoot on the basis of monthly figures for the first few months of the fiscal year. The distortions in the data, including a new Treasury system for monitoring spending meant that few sensible conclusions could be drawn.

So it is proving. Public sector net borrowing in September was £12.8 billion, £0.7 billion down on a year earlier. More significantly, revisions to earlier data mean that borrowing for the first half of the fiscal year, £65.1 billion, is only marginally up on the £62.4 billion figure for a year earlier.

Tax receipts in September, up by 3.7% on a year earlier, were stronger than in recent months. More details here on the numbers.

They are important in economic terms, but also important politically. Labour unwisely bet the ranch at its party conference on a big overshoot in borrowing this year. Oddly, it is is persisting with this attack even though the numbers are coming back towards official projections. But then Labour has a long way to go to get back credibility on the public finances.

Thursday, October 18, 2012
Retail sales bounce
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

After slipping by 0.1% in August, when people appear to have been distracted by the Olympics, retail sales volumes rose by 0.6% in September. Volumes were up by 2.5% on a year earlier (2.9% excluding automotive fuel), and by 1% in the third quarter compared with the second (0.7% excluding fuel). This should mean consumer spending makes a reasonable contribution to third quarter growth.

Sales value rose by 1.1% between August and September, following a 0.2% increase between July and August. The Office for National Statistics attributes some of that rise to school uniforms, though September seems a little late for that. More here.

Wednesday, October 17, 2012
Strong labour market data
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Another excellent set of labour market numbers, the highlights of which are as follows:

The employment rate for those aged from 16 to 64 for June to August 2012 was 71.3 per cent, up 0.5 from March to May 2012. There were 29.59 million people in employment aged 16 and over, up 212,000 from March to May 2012.

The unemployment rate for June to August 2012 was 7.9 per cent of the economically active population, down 0.2 from March to May 2012. There were 2.53 million unemployed people, down 50,000 from March to May 2012.

The inactivity rate for those aged from 16 to 64 for June to August 2012 was 22.5 per cent, down 0.3 from March to May 2012. There were 9.04 million economically inactive people aged from 16 to 64, down 138,000 from March to May 2012.

Between June to August 2011 and June to August 2012, total pay (including bonuses) rose by 1.7 per cent and regular pay (excluding bonuses) rose by 2.0 per cent.

Overall employment is now back above pre-crisis levels, though its composition has changed. The ONS has done a useful five-year comparision, available here - all in all, another remarkably good set of numbers.

Tuesday, October 16, 2012
Inflation within sight of target - for now
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

The drop in inflation to 2.2% in September, from 2.5% in August, is welcome in its own right, by easing the squeeze on real incomes. It is also good news for the government, being the monthly number used for next spring's benefit uprating. The Treasury has already been hinting at not uprating benefits by the full amount of indexation. This number may mean the political flak is not worth it. Retail price inflation fell from 2.9% to 2.6%.

The shape of things to come is hinted at by the producer prices index, which showed that factory gate prices rose by 2.5% in the 12 months to September, up from 2.3% the previous month. Input prices, however, fell by 1.2% in the 12 months to September.

In a busy day for news on prices, the Office for National Statistics said house prices rose by 1.8% in the 12 months to August.

Monday, October 15, 2012
The Nobel Prize in Economics
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The Nobel prize for economics - the Bank of Sweden prize - has been awarded to Alvin Roth and Lloyd Shapley for their work on "the theory of stable allocations and the practice of market design". A reasonably accessible explanation of their work is here.

Friday, October 12, 2012
Turner is for turning
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Lord Adair Turner, chairman of the Financial Services Authority and candidate for the Bank of England governorship, has done a mea culpa on his earlier advocacy of euro membership for Britain. In a speech at the Mansion House, he said:

"Ten years ago I argued in favour of the Eurozone project and for Britain’s eventual membership. As I have said before, I was wrong, failing to recognise the inherent flaws in the Eurozone’s current design. And it’s important for both individuals and institutions to recognise mistakes and learn from them.

"The crucial mistake was a failure to recognise that debt issued by a nation within a multinational currency zone is quite different from debt issued by a nation which also issues its own currency – it is inherently more susceptible to default risk, it is inherently less likely to be perceived as risk-free. As a result, in a multi national currency zone with significant debt issued at national level, bank solvency and national solvency can become linked in a potentially fatal embrace."

Turner will also have endeared himself to Sir Mervyn King (or not) with his comments on monetary policy: "Quantitative easing alone may be subject to declining marginal impact, the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand. So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies, and to consider the combined impact of multiple policy levers – monetary policy, Bank of England liquidity insurance, prudential regulation and direct support to real economy lending – which we used either to consider quite separately, or else avoid entirely." The speech is here.

Tuesday, October 09, 2012
Bouncing through the disappointment
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

Today's industrial production figures, for August, looked disappointing, with falls of 0.5% for overall output and 1.2% for manufacturing but they followed big jumps, of 2.8% and 3.1% respectively, in July. Industrial production in July-August was 1.4% up on the second quarter average, while manufacturing was up 1% on the same basis, suggesting a significant contribution to growth from both in the third quarter. More details here.

The National Institute of Economic and Social research, here, suggests GDP rose by 0.8% in the third quarter, though some of that reflects a bounceback from the Jubilee-affected second quarter. It rightly points out that underlying growth in both quarters was probably 0.2% to 0.3%.

There was bad news on trade today, with the deficit widening to £4.2 billion in August, from £1.7 billion in July. The size of the trade deficit is worrying, particularly given the advantages of a competitive pound. Behind the statistical noise there is an underlying deterioration. More here.

Monday, October 08, 2012
Osborne's automatic stabilisers
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

George Osborne's Tory conference speech was pretty dour, and did not contain much that was new. Further welfare cuts will be needed as the government takes fiscal consolidation even further into the next parliament, and there was an eye-catching, if highly controversial proposal, for workers to surrender some employment rights in return for employee shares that will be taxed at a zero CGT rate.

On policy, this was most significant: "We have never argued that you stop what economists call the automatic stabilisers operating - the lower tax receipts and extra government payments that follow if, for example, the global economy turns down." That will be the Autumn Statement defence for missed fiscal targets. The speech is here.

Wednesday, October 03, 2012
Soggy September
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Just as the GDP figures gave an artificial impression of weakness in the economy in the second quarter, so the third quarter numbers risk giving an artifical impression of strength. The service sector purchasing managers' index for September showed a fall from 53.7 to 52.2, below market expectations of 53.

There was good and bad news in the survey. The employment component dropped below 50, suggesting a drop in jobs, but new work rose at its strongest rate since May. The headline on the release by Markit, which prepares the data, is: "Faster rise in new business supports solid increase in activity during September."

So we should not be too gloomy. But the average level of the three purchasing managers indexes for the third quarter, 51.1, is according to Markit consistent with only 0.1% growth. It is the unwinding of the Jubilee effect, perhaps contributing 0.4% or 0.5%, which will provide a healthier picture.

The big picture, as it has been over the past three years, is of an economy growing modestly, at something like a 1% rate. There is nothing in these surveys to suggest a breakout from that.

Friday, September 28, 2012
Service sector bounces
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Service sector output bounced in July, as expected, rising by 1.1% on the month as it recovered from the July distortions. The service sector has grown by 0.1% over the latest three months (despite the June drop) and by 0.7% on a year earlier. So most of the economy - services are 77% of gross value added - has been growing. July service sector output was up by 0.3% on the second quarter average. More here.

Thursday, September 27, 2012
A rather different GDP picture
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The revised Q2 gross domestic product figures - the Office for National Statistics' second GDP revision and third take on the numbers - showed the expected trimming of the fall from 0.5% to 0.4%. The latest estimate compares with an initial 0.7% decline. If the extra Jubilee bank holiday trimmed GDP by 0.5% in the second quarter, underlying growth was flat to marginally up.

Until the latest figures, GDP had fallen in five out of 12 quarters since the recovery began in mid-2009. One of those has now been revised away: the second quarter of 2011 now shows a small 0.1% GDP rise. There will be many more revisions to come.

The details of the latest release are interesting. Consumer spending fell by 0.2% in the second quarter, up from an initial 0.4% fall. This occurred despite an apparent 1.9% jump in household real disposable income. However, consumer spending is now thought to have grown modestly over the past year, by 0.2%, which sits more easily with the retail sales figures.

Business investment was revised higher, and government spending growth lower. The big drag on GDP over the past year has been net trade (exports minus imports), which subtracted 0.9 percentage points from growth, suggesting that eurozone woes have played a significant part in the UK's growth disappointments. More here.

Friday, September 21, 2012
Mixed news on public borrowing - and don't forget OSCAR
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Most of the commentary on the public finances will focus on the continued overshoot compared with last year. That was not the case in August - public sector net borrowing of £14.4 billion was identical to a year earlier - but remains the case on the cumulative numbers.

So public sector net borrowing in April-August (excluding the Royal Mail distortion) was £59 billion, compared with £48.4 billion in the corresponding period of 2011-12. All other deficit measures are up, for the simple reason that spending is rising faster than tax receipts.

The news, however, is not yet that bad. The Office for National Statistics also announced a big downward revision to 2011-12 borrowing, to £119.3 billion. That is not only £6.7 billion below the Office for Budget Responsibility forecast for the year, but below its forecast for the current year (£119.9 billion).

It is also a reminder that these numbers get extensively revised, and often down. One attack on the coalition's fiscal strategy has been that its borrowing numbers have been consistently revised up. The latest outturn for 2011-12 is quite close to the OBR's initial forecast of £116 billion, made in June 2010. We may get down there in time.

The new numbers cast the coalition's stratagy in a better light. In its first two years, it reduced the deficit from £159 billion to £119 billion.

There is also an uncertainty concerning "OSCAR", the Treasury's new system for controlling and monitoring spending. According to the ONS:
"HM Treasury has replaced its COINS system for financial reporting with a new Online System for Central Accounting and Reporting (OSCAR) for 2012/13 onwards. This system collects public spending data from central government departments and the devolved administrations. August is the fourth month that the central government spending data for 2012/13 has been produced using this system. Although the data are for the most part of comparable quality to previous years, there are still some initial data and system issues. Resolving these issues may lead to larger than normal revisions in the central government expenditure data reported over the first half of 2012/13."

More here.

Thursday, September 20, 2012
Retail sales - no Olympic gold medal
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Retail sales volumes slipped by 0.2% last month, which was slightly less than expected, but suggesting there was no Olympic boost for retailers. The effect, however, seems to have been mainly on online sales - people watched the Olympics and Paralympics rather than clicking and shopping.

So, clothing and footwear sales rose by 1.6% on the month, partly as a result of aggressive discounting, food sales also rose, while there were 2.7% drops in household goods sales and 6.7% in non-store retailing. The percentage of retailing online droppped from 9% to 8.1%.

However there was also a positive Games effect. According to the Office for National Statistics: "The largest contribution to growth in the non-food sector came from the other stores category in particular sporting goods and toys. Feedback from these stores suggests that sales were boosted by an increase in sales of football shirts with the start of the new season and the European Championship but also from increased sales as a result of the Olympics."

Overall, the sales picture over the past 12 months looks surprisingly healthy given the squeeze on real incomes, with a rise of 2.7% in volumes in August compared with August 2011, 3.1% excluding petrol and diesel sales. Non-food sales rose by a very strong 5% in volume terms.

There's a note of caution, of course. This year there are Olympic/Paralympic distortions, last year we had the riots in London and other cities (though retail sales fell by only 0.6% on the month). We will get a better picture in the run-up to Christmas. More here.

Tuesday, September 18, 2012
Inflation fall needs to go further
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Consumer price inflation dropped from 2.6% in July to 2.5% in August, with retail price inflation down from 3.2% to 2.9%. Both falls were welcome and imply that inflation - 5.2% last September - has halved in less than a year.

According to the Office for National Statistics: "The largest downward pressures behind the change in the CPI rate came from furniture, household equipment & maintenance, housing & household services (particularly domestic gas) and clothing & footwear. These were partially offset by an upward pressure from transport (particularly motor fuels)."

The question is what happens next. The ONS notes that petrol prices fell between August and September last year, while they have risen this September. Some gas and electricity prices will be rising in the autumn, as has already been announced. The poor summer and weather events around the world will push up food prices.

On the positive side, the latest figures continued a pattern in which inflation has been generally subdued in 2012. The consumer prices index in August was less than 1.2% up on its December 2011 level. Although there are seasonal patterns in inflation, this implies that inflation this year has been running below the 2% target.

Can this continue? For inflation to fall further monthly rise sin the index have to be lower than a year ago. That looks achievable in September - last year the index rose by 0.7% - but more of a challenge for October and November, when the increases were 0.1% and 0.2% respectively.

This is not just a matter of statistical interest, of course. Even at 2.5% inflation, prices are rising a percentage point faster than average earnings. To restore the growth in real incomes, and get consumers spending more, inflation needs to drop below 2%. That is still far from guaranteed. More here.

Separately, the Office for National Statistics, said it would review the construction of the retail prices index to deal with a longstanding anomaly, the so-called formula effect, which boosts measured retail price inflation.

Wednesday, September 12, 2012
Another set of strong employment numbers
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Employment rose by 236,000 in the three months to July and, at 29.56m, is within a whisker of its pre-recession peak of 29.57m. The corresponding fall in unemployment over the period, 7,000, is disappointing, though there was a bigger 181,000 fall in economic inactivity during the quarter. The claimant count dropped by 15,000 to 1.57m between July and August.

The Office for National Statistics has usefully contrasted the pre-recession employment peak, in March-May 2008, with the current position. As it notes, since then there has been a 640,000 fall in full-time employment, a 628,000 rise in part-time employment, a 978,000 rise in employment, a 60,000 drop in economic inactivity (16-64) and a 1.524m increase in the 16-plus population. So some way yet to go.

More here. Other highlights:

* The employment rate for those aged from 16 to 64 was 71.2%, up 0.5 on the quarter. There were 29.56 million people in employment aged 16 and over, up 236,000 on the quarter.

* The unemployment rate was 8.1% of the economically active population, down 0.1 on the quarter. There were 2.59 million unemployed people, down 7,000 on the quarter.

* The inactivity rate for those aged from 16 to 64 was 22.4%, down 0.5 on the quarter. There were 9.01 million economically inactive people aged from 16 to 64, down 181,000 on the quarter.

• Total pay (including bonuses) rose by 1.5% on a year earlier, down 0.3 on the three months to June 2012. Regular pay (excluding bonuses) rose by 1.9% on a year earlier, up 0.1 on the three months to June.

Tuesday, September 11, 2012
Trade recovers from the distortions
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

The trade figures for July underline the folly of those who rushed to draw conclusions from the Jubilee-affected June numbers. The overall trade deficit narrowed sharply from £4.3 billion in June to £1.5 billion in July, while the goods deficit fell from £10.1 billion to £7.1 billion.

In July alone, the value of exports rose by 9.3%, while imports fell by 2.1%, proof that the June distortion hit exports significantly. Of course, no conclusions can be drawn from monthly movements between June and July.

A better guide is the three monthly picture, which shows that the overall trade deficit narrowed to £8 billion in the May-July period from £10.5 billion in the previous three months. Export volumes rose by 0.9%, excluding oil and erratics, while import volumes fell by 0.8%. There's a long way to go, but at least it is in the right direction.

The figures continue to show that exporters are being hit by the eurozone crisis, while making progress in non-EU trade. In the latest three months goods exports to the rest of the EU edged up by 0.3% but were down by 4.4% on a year earlier. Non-EU exports rose by 4.5% and were 12.5% on a year earlier. More here.

Friday, September 07, 2012
A post-Jubilee bounce
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

After the distortions to the data for June, caused by two additional bank holidays (one shifted from May), there is a distortion in the opposite direction for July, industrial production jumping by 2.9%, its biggest monthly rise for 25 years, while manufacturing output rose by 3.2%. The release includes revisions to data for earlier months.

Reading through the distortions, industrial production in July was 1.6% above its second quarter average, so if it were to hold at the July level industry would make a significant contribution to GDP growth for the first time in several quarters. Industrial production was still down by 0.8% on a year earlier, while manufacturing output was down 0.5%, though in both cases these growth rates will soon turn positive if output merely holds at July levels. More here.

Also released, producer price figures for August showing a strong 2% rise in input prices (up 1.4% on a year ago), while output prices rose by 0.5% (up 2.2% year-on-year).

Thursday, September 06, 2012
OECD downbeat, Bank unchanged
Posted by David Smith at 12:45 PM
Category: Thoughts and responses

America is the best of a mediocre bunch in the OECD's latest interim assessment, with growth accelerating to a 2.4% annual rate by the fourth quarter. The eurozone remains the biggest threat to the global economy, with even Germany set for two quarters of recession in the remainder of 2012. The OECD's short-term forecast for Britain is downbeat, with an annualised GDP decline of 0.7% in the third quarter, followed by growth of 0.2% in the final three months of the year adding up to a 0.7% GDP drop for 2012 as a whole. Curiously, however, the OECD has not tried to adjust for the likely bounce in activity in the third quarter arising from Jubilee and Olympic distortions. The assessment is here.

The Bank of England, as expected, left Bank rate unchanged at 0.5% and made no change to the existing £375 bilion of quantitative easing.

Wednesday, September 05, 2012
Free Lunch Revisited
Posted by David Smith at 09:30 AM
Category: Thoughts and responses

flunch.jpg

A new edition of Free Lunch: Easily Digestible Economics is out, extensively revised in the light of the events of the past five years. Intended to introduce new readers to the subject, or to refresh others, it is available by clicking here. Signed copies may be available by contacting me at the economicsuk e-mail address.

This is from the introduction to the book:

This is a book about economics. I used to say that as a half-apology, knowing that economics had to work quite hard to compete with other subjects, not to mention most other things in the bookshop. Things are different now, thanks to the global financial crisis that began in the summer of 2007 and was from over in the run-up to its fifth anniversary as this was being written. The crisis came like a whirlwind, damaging everything in its wake but also shaking up perceptions, including those about economics. Everybody has a view on the crisis, and most people have something to be angry about, with bankers, regulators, politicians and even economists. Apart from the fact that the repercussions of the crisis will live in the memory for decades, its effects are real.

Would we have had severe cuts in public spending and tax hikes in the absence of the crisis? Would, to take a simple example, the coalition government in Britain have been emboldened enough to introduce big increases in university tuition fees? Would there have been a coalition government at all, a rarity in Britain, in the absence of the crisis? The crisis drew into sharp focus questions about how modern economies operate.

It marked a shift from the easy, credit-driven growth of the 1990s and 2000s into something very different. Banks were safe, staid institutions, were they not? No, and in the autumn of 2008, the Western banking system came very close to collapse. This was the time when at a practical level the cash machines almost did not get refilled, the supermarket shelves almost were not restocked, the wages not paid. It was very close to a full state of economic emergency, in Britain and in other countries.

So, without wishing that kind of crisis on anybody, it seems to me that it taught us that everybody should take an interest in economics, and not just at times of great turbulence. The crisis, you will find, makes appearances throughout this book but it does not dominate it. For this is a book about economics. And it is a book about economics quite unlike any other. There are no tricky diagrams of the kind that leave you wondering whether the page has been printed the right way up. There are no complicated mathematical equations. Unless something can be easily explained, it has no place in this book. Above all, at a time when we all need to know some economics, it is intensely practical. This book will not necessarily make you a millionaire – I always say that the only economists you see driving Rolls-Royces are wearing a chauffeurs’ caps – but it will tell you about the process by which we become, mainly, better off, apart from when those crises hit. It is also, I hope, good fun.

The aim of this book is to fill a gap, just like a good lunch. For years, at The Sunday Times and elsewhere, readers have been asking me to recommend an easily digestible book on economics, either for non-economists or for those whose grasp of it is a little rusty. Until now I have found it difficult to do so. There are some excellent textbooks on economics, some of which I shall recommend later, but they are intended for formal courses of study, with teachers offering a guiding hand. This is different. I hope that many students will read and profit from Free Lunch but in a way that complements formal study rather than replaces it.

There are, too, some excellent books describing recent economic history but these can be difficult, if not impossible, in the absence of the building blocks. An account of, say, Alan Greenspan or Ben Bernanke’s time as chairman of the Federal Reserve Board in Washington needs the context of knowing something about monetary policy and how central banks are supposed to operate it. Similarly, trying to judge whether an assessment is fair or unfair of the success of the government’s management of the economy requires a few basic tools.

Tuesday, September 04, 2012
Services up, construction down
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

There was mixed news today from the purchasing managers' surveys for August, with the construction survey showing a drop from 50.9 to 49 while the larger service-sector PMI jumped from 51 to 53.7. This was what Markit, which prepares the data, had to say about services:

"A solid expansion of UK service sector activity was signalled in August as companies benefited from a further rise in incoming new business and continued to make inroads into unfinished work. Capacity was further increased as positive expectations were retained by a significant proportion of service providers.

"However, amid evidence that the operating environment remains challenging, sales and activity continue to grow at below par rates, while confidence was again well below its historical trend level.

"The headline seasonally adjusted Business Activity Index was comfortably above the 50.0 no-change mark in August. Posting 53.7 and rising from July’s 51.0, the index signalled a twentieth consecutive month of growth and its best reading since March."

Monday, September 03, 2012
Coalition unveils its autumn range
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Under pressure from business bodies, its own backbenchers and just about everybody else, the government has gone into full initiative mode. Though full details are awaited, it appears to comprise:
- up to £50 billion of government guarantees for infrastructure spending, £10 billion of them for housing.
- an easing of planning rules, particularly for housebuilding, but also other developments.
- a "business bank".

There is a strong dose of New Labour about this raft of initiatives. £40 billion of the infrastructure guarantees were announced in July, so only the housebuilding is new.

The government has been in a mess on planning since the Conservatives and Liberal Democrats were in opposition, first proposing what amounted to a Nimby (not in my back yard) charter, before eventually seeing the light on the need to speed planning from the centre. This is just another step along that road.

The "business bank", it seems, is a website that will bring together existing initiatives, not a new bank at all. It remains to be seen if there is anything further.

None of this means some of these things won't be important over the medium term, particularly the infrastructure guarantees. But this flurry of announcements is driven mainly by politics.

Meanwhile, on a day when the EEF came out with a downbeat manufacturing survey, the manufacturing purchasing managers' index actually recorded a reasonable rise, from 45.2 in July to 49.5 in August. That still means the sector is contracting, though only marginally.

According to Markit, which prepares the data: "The downturn in the UK manufacturing sector showed signs of easing during August, following a severe contraction in the previous month. The seasonally adjusted Markit/CIPS Purchasing Manager’s Index rose to 49.5, from 45.2 in July, a four-month high and only slightly below the 50.0 mark that separates expansion from contraction.

"Manufacturing production fell for the second successive month in August, albeit to a much lesser degree than in July. The decline in output was centred on the investment goods sector. Output rose solidly at consumer goods producers, while intermediate goods companies saw a marginal return to growth."

Friday, August 31, 2012
A mixed bag
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

House prices rose by 1.3% in August, their biggest monthly increase since January 2010, according to the Nationwide building society. It followed two successive monthly falls, however, and the best way of looking at the data is that in nominal terms house prices are flat, which is roughly where they've been for the past three years.

Compared with a year ago, prices were down by 0.7%, compared with a 2.6% annual fall in July. More here. The John Lewis Partnership reported an 8.8% year-on-year rise in sales in the week to August 24, which most retailers would give their eye teeth for but is not as strong as its recent performance. The increase for the latest four weeks was 14.9%.

How to square these with the downgrading of the CBI and British Chambers of Commerce forecasts, to -0.3% and -0.4% respectively? Mainly this is a question of arithmetic. Even after the revision of the second quarter GDP figures it would have taken a big rebound in the second half to neutralise the effect of three quarterly declines in GDP. As it is, these forecasts assume growth in the third and fourth quarters.

Perhaps of more concern is that both business organisations predict growth of only a little over 1% in 2013. Their members won't want to invest much on that prospect.

Friday, August 24, 2012
A modest GDP revision
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

There was no surprise in the fact that GDP was revised up for the second quarter - the first estimate from the Office for National Statistics of a 0.7% fall always looked too low. The surprise is that the revision, to a fall of 0.5%, was not bigger.

We knew the ONS estimates for industrial production and construction were too pessimistic, and each contributed 0.1 points to the revision. But there were also reaons to expect an upward revision to services, down 0.1% on the quarter, following stronger retail sales in June.

As it is, the economy appears to have been flat in the second quarter after the bank holiday effect is taken out. But these are still early stage numbers. Compared with a year earlier UK GDP, not adjusting for any bank holiday effect, was down 0.5%, similar to the 0.4% fall for the EU and eurozone. More here.

Tuesday, August 21, 2012
Borrowing still overshooting
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Both the Institute for Fiscal Studies and the Office for Budget Responsibility will have something to say on the public finances later and I imagine they will say it is too early to draw conclusions on the full-year outturn from the numbers for the first few months.

Even so, there is an overshoot, both for July and the first four months of the fiscal year. In July public sector net borrowing was £0.6 billion, compared with a surplus/repayment of £2.8 billion a year ago. Cumulative borrowing, excluding the Royal Mail and other distortions was £11.6 billion higher than in the corresponding period of 2011-12.

This is the Office for National Statistics' explanation:
"The April 2012 net borrowing figures include two one-off transactions. The first is a £28 billion transaction to the Government from the transfer of the Royal Mail Pension Plan and the second is a £2.3 billion transaction to the Government from the closure of the Special Liquidity Scheme ... If the effect of these two one-off transactions is removed from the public sector net borrowing then PSNB ex in the period April to July 2012 would be £47.2 billion, which would be £11.6 billion higher than in April to July 2011."

Other highlights: Public sector net debt was £1,032.4 billion at the end of July 2012, equivalent to 65.7% of gross domestic product (GDP) - this is actually £7 billion lower than at the end of June. 2011-12 borrowing is now back to £125 billion - from £128 billion a couple of months ago.

And current spending is still rising quite strongly: "In July 2012, central government accrued current expenditure was £50.2 billion, which was £2.4 billion, or 5.1%, higher than July 2011, when central government current expenditure was £47.8 billion. For the period April to July 2012, central government accrued current expenditure was £212.5 billion, which was £7.3 billion, or 3.5%, higher than in the same period of the previous year, when central government current expenditure was £205.3 billion."

I'd recommend a glance through the ONS press release, here, and its many footnotes and explanations, for a glimpse of how complicated putting together numbers for the public finances is.

Thursday, August 16, 2012
Retail sales much better than feared
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Retail sales volumes rose by 0.3% in July, which was better than expected, after a dramatic upward revision from 0.1% to 0.8% in June. As a result, sales volumes were up by 2.8% on a year earlier, 3.3% excluding automotive fuel.

The July numbers themselves were unspectacular, with clothing and footwear and household goods' sales down on the month, by 1.8% and 1.5% respectively, probably as a result of the bringing forward of summer sales. Food sales were up, however, and sales volumes in the latest three months were up by 0.9% on the previous three months, 1.4% excluding automotive fuel.

The upward revision to retail sales in June should give a stronger service-sector number for the second quarter, alongside better manufacturing and construction. Let us see if it does. More here.

Wednesday, August 15, 2012
Employment keeps on booming
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Was there any bad news in today's labour market numbers? if you were looking for it, it would be the fact that pay, rising by 1.6% (1.8% excluding bonuses) is still running below inflation, 2.6%. Or it would be that, at 8%, unemployment is still high, and much higher among young people.

But the big message from today's figures is a positive one, with employment up by 201,000 over the April-June period to 29.48m, which is less than 100,000 below the pre-recession peak. Unemployment dropped by 46,000 to 2.56m, which is 8% of the workforce. Even the claimant count, which is being boosted by benefit changes, fell by 5,900 to 2.56m.

There may have been a small Olympics boost in employment in the figures, but it is absurd to suggest they are solely responsible for the rise. It is possible there has been a slowing in the pace of public sector job cuts (the next set of figures will be distorted by the reclassification of further education colleges).

But overall, the rise in private-sector driven employment and in hours worked - up strongly in the second quarter compared with a year earlier (more than 20m a week) is hard o reconcile with even a flatlining economy. Some can be explained by weakness in the energy sector, which is not closely linked to employment. Overall, though, it is a mystery. More here.

Tuesday, August 14, 2012
A disappointing inflation blip
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The July inflation figures were a little disappointing, consumer price inflation rising to 2.6% in July from 2.4% in June, while RPI inflation increased more sharply, from 2.8% to 3.2%. After three successive months in which inflation surprised on the downside, this broke the pattern.

We should not be too downhearted. The main reason inflation rose was because prices fell faster a year ago, particularly clothing and footwear, where bad weather brought the summer sales forward this year. Clothing and footwear prices still fell in July, 2.6%, but not as much as in July 2011.

Even so, the consumer prices index only rose by 0.1% between June and July and has increased by just 0.7% since December. Not much inflation there. More here.

Friday, August 10, 2012
Housing market picks up
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

Probably more important than the fact that house prices rose by 0.2% in July, and were 3.2% on a year earlier, is that transactions rose by 11% after falling back in Jubilee-affected June. according to the latest LSL-Acadametrics house price index.

The index, the most comprehensive timely measure of the market, notes wide regional variations. According to LSL:

"There is by no means a consistent picture across the country. While the average national price has climbed, less prosperous areas such as Hartlepool have seen prices fall by 8.3% in the last 12 months, reflecting lenders’ caution in areas with weaker local economies where higher levels of unemployment may threaten borrowers’ finances.

“In contrast, London’s market is going from strength to strength. House prices in 10 London boroughs have hit new highs, with Kensington & Chelsea seeing capital gains of 38% since last June. While the figures may be flattered by comparison to last year’s hangover after the introduction of the stamp duty in April on properties worth more than £1m, money is pouring into prime areas from cash buyers and international investors looking to store their wealth in bricks and mortar. As demand from wealthy buyers continues and first-time buyer numbers remain subdued, the gap between the opposite ends of the market remains.” The index is here.

Also announced today. The John Lewis Partnership said department store sales were 22.4% up on a year ago, benefiting from an Olympic uplift.

Thursday, August 09, 2012
Exports take a hit
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Apart from the headline widening of the trade deficit in June to £4.3 billion, from £2.7 billion in May - and a second quarter widening to £11.2 billion, from £7.8 billion in the first quarter - the most disturbing aspect of the latest trade figures is the performance of exports.

The Office for National Statistics says export volumes, excluding oil and erratic items, fell by 3.3% in the second quarter, while import volumes dropped by 0.5%. There is clearly a eurozone effect here: in the second quarter the value of exports to the rest of the EU was down by 9.9% on a year earlier, while non-EU exports were up by 9.7%. More here.

Wednesday, August 08, 2012
Bank sees a "slowly healing" economy
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

The Governor of the Bank of England probably overdid the Olympic analogies but his broad assessment in introducing the August inflation report is a reasonable one. He said:

"A year ago inflation was rising and heading towards 5%. It has now fallen to within touching distance of the 2% target. The big picture in today’s Report is of a further decline in inflation, as external influences fade and domestic cost pressures ease, and a gradual recovery in output. Nevertheless we are navigating rough waters and storm clouds continue to roll in from the euro area.

"Output has contracted in each of the past three quarters, but the underlying picture is probably not as weak as the headline data suggest. The extra bank holiday in June is likely to have reduced output in Q2 by around ½%, an effect that should unwind in Q3. And a large fall in construction output in the first half of the year, which seems at odds with survey data, is unlikely to be repeated. Even looking through these erratic factors, though, the underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed expectations of a recovery.

"In contrast, the labour market has remained surprisingly resilient in recent months. Private sector employment has grown robustly and unemployment has edged downwards. Although welcome news in its own right, the resilience of employment, combined with the weakness of output, means that productivity growth has been unusually low. That continues a recent pattern of both weak output and productivity growth that is difficult to explain."

The Bank doesn't believe the recent GDP figures and thinks the Jubilee effect alone depressed GDP by around 0.5% in the second quarter - add in a weather effect and you get a flat figures - but has been obliged to revise down its growth forecasts again. Nonetheless it thinks the mechanism for restoring growth - the recovery in real incomes - remains intact. It will, however, be a subdued recovery.

The Bank expects inflation to undershoot the official target for most of the next three years, suggesting the unanticipated squeeze on spending will ease. Buit further monetary stimulus is more likely to come from additional quantitative easing than cutting interest rates. A rate cut from 0.5% was, said Sir Mervyn King, "neither here nor there". The inflation report is here.

Tuesday, August 07, 2012
Industrial production marginally less gloomy than feared
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The industrial production figures look awful, with a drop of 4.3% on a year earlier in both industrial production and manufacturing and falls of 2.5% and 2.9% respectively on the month. The extra June bank holidays were, however, a big factor and the 0.9% quarterly drop in both measures was less than the 1.3% the Office for National Statistics had feared, implying a 0.1 point upward revision in Q2 gross domestic product. More here.

Friday, August 03, 2012
Surveys suggest downbeat July
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

After the manufacturing purchasing managers' index earlier in the week - sharply down - and that for the construction sector, surprisingly up, today we had the service sector reading.

It fell from 51.3 to 51, so still expanding, but at a slower rate. However, according to Markit, which prepares the data:

"The Markit/CIPS PMI surveys for July collectively signalled the weakest economic performance since April 2009, a downturn which can only in part be attributed to temporary factors.

"Markit’s all-sector PMI fell for the fourth month running in July, down from 51.1 in June to 49.5, signalling the first monthly fall in output since April 2009. The decline was led by the sharpest drop in manufacturing output for three years, while growth of services activity was only modest and the weakest since heavy snowfall disrupted business in December 2010. Construction activity also rose only moderately, but the increase was at least an improvement on the downturn seen in June.

"At 49.5, the current level of the PMI is historically consistent with gross domestic product stagnating at the start of the third quarter. The average of 52.2 seen in the second quarter is consistent with GDP growing by 0.1% while the first quarter average of 54.8 signalled GDP growth of 0.5%."

Note that Markit continues to challenge the recent GDP numbers.

Wednesday, August 01, 2012
Manufacturing's struggles
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The Markit purchasing managers' index for UK manufacturing in July made for depressing reading, with a drop from 48.4 in June to 45.4 in July. As Markit put it:

"Output and new orders both contracted sharply during July, as companies faced weaker demand from domestic and export clients. The decline in production was the steepest for 40 months, with contractions recorded in both the intermediate and investment goods sectors. In contrast, output rose slightly at consumer goods producers."

How did it compare with elsewhere? The Eurozone manufacturing PMI was at a 37-month low of 44 in July, down from 45.1 in June. The US index was stronger, at 51.4, down from 52.5 in June. The global manufacturing PMI was 48.4, down from 49.1 in June. So manufacturing is struggling everywhere, but particularly in the UK and the Eurozone.

Tuesday, July 31, 2012
Income poor but wealth rich
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The Office for National Statistics has pulled together its material on the household sector, showing that real household income per head fell by 0.6% in the first quarter, to its lowest level since the second quarter of 2005. We've made no net progress for six years, in other words.

The ONS says this is mainly due to the impact of high inflation on real incomes, which offers a degree of hope if inflation continues to fall. In the meantime, household actual spending per head in the first quarter was its second lowest, in real terms, since the third quarter of 2003.

Wealth, however, is slowly recovering. Most people focus only on household debt, but household assets - physical and financial - are also important. Net household wealth rose strongly in 2009 and 2010 and edged up by 0.1% in 2011, to around £7 trillion. In cash terms, we've never been wealthier. More here.

Sunday, July 29, 2012
Construction mysteries revisited
Posted by David Smith at 07:15 PM
Category: Thoughts and responses

One way of trying to solve the mystery of the extreme weakness in construction this year - the main drag apart from special factors on the GDP numbers - is to dig deeper into the statistics.

Paul Bivand of the Centre for Economic and Social Inclusion (usually known as Inclusion) has done this by looking at the detailed employment numbers for the construction sector. They show that while employment demand weakened significantly at the start of the year, supporting the weakness of production at that time, it has since strengthened significantly.

There may be, as Bivand says, a rational explanation, but just as likely is that the construction figures used in the GDP calculations are implausibly weak. His note is here. One thing we do know is that the construction revisions are extraordinary. An initial estimate of a 4.7% drop in the sector's output in the first quarter of 2011 has now become a 0.5% rise.

Wednesday, July 25, 2012
A GDP shocker - down 0.7%
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The Office for National Statistics never loses its capacity to surprise. Against expectations of a 0.2% quarterly fall in GDP in the second quarter, its estimate is for a 0.7% fall. Some of that is due to the extra bank holiday but it seems likely there would have been a contraction even without that.

These are bad numbers, with little in the way of optimism. The economy is now smaller than wne the coalition came to power and Labour will have a field day. They are even harder to square with the buoyant employment figures.

Are they credible? Nobody doubts the economy is weak but the detail of these numbers should give some pause. The ONS has not really got its collective head around construction, and its figures, a 4.9% fall in the first quarter and a 5.2% drop in the second, suggests a sector collapsing at a 20% annual rate after being pretty flat on a quarterly basis during 2011. That does not make much sense. More here.

Friday, July 20, 2012
Public finances - bad but not disastrous
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

After two awful sets of numbers for the public finances, the June figures were not as bad. Yes there was an overshoot compared with a year ago - public sector net borrowing was £14.4 billion compared with £13.9 billion in June 2011 - but this was smaller than in April or May. So things might be coming back on track.

The current budget deficit was £13 billion, compared with £12.4 billion a year ago. So far this fiscal year underlying borrowing on this basis has been £41.6 billion, compared with £35.1 billion in the corresponding period of 2011-12. Public sector net debt is £1,038 billion, 66.1% of GDP.

According to the ONS: "In June 2012, central government accrued current receipts were £40.9 billion, which was £1.4 billion, or 3.6%, higher than in June 2011, when central government current receipts were £39.5 billion."

In June 2012, central government accrued current expenditure was £52.4 billion, which was £0.4 billion, or 0.8%, lower than June 2011, when central government current expenditure was £52.8 billion."

Interestingly, the ONS has revised down the 2011-12 borrowing outturn. It is now back down to £125.7 billion, just below the Office for Budget Responsibility's forecast of £126 billion, having been revised up to £128 billion a month ago. The figures are here.

Thursday, July 19, 2012
Something for everybody on the IMF's menu
Posted by David Smith at 06:45 PM
Category: Thoughts and responses

The IMF's detailed Article IV consultation document on the UK economy is interesting, not least because of the ground it covers. Those who think the Office for Budget Responsibility went too far in revising down the estimate of Britain's output gap - spare capacity - will find comfort in the fact that the IMF agrees.

The IMF thinks the output gap is 4%, the OBR 2.7%, The difference between the two numbers translates into a smaller amount of future fiscal tightening that will be needed to eliminate the structural budget deficit.

On fiscal policy more generally, the key point will be reached in early 2013. If growth fails to pick up, then the planned fiscal consolidation for next year, 1.5% of GDP, should be cut back. The IMF thinks this could be achieved as long as the government puts in place credible deficit-reduction measures for the longer-term such as accelerating the increase in the state pension age.

The IMF says fiscal policy was too loose before the crisis, which contributed to the present difficultiues, though most of Britain's fiscal problems arise from the impact of the crisis. It thinks the government should look at scaling back public sector pay and welfare entitlements to make room for more infrastructure spending.

Is it an open call for a Plan B? Not yet, and what comes over strongly from the document is the extent of uncertainty over the effects of fiscal policy. It backs more quantitative easing, lower interest rates and credit easing measures. Its thoughts on fiscal policy are in two parts:

"Budget neutral reallocations should be undertaken to make room to increase
government spending on items with higher multipliers (e.g., public investment)."

And: "The planned pace of structural fiscal tightening will need to slow if the recovery fails to take off even after additional monetary stimulus and strong credit easing measures."

The report is here. You get the sense that the IMF is using the example of the UK to forge a new and more rounded version of the Washington consensus. Some of the things it is concerned about, for example the hysteresis effects of high unemployment (essentially people who don't work losing the ability to work productively) suggest a more stagnant labour market than recent figures have suggested. If they apply to Britain, they apply to other countries in Europe even more.

Retail sales soggy in June
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

By including petrol and fuel sales in the retail sales statistics, the Office for National Statistics has introduced a volatility into the numbers that was not there before. This has been particularly the case in recent months, when fuel sales were affected by panic buying over fears of a tankers drivers' strike.

So retail sales volumes including fuel rose by just 0.1% in June, following a 1.5% jump in May. In April they fell sharply, so are down by 0.7% in the latest three months. Sales volumes on this basis were 1.6% up on a year earlier in June.

Excluding fuel sales, the traditional way of reporting the numbers, sales volumes rose by 0.3% in June after a 1% rise in May. In the latest three months they were flat in volume - up 0.1% - but down 0.3% in value. That is probably a better guide to high street spending. In June they were 2.2% up in volume terms on a year earlier. More here.

Wednesday, July 18, 2012
Another strong set of labour market figures
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The job market continues to perform well, defying the message from the GDP figures. The employment rate for 16-64 year-olds rose to 70.7% in the March-May period, up 0.3 on the quarter. As before, and indeed as for the past two years, private sector employment growth is greatly outstripping public sector job losses, with an overall rise of 181,000 in 16-plus employment in the latest three months, to 29.35m. Unemployment fell by 65,000 to 2.58m, 8.1% of the workforce.

These numbers speak of a healthy labour market. Hours worked, while affected by the change in timing of bank holidays, continued to rise, to 937.8m in the three months to May, up by 26.8m on a year earlier.

Was there any bad news in these figures? Average earnings are only rising by 1.5%. Strip out bonuses and they are still increasing by only 1.8%. The claimant count rose by 6,100 to 1.6m, 4.9% of the workforce. Normally this would be a harbinger of trouble, but the rate has only increased by 0.2 percentage points over the past year and is being boosted by claimants being shifted from other benefits. More here.

While the labour market continues to point to growth, the Bank of England is reacting to GDP figures it once said it did not believe. It voted 7-2 in favour of £50 billion more quantitative easing at its July meeting, considered £75 billion, and pondered cutting interest rates. The minutes are here.

Tuesday, July 17, 2012
Not much inflation in 2012
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Whisper it quietly but these were very good inflation figures. Three months ago, after disappointing numbers, Paul Tucker, now in the news for other reasons, suggested inflation would stay above 3% until well into the second half of the year. Instead, it has dropped sharply, including the fall in consumer price inflation from 2.8% in May to 2.4% in June announced today.

Retail price inflation came down from 3.1% to 2.8%. It was the lowest since December 2009, while CPI inflation was the lowest since November that year. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between May and June came from clothing & footwear, transport and food & non-alcoholic beverages."

Where it gets very interesting is look at the consumer prices index in June and comparing it with December last year. It has increased by just 0.5%, implying that inflation is running at an annualised 1%. It has further to fall. Is a drop to 2.4% enough on its own to turn real income growth positive? Probably. Though it is still above the official figures for the growth in average earnings, nominal household incomes appear to be rising by more than earnings. So these numbers set things up for a recovery in real income growth.

Of course some will say that falling inflation is a product of weak demand and so is bad news. Mainly, however, it is good news. Energy and commodity prices ran up by too much and some people saw only high inflation on the horizon in spite of weak growth. More here.

Monday, July 16, 2012
IMF - a question of arithmetic
Posted by David Smith at 05:30 PM
Category: Thoughts and responses

When you've had a drop in GDP in the fourth quarter of 2011, a further fall in the first quarter of 2012, and a likely fall in the second quarter, the growth arithmetic for 2012 as a while becomes very difficult. The Ernst & Young Item Club thinks it will leave us with zero growth this year, while the International Monetary Fund's latest figure, just out, is 0.2%.

Next year, the IMF says, growth will be 1.4% (the same as Germany). In each case, growth has bene revised down by 0.6 percentage points compared with the IMF's spring projections. These are disappointing figures, though are not being used by the IMF to push a Plan B, and won't be used by the government for that either.

The bigger picture for the world economy is less bad than feared, though these are just forecasts. Global growth for this year is trimmed fractionally to 3.5%, next year from 4.1% to 3.9%. More here.

Friday, July 13, 2012
Funding for lending
Posted by David Smith at 01:45 PM
Category: Thoughts and responses

To what extent is the Funding for Lending (FLS) scheme genuinely intended to get more credit into the economy, and to what extent is it just a way of getting cheap funding to the banks? The surprise in the announcement is that the banks only have to maintain their lending to benefit from the cheap funding. And there is no guarantee that they will pass on lower funding costs to borrwers.

This is what the Bank says: "The Bank of England and HM Treasury are today announcing the launch of the Funding for Lending Scheme (FLS). The FLS is designed to boost lending to the real economy. Banks and building societies that increase lending to UK households and businesses will be able to borrow more in the FLS, and do so at lower cost than those that scale back lending.

"The introduction of the FLS occurs against the backdrop of a euro-area debt crisis which has revealed severe vulnerabilities in the European banking system and has led to a marked deterioration in the outlook for the UK economy over the past twelve months. In spite of the policy actions of the authorities, the flow of credit through the banking system – which households and many businesses necessarily rely on – has remained impaired. The FLS is designed to tackle this problem by reducing the price at which banks and building societies are able to fund themselves."

And here is its explanatory document.

House prices - up in a weak market
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The latest LSL-Acadametrics house price index, published today, shows a strange picture. Normally, low transactions would be associated with very weak prices, but not at the moment. June saw the second lowest monthly transactions since 1995, partly as a result of the Jubilee bank holiday and bad weather, and yet prices just slipped by 0.1% on the month. They were 3% up on a year earlier. Low demand and low supply are producing a curious balance in the market. More here.

Thursday, July 12, 2012
Wealth rising faster than debt
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

One of the points I always make about household debt, which is around £1.5 trillion, is that it is small in relation to household assets, wealth. That is confirmed by the latest release from the Office for National Statistics, which shows that household wealth in the 2008-10 period was £10.3 trillion, up by £1.2 trillion or 12.9% from 2006-8.

Not only is debt a lot smaller than wealth, roughly a seventh, but it is rising more slowly now - if at all. Unlike in America, where household wealth has fallen very sharply, UK household wealth appears to have survived the housing correction.

It is, however, very unevenly distributed. The wealthiest 10% have wealth of £4.5 trillion, while the poorest 10% have wealth of just £8 billion (which is actually a better position than they were in before). More here.

Tuesday, July 10, 2012
Better industrial and trade news - but beware the distortions
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Manufacturing output rose by 1.2% in May and overall industrial production rose by 1%. But what goes up too often comes down, and these increases are likely to be reversed in June. The reason is that the late-May Bank Holiday was moved from May to June, giving an extra day's output in May, but the loss of a day in June.

Will the June drop be big enough to produce a fall in overall industrial production in the second quarter? Probably. Taking April and May together production was only marginally up on its first quarter level. There's a little more leeway in the manufacturing numbers, but not much. Industrial production is likely to be a drag on second quarter GDP.

Even with the May boost, the numbers are not exactly encouraging. May manufacturing output was down by 1.7% on a year earlier, while overall industrial production was down by 1.6%. More here.

It is less obvious that there should have been a distortion in the trade figures, which showed a narrowing of the overall trade deficit from £4.1 billion in April to £2.7 billion in May and a narrowing of the deficit on goods trade from £9.7 billion to £8.4 billion. Some of the despair that followed April's trade figures was overdone. More here.

Thursday, July 05, 2012
Another £50 billion of QE
Posted by David Smith at 12:05 PM
Category: Thoughts and responses

The Bank of England, as expected, announced a further £50 billion of quantitative easing, while leaving Bank rate unchanged at 0.5%. Economic weakness and concerns about the eurozone, along with falling inflation, triggered the move.

This is what the Bank said about the economy: "UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.

"CPI inflation fell to 2.8% in May and is likely to edge down further in the near term. Commodity prices have fallen, which should help to moderate external price pressures. And pay growth remains subdued. Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term."

The full statement is here.

House prices flat, car sales up
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

It would have been easy, in a month affected by an extra bank holiday and other disruptions, to expect grim readings from the consumer sector. But house prices rose by 1% in June, according to the Halifax, and were down a modest 0.5% in the latest three months compared with a year earlier. This points to a flattening of prices over the past year: in May 2011 they were falling by an annual 4.2%.

Car sales, mean while, continued to defy expectations, a 3.5% rise in new car registrations in June - to 189,514 - driven by a 9.8% rise in private car registrations. More here.

Monday, July 02, 2012
Manufacturing PMI - up but still weak
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The UK's manufacturing purchasing managers' index perked up in June, rising from 45.9 to 48.6. But it still points to a contracting sector. This is Markit's summary

"Conditions in the UK manufacturing sector remained fragile in June. Although output volumes recouped some of the losses incurred in the previous month, demand remained weak and job losses continued. On a slightly brighter note, cost pressures fell sharply, with average input prices declining at the fastest pace since May 2009.

"At 48.6 in June, up from May’s three-year low of 45.9, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) remained below the neutral 50.0 mark for the second consecutive month. Over Q2 2012 as a whole, the average PMI reading (48.2) was the weakest since Q2 2009.

"June saw manufacturing production rise for the sixth time in the past seven months, but only following a solid contraction during May. The underlying outlook remained subdued overall, as companies reported that output volumes had been underpinned by a marked reduction in backlogs of work. In contrast, new order intakes fell further."

Thursday, June 28, 2012
The recession gets revised
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

There is a lot in the latest GDP release. It does not change the picture much for the latest quarters - that will come later - but it does give us a different picture for the recession, and for earlier years, as well as revising down growth for 2010 and revising it up for 2011.

So the peak-to-trough fall in GDP in the recession is now put at 6.3%, from 7.1%, 2010's growth is down to 2.1% from 1.8%, and 2011 is up from 0.7% to 0.8%. We still have the implausible double-dip, with a downward-revised GDP fall of 0.4% in the fourth quarter of 2011 followed by an unchanged 0.3% fall in the first quarter of 2012.

But these figures are a reminder that the revisions, in both directions, go on for years. 2005, for example, used to be thought of as a weak year for the economy. Today's figures revise it up from 2.1% to 2.8%. More here.

Tuesday, June 26, 2012
Poor public finances
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

A £17.9 billion budget deficit (public sector net borrowing) for May, £2.9 billion up on a year earlier, the result of strong growth in public spending and weak growth in tax receipts, was not the way it was supposed to be. Borrowing is supposed to be falling but for the first two months of the current fiscal year it is up on the corresponding period of 2011-12.

Why the weakness? The Office for Budget Responsibility, here, notes that the spending numbers can be volatile - until the last months of 2011-12 they pointed to a big undershoot - and that the weakness in income tax receipts is non-PAYE, in other words it has a lot to do with self-assessment. This may be still the backwash of the 50% rate, and efforts to avoid it.

More worrying, past deficits have been revised higher. In round numbers the 2009-10 borrowing peak is now put at £159 billion, falling to £141 billion in 2010-11 and £128 billion in 2011-12. Of that reduction in the deficit, a third, £10.5 billion, reflects a reduction in the current budget deficit. The rest is due to lower capital spending. More here.

Thursday, June 21, 2012
Retail sales bounce back
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

A bit of good weather works wonders, and May's weather was not bad. Add in a recovery in diesel and petrol sales following the panic-buying distortion and the retail sales numbers were remarkably good, up 1.4% in volume terms May over April, 0.9% excluding the fuel effect.

Compared with a year earlier, total sales were up by 2.4% on a year earlier, or 3% excluding fuel (the old way of recording retail sales growth). The three-monthly picture probably gives the best guide but that still shows sales excluding fuel up 1.9% on a year earlier. Falling inflation is easing the squeeze on consumers.

Wednesday, June 20, 2012
A strong set of job numbers
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

The latest employment figures add to the puzzle over the UK economy.There is no way an economy in recession generates jobs at this rate. Employment rose by 166,000 in the February-April period. In the latest quarter there were 205,000 additional private sector jobs, partly offset by a 39,000 public sector fall. Unemployment fell by 51,000 to 2.61m. The only blot was an 8,100 May rise in the claimant count. More here.

Meanwhile, there were four votes for more quantitative easing on the Bank of England's monetary policy committee.

Tuesday, June 19, 2012
A pleasant surprise on inflation
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The drop in consumer price inflation from 3% to 2.8%, its lowest since November 2009, was a very pleasant surprise. The Bank of England had expected the rate to remain at 3% or above over the summer. Falling petrol prices are making a big difference, as are lower food prices.

Retail price inflation also fell significantly, from 3.5% to 3.1%. According to the Office for National Statistics: "The largest downward pressures to the change in RPI annual inflation between April and May came from petrol & oil and food. Partially offsetting these was an upward pressure from other travel costs which includes air transport."

Core consumer price inflation, excluding food, energy and tobacco, edged up from 2.1% to 2.2%, though it was running at nearly 3.5% last autumn. So generally good news. Inflation may be starting to act as it should given the weakness of growth. More here.

Friday, June 15, 2012
April gloom on trade and construction
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Growth in the second quarter was an uphill task even before the latest trade and construction figures. The former showed a widening of the overall trade deficit from £3 billion in March to £4.4 billion in April, including a £10.1 billion deficit in goods, up from £8.7 billion.

This was a nasty set of figures, though they look a bit erratic. A 7.1% monthly drop in exports is hard to explain, however much trouble the eurozone is in. More details here.

Meanwhile, the Office for National Statistics came up with another awful construction number, down by 8.5% in April compared with a year earlier. The figures are here.

Thursday, June 14, 2012
A Bank-Treasury lending and liquidity boost
Posted by David Smith at 09:45 PM
Category: Thoughts and responses

Mansion House speeches can be dull and content-free but this year's were policy-rich. There were three things to note in tonight's speeches:
- a new "funding for lending" scheme, worth an intended £80 billion, and linked directly to banks' lending into the economy. In return, they will receive official funding at below market rates.
- Regular injections of liquidity of at least £5 billion a month by the Bank, under the emergency facility unveiled last December.
- a broad hint from Sir Mervyn King that more quantitative easing is on the way.

It has been a long time coming but the authorities finally seem to have woken up to the weakness of lending. Why it is happening? Because the banking system has not recovered as hoped and because, said King, the effect of "the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole".

This is the key passage: "Today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times. Such a scheme could prevent an aggregate deleveraging of the banking system that might hold back recovery. Prior to the crisis, risk premia and bank funding costs were unsustainably low. Today, the black cloud of uncertainty has created extreme private sector risk aversion. Should the public sector, therefore, take upon itself some of those risks? Or put another way, should we collectively take on risks in return for lower compensation than we would demand as individuals? In present circumstances, when private sector spending is depressed by extreme uncertainty, there may be a case for a scheme to underwrite risks which the market itself is unwilling to take.

"What I can say tonight is that the Bank and the Treasury are working together on a “funding for lending” scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty. The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury. It would complement the Government’s existing schemes, and tackle the high level of funding costs directly. It could, I hope, be in place within a few weeks.

"On liquidity, I want to make clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead. Last December, the Bank announced the new Extended Collateral Term Repo Facility under which auctions of short-term sterling liquidity can be held at any time. It is now time to activate that scheme, in the words of the Bank’s Red Book, “in response to actual or prospective market-wide stress of an exceptional nature” over the coming weeks. The Bank will start holding auctions of sterling liquidity with a maturity of six months, and tomorrow morning the Bank will issue a market notice explaining details of the timing and size of these auctions."

King's speech is here.

Tuesday, June 12, 2012
Still a flat economy
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

On the face of it, the National Institute of Economic and Social Research's estimate of 0.1% UK economic growth in the three months to May is mildly encouraging after two successive quarters of falling GDP. 0.1% is, however, neither here nor there.

There are also a couple of caveats. in January NIESR predicted a 0.1% rise in GDP for the fourth quarter, while the Office for National Statistics gave us a 0.3% fall. There was a similar picture in April, and NIESR's estimate of 0.1% growth - and avoidance of technical recession - for the first quarter. Again the ONS's number is now minus 0.3%.

This is not to criticise NIESR. I think its estimates will eventually turn out to be more right than those of the ONS. But it suggests we may have to aim off when it comes to initial official GDP estimates. The other point, of course, is that the three months to May do not include the effects of the Jubilee bank holiday.

The latest estimates were on the back of industrial production figures which were flat in April, though only after a big cold weather boost in utilities (gas and electricity) output. Industrial production still fell 1% year on-yera.

Manufacturing disappointed, falling by 0.7% on the month, and 0.3% on a year earlier. The high watermark for manufacturing was May last year, at which point it had recorded a 7.5% rise from its mid-2009 lows. More here.

Monday, June 11, 2012
Making monetary policy more effective
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

Adam Posen, who to be fair has been there before, is continuing to push for monetary policy to be made more effective, notably through the purchase of private sector assets. I agree entirely. It is to be hoped that the pressure for such action does not disappear with Posen's departure from the monetary policy committee.

This is what he said: "I believe that further asset purchases by central banks can improve the economic situation we are now in. I believe that this is particularly true because a major source of our difficulties is an excessive perception of and aversion to risk on the part of investors, even though some rise in that perception and aversion were justified after the boom years. That rise which we see, and the resultant cash hoarding by businesses and portfolio investors, are excessive because some credit problems really are due to illiquidity and to financial market dysfunction rather than to insolvency and indebtedness. We are at risk of the reluctance to invest becoming a self-fulfilling prophecy, as opposed to investment leading us into recovery as in normal
situations. Additional expansionary monetary policy should be effective in breaking this cycle, and must be pursued to meet central banks’ mandated goals.

"I propose that further asset purchases by central banks should take the form of private sector securities for the time being. This will allow more direct targeting of financial sector dysfunctions, and greater impact on liquidity preferring investors’ portfolios, thereby leading to greater impacts on confidence and on the real economy than a similar unit of QE on government bonds. Obviously, not all private sector assets should be eligible for central bank purchases. Central banks should choose those assets which provide the best combination of market depth when functional, importance to the economy, and financial dislocation at present. Securitized bundles of bank loans are in many ways the best kind of private asset to purchase, be they for SME lending in the UK or for mortgages in the US. Where securitized markets of sufficient depth for such assets do not yet exist, as in the UK for SME loans, the central bank should engage in offers to purchase which help make the market for such assets."

The speech is here.

Thursday, June 07, 2012
Bank on hold after better-than-expected services
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

In the event, the Bank of England's monetary policy committee neither added to the existing £325 billion of quantitative easing nor cut Bank rate from its record low of 0.5%. Like the European Central Bank it is waiting to see how events in the eurozone unfold.

Had the construction and service-sector purchasing managers' indices followed last week's manufacturing PMI and fallen sharply, the decision might have been different. But the construction PMI was surprisingly strong at 54.4 and this morning's service-sector PMI held steady at 53.3, better than expected. The Bank will take stock again pending developments in the eurozone and at home.

Saturday, June 02, 2012
Debt absolutists and simplistic Keynesians
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

This is an excellent piece by Kenneth Rogoff, which is in the same territory as my piece for The Sunday Times tomorrow. Rogoff has no time for the debt-ceiling absolutists, who argue for an immediate block on all additional government debt. As he says, it can't be done. But, by the same token:

"If the debt-ceiling absolutists are naïve, so, too, are simplistic Keynesians. They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom. People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing.

"But who is being naïve? It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. But it is wrong to think that massive accumulation of debt is a free lunch."

Friday, June 01, 2012
Weak data everywhere
Posted by David Smith at 02:15 PM
Category: Thoughts and responses

The May manufacturing purchasing managers' index was a shocker, for which there was no obvious warning in other surveys of the sector. This is the summary by Markit, which produces the figures:

"The UK manufacturing sector took a sudden sharp turn for the worse in May. Companies scaled back production and employment as inflows of new business declined at the steepest pace since March 2009, amid rising uncertainty among domestic and overseas clients.

"At 45.9 in May, down from 50.2 in April, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell to its lowest level for three years and below the neutral 50.0 mark for the first time since last November. The headline index fell by 4.3 points over the month, the second-steepest fall in its 20-year history."

It was accompanied by a weak eurozone PMI, which dropped to 45.1 in May from an already weak 45.9 in April. The US manufacturing PMI was stronger, dropping from 56 to 54, but was nevertheless at a three-month low.

Much more disappointing were the US employment numbers, which rose only 69,000 in May after a downward-revised 77,000 in April. This compared with an average of 226,000 in the first quarter. The unemployment rate edged up from 8.1% to 8.2% (the same as the UK rate). More details here The eurozone crisis, it seems, has a lot to answer for.

Thursday, May 24, 2012
A 'deeper' recession
Posted by David Smith at 10:00 PM
Category: Thoughts and responses

The first quarter growth figures were revised lower, gross domestic product dropping by 0.3% rather than 0.2%, as the Office for National Statistics had suggested when publishing revised construction figures on May 11. What do we know? A year ago the ONS was similarly gloomy about construction, only to revise it up later. It is impossible to say whether the latest construction numbers will undergo the same fate.

What else do we know? Something odd happened in February. That month manufacturing output fell by 1% while the service sector contracted by 0.6%, in both cases bouncing back the following month. February was an unusually difficult month for the economy, for no obvious reason. This was a leap year, which the ONS adjusts for. I'm sure the February weakness, without which GDP would not have fallen, had anything to do with that adjustment.

The figures also tell us that there was a significant build-up of inventories in the first quarter, which normally tells us that the ONS cannot make the numbers add up. But anyway, the ONS has generated another set of headlines. This time Britain is apparently "deeper" in recession. The figures are here.

Wednesday, May 23, 2012
Weak April retail sales
Posted by David Smith at 09:55 AM
Category: Thoughts and responses

Sometimes you get fed up of blaming the weather but there must have been a strong weather effect in the April retail sales figures, down 2.3% on the month as petrol and diesel sales (included in the figures) plunged by more than 13%. The volume of sales excluding fuel fell by 1%.

Both measures were up over the latest three months, by 0.2% and 0.5% respectively. My reading is that the grim April weather deterred people from taking day trips and last-minute short breaks over Easter, a factor that also hit summer clothing sales hard. There's a strange number in the release, which is that the value of food sales was only 0.1% up on a year earlier, at a time of high food inflation. Not so easy to explain. The weather is not, of course, the only factor. Real incomes are being squeezed by high inflation, etc. More here.

Meanwhile, the Bank of England's monetary policy committee (MPC) voted 8-1 to leave the amount of quantitative easing unchanged at £325 billion in May. The one vote in favour of more, £25 billion, was David Miles. Most MPC members saw no case for more QE, though "several" saw it as being finely balanced. The International Monetary Fund, of course, has urged more. The minutes are here.

Tuesday, May 22, 2012
Inflation down to 3% - a no letter day for the Bank
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

At last some unexpectedly good news on inflation with a drop in the rate of consumer price inflation from 3.5% in March to 3% in April, its lowest since February 2010. For the first time since the general election Sir Mervyn King, the Bank of England governor, has not had to write a letter explaining why inflation is more than a percentage point away from the target.

Retail price inflation was more sluggish, dropping only from 3.6% to 3.5%, and there may have been some temporary factors behind the CPI inflation fall. According to the Office for National Statistics: "Air transport, off-sales of alcohol, clothing and sea transport were the most significant drivers behind the decrease in annual inflation between March and April." The clothing element could have been the grim April weather, with retailers desperate to unload summer stock.

Even so, better news than expected. More details here.

The public finances are harder to read, distorted by the £28 billion transfer of the Royal Mail pension fuind to the public finances. On the face of it there is an underlying deterioration, with a current budget deficit of £12.4 billion in April compared with £8 billion a year earlier. But there is a pattern of initial borrowing releases being revised. In the latest data, for example, last year's borrowing has come down to £124.4 billion. Public borrowing is not down by a quarter from the peak, as ministers have been claiming (except as a percentage of GDP, where the fall is 26.5%) but it is down by 21%.

Wednesday, May 16, 2012
Good news on jobs, bad news for Mervyn
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

This was Sir Mervyn King today, presenting the Bank of England's latest inflation report:

"Output in the United Kingdom has been broadly flat for a year and a half. It remains more than 4% below its level at the start of 2008. Inflation has fallen back sharply from its peak in September last year but remains well above the 2% target, and is more likely than not to be above target until the middle of next year.

"Weak growth and high inflation have been the unavoidable consequences of the financial crisis, developments in global commodity prices, and the need to rebalance our economy. That has been painful for everyone in our society. The challenge facing the MPC is to navigate a route back to normality."

The governor, to be fair, has never exuded confidence about growth and has always stressed the uncertainties about the inflaton outlook. But the 'Waiting for Godot' pattern of the Bank's forecasts - inflation is always gong to come down and growth pick up but not just yet - is developing the pattern of a serial offender.

Today's forecast suggests that the recession of the past two quarters will be revised away and that growth will be around 0.75% this year, picking up to just over 2% next year. Inflation is unlikely to get to 2% before the middle of next year, so may not return to target during the remainder of Sir Mervyn's reign, but should be falling in the early months of the new governor's tenure. As long, that is, as the forecast is right. The report is here.

The labour market numbers, meanwhile, were encouraging, and raised more doubts about the official GDP figures. Employment, driven by an increase in part-time workers, rose by 105,000 in the latest three months. Unemployment dropped by 45,000 to 2.63m, and from 8.4% to 8.2% of the workforce.

Total hours worked rose to 925.8m in the first quarter, from 917.4m in the fourth quarter. Earnings growth, however, remained very weak, up by 0.6% on a year earlier including bonuses, and 1.6% excludng bonuses. More here.

Tuesday, May 15, 2012
Meanwhile, in the real world
Posted by David Smith at 08:00 PM
Category: Thoughts and responses

The argument that very low gilt yields mean the government should be borrowing a lot more to fund capital or other spending has been around for a while, though nobody knows how much more borrowing it would take to trigger a flight from gilts and hence higher yields. Now Jonathan Portes of the National Institute has come up with a variation.

He claims to have made an extraordinary discovery, that for the amount of money the government is raising with the pasty tax, which he says is £150 million a year, the government could fund a £30 billion infrastructure programme. He accuses me of being confused for challenging it.

The real interest on index-linked gilts is 0.5%, so £30 billion of funding could be achieved for a "real" £150 million a year, as he says. It looks too good to be true. The pasty tax raises rather less than £150 million a year but let's leave that aside. Let us also leave aside that another £30 billion of index-linked issuance would probably cause market indigestion, almost doubling the amount the Debt Management Office is issuing at present. The question is what is the cost of index-linked funding?

There are two elements to an index-linked gilt. The inflation-adjusted coupon, or interest, and the inflation adjusted redemption value. It is the latter that we should concern ourselves with. It means, for example, that £30 billion of long-dated index-linked gilts issued now will be redeemed for something over £70 billion in 30 years time, using the DMO's 3% inflation assumption (2.75% is consistent with the Bank of England's 2% consumer price inflation target).

So what is the appropriate way to account for this inflation uplift? Is it to take a £40 billion hit in 30 years' time, or is it to allow for it annually? The latter approach has to be the only sensible one, so the first year's inflation uplift of our £30 billion of gilts has an effective cost of £900m, plus the £150m of interest, giving an overall cost of just over £1 billion, similar to the current annual cost of issuing 30-year conventional gilts, and lot of pasty taxes.

The DMO, in calculating nominal yields on index-linked gilts, does precisely this: "The real yields for index-linked issues have been converted into nominal yields using the Fisher Identity and a 3% inflation assumption", it says in its annual report on gilt issuance yields. It means, properly measured, yields on index-linked gilts are close to those on conventionals, as you would expect. There's a nice, and longer, critique, here, which makes some additional points.

You could argue, as Jonathan appears to, that the inflation element doesn't matter, though the persistent inflation overshoots of recent years mean index-linked has been an expensive form of funding. You could argue that the debt could simply be rolled over but that's just passing the buck to future generations.

I apply a simply test to this. If a politician said he could fund £30 billion of infrastructure spending for £150m a year people would accuse him of being a snake-oil salesman. It would be hard to disagree.

French and German GDP - a welcome puzzle
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

There is some small eurozone relief in the fact that German gross domestic product rose by 0.5% in the first quarter, while French GDP was flat. Both countries have avoided the commonly-used definition of recession: two consecutive quarters of declining GDP.

This is in contrast, of course, to Britain, where GDP fell by 0.3% in the final quarter of 2011 and again by 0.2% in the first quarter, a number that may be revised down to minus 0.3%. The puzzle is that the purchasing managers' surveys for the UK were stronger than for both France and Germany in the first quarter. Germany's PMIs suggested modest growth, France's something weaker. UK GDP in the quarter, it seems, should have been at least as good as these two economies. Unless, of course, the purchasing managers' surveys are wrong ...

Friday, May 11, 2012
Construction down further
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Because of the quality and volatility of the data, the Office for National Statistics had to make heroic assumptions even to limit the fall in construction output in the Q1 gross domestic product figures to 3%. Now it has more data, the fall is 4.8% and the effect will be to knock a further 0.1 points of growth in GDP in Q1, so that the initial 0.2% fall is likely to be revised to 0.3%.

It might not, if the service sector is found to have done better than its initially estimated 0.1% rise. Ultimately, the 4.8% drop in construction will also be revisited, though not for a while. A similar fall a year ago was mainly revised away. For the moment, however, we are stuck in the position of weak official data further undermining confidence.

Meanwhile, manufacturers achieved some margin growth. The drop in output price inflation last month from 3.7% to 3.3% was less than expected. Input prices were up by only 1.2% on a year earlier.

Thursday, May 10, 2012
Mixed industrial news
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

There was a welcome 0.9% rise in manufacturing output in March, according to the Office for National Statistics, following a disappointing 1% drop in February. Manufacturing output was flat in the first quarter compared with the final quarter of 2011, still notably weaker than the message from the surveys.

Manufacturing's good work was, however, undermined by other parts of industrial production, particularly energy. The mining and quarrying sector, which includes North Sea oil, was down by 10.2% in March compared with a year earlier, while mild weather meant electricity and gas supply recorded a year-on-year fall of 6.2%.

Overall industrial production fell by 0.4% in the first quarter compared with the fourth quarter of 2011, in line with the number used for the first quarter GDP data. More here.

Thursday, May 03, 2012
Services cool a little
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

After the GDP figures, which showed a fall in spite of stronger readings from the purchasing managers' indices, and which showed only weak growth in services, the usefulness of the PMIs as predictors of initial GDP readings has been called into question.

I still think the PMIs, particularly for manufacturing and services, tell us a lot about underlying private sector activity, and where the GDP numbers will eventually end up, though not for a long while.

The latest suggest some moderation in activity in April, with the service sector PMI down 2 points to 53.3 and the composite measure (manufacturing, construction and services) down to a five-month low of 53.2, from 55 in March. Another weak GDP reading was already expected for Q2 and this will have done nothing to change that view.

Meanwhile, Nationwide said house prices fell by 0.2% in April and were 0.9% down on a year earlier.

The Governor's Today Lecture
Posted by David Smith at 08:15 AM
Category: Thoughts and responses

My reaction to Sir Mervyn King's Today programme lecture on Wednesday evening was that it was a mainly a BSE (blame somebody else) speech. Chris Giles of the Financial Times said it was a "theyaculpa" rather than a mea culpa speech. Is that fair?

There were two main messages (a) the Bank should have warned more about what was happening (b) there was no boom before the bust. The Governor, in an interview this morning on the Today programme, says the Bank takes its share of the blame. Judge for yourself. The lecture is here.

Wednesday, May 02, 2012
Slightly better money supply news
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The construction industry is sceptical about the sector's purchasing managers' index, which is a pity. The latest index, for April, shows the index down from March's 56.7 to 55.8, but still well above the 50 level consistent with expansion. March's index was a 21-month high, in contrast to official figures showing falling output.

In Europe, meanwhile, the manufacturing PMI dropped to a worrying 34-month low of 45.9 in April. Even German manufacturing output is in decline, with an index of 46.2.

Last weekend I wrote about the weakness of bank lending. Today's figures show a £1.4 billion increase in lending to individuals in March, compared with £1.3 billion on average for the previous six months. Mortgage approvals rose to 49,860 from 49,029 but were below their previous six-month average of 53,103.

Lending to businesses continues to fall, dropping by £1.7 billion in March, for a 3.4% annual fall. There was stronger growth in the adjusted M4 measure of the money supply, up an annualised 6.4% in the latest three months. But this is still a mixed monetary bag.

Tuesday, May 01, 2012
Some interesting numbers
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

After the purchasing managers' surveys flagged up decent growth in the first quarter, maybe we should not be too worried about a drop in the manufacturing purchasing managers' index from 51.9 in March to 50.5 in April. Nonetheless it is disappointing, suggesting a weakening of growth momentum.

Anyway, I have been looking at the GDP figures again. Why is growth so weak? Is it the cuts? Take a look at P23 of the quarterly national accounts, here (click on the pdf), and you see that it would be wrong to blame government "cuts" for reducing growth.

In 2010 government spending made a small contribution to growth, 0.3 percentage points, while in 2011 it was zero. That is not quite the full story. Labour's boost to public sector capital spending made a contribution to growth in 2010, though the deep capital spending cuts it bequeathed to the coalition reduced spending in 2011.

The biggest contribution to growth in 2010, however, was stockbuilding, which can only ever be a temporary factor. There were two big shifts between 2010 and 2011, one good, one bad. The good one was that net trade, having subtracted 0.5 points from growth in 2010, contributed a full percentage point in 2011.

The bad was that consumer spending, having contributed 0.8 points to growth in 2010, subtracted 0.7 points in 2011. Some of that was the VAT and National Insurance hikes. Mostly it was the real income squeeze from other sources of high inflation.

Friday, April 27, 2012
ONS to clear up the GDP confusion
Posted by David Smith at 05:30 PM
Category: Thoughts and responses

Read the Office for National Statistics GDP press release, here, and it all looks very straightforward, Growth has disappointed throughout 2011 and into 2012, with growth rates through 2011 of 0.2%, -0.1%, 0.6%, -0.3% and -0.2% respectively, as set out on page 2 of the release.

But then look on page 7 of the release and, as Economics UK reader Sean Fear points out, you get a very different picture. Add up the contributions to GDP growth and, while the latest two quarters are unchanged, the first three quarters of 2011 look as if they should be 0.6%, 0.1% and 0.7% respectively, a somewhat stronger picture. A similar message emerges in Table B1 on the last page of the release.

There is an ONS explanation, and this is it: "The link between GVA and GDP is shown below:
GVA at basic prices (by industry) plus Taxes on products (e.g. VAT) less Subsidies on products (e.g. transport) equals GDP at market prices (for the whole economy). The above applies to both current prices and in volume terms.

"At the Month 1 stage, the headline GDP measure in volume terms is based on the Output approach (proxy to Production) to measuring GDP. This in reality is based on the aggregation of all industries' GVA. The whole economy GDP estimate implicitly assumes the movement in volumes of taxes and subsidies is in line with the underlying movement in volume terms for GVA (for the whole economy). In terms of the industry contributions to growth, this is in reality applied to whole economy GVA and not GDP, generating minor differences.

"At Month 2 and Month 3, the headline GDP measure in volume terms is based on all three approaches to measuring GDP - Production (i.e. output), Income and Expenditure. In achieving the headline estimate, there is a statistical discrepancy applied to both the Income and Expenditure approaches. The values of the statistical discrepancy may differ on Expenditure compared with Income. At Month 2 and Month 3, the industry contributions to growth are evaluated against GVA as laid out in Annex A of the respective release."

The ONS has promised to change the presentation of some of the data to clear up the confusion. Looking back on the data for some of those earlier quarters, it looks as if the expenditure measure of GDP is a lot weaker than the two other measures.

Wednesday, April 25, 2012
Computer says no - ONS says GDP down 0.2%
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

As feared, the Office for National Statistics has done it again. A 3% drop in construction output in the first quarter and growth of just 0.1% in the service sector has pushed Britain back into technical recession. Gross domestic product fell by 0.2% in the first quarter, following a 0.3% drop in the fourth quarter of 2011.

The fall in GDP in the first quarter, foreshadowed by the Bank of England when it described the ONS figures as "perplexing", is indeed puzzling. To be fair to the ONS, it has worked quite hard to prevent the construction figures from dragging down the GDP number by even more, setting out a range of assumptions on what might have happened to the sector in March. It could easily have slotted in a bigger negative number for construction.

But 0.1% growth in the service sector looks implausiably weak (as, despite the ONS's transparency does construction). It leaves egg on the faces of the Office for Budget Responsibility, Bank of England and government. The figures will be revised, but not for a while. In the meantime, the risk is of a hit to confidence. More on the figures here.

Shortly after the figures were released the CBI reported that business confidence among manufacturers was at its highest for two and a half years. Until the surveys are reflected in the official data, however, that looks like small comfort.

Tuesday, April 24, 2012
Borrowing exactly as forecast
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

The Office for Budget Responsibility can be proud of its budget forecast of £126 billion of public sector net borrowing for 2011-12. Official figures from the Office for National Statistics show it came in exactly at that level, down from £136.8 billion in 2011-12. This was in spite of a larger-than-expected figure of £18.2 billion in March alone.

The ONS revised down its February figure, released on the morning of the March 21 budget, by more than £2 billion to £12.2 billion. The high March figure, the product of weak tax revenues and strong spending, may suffer the same fate. That means, while the OBR is right now, future revisions are likely to see the 2011-12 figure shaved. The government would appear to be in track to get borrowing down to £120 billion in 2012-13 (£92 billion when the one-off Post Office payment is taken into account). More here.

Monday, April 23, 2012
Construction - weak but not collapsing
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

Two widely-watched measures of what is happening in the construction industry are provided by the Office for National Statistics and the Markit purchasing managers' index (PMI). as far as the industry is concerned, the former is showing too weak a picture - particularly for recent months - and the latter far too strong. This is the Construction Products Association's latest assessment, weak but not collapsing:

"Construction output is forecast to fall by almost 3% this year, according to the latest forecasts published today by the Construction Products Association, as the cuts to the capital budget announced in the CSR start to have a real impact on industry activity. Construction output is forecast to remain flat in 2013 before private sector work strengthens and drives a return to growth in 2014.

"Commenting on these forecasts, Michael Ankers, the Chief Executive of the Construction Products Association, said: ‘It seems inevitable that construction output fell in the first three months of this year and this will have had a significant impact on the rate of GDP growth at this time. With new orders for construction falling significantly at the end of last year, 2012 is going to be a difficult year for the construction industry with output forecast to fall by almost 3%.

"The construction industry accounts for nearly 9% of GDP and therefore is going to be a major constraint on growth in the wider economy over the year ahead. ‘Public sector spending cuts are now beginning to bite and with the exception of a steady recovery in the private housing market, where starts are forecast to increase by 5% this year and 11% next, the private sector is pretty subdued. What is particularly disappointing is the weakness of the private commercial market where output is expected to decline both this year and in 2013. Office development is slowing down and private finance for social infrastructure is unlikely to make a rapid comeback. ‘One bright spot in the forecasts is investment in infrastructure, particularly rail and energy where growth is expected to increase in each year from now until 2016.'

Meanwhile Danny Alexander, the Treasury chief secretary, has asked government departments to identify 5% of cuts to cover unforeseen circumstances. Damian McBride, formerly Gordon Brown's spin doctor, has suggested that when it comes to budgets there are no new ideas, only recycled ones. That is certainly true of this one. I've heard it before from previous chief secretaries.

Friday, April 20, 2012
Retail sales - distorted but strong
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The fuel panic had an impact on the official retail sales figures and, by implication, should have provided a boost to first quarter gross domestic product. Overall retail sales volumes rose by 1.8% between February and March and were 3.3% up on a year earlier. The office for National Statistics says that part of that reflected the rush to buy petrol and diesel ahead of the feared tanker-drivers' strike.

Whether or not there was panic buying of other goods, or whether it was just the favourable weather, but sales excluding fuel also rose strongly, by 1.5%, and were 2.8% up on a year earlier. The retail sales deflator rose from 2.4% to 2.5% in March compared with February, in line with the small rise in consumer price inflation reported earlier in the week.

Overall, a distorted but reasonably strong set of figures. More here.

Wednesday, April 18, 2012
Better employment news, and a puzzled MPC
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Labour market statistics were better than expected, supporting the idea that recent growth in the economy has been stronger than official figures have suggested. These are the highlights:

"The employment rate for those aged from 16 to 64 was 70.4 per cent, up 0.1 on the quarter. There were 29.17 million people in employment aged 16 and over, up 53,000 on the quarter."

"The unemployment rate was 8.3 per cent of the economically active population, down 0.1 on the quarter. There were 2.65 million unemployed people, down 35,000 on the quarter. This is the first quarterly fall in unemployment since the three months to May 2011."

Some people are confused about the different measures of unemployment. The Labour Force Survey measure, now 2.65m, is not benefit-related - it measures people who declare themselves to be unemployed and available for work, whether in receipt of benefit or not. That is why it includes some 300,000 full-time students.

The claimant count rose by 3,600 to 1.61m, though data revisions mean it has been reported at around the 1.6m level for some months. It is also boosted to an extent by the shift of some people from other incapacity benefit to jobseeker's allowance.

Pay growth, however, remains very subdued: "Total pay (including bonuses) rose by 1.1 per cent on a year earlier, down 0.2 on the three months to January 2012. Regular pay (excluding bonuses) rose by 1.6 per cent on a year earlier, unchanged on the three months to January 2012." The release is here.

Also, the Bank of England's April minutes showed puzzlement over weak official statistics versus stronger surveys, a fear that those official statistics will show three successive quarters of declining GDP and a single vote (David Miles) of £25 billion for more quantitative easing. The minutes are here.

Tuesday, April 17, 2012
Inflation rise wasn't part of the script
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The Bank of England thought a drop in inflation to the "low threes" by March was a dead cert, so the rise from 3.4% to 3.5% in consumer price inflation is a disappointment, only partly compensated for by an accompanying drop in retail price inflation from 3.7% to 3.6%. The fall in both measures of inflation is essential if the growth in real incomes is to be restored, thus supporting spending.

According to the Office for National Statistics: "The largest upward pressures to the change in CPI annual inflation between February and March came from food (particularly fruit, bread & cereals and meat), clothing and recreation & culture. The largest downward pressures to the change in CPI annual inflation between February and March came from electricity, gas & other fuels and transport.

The annual rate of RPI inflation was last lower in December 2009. "The largest downward pressures to the change in RPI annual inflation between February and March came from motoring expenditure and fuel & light. Partially offsetting these were upward pressures from food and clothing."

The Bank can no longer blame George Osborne for high inflation. CPIY, excluding indirect taxes, is 3.5% and on a rising trend, while CPI at constant tax rates is just below it. More here.

Friday, April 13, 2012
Producer prices OK, construction puzzling
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

It is unfortunate that the Office for National Statistics chose to release two of its hard to interpret sets of data on the same day, The producer price numbers are easiest to interpret. They show the pressure from rising energy and commodity prices persists, with industry's raw material and fuel costs up 1.9% in march. But, because of helpful base effects, the annual rate dropped from 7.8% to 5.8%.

Base effects also helped convert a monthly rise of 0.6% in output prices into a drop in the annual rate from 4.1% to 3.6%, its lowest since January 2010, and there was unequivocal good news in a tiny 0.1% monthly rise in "core" output prices. More here.

More difficult are the construction figures, not least because they are not seasonally adjusted. in February they were 4.6% down on a year earlier, though in December-February they showed a 0.2% increase on a year ago. Even so, it appears that construction will need to show a spectacular March rise if the sector is not to reduce gross domestic product in the first quarter. More here.

Thursday, April 05, 2012
Oh No - ONS manufacturing data
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Just when we were getting more optimistic about the economy along comes the Office for National Statistics with its February industrial production data. Manufacturing output officially fell by 1% in February, though overall industrial production rose by 0.4% on the back of a cold weather boost to energy output.

These were disappointing numbers, after a week in which manufacturing, services and construction purchasing managers' indexes (for March) were strong, and after the February manufacturing PMI pointed to growth. As it stands, it will be a challenge for manufacturing to make any contribution to growth in Q1 and the risk is that overall industrial production will be pulled down by the good March weather. More here.

Tuesday, April 03, 2012
Chambers of Commerce cautiously optimistic
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

Following yesterday's good purchasing managers' index for manufacturing, up from 51.5 to 52.1, the British Chambers of Commerce quarterly survey is also cautiously upbeat. While warning that growth is slow, the BCC cites an improvement in Q1 over Q4 2011.

It says: "Manufacturing home deliveries up 12 points to +12%, and home orders up 19 points to +6%. In the service sector, the home deliveries balance rose eight points to +10% and the home orders balance is up 16 points to +7%.

"The manufacturing balance for export deliveries rose 12 points, to +24%, and for export orders increased 15 points, to +20%. - The service export deliveries balance rose six points, to +16% and for export orders the balance is up 13 points, to +12%." More here.


Sunday, April 01, 2012
Three votes for a rate hike on the shadow MPC
Posted by David Smith at 08:59 AM
Category: Thoughts and responses

In its most recent e-mail poll, completed on 27th March, the Shadow Monetary Policy Committee (SMPC) decided by six votes to three that UK Bank Rate should be held at ½% when the official rate setters meet on Thursday 5th April. The three dissenters all wanted to raise Bank Rate by ¼%. In addition, two of the members who voted to hold in April had a bias towards rate increases in the near future.

Several of the ‘hikers’ also had a bias towards further rate increases subsequently. This represented the most hawkish position that the SMPC had adopted for some time. It reflected the views that: 1) money-market rates were so far above Bank Rate that the latter risked irrelevance; 2) some normalisation of Bank Rate up to, say, 2% was appropriate now that conditions had partly stabilized, and 3) the improved euro-zone situation provided a possibly, short-lived window of opportunity to normalise UK borrowing costs.

The predominant reason why most SMPC members voted to hold Bank Rate in April was the view that there remained ample spare resources in the British economy, despite some tentative signs of recovery, together with concern that broad money was still growing too slowly to sustain any upswing. There was a general view that the macro-economic impact of the 21st March Budget was broadly neutral, and did not warrant a change in rates.

However, committee members questioned the desirability of adding further complications to a tax system that was already of baroque complexity and needed wholesale simplification and reform instead. There was a further concern that the Chancellor’s deficit forecasts were too optimistic and that a future British sovereign debt crisis could not be precluded if fiscal credibility was lost.

Comment by Tim Congdon
(International Monetary Research)
Vote: Hold Bank Rate.
Bias: To hold, while employing QE to maintain steady monetary growth.

The regulatory attack on the UK’s banks has been under way for over three years now and has resulted in a radical transformation in their balance-sheet structures. The key policy-making individuals and officials (i.e., the Governor of the Bank of England and the then Chancellor of the Exchequer downwards) did not realise in late 2008 that substantial shrinking of banks’ risk assets and massive recapitalisation would lead – if not offset by some other force or forces – to a huge contraction in the quantity of money and, hence, to a very severe recession or even a depression. Am I saying then that the key individuals were, to put it mildly, pretty misguided? Yes, that is exactly what I am saying. They might protest that my argument depends on the validity of the monetary theory of national income determination. So indeed it does. They might go further and claim that the monetary theory of national income determination is controversial. Well, that is their problem. My view remains that they were very misguided. UK officialdom’s attempts to force banks to cut the size of the balance sheets by a quarter or a third, in only a few years, has to be condemned as crazy; the equivalent in monetary policy of such historical madness as the Charge of the Light Brigade.

In practice, as the recession gathered pace in late 2008 and early 2009, UK officialdom responded not only by slashing short-term interest rates to virtually zero, but also by operations (which became known as ‘Quantitative Easing’ or ‘QE’) that had – as an intended direct effect – an increase in the quantity of bank deposits. So the quantity of money did not fall as drastically in 2009 as it would otherwise have done. Macroeconomic conditions were certainly far better by early 2010 than had been expected a year earlier, and remained not too bad in the rest of 2010 and 2011. UK banks now have lower risk assets, and far more cash and government securities, than in mid-2008. These assets are matched on the other side of the balance sheet by roughly the same level of sterling deposits, but higher capital.

In late 2011, fears were expressed that the UK economy was about to enter another downturn. The latest data do indeed show that in the closing months of 2011 banks jettisoned a significant quantity of risk assets. Without offsetting action, the quantity of money would almost certainly have dropped. In its wisdom the Monetary Policy Committee (MPC) decided in October to initiate another £75 billion of asset purchases under the QE label. That ought to have resulted – over the next three or four months – in additional bank deposits being created as the Bank of England bought gilts (mostly, although not entirely) from non-banks. The monetary effect of official operations of this sort can be identified in the credit counterpart arithmetic in the category ‘public sector contribution to money growth’. The public sector contribution to money growth was high in October itself, but then surprisingly small in November and December. However, we now have the January figure and everything has gone according to plan. The public sector contribution to M4 growth in the four months to January was £53.4 billion, not exactly £75 billion, but allowance needs to be made for purchases from banks, purchases from foreigners, etc.

Although banks continued to rid themselves of assets that they deemed non-core, the M4ex money measure rose by 1.9% in January. The three-month annualised rate of growth – which was negative in December – bounced back to a perfectly satisfactory 4.2% in January. Meanwhile the UK’s broad money measure remains in positive territory on the annual rate of change, with the January figure being 2.9%. With non-energy prices pressures weak and short-term interest rates at more or less zero, numbers like these are consistent with a general absence of balance-sheet strains throughout the economy. The stock market has indeed had a good start to 2012. Last autumn’s QE programme deserves a small pat on the back.

But, what happens from here on? The £75billion of QE announced last autumn seems to have been fully justified by the weakness of lending to the private sector, as the banks cut down on assets that they did not really want (or, at any rate, that under regulatory pressure they felt obliged to relinquish). What happens in the spring of 2012 if banks keep on cutting back heavily on their risk assets? The closing months of 2011 saw severe weakness in bank lending to ‘intermediate other financial corporations’, i.e., the quasi-banks established a few years ago partly as a device to evade regulatory capital ratios. However, lending to genuine non-banks has been growing in the last two or three months at a welcome annualised rate in the low single digits. It is possible that the total stock of bank lending to the private sector may contract further in the next few months, as banks make their final effort to comply with the regulatory push for extra safety, higher capital/asset ratios, less inter-bank funding and so on. However, the rate of contraction should be less than in 2011. Meanwhile the MPC has shown itself to be rather trigger-happy with regard to QE. Indeed, two MPC members wanted the present round of QE operations to be £75 billion instead of £50 billion.

A reasonable central view is that broad money will grow in 2012 even on present policies (i.e., without extra QE), although not rapidly. No doubt banks want to expand their balance sheets again, not least because of the endless (if rather silly) barracking they receive in the media for not doing enough new lending. The money growth rates seen in the mid-noughties (of 10% a year or more) are not on the horizon, but in 2012 the UK could enjoy broad money growth of 3% to 5% a year, the highest rate for five years. An annual growth rate of 3% to 5% in M4ex balances (i.e., in the money balances of the non-bank private sector) ought to be consistent – given the current low inflation and zero interest rates – with satisfactory or even very satisfactory macroeconomic outcomes. My corresponding policy preference is for Bank Rate to stay at ½% and for the Bank of England to vary the quantity of QE in order to sustain M4ex growth in the mid- single digits, at an annualised rate. For the first time since early 2008, it is conceivable that my bias in, say, early 2013 will be to tighten. Nevertheless, and for the moment, my bias is ‘no change’.

Comment by Jamie Dannhauser
(Lombard Street Research)
Vote: Hold Bank Rate and QE.
Bias: To expand QE if situation deteriorates once again.

Despite much fanfare and media hysteria, the Budget has done little to alter the macroeconomic outlook. There was plenty of micro-tinkering but no change in the Coalition government’s overall fiscal strategy. By the end of this parliament, the government plans to have cut real departmental spending (broadly speaking, total managed expenditure net of social security payments, debt interest and other transfer payments) back to fiscal 2003-04 levels. Between 2009-10 and 2016-17, the expected annual average reduction is 2.9%. This is the tightest spending settlement in the post-war period by some margin. The only comparable period of real-terms cuts in departmental spending was 1974-75 to 1988-89. Over these fourteen years, real departmental spending was cut by 1.5% per annum on average. The current consolidation effort is almost identical in overall size – at least, in terms of departmental spending – but will progress at twice the rate.

Whether this is administratively feasible, economically desirable or politically achievable remains to be seen – history does not suggest departmental spending cuts on this scale can be achieved over such a short time-frame. Moreover, and in a world of excessively leveraged private sector balance sheets, the scope for monetary and debt management policy to offset the short-term growth effects of fiscal deflation is more limited than in a normal business cycle. However, it is absolutely right for the government to be talking tough – the UK remains an improbable ‘safe-haven’ in part because of the credibility the government had earned in the markets. The other half of this grand bargain is easy monetary policy. While the government gets its house in order, the Bank of England must limit the pace of private sector deleveraging, and ensuing monetary destruction, by keeping short rates at their effective zero bound and injecting money directly into the private sector via QE.

This is the correct orientation for macroeconomic policy; but it is not without its dangers. For one thing, it is delaying the necessary repair of private sector balance sheets, what Sir Mervyn King has called the ‘paradox of policy’. More importantly, it potentially endangers the credibility of the central bank – Bank of England asset purchases will only continue to stimulate asset prices and economic activity as long as markets remain convinced of the central bank’s anti-inflation resolve.

There has been much discussion about the desirability of QE, both in the media and amongst academics. Recently, hostility towards the policy has been growing. Even on the MPC there are concerns about inflation expectations becoming dislodged. However, the evidence for this is scant, not least in financial markets where five-year forward inflation breakeven rates are below their five-year average. There remains a strong case for continuing to use central bank asset purchases as a means of lowering longer-term interest rates and boosting the supply of broad money. The key judgement is whether the outlook warrants additional QE at this stage.

Inflation is falling back from its recent high point as expected; whether it continues to do so is less obvious. There is a clear upside risk to inflation in the near-term from further disruption to oil supply and the possibility of war in the Middle East. There is also some debate about exactly how much spare capacity there is in the economy and its downward impact on price pressures. On the latter issue, it seems hard to believe that there is not a considerable amount of underutilised resources, especially in the labour market. While the financial crisis will have trimmed the economy’s supply potential, the degree of damage implied by many output gap estimates is implausibly large. The OBR, for instance, has argued that output per hour was only 0.4% below its trend level. With output per hour still 1.1% below its pre-crisis peak, this implies a permanent hit to labour productivity of 10% when compared to a continuation of the 1995 to 2005 trend. Even if it is accepted that excessive borrowing inflated pre-crisis productivity, there is no evidence that there has been a massive deterioration in Britain’s capital stock or a collapse in total factor productivity. Both the data on wage growth and economy-wide prices (e.g., the gross value added deflator) are consistent with plenty of spare resources bearing down on inflationary pressures. Notwithstanding the downward pressure on money demand from record low policy rates and QE, the recent growth in UK broad money is, if anything, still suggestive of inflation settling slightly below its 2% target.

While there is no need to alter the stance of policy at this month’s meeting, the likelihood is that further monetary support will be needed. Despite tentative signs of life in the US economy, the global backdrop to the largest post-war fiscal tightening in Britain is pretty grim. Emerging world growth is slowing after monetary tightening last year. In Europe, the crisis is far from over, even if Mr. Draghi has bought some time. UK output growth is likely to be below historical norms until 2014 at the earliest; growth risks are very much skewed to the downside. The same is true of inflation over the medium-term. This alone would justify an easing bias. Were monetary policy being set on the basis of both monetary and financial stability, that bias would be even stronger.

Comment by Anthony J Evans
(ESCAP Europe)
Vote: Raise Bank Rate by ¼%.
Bias: To raise Bank Rate further but keep lender of last resort facilities on standby in case market conditions deteriorate.

Most economists seem to accept that low interest rates contributed to the causes of the financial crisis, and that at some future point they need to return to more normal levels. The debate is therefore about how soon, and how quickly, they should rise. While the costs of raising too early are well known, it is important to also consider the ongoing costs of low interest rates. Foremost among these are the adverse impact on people on fixed incomes. However, it would be interesting to see more research on the welfare costs of QE given that low gilt yields have also led to high asset prices meaning that for many savers the impact is ambiguous. The Bank for International Settlements (BIS) also points out that low interest rates are delaying balance sheet adjustments and magnifying the credit risks that arose ahead of the crisis. An even less understood cost is the fact that low interest rates send false signals to the market and generate mis-allocations of capital. The longer that interest rates remain artificially low, the more likely that the public use them as a benchmark for what is considered normal. UK households are spending 25% of disposable income on debt repayments, and the low rates available for tracker mortgages entices borrowers to become susceptible to rate rises. Standard variable rates have already begun to rise and further rises need to form part of the expectations of current borrowers. A moderate raise in Bank Rate would serve as a useful warning about the future path of interest rates.

We should not forget that the MPC’s primary aim it to deliver low inflation. Although the rate of Consumer Price Index (CPI) growth is lower than it has been in recent months (down from 3.6% in January to 3.4% in February), this should not be a distraction from the fact that it has been above target for more than two full years. Medium-term inflation expectations may be considered a better focus of policy than historical figures, but there is evidence that this is creeping up. As February’s Inflation Report points out, households inflation expectations are ‘elevated’ and other forecaster’s probability distributions for CPI inflation show that from 2013-2015 the probability of below target inflation is falling, whilst the probability of above target inflation is rising. M4ex broad money continues to grow at a moderate rate and has recovered from the lull that occurred in December 2011.

The policy response of low interest rates and QE have had time to work but the more time that passes the less likely that the economy will respond to aggregate demand stimulus. In short, and if the aim is to boost nominal GDP, it becomes increasingly likely that we will see inflation rather than increases in real output, suggesting that the economy is facing a supply side problem. Given the extent of inefficient labour market regulations, punitive tax rates on middle and high rate earners, an ongoing skills shortage – and the fact that the recent Budget did little to affect the long-term trajectory of these issues – sluggish growth is perhaps the best we can hope for. A lot of the household ‘wealth’ that appeared to evaporate during the crisis might best be viewed as a permanent decline in consumer spending as opposed to an output gap that may be regained. Productivity figures back this up.

It would be wrong to be blasé about the downside risks facing the UK economy, and fears that excessive monetary stimulus will lead to uncontrollable inflation have consistently failed to materialise. However, low interest rates and QE were adopted on emergency grounds and the goalposts as to when this emergency is over continue to shift. If the first quarter growth figures show that the UK is back in recession, this may justify keeping interest rates on hold. However, most forecasters expect growth to return. The risks to the UK economy posed by a Greek default and a disorderly breakup of the Euro have diminished, and those of us who advocated keeping interest rates low to see how the February/March restructuring would play out should now accept that it is time to move forward. Of course, conditions in the euro-zone may worsen, and the threat of further sovereign debt crises remains. However, this will always be the case. The Bank of England must be alert to a possible spike in the demand for money but this should not preclude a moderate raise in Bank Rate.

Comment by Ruth Lea
(Arbuthnot Banking Group)
Vote: Hold Bank Rate.
Bias: To hold Bank Rate (no bias); no more QE and no bias regarding future QE.

The Budget contained no significant surprises, mainly because the policy changes had been so comprehensively leaked. Nevertheless, the acceleration in the cuts in the Corporation Tax Rate, down to 22% by 2014/15 and with an aspiration to reach 20%, was helpful to business. In addition, the reduction in the higher rate of tax, albeit to 45 pence and in April 2013, gives a much needed fillip to retaining internationally mobile senior staff, not least of all in the City. Even though these policy changes will not transform Britain’s economic outlook overnight, they are undoubtedly a step in the right direction.

The March 2012 forecasts from the Office for Budget Responsibility (OBR) were a tad brighter than those released last November. The economic mood has lightened since then reflecting brighter prospects in the USA and a deceptive lessening of tensions within the euro-zone, engineered by the activist European Central Bank (ECB) and an apparently successful conclusion to the negotiations over Greece’s second bailout. Nevertheless, with many euro-zone economies stumbling further into recession, it is all but inevitable that the euro-zone ‘crisis’ will blow up again at some stage. Sanity will only prevail in this beleaguered currency bloc when it is reconfigured and the weaker countries leave and are free to pursue expansionary policies. As far as timing is concerned, I am with Macbeth: “…if it were done when ‘tis done, then ‘twere well it were done quickly.” Unfortunately, it probably will not be.

Despite the falls in CPI inflation in recent months – it was 3.4% in February – the underlying inflationary outlook has worsened since the turn of the year as continuing tensions in the Middle East have driven oil prices up to record highs in sterling terms. The Bank’s projection in the February Inflation Report that CPI inflation would be down to the 2% target by the end of 2012 looks optimistic – though much will depend on the trajectory for oil prices. This doubt was endorsed recently by Spencer Dale who warned that inflation could indeed turn slightly higher than the Bank’s projection this year and next. The MPC’s March Minutes also noted that “seasonally adjusted monthly inflation rates had remained somewhat higher than the inflation target”. The Minutes also contained a discussion on domestically-generated inflation, focussing on wage costs. They noted that, even though the annual total earnings growth was just 2% in 2011 Q4, there were “some early indications that private sector wage settlements had picked up at the beginning of the year”. The latest survey by Income Data Services did indeed suggest that average pay deals had risen to 3% in the three months to January compared with 2.5% in the previous three months.

Money supply growth recovered strongly in January, probably reflecting an unwinding of exceptional year-end balance sheet effects. However, higher bank funding costs are also being passed onto borrowers. Halifax for example recently raised its standard variable rate by nearly 0.5%. There was no major fiscal stimulus announced in the Budget – overall it was fiscally neutral over the forecast period. Furthermore, and given the absence of effective supply-side policies, the Government still seems to be relying on the Bank to provide much of the economic stimulus. The MPC has obliged by sanctioning a very accommodative monetary policy. It should continue to do so. Despite signs that wage settlements are ticking up, there is no need for any change at the moment.

Comment by Andrew Lilico
(Europe Economics)
Vote: To raise Bank Rate by ¼% and do no more QE for now.
Bias: To raise Bank Rate fairly continuously up to 2%, before a pause to review.

With the euro-zone crisis temporarily off the boil, there is a brief window of opportunity for the Bank of England to raise rates. It should seize it. It is well behind the curve on raising rates. The economy is increasingly at risk of a lasting dependency on emergency rate levels. However, the emergency has long since passed, and the economy is now in a sustained period of working through its debt problems. Rates should be raised, not yet to their natural rate (which may have fallen significantly, perhaps to as low as 3%) but at least to a level at which Bank Rate reconnects to the wider monetary transmission mechanism and makes it more credible for banks to seek to fund themselves via deposits. This implies a Bank Rate of around 1.5% to 2%.

Even such a modest rise may drive some households into mortgage default. Some estimates suggest that even millions of households could be placed in distress by a 2% rise in mortgage rates. However, those on tracker mortgages linked directly to Bank Rate have tended to be significant gainers from emergency rate levels. And, to be blunt, if your mortgage has been 0.99% for the past three years and you have not been able to pay down some of your debt, monetary policy is unlikely to be able to save you from here on, even if doing so were morally justified (which it is not). For those on more standard mortgage packages, interest rates have already started to rise, reflecting regulatory requirements, increasing default risk, and funding costs. One way or another, mortgage rates are going up. Those mortgagees who have failed to make their finances more sustainable over the past three years are going to default. Policy makers can (and should) delay this only for so long.

It is, of course, the case that there are other, regulatory pressures on the money supply, created by misguided notions of increasing capital requirements. There is, again, only so much monetary policy can do to offset such huge policy errors elsewhere and only so long that monetary policy is justified in attempting this.

Accompanying the Budget, the OBR downgraded its estimate of the sustainable growth rate for the UK yet again – now to just 0.8%. That means that, in the OBR’s view, the years 2011 and 2012 are not slow-growth years, but instead years in which the economy grew fairly close to its potential. In that context, there is less and less justification for monetary policy to be providing extreme stimulus. The only consequences of maintaining rates so far below the natural rate of interest are: (a) increased inflationary pressure; and (b) mal-investment, induced by artificially low rates. Whether inflationary pressure is realised into inflation in the short-term will depend on how quickly mal-investment is exposed as such. There is every prospect that, in fact, mal-investment will be sufficiently serious that its purging in recession will come ahead of inflationary pressures, so that mal-investment-induced recession beats inflation to the punch, and the first recession we get comes before the high inflation. However, if it does not – and if the economy does start to recover – we can expect inflationary pressures and a need for a, perhaps, steep rise in interest rates to combat inflation, inducing recession either way. The experience of the past five years suggests that if the UK economy is not actually contracting, then inflation rises towards 5%. We shall be lucky if the peak is as low as that the next time. Raising interest rates a little would provide a signal to households that they needed to panic more and, deleverage faster. That would be healthy. If household debt reduces and Bank Rate rises a little closer to the natural rate of interest, then the economy’s rate of growth in potential output will rise and the chances of being able to service our debts over the medium term without resorting to inflation will be improved. We do not need a large spike in interest rates, but it is past time for a tweak. A signal is needed that emergency rates will not be sustained indefinitely.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate by ¼%.
Bias: To raise Bank Rate and halt and then withdraw QE.

The fundamental Budget plan is correct: to cut spending steadily and raise taxes as needed across a broad tax base, until the government’s debt ratio to GDP is stabilised and brought back down towards a less dangerous level of below 60%. The problem has been the lack of policies so far to cut taxes that deter the growth of enterprise. In this year’s Budget the Chancellor, George Osborne, made a start in addressing this problem. However, it is never easy to reform tax when there is no spare money to buy out losers. This is the situation today. So George Osborne is to be congratulated on making some progress in changing the tax system in beneficial ways.

First, he managed to cut the damaging 50 pence top tax rate, which HMRC confirmed was raising virtually no revenue. These calculations are tricky since they depend on assumptions about responses to alternative tax structures. However, based on previous work for the UK, it seems most likely that the 50 pence rate reduced tax revenue because of evasion and negative supply responses, either through net emigration or by reduced labour supply. HMRC’s assumptions were cautious and so found less dramatic effects. However, the tax is damaging activity as well. Indeed, that is how the revenue loss comes about, via a lowering of the tax base, offsetting any gain from the higher tax rate. So, when that is put into the equation, it is ludicrous to raise such a small amount of revenue from better-off people in this way. The 45 pence rate remains too high. Nevertheless, the cut is important as a signal of the priorities being given to incentives for business and business people. Presumably, it will be followed by further reform, or so we are being led to expect.

Second, there was an added 1% cut in corporation tax, with an eventual move to 22 pence; capital allowances are somewhat reduced. This is again very welcome. Capital allowances distort investment decisions towards greater capital-intensiveness; while leaving the marginal tax rate on new profitable projects unaffected, since at the margin the extra activity or business expansion may not use these allowances. Cutting corporation tax does cut this marginal tax rate and so encourages expansion.

Further budget tax cuts come from raising personal allowances to £9,000, which is a Liberal-Democrat priority. It is not really a good idea when one considers it against the yardstick of marginal tax rates. The best schedule of marginal tax rates is flat; a higher personal tax allowance creates a bigger band where it is zero which has to be paid for by higher marginal rates of tax elsewhere. ‘Taking people out of tax’ sounds attractive administratively. Nevertheless, it is something of an illusion because many of the people ‘taken out’ go back in for tax credits and welfare benefits. Furthermore, the costly rise in the allowance is balanced by extra taxes of various sorts: the extra 7% stamp duty band on properties over £2 million is the main one. Another is the freezing of the allowances for pensioners and higher rate bands. On marginal tax rate grounds, this whole package is poor. Stamp duty in particular is a tax that damages mobility and should in any case be repealed in favour of a proper consumption tax on the imputed rent of owner-occupied housing. However, it is mandated by the politics of the coalition and as tax goes is relatively harmless. There has been a big fuss about the freezing of the pensioner allowance. However, in the context of the full indexation of pensions themselves over the last few years when real wages for other groups fell dramatically, the retired have not been badly treated.

The latest news from the economy has been more upbeat, with purchasing surveys suggesting revival, much as they are in the US. The Osborne budget should add to business confidence. With the euro-zone crisis currently relegated to the backburner as a result of the ECB’s 1 trillion euro injection of liquidity into the banking system, it should now be possible for the Bank of England to focus on getting interest rates up and unwinding its dangerously high holdings of UK government debt particularly as the news from the inflation front is ominous once more. Because it has refused to take any action to bring down inflation, the Bank has made itself vulnerable to a further dose of commodity inflation, which is now duly occurring, with both oil and food prices rising substantially. Once more this year, the Bank looks likely to seriously overshoot its inflation forecast, not to speak of its inflation target.

In these circumstances, I recommend a small rise in interest rates, of ¼%, with a bias to raise in future; and also a cancellation of the latest QE proposal of £50 billion, with a bias to unwind QE by £50 billion per quarter for the next year. If the Bank is serious about attacking the structural malaise in banking that is in turn sabotaging the growth of Small- and Medium-sized Enterprises (SME’s), then it should match the Chancellor’s overtures to business with its own overtures to bankers. It should start to put its weight behind banking deregulation and the reduction of banking costs; it should reverse the regulative overkill that UK bureaucracy has indulged in. This would complement the return to monetary orthodoxy recommended above.


Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Hold Bank Rate.
Bias: To raise Bank Rate; QE in reserve for lender of last resort purposes.

The first comment on the 21st March Budget is that at least it did no major new damage to the UK economy. This contrasts with Mr Osborne’s previous misguided decisions to raise Value Added Tax and employer’s National Insurance Contributions, which hit the nascent economic recovery on the head, reduced output and employment, and made the public finances worse not better. That having been said, it was also a curiously ‘Brownite’ budget in two distinct senses. First, there was a lot of needless, politically-motivated tinkering with a tax system which is already massively over-complex and desperately needs simplification and reform. Second, there was a strong reliance on Gordon Brown’s old friend Rosy Scenario, and ‘jam tomorrow but never today’ where the budget deficit is concerned. Mr Osborne’s ‘narrative’ – in a spin doctor’s sense – was also interesting. At some points, he seemed on the verge of making the intellectual case for a less interventionist more pro-business approach (as represented on The Economist magazine’s amusing cover for its 24th-30th March edition). However, at other points he seemed to be playing the class-warfare card and revelling in it.

The Labour opposition now has a simple spin-doctor’s ‘narrative’. The recession was nothing to do with their own earlier policies in office; the blame lies entirely with the feckless behaviour of the rich; the country is stuck with the adverse consequences, and all that can be done is to share out the misery as fairly as possible. The Chancellor’s should have argued that the economic misery was the result of policy blunders in the area of financial regulation and monetary policy as well as fiscal overstretch by the previous government, the misery was not inevitable but could be reversed, and the way to do so was by unleashing the wealth creating powers of liberal-market capitalism. Sticking one’s head over the parapet may be too much to ask when the cabinet is made up largely of gilded ‘wealth conservators’ rather than self-made entrepreneurs. However, the default position that has gone unchallenged for too long in the UK political debate is that there are only two morally legitimate sources of income. One is living off the state, which appears to be the position adopted by Labour and Liberal-Democrats and also the BBC. The other politically-acceptable route to income appears to be via inheritance, which seems to be the, not necessarily conscious, attitude of the ‘Cameroons’.

A society which treats wealth creators badly is not likely to have much wealth generated, especially if the smaller entrepreneurs – who create most new jobs – have to divert their energies to coping with a highly complex tax system and a spider’s web of labour market regulation. Mr Osborne’s medium-term projections have economic growth picking up to 3% in the final years of his forecasting horizon 2015 and 2016. However, the supply-side policies implemented so far have been too timorous and modest for this to be achievable. At the same time, the forecast in the OBR’s post-Budget Economic and Fiscal Outlook that the cash value of general government expenditure on goods and services would only rise from £348.2bn in 2012-13 to £348.4bn in 2016-17 is eyebrow-raising, to say the least, as is the prediction that the cash value of general government gross capital formation will only increase from £30.6bn in 2012-12 to £31.2bn in 2016-17. The volume of general government consumption is officially predicted to be 9.9% lower in 2017 Q1, when the official forecasts end, than it was in 2011 Q4 (the last published data point) while the volume of government capital formation is predicted to drop by 1.3% over this period. It is also significant that the household consumption deflator is predicted to go up by 14.5% between 2011 Q4 and 2017 Q1, while the cost of general government current expenditure is expected to rise by 11.1% and that of government investment by 1.3%. Normally, government consumption costs grow by some 1% to 1¼% more each year than the inflation rate of household consumption. Mr Osborne’s projections rely on a noticeable squeeze on public sector costs, as well as real ‘cuts’.

Unfortunately, there are now few independent macroeconomic models available to provide an independent assessment of the OBR forecasts. The situation has been worsened by the chaotic and delayed introduction of the new ESA 2010 national accounts, which means that most forecasters have little faith in the reliability of the official statistics that they are including in their models. However, the Beacon Economic Forecasting (BEF) macroeconomic model has recently been re-estimated using the new ESA 2010 data and has been run to incorporate the Budget measures. The post-Budget BEF projections show UK growth averaging 1.1% this year (compared with an OBR forecast of 0.8%), 2.8% next year (OBR 2.0%), 2.4% in 2014 (OBR 2.7%), and 2.7% in 2015 and 2016 (OBR 3% for both years). The BEF’s relative optimism on short-term growth partly reflects the absence of further harmful tax shocks – the BEF model has moderately powerful supply-side effects incorporated in it – and also the scope for a recovery in world trade which should help UK export volumes, if it transpires. With limited room for household consumption growth, the UK outlook is now highly dependent on the strength of non-oil exports; especially as much domestic capital formation is undertaken to help supply overseas markets, not domestic ones.

Unlike the official forecasts, which simply assume that the official 2% CPI target is met in the outer years, the BEF forecasts show something of a ‘U’-shaped pattern with annual CPI inflation falling to 2.1% in the final quarter of this year before rising to 2.8% in 2013 Q4 and a target-busting 3.9% in 2014 Q4. This pattern is heavily dependent on wider international price trends, including those in the prices of oil and non-oil commodities, and also to the external value of sterling. The OBR expects the pound to be broadly flat at around 81 (January 2005=100) on the Bank of England sterling index. However, it is expected to follow a broadly depreciating path in the BEF projections. This means that UK inflation will exceed that in the OECD area as a whole. However, OECD inflation is itself expected to pick up over the next few years as the international output gap narrows and the lagged effects of recent extreme monetary stimuli work through to the price level. The downward trend in claimant unemployment shown by the OBR from 1.65 million in 2012 to 1.19 million in 2016 is broadly compatible with the BEF forecasts, which show a decline from 1.625 million to1.253 million. There also seems scope for an export led improvement in the balance of payments deficit over the next half decade, albeit the improvement is noticeably less marked in the BEF forecasts than the OBR ones.

Despite their relatively more optimistic short-term growth forecasts, the latest BEF forecasts do not show public borrowing coming down at anything like the pace set out in the 21st March Budget projections, however. This is despite the fact that the official forecasts for the volumes of general government consumption and capital formation have been incorporated into the BEF predictions. The borrowing overshoots that emerge do so for three main reasons. First, the costs of government spending are set endogenously and overshoot the OBR forecasts. Second, the non-socialised sector of the economy now appears too small to sustain the flow of non-oil taxes projected by the OBR. Finally, the official projections for a number of other government spending items are lower than the BEF model is projecting. This includes welfare payments and debt interest. The upshot is that the BEF predictions show public sector net borrowing (PSNB) dropping from £126 billion in fiscal 2011-12 to not quite £109 billion in 2012-13 – when the OBR anticipates a deficit of £92bn – before rising to nearly £126 billion in 2013-14 (OBR forecast £98 billion) and then easing to £110bn in 2014-15 (OBR £75 billion), £81bn in 2015-16 (OBR £52 billion) and £43.5 billion in 2016-17 (OBR £21 billion). The PSNB figure for 2012-13 has been distorted by the government’s takeover of responsibility for the Post Office Pension Fund. This has had the side effect of reducing reported borrowing by £28 billion in the present financial year and explains the deterioration between 2012-13 and 2013-14. The longer-term risk remains that it will be impossible to avoid a British sovereign debt crisis indefinitely, if further public borrowing overshoots undermine the Chancellor’s credibility in the financial markets.

Nothing has been said about monetary policy so far. However, monetary policy predominantly remains more of the same for the time being. It is arguably inappropriate to raise Bank Rate immediately after a Budget because of the implied criticism entailed. However, some normalisation of rates will be appropriate in the near future, particularly as Bank Rate is so far below the rates at which commercial banks can raise funds in the money markets that it risks irrelevance. There has also probably been enough QE for the time being. Any future tranches of QE should only be considered if broad money growth threatens to turn negative or there is a renewed financial crisis which requires the Bank to act as a lender of last resort. Bank Rate should be held in April, but with a strong bias to raise rates thereafter. Furthermore, there should be no additional QE for the time being.

Comment by Peter Warburton
Economic Perspectives Ltd)
Vote: Hold Bank Rate, with no extension of QE.
Bias: To raise Bank Rate.

Over the past few months, there have been several indications that the structural damage to the UK monetary sector is repairing. Regarding M4 lending, the three-month annualised growth rate in the measure that excludes intermediate other financial corporations (OFCs) has lifted from minus 6.4% last September to plus 4.2% in January. Gross mortgage lending in the three months to January 2012 was up by 6.6% on the previous three months and 13.4% higher on the year. The total mortgage stock is rising at a 1.3% annualised three-monthly pace, up from zero very recently. Banks and building societies wrote off £15.3 billion last year, down 12% from two years ago and 9% from last year. Write-offs in the fourth quarter of 2011 were 23% lower than a year earlier. Regarding the M4 money stock, excluding intermediate OFCs, the annual growth rate in January was 2.9% as compared to 1.6% last March. The deposits of the household sector grew by 2.8% in the year to January, up from 1.8% in June; deposits of private non-financial corporations decreased by 1.3% in the year to August 2011 but were 3.8% higher in January, year-on-year. Competition for retail savings has improved; the average interest rate paid on time deposits is now 1.23% as compared to 0.83% in August.

These encouraging developments signal that the Bank of England’s de facto credit tightening of 2010 and 2011 has ended and that the resumption of gilt purchases by the Bank has begun to have an impact on the broad monetary aggregates. However, the strategy of purchasing gilts at their lowest yields (highest prices) in living memory is already looking shaky as government bond markets have begun to surrender some of their extraordinary price gains of last summer. There is no justification for extending the QE programme. However, The Bank’s reluctance to take steps to revive the wholesale funding markets, including securitisations, is holding back the healing of the monetary system. Commercial banks can never revert to a purely customer-deposit funding model, but their willingness to extend credit continues to be tightly constrained by the lack of funding liquidity. If the interbank market is broken beyond repair, then a substitute (collateralised) market is urgently required to take its place. The revival of the interbank and securitisation markets, through which monetary policy formerly operated, is vitiated by near-zero interest rates.

The March Budget lays some better foundations for a consumer recovery during 2013, but another year of heavy lifting lies ahead for the household sector. Job shedding in the public sector has occurred more rapidly than expected while the loss of economic momentum last year has damaged opportunities for household income growth in the private sector. Past and present Budget changes to income tax and National Insurance payments imply a further increase in the household tax burden for 2012-13. The inflation optimism of the Office for Budget Responsibility and the Bank of England’s Monetary Policy Committee for 2012-13 is poorly founded and hence real disposable income is not expected to register an annual gain this year.

Bizarrely, the OBR has upgraded its consumer spending outlook for 2012, relative to last November, while downgrading its business investment projections. The stated justification for the stronger household consumption forecast was that the receipt of windfall gains from the mis-selling of payment protection insurance (PPI) are more likely to be saved than spent. About £2 billion of compensation was paid in 2011, with a further £6 billion set aside by UK banks. However, the recent experience of one-off income supplements suggests that the saved proportion will be quite high. Set against the expansionary PPI effect is the adverse impact from increases in mortgage interest rates. The average standard variable rate (SVR), now paid by more than half of all mortgagees, has drifted up to 4.17% in February from 3.98% last May. Halifax, Royal Bank of Scotland and Santander have recently announced rate increases from previously attractive levels that will lift the average SVR even higher.

Sluggish private sector loan growth and weak transmission of negative real interest rates to the real economy remain key impediments to a more vigorous UK recovery. Hence, this is not the moment to raise Bank Rate. However, the reconnection of Bank Rate with the market interest rate structure cannot be postponed indefinitely. A token Bank Rate increase should be pencilled in for later on in the present year.


Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold Bank Rate and maintain QE.
Bias: To ease via QE if broad money growth slows.

The 21st March UK Budget did not deviate from the task set out in the very first Budget under Chancellor Osborne in June 2010, and reiterated at the start of his speech, to get the Budget deficit down to manageable levels within five years. This meant that what he gave with one hand he took away with the other, so that there was no net real change in either the path, or the level, of the budget deficit and debt. By 2015/16, the budget deficit is expected to be back in surplus after taking account of the economic cycle, which is in line with the projections made in the 2011 Autumn Statement. In short, this was a ‘fiscally neutral’ Budget and so contained no net tax give-away over the forecast horizon. Real cuts in spending are scheduled for the remainder of this Parliament and beyond. To be sure, with borrowing in fiscal 2011-12 now projected to have been £126bn or 8.3% of GDP, the Chancellor had little choice in the matter. With the UK on negative watch from some rating agencies, a net tax give-away or radical Budget was clearly judged too risky and the need to retain Britain’s ‘safe haven’ status too urgent.

Yet, there were some significant changes announced. Most were widely discussed ahead of the Budget, including a rise in the personal tax allowance and a cut in the corporation tax rate to 24%, with the promise of further reductions to 22% by fiscal year 2014/15 and thence to 20%. These were paid for by a rise in stamp duty, to 7% for properties over £2 million; cuts in the income tax threshold for basic rate and upper rate tax payers; a reduction in age-related allowances and a crackdown on tax avoidance. The latter includes a 15% stamp duty on people buying properties through overseas companies.

Also helping to pay for the give-aways, was a rise in the bank levy, so that the net take for the Exchequer remained at around £2.5 billion. There were efforts to help growth. However, these measures added up to very little in total and are unlikely to boost the economy. In this regard, therefore, it is no surprise that the economic assumptions for 2012 and 2013 are roughly unchanged at 0.8% and 2% growth, respectively. Further out, the OBR assumption remains at 3% for economic growth in 2015 and 2016, which seems somewhat optimistic compared to independent forecasts. Risk to 2012 and 2013 remain significant, especially from Europe and higher oil prices. All in all, this was a Budget that was steady as you go, which suggests that the perception of the UK as a safe haven remains intact for now.

There should be little implication of any policy reaction in light of the unchanged growth figures. There was also an acknowledgment that inflation will average 2.8% this year. On the surface, this is higher than the Bank of England assumption. For now, the bias for monetary policy should be to keep Bank Rate at the three year low of 0.5%, and to maintain QE for the time being. This is to help offset the fiscal tightening underway and to keep money supply growth positive in face of the regulatory restraints and the risks from private sector and bank balance sheet reduction this implies.

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

Current SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other members of the Committee include: Roger Bootle (Capital Economics Ltd), Tim Congdon (International Monetary Research Ltd.), Jamie Dannhauser (Lombard Street Research), Anthony J Evans (ESCP Europe), John Greenwood (Invesco Asset Management), Ruth Lea (Arbuthnot Banking Group), Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Gordon Pepper (Lombard Street Research and Cass Business School), Akos Valentinyi (Cardiff Business School, Cardiff University), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that exactly nine votes are always cast.

Thursday, March 29, 2012
The OECD
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

A link to the OECD's latest update: more upbeat on America, no more upbeat on Europe. Available here.

House prices dip, service sector grows
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

House prices have fallen by 1% in March, according to the Nationwide, converting a 0.9% annual rise a month ago into a 0.9% annual fall this month. The removal of the stamp duty concession for first-time buyers may have been a factor, though the increase in standard variable rates by many mortgage lenders will not have helped. Nationwide expects prices to be flat or slightly lower for the remainder of the year. Its release is here.

The slowdown in the housing market, and the likely stamp duty effect, was confirmed in data from the Bank of England. Mortgage approvals slumped to 48,986 in February, from 57,899 in January. The January numbers were boosted by the rush to beat the stamp duty deadline, the February figures depressed. More here.

There was better news from the Office for National Statistics on service sector output. It rose by 0.2% between December and January and was 0.5% up on its fourth quarter average. Service sector output in January was 1.8% up on a year earlier, as detailed here.

Wednesday, March 28, 2012
GDP down 0.3% in Q4
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

When the fourth quarter GDP figures were first published showing a decline of 0.2%, there was some relief that the fall wasn't bigger. Now we know it was - the Office for National Statistics has revised the number to a fall of 0.3%. This is, of course, an early-stage revision: in a couple of years time the GDP figures will look nothing like this.

Everything apparently fell in the fourth quarter, with the service sector down 0.1%, construction 0.2% and industrial production 1.3%. An energy-related drop in industrial production is plausible, as is the drop in construction as weaker public spending bites. But the service sector number looks out of line with the surveys.

Consumer spending rose by 0.4% in the fourth quarter but was down by 1% on a year earlier, while govenment consumption was up by 0.5%. Overall investment dropped 0.6%. Exports of goods rose 4% in Q4 but exports of services fell by 2%.

So disappointing numbers, of which more here. There was better news on the balance of payments, with the current account deficit down to £8.5 billion, from £10.3 billion in Q3.

Thursday, March 22, 2012
Retail sales disappoint
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

A 0.8% drop in retail sales volume in February was disappointing, as was the downward revision of the January increase from 0.9% to 0.3%. To be fair, retailers have been surprised by the strength of the official numbers, given the surveys, so a weaker number was perhaps to be expected: these things have a habit of catching up.

Barring a very weak March number, first quarter retail sales volume should be up on the fourth quarter of 2011. Volumes in December-February were up by 0.7% on the previous three months and the January-February average is 0.3% up on the fourth quarter average. Even so, a setback. More here.

Wednesday, March 21, 2012
First thoughts on the budget
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

A budget that cuts the top rate of tax from 50p to 45p, raises the personal allowance next year from £8,105 to £9,205 and reduces the main rate of corporation to 24% from April, 22% in two years, and with an ambition of 20%, can't be all bad.

Along the way, George Osborne stemmed the self-inflicted wound of removing child benefit from higher rate taxpayers. Instead, households will only start to lose the benefit when there is an earner on £50,000 and it will be progressively but not suddenly withdrawn up to £60,000, after which it will stop. A messy but probably politically effective solution.

The economics of the budget were straightforward enough; this mornings's disappointing public finances destroyed hopes of a big undershoot in borrowing, and of any giveaway. The Office for Budget Responsibility's 2011-12 number came down only fractionally, from £127 billion to £126 billion.

There was a similar small change in the OBR's growth forecast, up from 0.7% to 0.8% this year. In general, though, it remains a story of jam tomorrow - 2% growth in 2013, 2,7% in 2014 - low inflation, which will help restore real income growth and thus consumer spending, is key to this.

Was it a tax reforming budget? Not in the 1888 Nigel Lawson sense. Indeed not in many senses. It appeared too detailed and micro for that. Were there any surprises? If there were, they were all in the small print. Did it do enough at this stage of the parliament? Probably.

Tuesday, March 20, 2012
An LSL property award
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

LSL.jpg

At last night's property press awards, sponsored by LSL, I was awarded the property columnist of the year prize. Thank you to the judges, commiserations to the runners-up and congratulations to all the other winners, listed and pictured here.

Inflation falling, but one or two doubts
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Inflation fell to 3.4% in February, from 3.6% in January. This was the lowest since November 2010 and, according to the Office for National Statistics, "the largest downward pressures to the change in CPI annual inflation between January and February came from domestic electricity and gas, recreation & culture and transport".

RPI inflation, meanwhile, dropped from 3.9% to 3.7%, its lowest since February 2010, with "the largest downward pressures from motoring expenditure and fuel & light". These are welcome falls and suggest that the high-inflation nightmare of 2011 is starting to come to an end. The release is here.

It is not, however, all plain sailing. The CBI, in a generally strong industrial trends survey, here, says production is picking up but inflationary pressures are rising, which is blames on a higher oil price. Oil, to mix metaphors, could still be a spanner in the works.

Friday, March 16, 2012
The 50p rate
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The Guardian's story that George Osborne is "poised to slash" the 50p rate on earnings above £150,000 has livened up the debate. The position on the top rate has been clear for some time. It probably raises very little net revenue and, according to the Institute for Fiscal Studies, may even have a negative revenue effect.

On the other hand, the politics of early abolition are awful - at a time of widespread public pain and anger of bankers' bonuses - and the revenue evidence from Her Majesty's Revenue & Customs is unlikely to be yet conclusive because many top earners brought forward earnings to escape it. The bankers' effect could arguably be tackled by a special bonus tax but the government has said repeatedly its bank levy is a better way of taxing the banks.

For these reasons, most of the speculation has been about a strong signal on future abolition, or even a staged reduction to 45p then 40p, rather than immediate abolition. Maybe this explains why Liberal Democrats have been so voluble on tax in the run-up to the budget. There are important meetings of the "quad" of David Cameron, George Osborne, Nick Clegg and Danny Alexander today - originally it was thought the key decisions had to be agreed earlier in the week - so we shall see what happens. The story is here.

Wednesday, March 14, 2012
The jobs figures - not bad, could be better
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

The latest labour market statistics were, it should be said, mixed. The good news was that unemployment, 2.67m, remained steady for a third successive month. What appears to have happened is that, having remained flat at roughly 2.5m for two years from mid-2009, there was a lurch higher in the summer and autumn of last year, followed by stabilisation.

The detail was less encouraging. Employment rose by only 9,000 over the latest three months and all of this and more was due to a rise in part-time employment (up 59,000), offset by a drop of 50,000 in full-time jobs. So on an hours-adjusted basis employment fell.

The underlying weakness of the labour market was reflected in earnings growth of 1.4% (1.7% excluding bonuses) showing that the squeeze on real earnings persists.

There's better news in the fact that private sector employment, up 683,000 over the past two years, has more than outweigned the drop of 390,000 in public sector employment (which is now down to 2003 levels) over the period. Details here.

Saturday, March 10, 2012
Who's in Charge Here?
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

beattie.jpg

I'm tempted to say that Alan Beattie has written an entertaining little book on the crisis and the uselessness of politicians in it. But, to be strictly accurate, this is not a book but a Penguin Short available for digital download, here. It is, however, hugely entertaining. This sums it up:

"At every stage since the crisis hit, two things have become clear. One is that the governments, central banks and international institutions charged with safeguarding the world economy have had almost no idea about the severity of what was coming. The second is that official reactions have for the most part been slow and inadequate within countries and disjointed and uncoordinated between them.

"At each turn, the international response to the successive attacks of financial contagion has been hobbled by complacency, misplaced ideology, a failure to coordinate and a lack of political will."

If there's a criticism, it is that Beattie goes a little easier on central banks than politicians. Maybe Mervyn, Jean-Claude, Ben and Co will get another volume. But that is a minor point. And the virtue of this electronic book is that it is written by somebody who was there: waiting (you always have to wait) for the politicians to show up at their press conferences and trot out their inanities.

He pulls apart Gordon Brown's moment of greatest triumph, the G20 summit in London's Docklands in April 2009:

"‘The Trillion-Dollar Summit’ was the headline Mr Brown wanted, and by and large he got it. He claimed to have achieved a $1.1 trillion boost to the world economy, including $500 billion for the IMF’s war chest, a $250 billion boost for trade and a $250 billion increase in the global money supply. The Guardian newspaper, a habitual cheerleader for the Prime Minister, ran its story under the millenarian headline ‘Brown’s New World Order’, and even less slavishly loyal papers were enthusiastic.

"The reality was less impressive. The $500 billion for the IMF was very welcome, as the institution had already started to eat into its reserves with a string of rescue loans for Eastern European countries in late 2008. But some of the money was already in train – Japan had offered a $100 billion loan the previous year – or would not be agreed until months after the summit, and an increase in the future firepower of a crisis lender was not an immediate boost to the world economy.

The $250 billion support for trade was more like $4 billion: it was a subsidy for the provision of trade credit (a basic form of finance that had been in short supply during the credit crunch) and the $250 billion was a highly optimistic assessment of the amount of trade that subsidy might help support over three years. The $250 billion boost to the world’s money supply was an issuance of ‘Special Drawing Rights’, a form of asset that governments could add to their foreign exchange reserves and use if they chose to. As it happened, most chose not to.

"The standard view of the G20 among most commentators is that it started well, in Washington and London, but thereafter achieved little. In reality, only the second half of that is true."

There's also a wonderful spoof report, writen by Beattie while waiting for some press conference or other to start:

"An ineffectual international organization yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies.

‘We are seriously concerned about this most serious outbreak of seriousness,’ said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat. ‘This is a wake-up call to the world. They must take on board the vital message that my organization exists.’

"The director of the body, based in one of New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day. The organization has sought to justify its almost completely fruitless existence by joining its many fellow talking shops in highlighting whatever crisis has recently gained most coverage in the global media.

‘Governments around the world must come together to combat whatever this year’s worrying situation has turned out to be,’ the director said. ‘It is not yet time to panic, but if it goes on much further without my institution gaining some credit for sounding off on the issue, we will be justified in labelling it a crisis.’

Great stuff, and worth £1.99 of anybody's money.

Friday, March 09, 2012
A bad day's data from the ONS
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The surveys may be strong but the official data is not, not yet at least. This morning's releases from the Office for National Statistics have put the possibility of a drop in gross domestic product in the first quarter back on the agenda, even though there's a long way to go.

Manufacturing output edged up by 0.1% in January. That was a little less than expected but puts manufacturing on course for a decent Q1 bounce - January was comfortably above the Q4 average. However, industrial production fell by 0.4% and in January was 0.3% below the Q4 average. Energy production was the culprit again. It remains to be seen whether February and March will be strong enough to lift production into positive territory. More details here.

More concerning was the official data from the construction sector. The numbers remain somewhat experimental and are not seasonally-adjusted but show a drop of more than 12% in construction output in January, after a fall of over 10% in December. The assumption has to be that most of this is seasonal, and the ONS, in its release here, does not flag up any particular alarm bells. But this is another drag of Q1 GDP, possibly a large one. Nobody said it would be easy.

Monday, March 05, 2012
Service sector slips but still quite strong
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The service sector purchasing managers' index fell from 56 in January to 53.8 in February, slightly weaker than had been expected. This followed three months of rises. Taken together with the other purchasing managers surveys, the economy appears to be on course for growth of 0.3% to 0.4% in the first quarter, though as the Bank of England has warned, things could be weaker in the second as a result of the additional bank holiday. This is Markit's verdici:

“Despite seeing some loss of momentum in February, the service sector continued to grow at a robust pace, adding to signs that a double-dip recession will be avoided. So far this quarter, the sector has notched up its best performance since the spring of 2010, when the economy was rebounding strongly from the recession.

“Combined with the ongoing modest growth in manufacturing and upturn in the construction sector, the latest services PMI data suggest that the economy will expand modestly in the first quarter, provided that no significant further loss of momentum is seen in March. The outlook in fact seems to have brightened, with business confidence about the year head hitting a 12 month high and firms again taking on more staff in February."

Thursday, March 01, 2012
Manufacturing growth eases, house prices up
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Given the strength of recent manufacturing surveys, including the CBI's, the easing in the manufacturing purchasing managers' index from 52 in January to 51.2 in February was mildly disappointing. It underlined the fact that, with the eurozone in recession, growth is still a challenge for industry.

This was Markit's verdict: "UK manufacturers continued to raise production and employment in February, building on the solid foundation seen so far at the start of 2012. This raises hopes that the sector will post an expansion over Q1 as a whole, or at least improve on the disappointing 0.9% contraction seen at the end of last year."

Earlier, the Nationwide reported a 0.6% rise in house prices in February, for a rise of 0.9% on a year earlier. Prices are 10.6% lower than their autumn 2007 peak in cash terms, and 22.6% lower in real terms. More here.

Wednesday, February 29, 2012
A money supply jump
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Weak money supply growth has been one of the Bank of England's concerns but the January numbers suggest a significant bounce. The three month annualised growth of the M4 money supply measure rose to 4.2% in January from minus 0.9% in December, helped by a £29 billion jump in this broad money measure. It would be tempting to see this as a direct response to the resumption of quantitative easing in October but it is not clear this is the case. More details here.

Sunday, February 26, 2012
If Britain were Greece ....
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Radio 4's Broadcasting House asked me to imagine the consequences of Greek austerity, if translated to Britain. This is what I said:

If Britain were Greece ….

We would be in the middle of the longest and deepest recession in the modern era, much worse than the Depression years of the 1930s, with no end in sight.
Unemployment would be nearly 7 million, more than a fifth of the workforce, 2.5 million of it among young people. Half of our young people would be out of work.

If Britain were Greece ….

Workers, particularly low-paid workers, would be about to be hit by a lot of pain. The minimum wage would be cut from £6.08 to £4.74, while the rate for young people would be cut from £4.98 to £3.39.
More than 100,000 public sector workers would be put into “reserve” – a waiting room for redundancy – and their salaries immediately cut by 40%. Well over a million public employees would be sacked by 2015. All public sector workers would see their wages, not just frozen, but cut sharply.

If Britain were Greece …

VAT would got up to 24%, we’d pay a “solidarity” levy of up to 5% of income, and new taxes on property. Alcohol and tobacco duties would go up by a third and we’d pay roughly £2 a litre for petrol and diesel: £120 to fill the tank of a family saloon. Anybody with a yacht or luxury car would pay extra tax on it.

People with a state or public sector pension above £800 a month would see it cut by 20%. Anybody with a pension above that level who had retired before the age of 55 would see it cut by 40%. Early retirement would become a thing of the past. The equivalent of Greece’s retirement age increase in Britain would be a rise in the state pension age to well over 70. All state benefits would be cut for years and be strictly means-tested..

If Britain were Greece ….

The defence budget would be slashed by a fifth – in cash – drastically reducing the number of military personnel and making it hard to maintain the army, navy and air force as viable separate services. NHS spending, instead of being ringfenced, would drop by a sixth. Treatments would be withdrawn, dozens of hospitals would be cut and tens of thousands of medical staff would lose their jobs. Education spending would not escape the axe, necessitating the merger or closure of thousands of schools and huge redundancies among teachers and support staff.

If Britain were Greece ….

We wouldn’t even have the weather to ease the gloom.

Friday, February 24, 2012
Investment drags down growth
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The second estimate of gross domestic product for the fourth quarter showed a drop of 0.2%, as expected, though the detail was interesting. On the production side, the mild weather contributed to a bigger drop in gas and electricity supply than originally estimated, while on the expenditure side a big drop in gross fixed capital formation, 2.8%, offset a 0.5% rise in consumer spending and a 1% increase in government final consumption expenditure. The drop in the trade deficit from £4.4 billion in the third quarter to £2.5 billion in the fourth meant net trade contributed to growth.

The figures showed a 0.1 point downward revision to growth in the first and third quarters, reducing the 2011 growth rate. This is the Office for National Statistics' description:

"GDP over the year [2011] grew by 0.8 per cent, compared with 2.1 per cent for 2010. The economy has now recovered just under half of the output lost during the 2008-09 downturn – growth of 3.4 per cent since the end of the contraction, during which GDP declined by more than 7 per cent.

"The subdued economic environment and sentiment continued into the last quarter of 2011, with a number of key economic indicators, in addition to GDP, reflecting the adverse economic conditions in the UK, as well as in the euro area."

These are, of course, early days. GDP revisions tend to come later and investment is one of the most revised series. This time last year the ONS put growth in 2010 at 1.3%. Now it is 2.1%. More on the latest numbers here.

Wednesday, February 22, 2012
Bank unanimous on more easing, split on amount
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Ahead of the Bank of England monetary policy committee's February meeting, the view was that it was a choice between £50 billion and £75 billion of additional easing. In the event, seven MPC members went for £50 billion and two, Adam Posen and David Miles, voted for £75 billion. The £50 billion crowd noted recent stronger data and the risk that a vote for more would be interpreted as a sign of Bank bearishness.

The MPC's central view is summed up in this paragraph:

"The Committee’s central view was that inflation would decline further during 2012 as the contributions of energy and import prices continued to wane and as spare capacity weighed on wages and prices. But the speed and extent of the fall remained uncertain, and would depend, in part, on the strength of demand. Growth was likely to be volatile in the near term, given the impact of one-off factors, particularly the additional bank holiday associated with the Queen’s Diamond Jubilee in the second quarter. But thereafter growth should strengthen gradually, supported by a recovery in households’ real income growth and the expansionary stance of monetary policy. Headwinds from the weak external environment, tight credit conditions and the fiscal consolidation were, however, likely to continue to depress spending, so that some margin of economic slack was likely to persist."

It notes, however, the risks in either direction, including hgher inflation from energy and commodity price hikes. The minutes are here - and contain no clear hint of further easing.

Tuesday, February 21, 2012
A £7.8 billion budget surplus in January
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

Public sector net borrowing in January was negative by £7.8 billion - there was a budget surplus - £2.5 billion up on a year earlier and £1.5 billion better than market expectations. The Office for Budget Responsibility revised up its borrowing projection for 2011-12 in November from £122 billion to £127 billion.

That looked puzzling at the time and looks even more puzzling now. It will be disappointing if borrowing does not come in below £122 billion for 2011-12. If so, this will cast doubt on the OBR's forecasts for later years.

The OBR, here, is not quite prepared to throw the towel in yet, though it points out that to meet its forecast, borrowing for the final two months of the fiscal year will have to be £7 billion higher than a year earlier, breaking the recent trend.

The January numbers do not answer the question of whether the 50% tax rate is bringing in extra revenue. Income tax and capital gainst tax receipts were up by a modest 1.5% on a year earlier but the OBR points out the likelihood of some slippage into February (the self-assessment deadline was extended because of industrial action), which is also when financial sector bonuses tend to be paid. Even so, the 50% rate is not yet resulting in any revenue bonanza.

When a Greek door opens ...
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

It is not the done thing to be remotely optimistic about Greece but maybe we should give the 2nd rescue package, 130 billion euros and plenty of haircuts for the banks, a chance. It is a long time since the Greek economic miracle of the 1950s and 1960s, when growth averaged 7% a year, but in the 10 years before the crisis Greek growth averaged 4% a year. The question is whether the austerity leaves any room at all for growth. It should leave some.

The eurozone crisis is far from over and has many twists and turns ahead, as the markets are indicating. But, largely thanks to the actions of the European Central Bank, sentiment has improved. The question is whether we should now have to turn our attention to Iran, and the risk of a sustained spike in oil prices.

Monday, February 20, 2012
The Bank and GDP data
Posted by David Smith at 07:15 PM
Category: Thoughts and responses

gdpmktfeb12large.gif

The above is a chart from last week's Bank of England inflation report. The black line shows the current published numbers from the Office for National Statistics. The green fan shows, not only the Bank's forecasts, but also its own estimates of past growth. The sharp-eyed will note that there is a clear expectation at the Bank that, as in every previous cycle, the initial GDP figures will be revised higher. Mentioning no names but you would expect anybody who had worked at the Bank to be aware of this.

The bible for the national accounts is, of course, the Blue Book, the latest edition of which was published last November. It revised up the average annual growth rate from 1997 to early 2011 from 1.9% to 2.2%. There is no reason to believe that past revision patterns will be any different in the future. Indeed, this is basic stuff.

Friday, February 17, 2012
Retail sales jump in January
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Another upside surprise. Surveys had suggested retailers struggled in January but official figures showed a 0.9% jump in volumes compared with December and a 2% rise compared with a year earlier. Sales values were up by 4.4%.

If you wanted to make the case that lower inflation will bring forward more spending there's support in these numbers. Retail inflation (the retail sales deflator) fell to 2.2%, its lowest since November 2009. More here.

Wednesday, February 15, 2012
Unemployment stabilises
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

A better set of jobless figures than had been feared. Though there was a 48,000 increase in Labour Force Survey unemployment in the October-December 2011 period, to 2.67 million, this was actually smaller than the 2.68 million reported for the September-November period. This fits other data suggesting activity strengthened during the quarter.

Employment rose by 60,000 in the final quarter and was up by 7,000 on a year earlier. Though there is a recent bias towards part-time work, this suggests private sector employment is just about offsetting public sector losses.

Claimant count unemployment rose by 6,900 in January to 1.6 million, 5% of the workforce. Unlike three years ago, when the economy was diving into recession and monthly claimant count rises exceeded 100,000, this is a modest rise. More here.

Tuesday, February 14, 2012
Today's real news - a drop in inflation
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The news is understandably dominated by Moody's overnight negative watch on the UK's AAA sovereign debt rating. In many ways it is remarkable the UK still has a AAA rating but the timing is curious. Very recent growth data has been encouraging and you would have thought they would have waited for the key January public finance numbers.

More important is the drop in inflation in January to 3.6%, from 4.2%, as last year's VAT hike dropped out of the comparison. In line with expectations and on course to drop to 3% over the next couple of months. More important is what happens after that. Retail price inflation 3.9%, lowest since February 2010. More here.

Thursday, February 09, 2012
It's all in the data
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

blanchflower2.jpg

Readers are probably already bored with the debate between me and David "Danny" Blanchflower, formerly of the Bank of England's monetary policy committee, but this is a final instalment, from me at least.

In his response, here, there is a Hallelujah moment. He has, he says, never said that the slowdown is entirely due to the coalition's strategy. "Fiscal tightening is just part of the explanation," he writes.

Exactly. Tax hikes and spending cuts reduce growth but so does the high-inflation squeeze on real incomes, the eurozone crisis and most importantly, as Rogoff and Reinhart have demonstrated, because recoveries after financial crises are usually weaker and more protacted than normal ones. So I look forward to hearing Danny spreading the blame for the slowdown, though I am not hopeful.

Danny also suggests I have "helped to establish the false narrative that Labour caused the crisis". Not so and, indeed, I have gone out of my way to stress the global nature of the crisis and that it would have been little different had the Tories been in charge.

But Labour was in charge and, as Ed Balls has conceded, has to accept part of the blame for its failure to regulate the financial system. It also has to accept part of the blame for the clumsy initial response to the crisis by the Bank of England and Treasury, which for a while made a difficult situation worse.

There would have been a lurch into large deficit whatever the state of the public finances before the crisis but the absolute size of the deficit was larger because of Labour's failure, under Gordon Brown, to stick to the golden rule. At the time, only people like Martin Weale of the National Institute were brave enough to point this out but now it is generally accepted, as in the recent Office for Budget Responsibility exercise. A pre-crisis deficit of 1% of GDP would have meant a smaller deficit when the crisis hit, and potentially more room for emergency Keynesian measures.

The big difference between us, I think, is not ideological but in use of the data. I examine the numbers, and report them. If there is good news among the bad, I report that. If it is bad, it gets reported as bad. You cannot hide bad news.

Was I being optimistic in reporting the January service-sector and manufacturing purchasing managers surveys as being good news? "UK economy shows renewed vigour in January" said Markit, here, which produces the data. Not my words, theirs.

Is it over-optimistic to say house prices were "resilient" at the end of 2011, when an average of the main house price indices shows them to have been flat over a year in which household real incomes recorded a record fall and unemployment rose? I don't think so.

As for GDP and the prospect of upward revisions in future, he should know that the Office for National Statistics has not begun to scratch the surface yet. Box 2.1 on p26 of this OBR report, here, shows the extent to which the initial data was revised up over many years, as it will be again. This, by the way, makes comparisons between this cycle and the 1930s facile.

As I say, it is important to look at the data. Danny is known as a labour market economist. Last year I criticised him for gloomily highlighting a "dramatic decline" in working hours in the second quarter of last year. Much of it, I pointed out, was due to the extra bank holiday for the royal wedding.

His response was to highlight the "monthly" figures for hours worked in March and May in the Labour Force Survey, which were also weak, and to say:
"Good try David. So how exactly would a bank holiday in April lower hours in March or May? Time to get your facts straight, mate, before coming after yours truly. The coalition is responsible for reductions in the demand for labour, hence the poor spending data."

This was, unfortunately, a second error, which a labour market economist should not make. The "monthly" figures on the ONS website for Labour Force Survey data are three-monthly averages, as the statisticians are happy to confirm. So "March", is the February-April average, "April" is the March-May average and "May" is the April-June average. They were all affected by the extra bank holiday. Boring but true. The facts were straight.

£50 billion more QE
Posted by David Smith at 12:25 PM
Category: Thoughts and responses

The Bank of England has come in for more flak ahead of this week's decision on QE than at any other time. Whether that persuaded it to limit the additional amount to £50 billion (the choice was between that and £75 billion) or somewhat stronger data remains to be seen. It is unlikely that the vote was unanimous. This is what the Bank said:

"The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

"In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries. A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.

"CPI inflation has fallen back from its September peak, declining to 4.2% in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison. Inflation is then likely to decline further as the contribution of energy and import prices diminishes, while downward pressure from unemployment and spare capacity continues to restrain domestically generated inflation.

"In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review."

Better manufacturing, better trade
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

As surveys had suggested, manufacturing got stronger as the fourth quarter went on. Today's official figures show a 1% jump in manufacturing output in December, enough to push annual growth back into positive territory (0.8%). Given that the surveys have pointed to even stronger growth in January, this is encouraging.

Overall industrial production also rose, by 0.5%, but not by enough to change fourth quarter GDP at this stage. Overall industrial production fell by 3.3% compared with a year earlier, dragged down by energy supply. This was a significantly depressing factor in fourth quarter GDP.

As the Office for National Statistics put it: "Gas supply output was the main downwards driver, falling by 14.0 per cent, with the comparatively mild weather in 2011 Q4 and reduced demand for gas in the generation of electricity factors in the fall." More here.

Alongside the industrial production numbers, there was a big drop in the monthly trade deficit, from £2.8 billion (goods and services) in November, to £1.1 billion in December, its lowest since April 2003. Exports rose marginally (in value terms), while imports fell by 3.4%.

The overall trade deficit fell from £36.7 billion in 2010 to £28 billion in 2011, though the trade in goods deficit increased from £98.5 billion to £99.3 billion. That was mainly due to a widening in the trade deficit in oil, up from £4.7 billion to £11.1 bilion. More here.

Tuesday, February 07, 2012
Retailers gloomy
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

The British Retail Consortium says retail sales values were up by 2.1% year-on-year in January, though sales were down by 0.3% on a like-for-like basis (adjusted for additional floor space and store openings). No doubt that these figures were weaker than December, when stores benefited from a late boost in spending and comparisons with the snow disruption of December 2010.

It should be remembered that January 2011 benefited from December 2010's disruption, despite the VAT increase that month. Even so, the BRC numbers suggest a weak start to the year, in contrast to figures from, say, John Lewis.

Interesting to note that retail floor space is still expanding, when many retailers have fallen by the wayside. Details here.

Monday, February 06, 2012
Oh Danny Boy
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

blanchflower.jpg

In his article in the latest New Statesman, here, David "Danny" Blanchflower accuses me of being a "Tory cheerleader" for suggesting that the fourth quarter GDP figures, which showed a fall of 0.2%, were likely to revised higher.

I am tempted to respond by calling him a Labour lackey but I would not stoop so low, not least because to descend to this kind of name-calling is usually the last resort of the desperate. As it is, I'd remind Danny I made the same point about the GDP figures in the third and fourth quarters of 2009, when Labour was in power, and when the Office for National Statistics also pitched its initial etimates too low. I also defended Alistair Darling's November 2008 fiscal stimulus against Tory attacks.

As for other points about the fourth quarter GDP numbers. I know Danny does not follow the details, but the Office for National Statistics dwelt at some length on the impact of the one-day public sector strike and the impact of the mild weather on gas and electricity supplies is clear from the figures. However, as I said in the very next sentence: "I am not pretending that these were anything but disappointing figures." Not much cheerleading there.

I used to like Danny. He was one of the more surprising appointments to the Bank of England's monetary policy committee but livened up the debate. But he behaved badly in badmouthing his former colleagues at every opportunity when he left the committee, knowing as public officials they could not respond.

Had he presented the kind of analysis he did in his latest New Statesman column while at the Bank, he would have been laughed out of the building. Apparently there have been three stages in the economic cycle in recent years: the global recession (i.e. nothing to do with the government) from 2008 Q1 to 2009 Q2, the "Darling recovery" from Q3 2009 to Q3 2010 and the "Osborne collapse", from Q4 2010 onwards.

Why? Why doesn't the coalition get half of Q2 2010 and the whole of Q3? Or, if you're applying lags, why should they stop at the start of Q4 2010, which happens to be the point at which GDP goes into reverse? What about the fact that Darling's fiscal tightening kicked in in 2010-11?

Danny's problem is that he may be the only economist in the country - or, rather, viewing the country from New England - who thinks Britain's slowdown is entirely due to the fiscal tightening. There may have been a "global recession" for the UK in 2008-9 but the global slowdown and the eurozone's woes apparently had nothing to do with the UK's slowdown in 2011. Nor, it seems, did 5% inflation (which I seem to remember him advocating), responsible for the biggest drop in household real incomes in the post-war period. His is not, I'm afraid, a serious analysis.

As for other criticism of me, that I predicted that private sector jobs will more than outweigh losses in the public sector, it will be astonishing if they do not. During the long upturn from 1992 to 2008 Britain added 4m net new jobs. All of them, in net terms, were in the private sector. Public sector employment fell sharply in the 1990s before rising in the 2000s.

That was then, what about now? In the two years to September 2011, public sector employment fell by 366,000 but private sector employment rose by 581,000. The position is more balanced in the latest 12 months; 275,000 public sector job losses against 262,000 private sector gains but that reflects many more public sector job losses than were expected at this stage by the Office for Budget Responsibility. There may be an element of bunching.

Only if we get large-scale private sector job losses alongside the public sector ones will we get the 4m or 5m unemployment confidently and so far inaccurately predicted three years ago by Danny. It would be a great pity if that were ever to happen, while he would no doubt celebrate his vindication. My only bias is against those who constantly talk down the economy, particularly from a distance.

Friday, February 03, 2012
Service sector at 10-month high
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

More good news for the economy with the purchasing managers' index for the service sector up from 54 in December to 56 in January, a 10-month high.

This is what Markit said:

"The UK service sector started 2012 in positive fashion with activity and new business both rising at marked and accelerated rates. Business confidence showed the largest one-month gain in the survey history, while employment was increased to the greatest degree in nearly four years.

"On the price front, input cost inflation eased to the lowest for 14 months while output charges were again little changed.

"January’s headline Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – improved to a 10-month peak of 56.0. That was a rise from 54.0 in December and represented a third consecutive monthly improvement in the index (the best run for over two years)."

Wednesday, February 01, 2012
A good start for manufacturing
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The purchasing managers' index for manufacturing in January is strong and, in the circumstances, rather surprising. The index rose from 49.7 in December to 52.1 in January, pointing clearly to a resumption of the sector's expansion. Adding to the good news was the sharpest fall in input prices for more than two years. Maybe we wrote manufacturing off too soon.

This was Markit's verdict: "The UK manufacturing sector started 2012 on a positive footing. Output expanded at the fastest pace since last March, new orders rose following a period of contraction and payroll numbers stabilised. Cost pressures continued to ease, as average input prices fell for the third straight month."

Monday, January 30, 2012
Keynes and the Keynesians
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

keynes.jpg

Jonathan Portes of the National Institute of Economic and Social Research asked me what I meant by 'Keynesian'. Jonathan's post is here, and there is an interesting one here from Simon Wren-Lewis. This is what I said:

The National Institute was founded in 1938, so I suppose strictly speaking "taking its back to its Keynesian roots" implies taking it back to the economics of Keynes, rather than post-war Keynesian economics, which David Colander many years ago described as Lernerian rather than Keynesian.

What is Keynesian economics? In Britain it was common to think of it as the 1950s and 1960s belief in fiscal fine-tuning, and the primacy of fiscal over monetary policy, buried in the 1970s by stagflation and the rise of monetarism, and encapsulated in the Jim Callaghan/Peter Jay 1976 speech to the Labour party conference.

What it means now is more difficult. Paul Samuelson famously wrote that all economists should think of themselves as post-Keynesians, "keen to render obsolete any theories that cannot meet the test of experience".

Do only Keynesians support an emergency fiscal stimulus in a crisis and deep recession? No. Robert Lucas was half -joking when he said he guessed everybody was a Keynesian in a foxhole, and it is true that some US economists were opposed. But support for the stimulus was pretty universal among the economic mainstream.

The IMF was criticised by some in the emerging world for abandoning the Washington orthodoxy, in which its standard prescription for developing economies in difficulty was fiscal austerity. Instead it supported a temporary fiscal stimulus, though with the proviso that countries should also put in place credible medium-term fiscal consolidation plans.

Is it Keynesian to call for a slowdown in the pace of those consolidation plans? A lot of this gets mixed up in the nonsense over "expansionary fiscal contraction". Every UK recovery from the 1970s has been accompanied by a significant fiscal consolidation. Would those recoveries have been stronger without the fiscal consolidation? Initially, certainly yes. This time, also yes, as I pointed out last May:

"Let me adjudicate. Summers says he would be astonished if Britain boomed over the next two years and so would everybody else. He has set up a straw man.

"The government’s deficit programme has removed the threat to Britain’s AAA rating and probably kept interest rates low. You cannot, however, hike taxes and cut spending without some impact on growth, even if there was no realistic alternative.

"As for the free marketeers, it is true that over time the private sector will expand into the space left by a smaller state. But in the short-term, in an economy when bank finance is scarce, growth will be slower than without cuts. As I say, Britain had little choice but to get the deficit down."

So is it Keynesian to say that, given the size of the deficit, the government should slow the pace of fiscal consolidation? Going back to where we started and Keynes, we cannot say, but I am not sure this would have been Keynes's view. Robert Skidelsky might argue otherwise.

But it is Keynesian in the sense that if you believe the fiscal multipliers are big enough, that Ricardian equivalence is a myth or greatly exaggerated and that there are no adverse consequences from the potential loss of fiscal credibility - which, as I have said, is the main reason why gilt yields are so low and the AAA rating still intact - you should slow the pace of consolidation or even put it into reverse? Yes, though this may be unfair to some Keynesians.

Wednesday, January 25, 2012
GDP slips. but no big deal
Posted by David Smith at 11:15 AM
Category: Thoughts and responses

The 0.2% drop in gross domestic product inn the fourth quarter of 2011 was disappointing, but probably no more than that. It did not change estimates for growth in 2011 of 0.9% (1.4% excluding North Sea oil and gas) and was broadly in line with expectations.

The service sector was flat in the fourth quarter, which looks to be a number likely to be revised upwards looking at the surveys, while industrial production was down by 1.2%. Included in this was a huge quarterly fall, 4.1%, in electricity and gas supply, reflecting the mild weather.

Given this, the possible effects of the November 30 public sector strike and the likely upward revision of these figures when more data comes in, we should not worry too much about these figures, which are here.

This is particularly the case when you look at an upbeat CBI manufacturing survey, the highlight of which was: "In the next three months, manufacturers expect output to rise modestly, with a balance of +15%." If manufacturing avoids a drop in the first quarter of 2012, so will the wider economy.

The Bank of England's minutes showed a unanimous vote in favour of unchanged policy, and an interesting debate:

"For some members, the risks of undershooting the target meant that a further expansion of asset purchases was likely to be required. Some of those members also noted a downside risk to inflation arising from the possibility that the reduction in the economy’s supply potential following the recession had been less, and hence spare capacity greater, than assumed in the Inflation Report. But there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.

"For other members, the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term. Annualised three-month inflation rates were still above the target. Looking ahead, particular concerns included: the risk of price pressures from firms seeking to increase margins; and the fact that even if wage growth were to remain subdued, wages might add to inflationary pressures if productivity growth were also weak."

More QE is likely in February but by no means guaranteed. The minutes are here.

Tuesday, January 24, 2012
Eurozone takes its toll on global growth
Posted by David Smith at 03:45 PM
Category: Thoughts and responses

The International Monetary Fund has revised down its growth forecast for 2012 to 3.3%, from 4% in September, and its 2013 forecast from 4.5% to 3.9%. To be fair, its earlier forecasts looked a little rosy, though the global economy grew by a very impressive 5.2% in 2010 before slowing to 3.8% in 2011.

According to the IMF: "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.

"Global output is projected to expand by 3¼ percent in 2012 —a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO). This is largely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation."

It predicts that Britain will grow by 0.6% in 2012, a downward revision from 1.6% in September. There will be a debate over this: "In the near term, sufficient fiscal adjustment is in motion in most advanced economies. Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits. Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation."

The update is here

Public borrowing continues to fall
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Public sector net borrowing was £13.7 billion last month, down from £15.9 billion a year earlier. The current budget deficit was £10.8 billion, down from £13.3 billion in December 2010. Upward revisions to earlier data mean that cumulative borrowing for the first nine months of the fiscal year, £103.3 billion, was below the £114.6 billion recorded in the corresponding period of 2010-11. So borrowing will be lower this year, but the difference will not be massive.

Will it undershoot the Office for Budget Responsibility's revised borrowing figure of £127 billion for the current fiscal year? I think so, and I thought the upward revision from £122 billion in November was unnecessary. But we'll see. The OBR's analysis, here, points out that borrowing will need to be £2.3 billion higher than a year earlier for the final three months for the target to be hit. It expects government spending to come in stronger and VAT and bonus-related taxes to be weaker.

The Office for National Statistics highlighted the fact that public sector net debt rose above £1 trillion for the first time.

Monday, January 23, 2012
Britain, Japan and low gilt yields, part II
Posted by David Smith at 01:45 PM
Category: Thoughts and responses

Jonathan Portes, director of the National Institute of Economic and Social Research (Niesr), has published a lively rejoinder to my piece yesterday on his blog, here, in which he suggests I tie myself "up in all sorts of knots".

Jonathan's also a bit sensitive about my suggestion that he has taken Niesr back to its Keynesian roots: he says he doesn't really think of himself as a Keynesian and hasn't changed its policy position. The argument I set out on Sunday was, I thought, very straightforward.

If you thought Britain's very low gilt yields were "just as in Japan — a sign of economic failure, not success", as Jonathan originally wrote, then you would expect that the markets were anticipating a long period of economic stagnation and deflation for Britain, as in Japan. They are not, and neither is the National Institute, barring a very big change in its forecasts in the next week or so.

The markets do expect Bank rate to stay low, as he says, but that is rather a different point. The Bank of England, and other central banks, have decided that the appropriate response to the aftermath of a banking crisis is to keep official interest rates low, and the expectation is that they will continue to do so even as the recovery strengthens. One of the arguments for doing so in Britain, of course, is that fiscal policy is being tightened. I'm not at all sure this is a sign of economic failure, merely a reflection of banking and financial conditions. Sir Mervyn King has made clear that a key factor keeping rates low is the health (or lack of it) of the banking system.

This, by the way, is in contrast to the response of the Japanese authorities. Zero rates only came in in Japan once deflation had taken hold. The response of the Bank of Japan to the bursting of its bubble economy two decades ago was to raise interest rates, not lower them. It was one of the lessons we have learned from the Japanese experience.

Why shouldn't the government take advantage of low gilt yields and borrow to stimulate the economy, as Jonathan suggests? Because, in my view, these things are a lot more finely-balanced than he allows. A Plan B fiscal stimulus would be seen by the markets and the ratings agencies as a powerful indication that the government was giving up on its fiscal strategy. Given how close the government came to breaking its fiscal rules in the Autumn Statement, it is hard to see the Office for Budget Responsibility looking benignly on any such policy shift. You can argue that none of this matters. In the real world, however, it does.

So, there should be no confusion. And if you want to draw a comparison with another country that has low government bond yields, why not Germany?

PS Jonathan has responded to my response on his website and appears to not know the difference between short-term and long-term interest rates. Very strange. My point was that, even if you accept his explanation for very low rates - that Bank rate will stay low - this does not imply Japanese-style stagnation and deflation. And it is perfectly possible for a country to have a low policy rate but very high government bond yields. Look at several eurozone members. Britain's low gilt yields reflect, as he has conceded, market confidence in the credibility of the government's fiscal plans.

Friday, January 20, 2012
A decent retail sales bounce
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Retail sales were surprisingly buoyant in December, rising by 0.6% on the month in volume terms both including and excluding sales of automotive fuel. This was a strong result. Sales value was up by 6.2% in December compared with a year earlier, while volumes were up by 2.6%.

Though this was helped by base effects (December 2010's snows) it suggests demand was unexpectedly strong in the run-up to Christmas 2011, despite mild weather being unhelpful to clothing retailers. Volumes in the fourth quarter showed a rise of 1.1% compared with the third, which should have provided some support to gross domestic product. More here.

Wednesday, January 18, 2012
A mixed bag of labour market figures
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

All the headlines on the labour market statistics will be bad, but the picture is rather more nuanced. Undoubtedly bad was the 118,000 rise in the Labour Force Survey measure of unemployment to 2.68 million or 8.4% of the workforce in the September-November period.

As the Office for National Statistics says: "The unemployment rate has not been higher since 1995 and the number of unemployed people has not been higher since 1994."

More reassuring was the small, 1,200, rise in the claimant count in December to just under 1.6 million. With downward revisions in earlier months, the claimant count has been essentially flat for four months. Also on the plus side, the inactivity rate for 16-64 year-olds fell from 23.3% to 23.1%, representing a drop of 61,000.

The rise in youth unemployment looks to be mainly a full-time student phenomenon. Excluding them, there was an increase of just 8,000 over the latsst three months. Including them, there was a rise of 52,000.

Pay remains subdued, average earnings rising by just 1.9% - still well below the rate of inflation. More here.

Tuesday, January 17, 2012
Inflation down to 4.2%
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

The fact that the fall in inflation in December, from 4.8% to 4.2%, was more or less in line with expectations does not mean it was unwelcome. We went through a period of many months when inflation came in well above expectations and the Bank of England looked to be in danger of losing control of it.

At 4.2% of course, inflation is still more than double the official target and RPI inflation only came down from 5.2% to 4.8%. The squeeze on real income remains. There are reasons, however, to expect it to ease in the coming months, including the January 2011 VAT hike dropping out of the comparison and lower household energy prices. More here.

Friday, January 13, 2012
The child benefit fiasco
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

This is what I wrote about the government's child benefit plans on October 10 2010:

It was brave for the Tories to attack last week one of the welfare state’s sacred cows, risking the wrath of its own supporters in middle England and demonstrating that the pain of the cuts will reach up the income scale.

What there was no excuse for, however, was announcing the change in such a cackhanded way. One characteristic of the Conservative team in opposition was the effort it put in to ensure external experts backed its numbers.

Perhaps it was the pressures of office, or of putting together the chancellor’s party conference speech in haste. Perhaps, to take the Machiavellian interpretation, the chancellor’s deliberate intention was to generate maximum anger in the short-term in return for long-term gains.

That is too generous. Something went badly wrong. You did not have to be a tax expert to spot the immediate double-income flaw in the crude removal of child benefit for higher rate taxpayers - two parents earning £40,000 each get it, a single earning parent on £44,000 does not.

It was predictable that the Institute for Fiscal Studies would warn that the move “seriously distorts incentives” for families with main earners. Nobody would know this better than Rupert Harrison, George Osborne’s special adviser, who used to work at the IFS.

So the episode is puzzling, and potentially worrying, though the Treasury has time, until 2013, to straighten it out.

Drop in inflation in the pipeline
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

They call producer price inflation pipeline inflation and the latest figures suggest a fall in inflation is firmly in the pipeline. Output prices of manufactured products fell by 0.2% between November and December, their first drop since June 2010.

Overall, output price inflation fell from 5.4% in November to 4.8% in December, its lowest for a year. Input prices also fell between November and Decemvber, by 0.6%, and the rate fell dramatically, from 13.6% to 8.7%. This offers a good prospect of a significant and sustained fall in consumer price inflation. The Bank of England will be relieved. More here.

Thursday, January 12, 2012
Industry is definitely in recession
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

However many special factors you cite, the picture for industry in Britain is not good. Overall industrial production in November was down by 3.1% on a year earlier, while manufacturing fell by 0.6%. Between October and November overall industrial production dropped by 0.6% while manufacturing slipped by 0.2%.

The weakness of industrial production particularly reflects weak mining and quarrying output, including North Sea, down 14.6% over 12 months, and energy supply, partly reflecting mild weather, down 8.6%. But the performance of manufacturing is also disappointing.

As for the fourth quarter arithmetic, industrial production in October-November was 1.2% down on its third quarter average. Achieving any growth in gross domestic product in this context will be very difficult. More here.

Tuesday, January 10, 2012
Retail sales strong, economy flat
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The British Retail Consortium, for all its warnings, reported that retail sales in December were 4.1% up on a year earlier, and 2.2% higher on a like-for-like basis. Though the comparisons are helped by December 2010's snows and while they do not imply volume increases - the figures are for sales values - they are significantly better than expected.

Food sales growth picked up strongly and non-food also improved, but with sales often promotion-led. Clothing and footwear showed good gains on last December's weak sales. Homewares improved but big-ticket items and furniture sales remained down on a year ago, hit by consumer caution.

Non-food non-store (internet, mail-order and phone) sales growth picked up sharply from November's low. Sales were 18.5% up on a year ago, double November's gain but similar to the 18.0% in December 2010.

The BRC does not expect it to last. Stephen Robertson, Director General, British Retail Consortium, said: "A better than hoped-for December closed a relentlessly tough year for retailers, but these figures hinged on a dazzling last pre-Christmas week and were boosted by some major one-off factors. We're not witnessing any fundamental change in customers' circumstances." More here.

The British Chambers of Commerce quarterly survey is slightly harder to read, since the organisation has used it as a lobbying exercise. It points to flat growth rather than a deterioration. More here.

Thursday, January 05, 2012
Service sector strongest for five months
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

All three purchasing managers' surveys have now surprised on the upside, with the service sector index up from 52.1 in November to 54 in December. This followed stronger-than-expected manufacturing and construction sector data. Markit, which produces the data, says December's bounce won't prevent a stagnant fourth quarter.

Even that, however, which may be cautious, is better than it looked a couple of weeks ago. The service sector PMI can be accessed here.

Wednesday, January 04, 2012
Strong numbers for productivity, profitability
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The Office for National Statistics, in presenting the latest (Q3 2011) productivity figures, chooses to emphasise the output per hour measure, which showed a modest rise of just 0.2%. Within the data, however, there was also a very strong, 1.2%, rise in output per worker and output per job.

This was the counterpart to the big drop in employment in the quarter and the rise of 0.5% in GDP. It may be a one-off but could also indicate that productivity, after being unusually subdued, is finally getting back in gear. The release is here.

Also released, figures showing that British companies are doing rather well. The net rate of return for non-financial companies in Q3 2011 was 12.9%, the highest since Q3 2008 - the eve of the worst phase of the financial crisis - though disturbingly, the rate of return in manufacturing was just 5%. More here.

Tuesday, January 03, 2012
Good news from UK manufacturing
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Everybody expected a downbeat reading from the UK manufacturing purchasing managers' index but it provided a new year boost by surprising on the upside. The index rose from 47.7 in November to 49.6 in December, just below the 50 level consistent with expansion.

Markit, which compiles the data, describes it as stabilisation rather than growth. These days maybe stabilisation is the new growth.

It said: "The UK manufacturing sector showed signs of stabilisation at the end of 2011. Production was broadly unchanged in December, following back-to-back contractions, and the rate of decline in new orders slowed as the trend in new exports strengthened.

"Weakness was mainly centred on the intermediate goods sector, as growth of output and new orders was recorded at both consumer and investment goods producers." Its release is here.

Friday, December 30, 2011
House prices relatively resilient
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

House prices slipped by 0.2% in December but rose by 1% during the whole of 2011 according to the Nationwide Building Society. Prices rose in 9 out of 13 UK regions. Though the price rise was small, and represents a real drop in relation to both earnings and (more especially) inflation, it shows quite a degree of resilience in the market. More here.

Meanwhile, housing equity withdrawal continued to reverse (i.e. there was a net injection), by £8.6 billion in the third quarter, following £9.6 billion in the second. Nothing better illustrates the housng turnround than that. Details here.

Thursday, December 22, 2011
Revised GDP figures - you win some, you lose some
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

At first blush the revised third quarter gross domestic product figures were good news, with GDP growth over the quarter revised up from 0.5% to 0.6%. Dig slightly deeper, however, and the third quarter's gain is the second's loss - that has now been revised down from 0.1% to zero.

In the third quarter itself, output of the production industries rose by 0.2% (manufacturing 0.1%), the service sector rose by 0.7% and construction by 0.3%. GDP compared with a year earlier was up by a weak 0.5%, so no change there.

There was better news for business investment, up by 0.3% on the quarter and 4.3% on a year earlier. But the current account deficit in the third quarter, £15.2 billion, was the biggest on record and equivalent to 4% of GDP. The second quarter's tiny £2 billion deficit was revised up to £7.4 billion.

So a mixed bag - you win some, you lose some. The GDP figures are here.

Wednesday, December 21, 2011
A borrowing undershoot?
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

November's public borrowing figures were pretty good, with public sector net borrowing of £18.1 billion versus £20.4 billion a year ago. Cumulative borrowing for the April-November period (the first eight months of the fiscal year) was £88.3 billion, versus £98.7 billion.

Did the Office for Budget Responsibility jump the gun in raising this year's borrowing forecast to £127 billion in the autumn statement? I suspect it did, though its analysis is based on higher 'back-loaded' spending in the final four months of the fiscal year. We'll see. Its analysis is here.

Thursday, December 15, 2011
Retail sales - soft but not dire
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Retail sales fell by 0.4% in volume terms in November, and by 0.7% excluding petrol and diesel sales. They were up by 0.7% in the latest three months compared with the previous three, and by 0.7% also in November compared with a year earlier.

The value figures, up 4.6% year-on-year, again suggest Britain would be enjoying surprising strength in retail sales if not for high inflation. Maybe, however, people are having to spend on essentials, high prices or not. Given the mild weather in November, you might expect clothing retailers to be doing a lot worse than their 0.1% volume rise compared with a year earlier. Many more details here.

Wednesday, December 14, 2011
Unemployment rises modestly
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

As unemployment releases go, this was not as bad as a month ago. The claimant count rose by just 3,000 to 1.6m, while the Labour Force Survey measure rose from 2.62m to 2.64m, though this was enough to push the rate to 8.3% (August-October), from 7.9% in the previous three months. Youth unemployment was steady at just over 1m.

Broadly speaking, the drop in public sector employment and the rise in private sector jobs have offset each other over the past 12 months, leaving a net fall in employment of 14,000. This is not as healthy as earlier, when private sector job creation was easily outstripping public sector losses. But there have been more public sector job cuts than expected.

This is the employment picture: "The number of people in employment aged 16 and over fell by 63,000 on the quarter and by 14,000 on the year to reach 29.11 million. The number of employees fell by 252,000 over the quarter to reach 24.77 million. The number of self-employed people increased by 166,000 on the quarter to reach 4.14 million. This is the highest number of self-employed people since comparable records began in 1992."

That strong rise in self-employment is surprising. More here.

Tuesday, December 13, 2011
Inflation falls to 4.8%
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Consumer price inflation fell from 5% in October to 4.8% in November, RPI inflation from 5.4% to 5.2%. It is falling, though perhaps not as fast as some might have hoped, and should receive a big downward kick next year, particularly when January's VAT hike drops out of the 12-month comparison.

As importantly, some of the most visible price pressures are starting to ease. According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between October and November came from food, petrol, clothing and furniture, household equipment & maintenance."

The fall in inflation should happen faster than the rise in unemployment, easing the misery index. The inflation release is here.

Friday, December 09, 2011
Trade looks too good to be true
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

Good news on Britain's overseas trade is there to be cherished but the sharp drop in the goods and services deficit between September and October, from £4.3 billion to £1.6 billion, looks a bit too erratic to be true. Adjusted exports rose by 9% to record levels while imports fell by 1.5%. Despite the scepticism, an underlying improvement is occurring. More here.

A good enough euro deal?
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

All the attention in Britain this morning is on David Cameron's veto and the reality of a two-speed Europe, with Britain in the slow/outer lane. Though that was inevitable given that the focus was on rescuing and more tightly binding eurozone members, it is a shift. Some would say such a shift requires a referendum.

What about the euro deal? There will be more fiscal discipline, which in time will help the euro, if it gets to that point. The challenge is to get from here to there, with deep austerity measures and the urgent need to restore competitiveness. This journey will have to be acccomplished without a European Central Bank bazooka to help clear the path, if we take Mario Draghi, its president, at his word. So, only half the deal the markets were looking for.

Thursday, December 08, 2011
Another year of unchanged rates
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee left Bank rate unchanged at 0.5% and the amount of quantitative easing at £275 billion. It said the existing programme (the additional £75 billion) will take another two months to complete. So Bank rate has remain unchanged in 2011, as it did in 2010. Another year of unchanged rates in 2012?

Wednesday, December 07, 2011
Manufacturing down - bad start to Q4
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Both manufacturing and overall industrial production fell by 0.7% between September and October and, given the message from the surveys, things do not bode well for the rest of the fourth quarter. The service sector is growing but manufacturing is contracting. It was supposed to be the other way around.

What does this mean for Q4 GDP? Overall industrial production, which is what matters, is down 0.2% over the latest three months. It appears to have been depressed by the weakness of energy production, goven the exceptionally mild autumn, which continued into November. We need a cold December. More here.

Monday, December 05, 2011
Service sector growing
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The purchasing managers' index for the service sector showed a welcome rise in November, up to 52.1 from 51.3 in October. Though this is consistent with only modest growth, it suggests the economy is holding up pretty well, given the huge uncertainty. Indeed, on this evidence, predictions of a drop in GDP in the fourth quarter may be unduly pessimistic. The release is here.

Thursday, December 01, 2011
What's worrying Mervyn
Posted by David Smith at 09:00 PM
Category: Thoughts and responses

Having failed to spot the last one coming along, Sir Mervyn King is determined not to get caught out by this crisis. His opening statement at the launch of the Financial Stability Report is here.

Highlights include: "Many European governments are seeing the price of their bonds fall, undermining banks’ balance sheets. In response, banks, especially in the euro area, are selling assets and deleveraging. An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts. That, in turn, will weaken banks’ balance sheets further. This spiral is characteristic of a systemic crisis.

"Tackling the symptoms of the crisis without resolving the underlying causes, by measures such as providing liquidity to banks or sovereigns, offers only short-term relief. Ultimately, governments will have to confront the underlying causes. A loss of external competitiveness in some euro-area countries has led to current account imbalances and large build-ups of private and public debt, much of it external. The problems in the euro area are part of the wider imbalances in the world economy. The end result of such imbalances is a refusal by the private sector to continue financing deficits, as the ability of borrowers to repay is called into question."

The full report is accessible here.

Wednesday, November 30, 2011
The IFS on the Autumn Statement
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

The Institute for Fiscal Studies' assessments of Budgets and Autumn Statements is always worth reading and the latest is available here.

The IFS settles one argument - that borrowing and debt would be higher under Labour: "With the worse economic outlook, their slower fiscal squeeze – with smaller tax rises and less deep spending cuts – would, if it had been implemented, now of course have implied even higher debt levels over this parliament than those we will in fact see. That would have left an even bigger job to do in the next parliament."

The headlines, however, will be attracted by this: "Again we are running out of superlatives to describe just how extraordinary are some of these changes. Our own estimates suggest that real median household incomes will be no higher in 2015–16 than they were in 2002–03, more than a decade without any increase in living standards for those in the middle of the income distribution. We estimate that in the period 2009-10 to 2012-13 real median household incomes will drop by a whopping 7.4% - another record matched only by the falls seen between 1974 and 1977."

Tuesday, November 29, 2011
Osborne confronts his grim reality
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

Perhaps George Osborne had reason to be grateful to the OECD for its pre Autumn Statement forecast. Certainly he had reason to be grateful to his advisers for getting his growth measures, including credit easing for small and medium-sized firms and a planned additional £30 billion of infrastructure spending out there before the gloom descended.

For gloom there is in spades and it goes beyond mere growth revisions, though they were unwelcome. There were four aspects to the Office for Budget Responsibility's downbeat assessment:

* Growth in 2011 will be just 0.9%, compared with 1.7% in March, slowing further to only 0.7% in 2012, down from 2.5%. GDP is declining by 0.1% this quarter, rising 0.1% the next, but remaining subdued through 2012.

* The economy's productive potential is less than it was, meaning it will be 3.5% smaller in 2016 than the OBR thought in March. Every 1% of GDP is about £15 billion, so add it up. In total, the economy will be 13% smaller in 2016 than if the Treasury's spring 2008 forecast had been right.

* This has direct knock-on effects for borrowing. Public borrowing is revised up every year, from £122 billion to £127 billion this year (8.4% of GDP), and from £29 billion (1.5% of GDP) to £53 billion (2.9% of GDP) in 2015-16.

* Because more of the budget deficit is now thought to be structural rather than cyclical, Osborne only meets his fiscal target in 2016-17 - eliminating the current structural budget deficit, two years later than in March, and only does so by going beyond just a real freeze on spending in 2015-16 and 2016-17; cutting total managed expenditure by 0.9% in real terms each year; beyond the next election.

A few things to highlight the grim picture. This year's 2.3% fall in real household incomes is the biggest in the post-war era, and will be followed by a further smaller fall (0.3%) this year. There will be 710,000 public sector job losses by 2017 according to the OBR, compared with 400,000 to 2016 in March.

Not only that, but only by rolling his fiscal target forward does Osborne meet it. The original aim was to eliminate the structural budget deficit in this parliament. That will not now be achieved. These rolling targets are a moveable feast, as we discovered under Gordon Brown.

It is, of course, ridiculous to compare the pre-budget projections the OBR made in June 2010 with these latest numbers. Alistair Darling did his best in difficult circumstances from 2007 to 2010 and would have liked to have done a pre-election comprehensive spending review.

He was not, however, allowed to, so his "plans" were merely a sketch. He too, had he remained in office, would have been affected by highly unfavourable headwinds. We cannot know precisely what would have happened to debt and the deficit under Labour - it is possible a fiscal crisis would have forced even greater austerity. In the absence of that, however, borrowing would have been higher, Osborne, using Treasury (not OBR) calculations says cumulative borrowing would have been £100 billion higher under Labour.

That will not, of course, settle the "Plan A/Plan B" debate. One result of the Autumn Statement is that it will run to, and probably now beyond, the next election.

Monday, November 28, 2011
OECD's call for action
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

We should be clear that the OECD's new projections, if they turn out to be true, will not count as a dip back into recession in Britain. The 0.1% annualised decline in GDP it projects this quarter, 0.025% for the quarter itself, would be recorded by the Office for National Statistics as flat. The 0.6% annualised decline in the first quarter of 2012 is bigger, but equivalent to 0.15% as the ONS would record it. Flat rather than recessionary. The numbers are here.

The OECD's main message is an urgent call for eurozone leaders to get to grips with their crisis.

£30 billion plus £40 billion = not that much
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

A billion here, a billion there, and soon you are talking about real money. The potential £40 billion the Treasury is talking about for credit easing - over it looks like four years - can be added to some £30 billion in extra infrastructure spending, much of it from institutions and sovereign wealth funds, probably over 10 years. All will be revealed in tomorrow's Autumn Statement.

It sounds like a lot of money, but £70 billion spread out in this way - say £10 billion plus £3 billion a year over the next four years - is somewhat less than 1% of annual gross domestic product. The hope that both will give more bang for the buck than their numbers suggest. But this is the chancellor signalling broad intent rather than providing a significant direct boost to economic activity.

Friday, November 25, 2011
Five years to get back to pre-crisis levels
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Martin Weale, a member of the Bank of England's monetary policy committee, says in a speech that Britain's gross domestic product will take five-and-a-half years to get back to pre-crisis levels, compared with what would normally have been expected to be two. He blames weak productivity and, in particular, very low levels of consumer spending for this stage of the recovery. That could be because spending was simply too high before the recession. The speech is here.

Thursday, November 24, 2011
GDP rise confirmed at 0.5%
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

GDP rose by 0.5% in the third quarter, according to the Office for National Statistics' second estimate. Preoduction, up 0.4% and the service sector, up 0.6%, drove growth. Both were a little weaker than in the first estimate but construction was revised higher. The interest, as always, is in the detail of these numbers. To take one, household spending was flat in the third quarter; less bad than recently. More here.

Wednesday, November 23, 2011
Bank votes 9-0 for no change
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The Bank of England is into unanimity these days, voting 9-0 for more QE in October and by the same margin to leave Bank rate at 0.5% and the total of QE at £275 billion in November.

While the monetary policy committee expects inflation to fall sharply it also acknowledges the risk that it will stay high "as a result of companies rebuilding margins more aggressively than anticipated; a greater-than-expected response of wage growth to a gradual increase in productivity growth or to the past squeeze in real incomes; or expectations of above-target inflation becoming embedded in wages and price-setting."

That will be for later. this was its verdict this time: "The Committee noted that the existing programme of asset purchases would take a further three months to complete and market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way. During that time the Committee could gather evidence as to the impact of the purchases on asset prices and the real economy. It could also take account of events in the United Kingdom and abroad.

"Some members noted that the balance of risks to inflation in the November Inflation Report projections meant that a further expansion of the asset purchase programme might well become warranted in due course; anticipation of that might itself have an effect on asset prices and demand. Some other members judged that the risks to inflation around the target were more balanced." The minutes are here.

Tuesday, November 22, 2011
Public finances on track
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The assessment by the Institute for Fiscal Studies of the latest public finance numbers is here. Borrowing last month, £6.5 billion, was £1.2 billion lower than in October 2010. Within this, as the IFS points out, both revenues and spending were weaker than expected.

There is some uncertainty about what happens for the rest of the year. So far at least, however, the government appears broadly on track to meet the Office for Budget Responsibility's £122 billion borrowing forecast for 2011-12. There may even be a modest undershoot. The official release is here.

Monday, November 21, 2011
Housing strategy - a step in the right direction
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The government's housing strategy, announced by David Cameron and Nick Clegg, "will break the current cycle in which lenders won't lend, builders can't build and buyers can't buy. We'll be making it easier for people to secure mortgages on new homes, help people get on the property ladder, address unfairness in social housing and ensure homes that have been left empty for years are lived in once again."

If it does all those things it will be quite a significant success. The package, which can be accessed here, ticks most of the right boxes. The main doubts are about the scale of the plans and whether it will really unlock the main problem of the housing market, inadequate mortgage funding. To do that it will have to open up mortgage securitization again. It is not clear it will do that.

I set out the importance of housebuilding to the economy - and the recovery - a while ago, in this piece.

Sunday, November 20, 2011
Job carnage as firms give up on recovery
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

steepnov11.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It was not the rise in youth unemployment to more than 1m last week which shocked me. It has been predicted so long its arrival had lost the capacity to surprise. I shall return to that in a moment.

No, it was another number from the Office for National Statistics (ONS). In the July-September period, the number of employees in Britain fell by 305,000.
That is a big number. So big, in fact, that it was, as the ONS said, “the largest quarterly fall in the number of employees since comparable records began in 1992”.

In the latest three months. in other words, there was a bigger fall in employees than during the 2008-9 recession (the worst in the post-war era) or for that matter any other three-month period in the past two decades; when the curren labour market series began.

The fall in employment - 197,000 - was somewhat smaller but mainly because the ranks of the self-employed apparently swelled by 100,000 over the summer and early autumn.

I think we are entitled to be a little bit suspicious of this 100,000. If self-employment soars at a time when firms are cutting back sharply on jobs, it probably does not tell us there has been a sudden outbreak of entrepreneurialism.

Instead, it is likely to be involuntary self-employment: people doing consultancy or freelance work, working for themselves, having lost or being unable to find a job.

The big picture is of a labour market, having behaved itself well in recent years, taking a dive. Unemployment, apparently stuck at 2.5m, is now 2.62m and rising.

Britain’s unemployment rate, having been a couple of percentage points - at least - below eurozone and American levels, is now 8.3%. It is rising at a time when US unemployment may be about to embark on a sustained fall.

So what explains this sudden deterioration? A very silly political debate has been running about whether to blame Britain’s disappointing growth performance on the eurozone crisis or on other factors.

The fact is that the weak recovery, and by extension a weak job market, has many authors. It reflects the banking hangover and weak bank lending (particularly as the Engineering Employers Federation points out, to small manufacturing firms). It reflects high inflation and the intense squeeze, which persists, on real incomes.

It undoubtedly reflects the government’s fiscal tightening, as it would have reflected Alistair Darling’s tightening (deep spending cuts and National Insurance and income tax hikes) had Labour retained power last year.

It is inconceivable, however, that it does not also reflect a eurozone crisis that has been running since May last year and intensified in the spring of this year. That was when Portugal had to be rescued and serious talk emerged of a Greek default and possible exit. It was also when Britain’s exports to the rest of the European Union, in volume terms, began to fall.

The eurozone crisis reached panic proportions in the summer. It provides at least a partial explanation, along with the August riots, of why employment took such a dive. Given the huge monthly and daily turnover in the job market, firms have only to stop recruiting for there to be a drop in the number of employees.

For a full explanation of what has been happening, however, it is necessary to look at the mentality of employers. The surprise, over the past year or so, has been strongly rising private sector employment, alongside a drop in the number of public sector jobs.

In the year to June, for example, public sector jobs fell by 240,000, while private sector employment rose by 264,000. We do not yet have a public-private breakdown for the third quarter, but the scale of the fall suggests both public and private employers cut back agressively.

Public sector job cuts are easy to explain, though they appear to be occurring at a far faster rate and in much greater numbers than the independent Office for Budget Responsibility expected.

As for the private sector, the fact that employment fell by less than expected in the recession (and in previous recessions) and has risen quite strongly - until now - in the recovery, is part of the same general story. Firms have been betting on recovery.

They did not want to get rid of workers only to have to hire them again when things picked up. They were keen to recruit, so as to be well placed as the recovery built up momentum.

So what we have seen in recent months, I fear, is capitulation on both fronts. Businesses that hoarded labour have come to regret it and are now throwing in the towel. Those that recruited are no longer doing so and in some cases are laying people off. Confidence in the recovery has evaporated, and with it the hopes for many in the job market. The crisis in the eurozone has contributed to that.

Can it be turned round? Every business I meet talks of not knowing what will come next. Until firms feel more secure, more bad news on jobs is inevitable. They need to feel more secure about recovery.

Which brings me to youth unemployment and the breaching of the 1m barrier. It is interesting to me that a rise from 269,000 to 286,000 in the number of full-time students seeking work was enough to push the total above 1m.

It is also interesting - and worth bearing in mind next time you are resisting the urge to attack the television when you see Ed Balls or Ed Miliband talking about their plan for jobs and growth - that youth unemployment rose by nearly 200,000 between 2001 and 2007 when the economy was growing well.

Young people are suffering from a cyclical but also a structural problem. They have been losing out in compeition with migrant workers but they have also been hurt by the minimum wage, high employment and training costs and mismatches betwen their skills and what organisations are looking for This is not, in other words, a short-term problem.

Employers need more of an incentive to take them on. It remains to be seen whether the November 29 autumn statement tries to offer one.

Thursday, November 17, 2011
Surprisingly strong retail sales
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Retail sales volumes rose by a strong 0.6% in October, following a 0.5% increase in September. This was in spite of a drop in consumer confidence to a new low. Sales volumes were up by 0.9% on a year earlier, while values rose by 5.4%. In the absence of inflation, in other words, sales volumes would have been very strong. The release is here.

Wednesday, November 16, 2011
Downbeat Bank looks ready to do more
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The markets' interpretation of the November inflation report is that it opens the way to more quantitative easing, perhaps £100 billion or more extra, though the Governor said the case for doing it would be reviewed from month to month.

Uncertainty is the buzzword in this report. Uncertainty about the eurozone - so big in the case of "extreme outcomes" that the Bank can't attempt to quantify it. Uncertainty too about inflation, though the Bank is more convinced than ever it will fall sharply next year and beyond. Let's hope this is right - it can't afford to get it wrong again.

Growth will be about 1% next year, on the assumption that there is some kind of resolution to the euro crisis over the next few months. The fact that Sir Mervyn King can't envisage what that resolution might be - or at least can't talk publicly about it - is concerning.

So no growth until the middle of next year, a further rise in unemployment and an economy that is infinitely more subdued than the Bank thought even recently. Not good news. The report is here.

Unemployment soars
Posted by David Smith at 09:35 AM
Category: Thoughts and responses

A nasty set of unemployment numbers, with employment down 197,000 in the July-September quarter and unemployment up 129,000. The unemployment rate, 8.3%, is the highest since 1996. Youth unemployment is at 1.02m. A troubling set of figures, with unemployment at 2.62 million and no doubt worse to come. More here.

Tuesday, November 15, 2011
Inflation edges down to 5%
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Not too much to write home about in the inflation numbers. Consumer price inflation edged down from 5.2% to 5%, while retail price inflation dropped from 5.6% to 5.4%. These remain high numbers.

According to the Office for National Statistics: "The largest downward pressures to the change in CPI annual inflation between September and October came from falls in the cost of food (due to significant and widespread discounting by supermarkets and good harvests for certain produce), air fares and petrol.

"The largest upward pressures to the change in CPI annual inflation between September and October came from increases in the cost of clothing, electricity and gas." More details here. Still a long way from the 2% target but at least moving in the right direction.

Friday, November 11, 2011
Construction output revised up
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Some better news on the construction sector, which could change the growth story for the past 12 months slightly. In the third quarter output declined by 0.2% but there were upward revisions for the fourth quarter of last year and the first and second quarters of this year.

The revisions, 0.3% in Q4 2010, 0.8% in Q1 2011 and 1.5% in Q2 2011, should add a small amount to growth. Not much, maybe 0.1 percentage points in Q2, but better than nothing. The release is here.

Thursday, November 10, 2011
No surprises from the Bank
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

There was some speculation ahead of the Bank of England's November meeting that it would either add to the additional £75 billion of quantitative easing or cut Bank rate to 0.25%. In the event it did neither, so all eyes are on next Wednesday's inflation report. Its statement is here.

Tuesday, November 08, 2011
Not much industrial cheer
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Manufacturing output rose by 0.2% between August and September and was 2% higher than a year earlier. Overall industrial production was flat in September and down 0.7% on a year earlier. So not much happening and, in fact, the 0.4% rise in industrial production in the third quarter was marginally lower than the 0.5% assumed for the GDP figures, though probably not large enough to lead to a revision of the data. More here.

Thursday, November 03, 2011
A swift ECB reversal
Posted by David Smith at 02:15 PM
Category: Thoughts and responses

Just a few months ago the European Central Bank appeared to be the only advanced country central bank appropriately concerned about inflation. Now, three months after the eurozone crisis broke violently back out into the open, it has cut its main refinancing rate from 1.5% to 1.25%.

The decision, at the first meeting to be chaired by its new president Mario Draghi, was welcome. But, just as in 2008, the ECB has found itself wrongfooted by events. However, as its new president has said, the big decisions now lie with governments.

Tuesday, November 01, 2011
GDP calm in the storm
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

Unusually, the third quarter gross domestic product numbers contained no huge surprises - good or bad - the third quarter rise of 0.5% being broadly in line with expectations and broadly acceptable.

Though growth over the past 12 months has been a modest 0.5%, growth through the year gives a better picture of an economy growing quite modestly, at a 1% to 1.5% rate.

The third quarter numbers were boosted by a 0.7% rise in service sector output and a 0.5% rise in industrial production. But construction output fell by 0.6%,

Of course with the eurozone threatening to implode and the manufacturing purchasing managers' index in October dropping sharply to 47.4, there are bigger issues out there. The GDP figures are here.

Thursday, October 27, 2011
A Petit Grand Plan
Posted by David Smith at 09:30 AM
Category: Thoughts and responses

It wasn't quite the grand plan that was being talked about at the IMF meetings a few weeks ago, and the beefing up of the European Financial Stability Facility is about half what Timothy Geithner said was needed. But the market response to the overnight deal in Brussels was positive and the consensus among analysts is that it was enough to calm markets.

The three-point plan consisted of:

* A voluntary increase in the "haircut" on Greek debt to 50%, easing Greece's debt burden.

* An agreement to recapitalise EU banks by 106 billion euros, taking their Tier 1 capital ratios to 9%. Spanish banks will account for a quarter of this recapitalisation (26.2 billion), followed by Italian banks (14.8 billion).

* An increase in the firepower of the EFSF to 1 trillion euros (from 440 billion), which will include the possibility of a direct input from China. Nicolas Sarkozy is to seek Chinese assistance.

According to Societe Generale: To our minds, this is likely to prove sufficient to ease financial stress and give the euro area a “window of opportunity” to put its house in order." That looks about right.

Wednesday, October 26, 2011
Manufacturers gloomiest since the recession
Posted by David Smith at 11:15 AM
Category: Thoughts and responses

The run of mildly encouraging surveys appears to have stopped if the CBI's latest industrial trends survey is anything to go by. It says:

"Sentiment has deteriorated sharply among UK manufacturers, in anticipation of significant falls in activity over the next three months, the CBI said today.

"Manufacturing orders and output are expected to fall over the next quarter, following modest rises in domestic demand and production over the past three months. Firms are also predicting a run-down of their stock holdings.

"Sentiment about both the general business situation and export prospects fell for the second consecutive quarter, with net balances of -30% and -24% of firms reporting that they were less optimistic than three months ago. The falls in sentiment were the sharpest since April 2009."

Export balances are above their long-run averages, in spite of the eurozone crisis, but companies are being held back by the lack of availability of export credit. More here.

Friday, October 21, 2011
Borrowing is on target
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

After yesterday's better than expected retail sales figures, more good news. Public borrowing in September was £14.1 billion, £1.3 billion down on a year earlier. Cumulative borrowing, at £63.5 billion, compares with £71 billion in the corresponding period of 2010-11.

Last year's outturn was £136 billion. This year's forecast from the Office for Budget Responsibility is £122 billion. As things stand, it is on track. More here.

Thursday, October 20, 2011
Retail sales in surprise bounce
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Retail sales rose by 0.6% (volume) and 0.8% (value) in September, stronger than expected. The value of sales in September was 5.4% up in September 2010. The volume of sales was up by 0.6% on September 2010, showing the impact on sales volumes of high inflation.

Interesting detail in the release includes the following: Non-store retailing and automotive fuel both saw sales volumes increase compared to September 2010 by 15.5% and 2.8% respectively. Textile, clothing and footwear sales volumes fell 2.1% compared to September 2010, the largest fall since April 2008.

Despite the bounce in September, sales volumes in the latest three months were down by 0.2% on the previous three months. More here.

Wednesday, October 19, 2011
Unanimity at the Bank
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Following Mervyn King's downbeat overnight speech here, the Bank's October minutes were also downbeat, with a unanimous 9-0 vote in favour of £75 billion of additional quantititaive easing. Though this was in line with market expectations ahead of the publication of the minutes, it was a long way from what most analysts expected ahead of the vote two weeks ago.

There are some oddities in the minutes. In paragraph 16 they refer to consumer confidence being at its weakest since March 2009 and expectations about household finances being lower than at any time since November 1992. Then in the next paragraph they talk about the slowdown being driven by external factors.

The overall message, however, is clear: "While the stimulatory monetary stance and present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth meant that the margin of slack in the economy would probably be greater and more persistent than previously thought. This made it more likely that inflation would undershoot the 2% target in the medium term, without further monetary stimulus."

I think this is growth targeting, dressed up as an inflation and spare capacity argument. Judge for yourself in the minutes, here.

Tuesday, October 18, 2011
Inflation hits 5.2% - is it the peak?
Posted by David Smith at 09:35 AM
Category: Thoughts and responses

The bald headlines for inflation are bad, and there is not a lot of comfort in the detail. With the unemployment rate at its highest for 15 years (17 in actual numbers unemployed), this may be a good time to revisit the misery index: unemployment plus inflation.

So, on inflation: CPI annual inflation stands at 5.2% in September 2011. CPI annual inflation has never been higher but was also 5.2% in September 2008

RPI annual inflation stands at 5.6% in September 2011, the highest it has been for over 20 years. The last time RPI annual inflation was higher was in June 1991 when it stood at 5.8%.

All I can say is that the Bank of England must have been desperately worried about growth, and very confident inflation will fall sharply to have launched another £75 billion of quantititive easing in this context. More here.

Thursday, October 13, 2011
Better news on UK trade
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Just when it was needed, news of a better performance on Britain's overseas trade, with the deficit narrowing to £1.9 billion in August, from £2.3 billion in July and £3.6 billion in August 2010. It may be premature to talk of a rebalancing spurt but it is welcome.

This is the ONS's summary: "The UK’s deficit on seasonally adjusted trade in goods and services was £1.9 billion in August, compared with a deficit of £2.3 billion in July. The deficit on trade in goods was £7.8 billion, compared with a deficit of £8.2 billion in July. The surplus on trade in services was estimated at £5.9 billion, unchanged compared with July. The volume of seasonally adjusted exports of goods was 1.3 per cent higher, and the volume of imports was 0.3 per cent higher than in July. Export prices of goods fell by 1.5 per cent and import prices fell by 0.5 per cent compared with July." The release is here.

Wednesday, October 12, 2011
Unemployment up to 2.57m
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

After being stuck at around 2.5m for the best part of two years, unemployment has started to rise quite strongly. There is a striking fall of 178,000 in employment in the latest three months (June to August), driven by a big drop (175,000) in part-time employment. As a result unemployment rose by 114,000 to 2.57m, or 8.1% of the workforce.

Youth (16-24) unemployment did not quite make it to 1m, instead hitting 991,000, 269,000 of which are in full-time employment. There are few bright spots in these figures. Total pay, including bonuses, rose by 2.8% over the latest 12 months but the excluding bonuses number remained depressed at 2.8%.

The claimant count rose by 17,500 to 1.6m, or 5%, in September. As a good lead indicator of future unemployment trends, it suggests the broader totals will continue to rise in the coming months. More here.

Tuesday, October 11, 2011
A modest rise in Q3 GDP
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The National Institute of Economic and Social Research says GDP rose by 0.5% in the third quarter, following the release of industrial production figures for August. These showed manufacturing down by 0.3% but overall industrial production up 0.2%. Industrial production, which matters for GDP, was about 0.3% up on its Q2 average in August.

The National Institute is not popping the champagne corks. It says: "UK economic growth over the past year has been anaemic; the level of output is only 0.5 per cent higher than this time last year. The level of GDP is still 4 per cent below its pre-recession peak, suggesting that this recovery will be the weakest of any since the end of the First World War." Its release is here.

The Nobel prize winners made easy
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

This is a useful guide, from the Nobel website, to the work of Thomas Sargent and Christopher Sims, winners of the Bank of Sweden Prize for Economics (the Nobel prize). Access it here, and you can also send congratulations to the winners.

Monday, October 10, 2011
Miles makes the case for QE
Posted by David Smith at 06:15 PM
Category: Thoughts and responses

Next to Adam Posen, David Miles has probably been the most enthusiastic advocate of quantitative easing on the Bank of England's monetary policy committee. In a speech tonight, apart from making the interesting point that the global financial crisis has lasted as long as the First World War, he also argues that QE can be as effective now as in 2009.

Though gilt yields are low, they can go lower, he argues, and the rise in bank funding costs and the deterioration in the economic news made the case for action. I don't agree but it is a good defence. The speech is here.

Sunday, October 09, 2011
The wrong kind of easing for Britain
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

wrong.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In the last few days we have had a big additional burst of £75 billion of quantitative easing from the Bank of England, backed up by Sir Mervyn King’s observation that this may be the “most serious financial crisis ever”. We also had, from George Osborne, a desire for credit easing but no hint of any fiscal easing.

Official statisticians have revised up the level of gross domestic product, while also saying the recession was deeper and the recovery weaker than previously thought. Puzzled?. All will become clear.

Let me start with quantitative easing (QE). For weeks I have been arguing against it, though never rising to the rhetorical heights of Ros Altmann, director general of Saga, who said it was “like launching the Titanic”. If you believe King, it was because of fear of Armageddon.

My arguments can be briefly summarised. This is not 2009, when the first £200 billion of QE was launched. King may know something we do not but September purchasing managers’ surveys suggest an economy that grew in the third quarter.

Inflation, meanwhile, is heading for 5% and, while the Bank says it will drop sharply, its record is poor. The Bank’s announcement pushed down the pound, which will push up inflation.

Most of all, it is questionable whether it will have much effect. The Bank, in its assessment of the programme so far, calculated that it boosted the economy by between 1.5% and 2% through a range of channels, including monetary effects and confidence. Many economists believe, however, the main route was via lower yields on government bonds (gilts).

When the Bank was contemplating QE last time, yields on 10-year gilts were close to 5%. Its decision last week was taken with yields at less than half of that, at 50-year low, and plainly with less scope to fall. The Bank may be firing blanks.

It has already told the markets the full £75 billion of QE will be in gilt purchases. There is still something uncomfortable about a government issuing lots of debt openly encouraging the Bank to buy it up, as George Osborne was doing last week. QE, crucially, does not boost bank lending.

The deed is done on QE, which brings me to credit easing,. In his letter to the governor giving permission for QE (which he has to authorise), the chancellor repeated his hit line from the Tory conference, that he had asked the Treasury to explore options for improving credit to small and medium-sized enterprises (SMEs).

Quantitative easing is intended to boost the quantity of money in the economy. Credit easing is intended to boost the flow of credit. They should be interchangeable but are not. I am much keener on the latter, having first written about it back in April 2008 and returned to it frequently.

Then the issue was the drying up of mortgage lending. From the start of 2009 it became the slump in lending to SMEs, which is what I have been writing about more recently. How do you address it? Put simply the Bank, on behalf of the Treasury, agrees to buy bundles of SME loans.

If the problem is funding such loans in markets, having an official buyer would overcome it. If the problem is confidence, an official buyer would ease investor worries about buying such securities.

So the chancellor’s commitment to explore credit easing was welcome but has to overcome a lukewarm Treasury and a hostile Bank. It is also very late. SME lending has been falling nearly three years.

Even if a plan is put in place it will be next year before anything happens. I would have loved to have seen the Treasury and Bank working together to get lending to where it is needed. I would love to have seen the Bank announce that it is ready and willing to buy up bundles of SME loans. Sadly it is not happening. Any credit easing will merely “complement” QE. A pity.

Is the recovery happening? As I promised last week, the Office for National Statistics has rewritten history. It has done so, however, in a way few expected.

All the headlines were grabbed by downward revisions to growth this year to 0.1% in the second quarter (form 0.2%) and 0.4% (from 0.5%) in the first. Take in the 0.5% snow-related fall in the final quarter of last year and there has apparently been zero growth in the past nine months.

I would not be too concerned about those figures, which are too recent to have undergone significant revisions. The really surprising thing was, according to the ONS, the economy shrank by 7.1% in the recession, rather than the 6.4% thought. That is hard to square with the employment figures and the message from the surveys but so be it, for now at least.

The other news was that growth in the 2000s - before the crisis - was revised up. As Michael Saunders of Citi points out, cumulative growth from 2001 to 2007 is now put at 21.1%, compared with 17.9% before. That is why, despite a deeper recession and a slower recovery, gross domestic product now is higher than we thought.

The revisions confirmed why GDP data are hopeless for short-term policy decisions. Now we know that in summer 2008, when the Bank was dithering about cutting rates, the economy was dropping like a stone, by 1% in the second quarter. At the time it was reported as a 0.2% rise.

The recovery is now estimated to have begun in the third quarter of 2009, as many of us said at the time. Then, it was apparently refusing to recover at all. Maybe this is for the nerds. But it is important. We do not get the numbers we need.

What those numbers tell us now, however, is also important. Consumer spending, down 0.8% in the latest quarter, is in recession; no higher now than in 2005.

It is my strong view that while some of that reflects the squeeze on real incomes from the government’s fiscal tightening, notably the Vat hike, the overwhelming majority is from the unintended income squeeze from high inflation. The recovery needs rising consumer spending. It will not rise as long as incomes are so squeezed.

In announcing more QE the Bank said it was more likely inflation would undershoot its 2% target in the medium-term. That is not good enough. It needs to be certain of an undershoot. A sustained period of high inflation needs to be followed by a long period of below-target inflation to restore real incomes. Easing that squeeze is the easing the economy really needs.

Thursday, October 06, 2011
Bank pumps in another £75 billion
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

The Bank's rationale for doing an additional £75 billion of quantititative easing is set out below. When asked in August about what would prompt the Bank to do more, both Sir Mervyn King and Charlie Bean said it would be the expectation of an undershoot of the 2% inflation target. Sure enough, that is included in paragraph four below. But the Bank's forecasting record on inflation, frankly, inspires little confidence on this score.

"The pace of global expansion has slackened, especially in the United Kingdom’s main export markets. Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

"In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated. The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses. While the stimulatory monetary stance and the present level of sterling should help to support demand, the weaker outlook for, and the increased downside risks to, output growth mean that the margin of slack in the economy is likely to be greater and more persistent than previously expected.

"CPI inflation rose to 4.5% in August. The present elevated rate of inflation primarily reflects the increase in the standard rate of VAT in January and the impact of higher energy and import prices. Inflation is likely to rise to above 5% in the next month or so, boosted by already announced increases in utility prices. But measures of domestically generated inflation remain contained and inflation is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term. In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy. The Committee therefore voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review."

GDP and the Bank
Posted by David Smith at 07:30 AM
Category: Thoughts and responses

The quarterly national accounts, produced yesterday by the Office for National Statistics, are a challenge for the government and - on the face of it - an incitement to action by the Bank of England. Growth of just 0.4% in the first quarter and 0.1% in the second (down from 0.5% and 0.1% respectively) leave growth over the latest nine months flat.

The new GDP figures, here, are indeed interesting. Against expectations that the ONS would revise down the peak-to-trough fall in GDP, it has increased it, to 7.1% from 6.4%.

The recession started before Lehman Brothers and did so aggressively, with GDP now estimated to have fallen sharply in the second quarter of 2008, and for 2008 as a whole. This is a very different picture to the one policymakers had at the time. One crumb of comfort is that the economy pulled out of recession in the third quarter of 2009, as many of us said it did at the time.

What about the latest data? We still have a picture in whiich most of the economy grew pretty well in the first quarter, with services up by 0.7% and manufacturing 1.1%, before slowing in the second to 0.2% in each case. In both quarters energy dragged down the overall GDP rise, while in the first weak construction and in the second the additional bank holiday were depressing factors.

What should be the Bank's response? There are plenty of reasons why the Bank might want to do more (there's speculation about a rate cut even though this appeared to be rejected last month) and quantitative easing will be on the agenda. But, while there may be reasons to do this, the GDP figures should not be among them. The Bank did not believe the recent data before and will believe them less now.

Monday, October 03, 2011
Osborne gets into credit engineering
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

George Osborne's Tory party conference speech, here, was notable for the absence of any significant spending commitments, a robust defence of the coalition's fiscal strategy and some imaginative thinking on getting credit flowing to small and medium-sized firms.

Though the details are sketchy, it is good that the Treasury is finally starting to think about credit easing, and has the ability to drag a reluctant Bank of England with it.

My favoured approach would be to swap out some of the gilts the Bank has bought under quantitative easing - at a profit - for bundles of SME loans. The Bank would have to be indemnified against losses on these securities, though that is the case at present under QE. Adam Posen of the monetary policy committee would do it in conjunction with more QE but that is not strictly necessary.

Some of the coverage of the credit easing announcement suggests the Treasury would buy the bonds of large corporates in the event of a eurozone meltdown. That may become necessary but does not fill the SME gap.

Earlier there was a boost for the UK with a rise in the purchasing managers' index for manufacturing from 49.4 to 51.1 - into expansion territory - while most eurozone PMIs suggest contraction.

Wednesday, September 28, 2011
The Bank of England on credit
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Two releases from the Bank of England, one on credit conditions, the other the latest deliberations of its financial policy committee.

Credit conditions first. It said the following:

"The availability of secured credit to households was reported to have increased slightly in the three months to early September 2011. Lenders expected availability to increase a little further in the next three months. Lenders reported that the availability of unsecured credit to households had also increased in 2011 Q3. Availability was expected to be broadly unchanged in Q4.

"The availability of credit to corporates was reported to have been broadly unchanged for large and medium-sized companies and slightly higher for small businesses in 2011 Q3. Availability was expected to remain broadly unchanged in Q4 for corporate of all sizes." That sounds mildly encouraging, except the Bank also said:

"Lenders reported a fall in demand for credit from small businesses and large companies, although demand from medium-sized companies was reported to have picked up a little." The survey is here.

Also from the Bank, the conclusions of the September 20 meeting of its financial policy committee, the key paragraph of which was this:

"The Committee therefore recommended that banks should take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy. This could include raising long-term funding whenever possible and ensuring that discretionary distributions reflected any reduction in profits."

Banks should look to the economy rather than dividends or, perhaps, big bonuses. The release is here.

Monday, September 26, 2011
A eurozone rescue?
Posted by David Smith at 08:30 AM
Category: Thoughts and responses

The market response to weekend reports of a comprehensive eurozone rescue plan is mixed, perhaps with good reason. It is not clear how much the plan - leveraging the European Financial Stability Facility up to around 2 trillion euros, recapitalising European banks and a 50% Greek default - represents a workable rescue plan or wishful thinking.

I suspect we will see something of this nature emerge over the coming weeks. Until the details emerge, however, markets are likely to remain sceptical. The danger is that when the details emerge, it will all have been priced in. But it has a fighting chance of pushing the problem well into the future, and rather more than anything so far.

Wednesday, September 21, 2011
Bank swings much closer to more QE
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee is clearly moving towards more quantitative easing and sterling has weakened in response. The key paragraphs from its September minutes are here:

"There remained substantial risks to inflation in the medium term in both directions. While there had been little news on the upside risks to inflation, the downside risks had clearly increased further. In the light of that outlook, Committee members reviewed the range of possible policy actions available to them to loosen monetary conditions were that judged appropriate. One possible action was to restart the asset purchase programme. This programme had been primarily focused on purchases of UK government bonds financed by the issuance of central bank reserves. There was inevitable uncertainty about the precise impact of asset purchases on demand and inflation, but asset purchases were an instrument that would continue to be effective in further loosening monetary conditions in the current context. The Committee also discussed a range of other possible policy options including: changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate beyond the information about the Committee’s judgement of the medium-term outlook for inflation contained in the Inflation Report and the MPC minutes. At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required."

"Other members judged that it was appropriate to maintain the current stance of policy at this meeting. The current weakness of demand growth was likely to persist for longer than suggested by the central case in the August Inflation Report. This meant that the balance of risks to inflation in the medium term was likely to have shifted further to the downside. Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point."

The minutes are here.

There's also an interesting speech by Spencer Dale, the Bank's chief economist. He focuses on productivity and the output gap and suggests that, while some of the current productivity puzzle may be revised away, some of it reflects the medium-term effects of the crisis and the changed circumstances of the previously high-productivity energy and financial sectors. It suggests, perhaps in contrast to a gung-ho move to more quantitative easing, a more cautious approach. The speech is here.

Also today, official figures showed public sector net borrowing of £15.9 billion in August, a record for the month, compared with £14 billion a year earlier. Cumulatively there is still an undershoot, £51.5 billion versus £55.3 billion, but not much of one. More here.

Tuesday, September 20, 2011
IMF's 'dangerous' 4% growth
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

On the face of it 4% growth this year and next, three years after the West's banking system almost failed, is what sports commentators would call "a result". That is what the International Monetary Fund is predicting, yet its World Economic Outlook is full of warnings.

4% growth is roughly in line with the global trend and a very long way from recession. “The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF says.

Why the worry? All the usual reasons - the eurozone crisis, weak banks, a very slow US recovery by historical standards, and so on. But mainly because growth is so lopsided. Advanced economy growth is predicted to be 1.6% this year, 1.9% next, downgraded by 0.6 and 0.7 points respectively.

Emerging economy growth is also revised down, but only slightly. This year's 6.4% and next year's 6.1% are trimmed by 0.2 and 0.3 points respectively. China is put at 9.5% and 9.1%, India 7.8% and 7.5%. These are huge differences in performance between the advanced and emerging world. Are they sustainable?

Inevitably, all the attention will be on the UK forecast, 1.1% this year and 1.6% next, with a warning that the deficit reduction programme may have to be adjusted if growth is slower than this. Britain is in the pack of slow growing economiies. The World Economic Outlook is here.

Friday, September 16, 2011
Osborne's euro plea
Posted by David Smith at 11:45 AM
Category: Thoughts and responses

Some may see George Osborne's emphasis on the euro's woes as a bit of an excuse, others as positive engagement by a Conservative chancellor in European matters.

In his speech today, Osborne was blunt about what's worrying the markets: "There is a lack of belief in the ability of political systems in the Eurozone and North America to respond."

And what needs to be done: "The Eurozone must now:

"Implement as quickly as possible their 21st July agreement; Resolve the uncertainty with respect to Greece; Specify how they intend to fulfil the commitment made at last week’s G7 meeting to “take all necessary actions to ensure the resilience of banking systems and financial markets”.

"Crucially, my European colleagues need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration."

I also liked this about what sounded like quite humble beginnings: "Over 40 years ago my father set up his own business, manufacturing and selling home furnishings. Over the years it’s grown to employ a couple of hundred people." The speech is here.

Thursday, September 15, 2011
Retail sales slip
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Retail sales volumes slipped by 0.2% in August and were flat on a year earlier. Slightly better than expected - the riot effect is hard to gauge according to the Office for National Statistics. It says:

"Concentrating on sales volumes between August 2010 and August 2011, the greatest upward pressure to the all retailing figure came from non-store retailing which increased by 13.7 per cent and provides 0.6 percentage points. Predominantly automotive fuel also increased by 1.6 per cent and provides 0.1 percentage points.

"Downward pressure came from predominantly non-food stores which decreased by 1.2 per cent and provides 0.4 percentage points, driven by decreases in the household goods stores which decreased by 4.1 per cent and other stores which decreased by 2.9 per cent. Predominantly food stores also decreased by 0.8 per cent and provides 0.3 percentage points."

Surprising to see petrol and diesel volumes up. More here.

Wednesday, September 14, 2011
Unemployment up by 80,000
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Unemployment is clearly on the up again, with a rise of 80,000 in the May-July period, and an increase in the level to 2.51 million. This was the biggest three-monthly rise since August 2009. The claimant count also rose, though by slightly less than expected, up 20,300 in August to 1.58 million.

More details: "The unemployment rate for the three months to July 2011 was 7.9 per cent of the economically active population, up 0.3 on the quarter. The total number of unemployed people increased by 80,000 over the quarter to reach 2.51 million. This is the largest quarterly increase in unemployment since the three months to August 2009. The number of unemployed men increased by 39,000 on the quarter to reach 1.45 million and the number of unemployed women increased by 41,000 to reach 1.06 million, the highest figure since the three months to April 1988."

More details here: The big story is that, for the moment, the private sector is not generating enough jobs to compensate for the growth in the workforce and the loss of public sector jobs, which is gathering steam:

"Public sector employment decreased by 111,000 in the second quarter of 2011, to 6.037 million. Local government employment decreased by 57,000; central government decreased by 47,000 and employment in public corporations decreased by 7,000. Employment in the private sector increased by 41,000 to 23.132 million. The Q2 2011 public sector estimate is 240,000 lower than the same quarter a year ago."

Tuesday, September 13, 2011
Inflation at 4.5% - and the case for a new monetary stimulus
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Inflation rose on both measures last month, from 4.4% to 4.5% on the consumer prices index and 5% to 5.2% on the retail prices index. The figures were more or less in line with expectations. More here.

According to the Office for National Statistics: "The main upward pressures to annual inflation came from clothing, fuels & lubricants, furniture & household goods and domestic heating. The main downward pressure to annual inflation came from transport services, particularly passenger transport by air, sea and rail." Though inflation is not yet at a peak, it feels close to it, emboldening some members of the Bank of England's monetary policy committee.

Adam Posen, in a speech at Wotton-under-Edge, Gloucestershire (he gets all the glamorous gigs) made the case both for additional quantitative easing and for other intervention by the authorities.

He said: "Make no mistake, the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus. If anything, it is past time for us to do so. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat in such an environment, and in fact the inflation that we have suffered due to temporary factors in the UK is about to peak."

And also argued this, in line with some of my recent suggestions: "I would suggest that the Government set up two new public institutions to address the investment gap by increasing the availability of credit to SMEs and to new firms.25 One would be a public bank or authority for lending to small business, as already exists in many other countries (and thus can readily be designed in compliance with EU state aid rules). The Small Business Administration in the US and the Kreditanstalt fuer Wiederaufbau in Germany are two examples of the various forms this could take. The many recently unemployed lending officers from British banks, particularly from branches outside of the City of London, provide a ready skilled labour pool with which to staff such an institution ...

"The other institution I would encourage the Government to set up would be an entity to bundle and securitize loans made to SMEs. Essentially, we need a good version of Fannie Mae and Freddie Mac to create a more liquid and deep market for illiquid securities which can then be sold off of bank(s) balance sheets."

Agree with it or not, it is a very good speech. Available here.

Monday, September 12, 2011
The Independent Commission on Banking
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

There is a lot in the Independent Commission on Banking's final report, including a recommendation that UK retail banks hold equity capital equivalent to 10% of risk-weighted assets, and that large banking groups have primary loss-absorbing capacity, which is explained in detail in the report, of 17% to 20%.

Ring-fencing is, however, at the heart of the report, as expected: "The Commission’s view is that the board of the UK retail subsidiary should normally have a majority of independent directors, one of whom is the chair. For the sake of transparency, the subsidiary should make disclosures and reports as if it were an independently listed company. Though corporate culture cannot directly be regulated, the structural and governance arrangements proposed here should consolidate the foundations for long-term customer-oriented UK retail banking.

"Together these measures would create a strong fence. There would however be important differences relative to complete separation. First, subject to the standalone capital and liquidity requirements, benefits from the diversification of earnings would be retained for shareholders and (group level) creditors. Among other things, capital could be injected into the UK retail subsidiary by the rest of the group if it needed support. Second, agency arrangements within the group would allow ‘one-stop’ relationships for customers wanting both retail and investment banking services. Third, expertise and information could be shared across subsidiaries, which would retain any economies of scope in this area. Fourth, some operational infrastructure and branding could continue to be shared.

"For these reasons, ring-fencing should have significantly lower economic costs than full separation."

The ICB report, which is here, says implementation of the reforms should be completed at the latest by 2015.

Thursday, September 08, 2011
No change from the Bank
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

The Bank of England used to get pressed by business to cut rates, now it is being urged (Institute of Directors et al) to boost quantitative easing. It did not do so today, leaving Bank Rate at 0.5% and QE at £200 billion but the minutes will be very interesting indeed.

OECD warns on growth
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

The OECD is very downbeat in its latest interim assessment, warning that growth has stalled and that advanced economies will not grow much in the second half of the year.

"Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, according to new analysis from the OECD," it says. "Growth remains strong in most emerging economies, albeit at a more moderate pace."

For Britain, the OECD sees growth, conventionally measured, of just 0.1% in both Q3 and Q4, while Germany and the big three eurozone economies (Germany, France and Italy) will see GDP contracting in Q4.

These, it should be remembered, are momentum forecasts, with a wide margin of error. The OECD also sees one or two signs of optimism:

"On the upside, a number of OECD countries are taking serious fiscal and structural reform measures, which should boost confidence. President Obama's announcement later today is expected to provide a boost to job recovery in the United States.

"Japanese growth is expected to be buoyed by the ongoing reconstruction efforts following the earthquake and tsunami. Inflation may have peaked in emerging markets, which will allow for some policy easing. Investment levels in many OECD countries remain well below historical averages, offering the possibility for renewed corporate spending in the coming months if uncertainty abates."

Its detailed forecast update is here.

Wednesday, September 07, 2011
Manufacturing edges up
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Manufacturing output edged up by 0.1% in July and rose by 0.5% over the latest three months. Overall industrial production was hit by energy shutdowns and dropped by 0.2% and 0.4% respectively. Not great data but not bad either. More in the Office for National Statistics' not very useful press release here.

Earlier, the Halifax said house prices fell by 1.2% in August, were down by 2.6% on a year earlier but, curiously, rose by 1% over the latest three months.

The 50% letter
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

A group of prominent economists has written to the Financial Times urging an early reduction in the 50% top rate of tax. It is a welcome contribution to the debate. I wrote on June 26 (Cut tax to make Britain a magnet for the world) about the damage the 50% top rate of tax was doing,and the need to send a signal by reducing it at the earliest opportunity.

I wrote: "What about an aggressive tax strategy to try to attract activity to Britain? By that I mean cutting the 50% top rate of tax and delivering early on the chancellor’s promise to give Britain the most competitive tax regime in the world.

"If such tax cuts could be shown to be at worst revenue-neutral, at best net revenue raisers - admittedly not an easy thing to demonstrate - there would be a powerful case for introducing them even at a time when the public finances are undergoing serious repair."

The piece, here, concluded: "High tax stunts growth, for business and individuals. Britain has become a high tax country. As long as that remains the case, growth will continue to be stunted. The golden goose will be well and truly stuffed."

Here is the FT letter. (May not be accessible to all).

Tuesday, September 06, 2011
Osborne's choppy recovery
Posted by David Smith at 10:30 PM
Category: Thoughts and responses

There were no numbers in George Osborne's speech tonight but an acknowledgement that in "very unsettling times for the global economy", "this is not a normal economic recovery" and "we have all had to revise down our short term expectations over recent weeks".

He insisted that banking reform would not be done in a way that damages the City of London. I found this rather interesting on monetary policy. The Bank of England may be independent but it appears, to con a phrase, we're all in this together:

"That’s why in the months and years ahead we will do everything we can to keep monetary conditions throughout the economy as growth-friendly as possible – consistent with the inflation target.

"As Andy Haldane of the Bank of England reminded us last month, the new Financial Policy Committee we have established has a vitally important mandate to ensure that financial regulation takes account of the economic cycle and does not exacerbate downturns or booms.

"The Merlin agreement is already delivering more lending to SMEs. And if there is more we can sensibly do to ensure that the benefits of low interest rates are felt throughout the economy then we will do it. Of course, with a banking system whose balance sheet is some 500% of our GDP we have to make sure that our banks are successful but safe.

"That is why we face what I have called the “British dilemma” – how to sustain a world beating international financial sector without putting our economy or our taxpayers at unacceptable risk." The speech is here.

Monday, September 05, 2011
Gloomy August - when the surveys matched the weather
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Once the role of Markit, which produces the monthly purchasing managers' surveys, appeared to be to expose some odd looking official figures. Markit's surveys signalled a UK upturn long before the Office for National Statistics did.

Now the purchasing managers' surveys are pointing to weak growth - it suggests its manaufacturing, construction and service surveys point to stagnation in the third quarter - at a time when the trajectory of the official figures (together with level effects) suggests faster growth in Q3 than Q2.

We will see what happens - the third quarter has time to run. In the meantime, some detail from today's service sector purchasing managers' survey, which showed a sharp index fall from 55.4 to 51.1, the sharpest drop for 10 years.

Was it the riots, the markets or just underlying weakness? This is Markit's verdict:

"August’s Markit/CIPS survey of UK service providers indicated a steep slowdown of activity growth, as an increasingly fragile economic environment undermined confidence and gains in new business. Activity rose to the least extent of 2011 so far, and confidence in the future was the weakest in a year. Increased caution amongst service providers and evidence of spare capacity led to another slight fall in employment.

"The headline index from the survey, the seasonally adjusted Business Activity Index, plunged 4.3 points in August to register 51.1, only modestly above the 50.0 no-change mark. The decline in the index was greater than those seen in the autumn of 2008 (following the collapse of Lehman Brothers) and was surpassed only by the foot-and-mouth related fall of April 2001.

"Moreover, the rate of growth implied by the index was the slowest since December 2010’s weather-related contraction, with respondents primarily blaming a weaker underlying trend in new business and general economic uncertainty. There were a few reports that the rioting and public disorder seen in some areas of the country in early August had adversely affected activity."

Friday, September 02, 2011
Construction: slowing or Armageddon?
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Construction may only be 6% of the economy but monitoring is proving a headache. The purchasing managers' index (PMI) for construction showed, on the face of it, an encouraging picture, with growth continuing in August. Readings above 50 on this survey are consistent with growth, so the drop from 53.5 in July to 52.6 in August was consistent with slower growth, not a fall in output.

However official figures for new construction orders in the second quarter showed something close to Armageddon. New orders fell by 16.3% in the quarter and, according to the statistical release: "The total volume of all new orders is now at its lowest total since the third quarter of 1980." Most will find that hard to believe and the Office for National Statistics appears to be suffering ongoing problems with the data. Anyway, the figures are here.

Perhaps more importantly, US non-farm payrolls showed no growth at all in August, and unemployment stayed at 9.1%.

Thursday, September 01, 2011
Manufacturing PMI disappoints, house prices slip
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

After an upbeat CBI manufacturing survey last week, there were high hopes for the purchasing managers index this week, but it disappointed, slipping from 49.4 in July to 49 in August, consistent with a decline in output in the sector.

There was not a lot of good news in the detail. This from Markit: "Business conditions in the UK manufacturing sector deteriorated further in August. Production fell for the first time since May 2009, as new order inflows declined at the most marked pace in almost two-and-a-half years. The trend in new export business was also substantially weaker than one month ago.

"At 49.0 in August, from a revised reading of 49.4 in July, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index posted its lowest reading for 26 months."

The Nationwide said that house prices fell by 0.6% in August and fell by 0.4% on a year earlier. In nominal terms they are just under 10% below their 2007 peak. More here.

Tuesday, August 23, 2011
CBI more upbeat on manufacturing
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Was the manufacturing upturn a flash in the pan, or did it just hit a temporary soft patch? The latest CBI industrial trends survey offers some encouragement for the latter view. These are the highlights:

"Of the 510 manufacturers responding to the CBI’s August monthly Industrial Trends Survey, 29% of firms described total orders as above normal, and 29% said they were below. The resulting rounded balance of +1% shows order books remain well above the long-term average of -18%, and is an improvement on the previous month’s balance of -10%.

"While 24% of firms said export order books were above normal, an equal 24% said they were below. The resulting balance of 0% compares with -8% in July, and is also significantly above the long-term average (-21%).

"Expectations for growth in factory output over the coming quarter have picked up a little. 31% of firms predict that production will rise in the next three months, and 17% anticipate that it will fall. While the resulting rounded balance of +13% remains above the long-term average (+6%), it represents a continuation of the broader trend of moderating expectations since April."

Friday, August 19, 2011
Still some worries over borrowing
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

Though the July public borrowing figures were better than expected - net borrowing of £20m in comparison with £3.5 billion a year ago - the deficit is not improving as fast as hoped and there is work to be done in the remainder of the year. The Office fot Budget Responsibility, here, cites weaker than expected corporation tax receipts and income tax revenues, though hopes for stronger data later in the year.

So far, borrowing in the first four months of the the fiscal year is about £2.9 billion lower than a year earlier. The OBR's forecast is for a £20 billion full-year fall in borrowing, from £142.9 billion to £122 billion, so is looking for an improvement. Weaker growth projections aren't helping.

Thursday, August 18, 2011
Retail sales edge up
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The 0.2% rise in retail sales in July was better than the surveys had suggested but was driven entirely by food sales. Non-food stores saw their sales drop by 1.1%, the first fall since January 2010. Retail sales volumes were flat year on year though values were up by 4.3%, an indication that if inflation were lower, retailers would be doing rather better in volume terms. The figures are here.

Wednesday, August 17, 2011
Blanchflower and the missing hours
Posted by David Smith at 09:00 PM
Category: Thoughts and responses

On the New Statesman blog Danny Blanchflower, former member of the Bank of England's monetary policy committee (MPC), has launched a spirited attack on George Osborne. The chancellor, he says, "needs to get his facts straight". Why? Because instead of the rise in employment the government claims, it is in fact falling.

How so? Because in the latest quarter, April-June, total weekly hours worked fell, and were down by 6.9m on a year earlier. That, according to Blanchflower, in the equivalent of nearly 200,000 lost jobs.

But hang on a second, didn't we have an extra bank holiday in the second quarter? And wouldn't that naturally lead to a fall in hours worked? Of course it would. In fact, there's an 11m drop in weekly hours worked between the first and second quarters. The sequence of weekly hours worked numbers, Q2 2010 917.6m, Q3 921.1m, Q4 920.7m, Q1 2011 921.9m, Q2 910.6m, points strongly to a bank holiday effect, as the Office for National Statistics says in its explanatory notes.

The News Statesman blog is here and the official figures are here but I think Danny needs to get his facts straight.

9-0 at the Bank and a softer job market
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

The Bank of England's August inflation report was dovish, and so were the minutes of its August meeting. Not so long ago the Bank was split 6-3 on the question of hiking rates, now it is back to 9-0, the two remaining monetary policy committee members who had voted for higher rates - Martin Weale and Spencer Dale - reverting to a no change position.

MPC members are worried about the global slowdown and very concerned about events in the eurozone. However, they ruled out taking action in anticipation of a eurozone disaster. The Bank is hugely uncertain about the outlook for growth and prospects for inflation.

This paragraph sums up that uncertainty: "Some members considered whether there was a case for increasing the degree of monetary stimulus by undertaking a further programme of asset purchases. Those members concluded that the case was not yet strong enough, particularly in light of the lower path for Bank Rate now implied by financial markets. Further asset purchases might nonetheless become warranted were some of the downside risks to materialise. Some other members remained particularly concerned about risks to the upside associated with a sustained period of above-target inflation. For them, plausible outcomes for productivity growth, company margins, the degree of spare capacity in firms, or import price pass-through could also result in inflation remaining elevated. But recent developments had weakened the case for removing some of the monetary stimulus." The minutes are here.

Meanwhile, the latest labour market statistics were downbeat, with the claimant count up by 37,100 in July to 1.56m, its biggest monthly increase since May 2009. The Labour Force Survey measure of unemployment rose by 38,000 to 2.49m, 7.9% of the workforce. An employment rise of 25,000 was insufficient to compensate for growth in the workforce.

In truth, the LFS measure of unemployment has been close to 2.5m for the past couple of years. Even so, these were softer numbers. More here.

Tuesday, August 16, 2011
The danger of embedding high inflation
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The trouble with high inflation is that it can become embedded, particularly when institutional factors kick in. So the July retail price inflation rate of 5% will mean higher rail fares (RPI plus 3%) in January, which in turn will push inflation higher next year.

High inflation also makes public spending harder to control. July saw a rise in consumer price inflation from 4.2% to 4.4%, June's fall proving only temporary. Core inflation measures rose by 0.2 or 0.3 percentage points. By September, inflation will be on a rising trend, and that is the month used for the following April's pension upratings.

There are reasons why inflation should fall next year, notably the January VAT rise dropping out of the annual calculation. The big risk is that firms have changed their pricing behaviour, perhaps even in response to what they think are permanently lower volumes.

If I were at the Bank of England, I'd be slightly worried about this, from the Office for National Statistics' analysis. It cites price rises for "miscellaneous goods & services where the upward pressure came from a wide variety of goods and services but by far the largest contribution came from financial services where, overall, fees rose this year but fell a year ago, particularly for arranging mortgages". More here.


Wednesday, August 10, 2011
Downbeat Bank likely to consider more QE
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The Bank of England is not given to making commitments to keeping interest rates steady for two years and will not do so now, according to Mervyn King, the Governor. But the markets appear to be doing that job anyway. According to King, the market view on rates implies something pretty close to unchanged rates for the next two years.

As expected, the Bank downgraded its growth forecasts and thinks there is an even chance of inflation being above or below the 2% target in two years' time. That is on the basis of the market profile for rates and the existing £200 billion of asset purchases, or quantitative easing. More QE could come into the frame if the monetary policy committee thinks inflation is heading decisively below target. Some would argue that the bar should be set rather higher than that but more QE will be the thing to watch out for over the coming months.

This is King on the headwinds to growth: "Over the past year, output, according to initial official estimates, has grown by less than 1%, reflecting a substantial squeeze on households’ real incomes. Underlying growth in the second quarter was probably stronger than the headline figure of 0.2% once we allow for the effect of special factors, such as the additional bank holiday, although the reverse is likely to be true of the third quarter. In the Committee’s view, the weakness in underlying activity is likely to be somewhat more persistent than previously expected.

"There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang. And these headwinds are becoming stronger by the day. Reflecting this, and the prolonged period of economic adjustment facing some countries, the MPC’s projections embody relatively slow growth in the euro area. The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks which are contributing to high borrowing spreads, tight credit conditions for households and smaller companies, and exceptionally weak credit and money growth in the UK."

And on the risks facing the UK and other advanced economies: "It is almost exactly four years since the start of the financial crisis. The origins of the crisis lie in the large stocks of indebtedness that resulted from the widening imbalances in the world economy, about which nothing was done for so long. One way or another, the losses that were built up in recent years will have to be shared between creditors and debtors; in the world economy between creditors in the East and debtors in the West, and within the euro area between creditors in the North and debtors in the South.

"The key question is whether that burden sharing will take place in the context of a downturn in the world economy, or whether it will take place in the context of a rebalancing of overall demand. The big risks facing the UK economy come from the rest of the world. We must work with our colleagues abroad to tackle the challenge of how to reduce the overhang of private and public debt. But there is a limit to what UK monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months. But it can ensure that policy is set in such a way that these adjustments take place against a backdrop of low and stable inflation. And that is exactly what the MPC will do."

So a difficult environment. The inflation report is here.

Tuesday, August 09, 2011
Fed won't hike rates for at least two years
Posted by David Smith at 07:45 PM
Category: Thoughts and responses

A week, which is when I last posted on this site, is a very long time. Anyway, those who were hoping for an announcement of a third wave of quantitative easing by the Federal Reserve on Tuesday evening were disappointed, though the Fed said it discussed a range of policy tools and is "prepared to employ these tools as appropriate".

Specifically, it made the announcement that it would keep the Fed Funds rate at its current level (0 - 0.25%) until at least mid-2013. Optimists will see this as a sign that the Fed is prepared to do everything to maintain the recovery, pessimists as evidence that America is turning into Japan.

The vote was not unanimous. Three members of the 10-member Federal Open Market Committee, Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota, Minneapolis Fed, dissented, preferring merely a commitment to keep rates low for an "extended period". This was the first time under Ben Bernanke's presidency there have been three dissenting votes.

Earlier in the day we had disappointing UK data, with a 0.4% drop in manufacturing output in June (though a flat figure for overall industrial production) and a widening in the trade deficit in June to £4.5 billion, from £4.1 billion in May, This despite a bigger fall in import volumes in June (5.8%) than the drop in export volumes (2.7%). Even so, the National Institute calculated that GDP rose by a healthy 0.6% in the three months to July.

Monday, August 01, 2011
IMF: Britain may need to be nimble, but no need for a Plan B yet
Posted by David Smith at 06:15 PM
Category: Thoughts and responses

An interesting blog from the IMF, here, setting out some different scenarios for the UK economy. It says that if demand weakens significantly, the authorities should be prepared to respond quickly with more quantitative easing and tax cuts.

Overall, though, it says there is no need to change now: "For now, staying the course and implementing the wide-ranging policy program that was agreed last year seems the right thing to do."

Where's the manufacturing growth?
Posted by David Smith at 10:10 AM
Category: Thoughts and responses

Manufacturing has had a bad July throughout Europe, according to the Markit purchasing managers' indexes. But Britain appears to have fared particularly badly. The PMI dropped from 51.4 in June to 49.1 in July. With no obvious special factors, this was bad news. Output is just about expanding but everything else is weak.

This is Markit's assessment:

“The Manufacturing PMI retreated into contraction territory in July. Growth of output reached a near standstill following the steepest decline in new orders for over two years, while payroll numbers were lowered for the first time since March 2010. This is a marked turnaround from the strong start made to the year.

“It is not entirely unexpected given that three of the pillars supporting the surge during Q1 – inventory rebuilding, a purple patch in global growth and stable domestic demand – have somewhat crumbled. Even though the weak sterling exchange rate is still supporting overseas sales, softer economic growth in key trading partners means it is having a much lesser impact at a time when domestic demand is contracting. With austerity arriving at home and debt ills rising in the US and euro area, significant headwinds are on the horizon.

“More positive news was seen on the price front. Inflation of input costs and output prices both moderated, while supply-chain pressures subsided, providing additional support to the Bank of England’s belief that inflationary pressures will prove transitory.”

Friday, July 29, 2011
House prices up but consumer confidence drops
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The Nationwide says house prices edged up by 0.2% in July but were down by 0.4% ona year earlier. It describes the market as stable, though at a lower level of activity. Year-on-year price changes have been essentially flat since November 2010.

The number of transactions in the second quarter, 204,000, was the lowest for two years. The market is not really recovering. The Nationwide also notes that home ownership continues to decline, from a high of 70.9% to 67.9% on the latest figures for England and Wales. More here.

The stability of house prices looks odd against plunging consumer confidence. GfK-NOP says its confidence reading, down five points at minus 30, has only been lower twice in the survey's 37-year history, in the early 1990s and mid-2008. It fits with weak housing demand.

Tuesday, July 26, 2011
GDP grows 0.2% in Q2, underlying picture stronger
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Expectations management is always useful, and so it is that growth of 0.2% in the second quarter of 2011 is moderately good news. Given the range of special factors depressing GDP, a negative number was perfectly possible.

There is nothing much to write about in these figures. Growth of 0.7% over the past 12 months is feeble and would only have been a little over 1% adding back the special factors in.

Even so, the service sector seems to be growing by around 0.9% a quarter (0.5% in the second with a possible 0.4% subtracted by the extra bank holiday and other special factors), after an actual 0.9% in the first. Q2 service sector growth was without any contribution from government.

The ONS is sticking with its strange construction numbers for Q1 but the sector contributed to growth in Q2. Manufacturing was hit by Japanese disruption, but still has momentum. So underlying growth of 0.6% or 0.7% in Q2. Not spectacular but certainly not bad. More here.

Friday, July 22, 2011
A short-term euro fix
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

European leaders went further than expected in their response to the eurozone crisis. Whether the Brussels summit meets Christine Lagarde's descritpion of a "game changer" remains to be seen but it has done what was vital, which was to buy time, and to rescue a second Greek rescue, with 109 billion euros from official sources and up to 50 billion from the private sector, including a haircut for the banks of up to 21%.

Questions that still need to be answered include:

Will the EFSF (European Financial Stabilisation Facility) need to be increased to take on its new role of stepping in early?

Will the fact of the EFSF stepping in itself generate alarm?

Will the change in terms on Greek, Irish and Portuguese debt be regarded as a default by the ratings agencies?

Does it take the prospect of Spanish and Italian contagion off the table, as the initial market reaction appears to suggest?

More details of the package will be provided by Manuel Barroso, the president of the European Commission, at noon.

Thee are still huge questions about the sustainability of the debt position of Greece and others. These countries are still very uncompetitive within the euro. But this has bought time.

Thursday, July 21, 2011
Retail sales up, public finances poor
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Retail sales volumes rose by 0.7% in June, better than expected, thanks to some hefty discounting by retailers. Retail sales values were up by only 0.3%. There was some fascinating detail in the numbers. Overall retail sales volumes in June were just 0.4% up on a year earlier, while sales values rose 4%, reflecting higher prices (including VAT).

Within the volume numbers, however, there was a big 4.2% drop in food sales, a record. A lot of this is explained by higher prices, up 5/8%. In contract, non-store retailing (internet and mail order) was up by 24.4%. The share of internet sales in total sales rose from 8.5% to 9.9% between May and June. More here.

The public finances, meanwhile, continued to disappoint. The expected drop in the deficit is not happening. Net borrowing in June was £14 billion, up from £13.6 billion in June 2010. Cumulative borrowing in the first three months of 2011-12 was £39.2 billion, only fractionally down on the corresponding period of 2010-11.

The problem is on the spending side. Current receipts for the first three months of 2011-12 were £121.1 billion, up from £115.8 billion a year earlier. But currrent spending was also up, from £151.6 billion to £156.8 billion. Details here.

Wednesday, July 20, 2011
Bank's dilemma laid bare
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

The Bank of England monetary policy committee's July minutes showed, as expected, a 7-2 vote in favour of keeping Bank rate at 0.5%, with only Spencer Dale and Martin Weale in favour of a quarter-point rate hike and Adam Posen continuing to push for an additional £50 billion of quantitative easing. But the minutes also showed the Bank's dilemma.

On inflation: "Inflation had been well above the 2% target as a result of the temporary boost from higher energy and other commodity prices, the increase in the standard rate of VAT and the past depreciation of sterling. Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5%, in the coming months. In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected."

And on economic activity: "The risks posed by an intensification of the sovereign debt and banking problems within the euro area to the prospects for economic activity and the financial system at home had remained substantial. The funding costs faced by the major UK banks remained elevated, in part reflecting those risks emanating from within the euro area, and were likely to continue to affect the price and availability of credit to many households and businesses adversely. Indicators had pointed towards continued modest underlying UK GDP growth in the second quarter and, more tentatively, to some softening in the outlook for the third quarter. But the implications of weaker activity for inflation would depend on the factors that had caused it."

This is a committee that feels itself to be buffeted by events outside its control. Overall, it says, the case for raising rates in the near-term have weakened. It is still relying on domestic factors, spare capacity in the economy, to bring down inflation. For that to happen, these unhelpful external factors will have to go away. The minutes are here.

More Europe, or less?
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

This blog post from the International Monetary Fund is an accompaniment to yesterday's warning about lack of action on the debt crisis. It argues, as in the UK, that Europe needs a plan for growth through reform. It is available here.

Tuesday, July 19, 2011
IMF gets heavy with Europe
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

The IMF has warned Europe it has to act fast to stem the sovereign debt crisis. It says: "Market participants remain unconvinced that a sustainable solution is at hand.

"The euro area’s banking system continues to display weaknesses. Leverage and dependence on wholesale funding remain high. Banks in the periphery are vulnerable from large exposures to their governments and real estate and from high marginal wholesale funding costs.

"Across the region, banks are significantly exposed to sovereign risks, with a weak tail of banks with low profitability and very thin capital levels remaining particularly vulnerable to further shocks." Its series of reports on the euro area are available here.

Monday, July 18, 2011
Challenging the ratings agencies
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

Are the rating agencies acting responsibly of just doing the equivalent of shouting fire in a crowded theatre? This short paper from Costas Milas (Keele Management School) and Theodore Panagiotidis (University of Macedonia and the LSE) challenges the logic of recent eurozone downgrades. It can be accessed here.

Friday, July 15, 2011
Ratings agencies make life tough for America too
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

The EU criticism of the ratings agencies has been that they have provided a US perspective on the eurozone's troubles. Hence talk of setting up European ratings agencies. There may be a point to that but it would take years for any such agencies to build credibility.

In the meantime, the EU argument is undermined by the fact that the agencies are also making life difficult for America too. S & P has now placed the US on "creditwatch negative", both because of the short-term debt impasse and longer-term worries.

It says (last night): "Today's CreditWatch placement signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days. We have also placed our short-term rating on the U.S. on CreditWatch negative, reflecting our view that the current situation presents such significant uncertainty to the U.S. creditworthiness." The assessment is here.

Wednesday, July 13, 2011
Job market still holding up - earnings up
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

Given the debate over whether the economy has shown any growth over the latest quarter, indeed over the latest nine months, the labour market is still doing pretty well. On the Labour Force Survey measure, employment rose by 50,000 over the March-May period (though 31,000 of this was in part-time jobs), while LFS unemployment fell by 26,000.

The employment rate ws 70.7%, the same as in the December-February period, while the unemployment rate slipped to 7.7% compared with that previous three-month period. The level of unemployment is currently 2.45m. It has been around the 2.5m mark for a long time. Employment has risen by 309,000 over the past year. Interestingly, given the growth debate, most of that increase - 187,000 - has occurred over the past two quarters.

The Office for National Statistics records that in the 12-month period to March, there was a rise of 77,000 in UK-born employment, and a rise of 334,000 in non-UK born employment. However, it adds: "The number of non-UK born people in employment is greater than the number of non-UK nationals in employment, as the non-UK born series includes many UK nationals. The estimates relate to the number of people in employment rather than the number of jobs. These statistics have sometimes been incorrectly interpreted as indicating the proportion of new jobs that are taken by foreign migrants."

The claimant count rose, however, by 24,500 to 1.52m, or 4.7% of the workforce. Some of this reflects claimants being moved off other benefits. It is also indicative, however, of some underlying softening of the labour market.

Also of note was a rise in average earninsg growth from 2% to 2.3%. This is not yet enough to worry the Bank of England but it is moving in that direction. All the figures are here.

Tuesday, July 12, 2011
Welcome respite on inflation
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Though there are some nasty utility price rises to come, the Bank of England will be encouraged by the drop in headline consumer price inflation from 4.5% to 4.2% and the drop in the core rate from 3.3% to 2.8%. It suggests weak demand is bearing down on inflation and that the spare capacity story is not entirely dead. Welcome news.

More here on the inflation figures. Three components of the CPI have very low inflation, including clothing and footwear, 1.5%, communication, 1.7%, and recreation and culture (minus 0.5%). Food, 6.9%, alcohol and tobacco, 9.6%, and transport, 7.9%, are at the opposite end of the spectrum.

Also out today, trade figures for May, which were disappointing. The overall trade deficit widened to £4.1 billion, from £3.1 billion in April. The figures are here.

Sunday, July 10, 2011
The OBR's fiscal sustainability report
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

This important report from the Office for Budget Responsibility will be published here on Wednesday July 13, not tomorrow as in some editions of today's Sunday Times.

Friday, July 08, 2011
Second quarter GDP - another drama?
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

The royal wedding was a splendid occasion but it risks setting the cat among the pigeons in terms of the gross domestic product numbers. The extra bank holiday in April coincided with a softening of economic activity and the result is that Q2 GDP could be very weak indeed, even negative.

The industrial production index averaged 89.8 in the first quarter. To even match that in the second quarter then, in the absence of revisions, industrial production would need to jump by 4% between May and June. Construction output is doing a little better. New figures show that output in the March-May period was 13.8% up on the previous three months. The figures, however, are unadjusted.

As for the service sector, all we know so far is that output fell by 1.2% between March and April. Its recovery in May and June is crucial to a positive Q2 number.

Thursday, July 07, 2011
Manufacturing bounces back
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Manufacturing output rose by 1.8% in May, following a 1.6% drop in April. Manufacturing output was up by 2.8% compared with a year earlier. Though this was a good bounce in activity - spread across most manufacturing sectors - it left output down by 0.2% over the latest three months. A further recovery from tsunami and bank holiday effects will be needed for manufacturing to make a contribution to growth in the second quarter.

The bigger problem is with overall industrial production, dragged down by a weak energy sector. While industrial production rose by 0.9% between April and May, it was down by 0.8% on a year earlier and by 1.5% over the latest three months. More here.

Wednesday, July 06, 2011
House prices up in June says Halifax
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The Halifax said house prices rose by a strong 1.2% in June, but were down by 0.5% in the latest three months and by 3.5% on a year earlier. The June reading means the house price trend is flattening out, according to the Halifax.

According to Martin Ellis, Halifax housing economist:

"House prices in the three months to June were 0.5% lower than in the previous quarter. This was the smallest quarterly fall in prices since the second quarter of 2010. There was a 1.2% rise in prices in June.

"Low interest rates, an increase in the number of people in employment and some tightening in market conditions earlier in the year are likely to have been the main factors behind the recent improvement in price trends. A slowly improving economy and sustained low interest rates should help to support broad stability in the market over the coming months." More here.

Also very perky, general price pressures, according to the British Retail Consortium. The Bank of England's inflation problem is not going away. According to the BRC's shop price index: "Overall shop price inflation increased to 2.9% in June from 2.3% in May. Food inflation accelerated to 5.7% in June from 4.9% in May. Non-food inflation rose to 1.3% in June from 0.8% in May."

Tuesday, July 05, 2011
Decent service sector growth
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

After recent weak surveys, news that the service sector continued to grow at a decent pace in June will have comes as a relief, though Markit, which prepares the numbers, expects only 0.3% growth in gross domestic product in the second quarter.

More details from Markit:

- Activity continued to increase, but rate of expansion remained below trend.
- Incoming new business rose at solid, but slower, pace in June.
- Job creation remained minimal; business confidence down to eight-month low.

"UK service sector growth was sustained during June at a solid pace as volumes of incoming new business continued to rise. However, rates of expansion remained below trend, a factor that led to another month of broad employment stagnation. Moreover, confidence amongst service providers weakened markedly to the lowest since last October as panellists provided a generally downbeat assessment of current economic conditions."

"The headline index from the survey, the Markit/CIPS Business Activity Index, registered 53.9 in June, a broadly sideways movement on May’s 53.8. The index has registered above the crucial 50.0 no-change mark for six months in a row, and the latest reading was consistent with solid expansion of the UK service sector."

Monday, July 04, 2011
The economics of long-term care
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

The Dilnot Commission has published its recommendations, which in summary are the following:

- Individuals’ lifetime contributions towards their social care costs – which are currently potentially unlimited – should be capped. After the cap is reached, individuals would be eligible for full state support. This cap should be between £25,000 and £50,000. We consider that £35,000 is the most appropriate and fair figure;
- The means-tested threshold, above which people are liable for their full care costs, should be increased from £23,250 to £100,000;
- National eligibility criteria and portable assessments should be introduced to ensure greater consistency; and
- All those who enter adulthood with a care and support need should be eligible for free state support immediately rather than being subjected to a means test.

The cost looks modest for achieving big changes, just £1.7 billion in 2010-11, though it rises, to £3.6 billion in 2025-6, in 2010-11 prices. The Treasury's concern will be over how rapidly these costs rise. The report is available here.

Friday, July 01, 2011
Disappointing manufacturing index
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The manufacturing purchasing managers' index slipped to 51.3 in June, a 21-month low, from 52 in May. Though production edged up, other components were weak, notably domestic and export orders, and employment growth, which was at a nine-month low.

According to Markit:

"The manufacturing sector continued to slip closer to stagnation in June, with the PMI sliding to a 21-month low. It is worrying to see that the slowdown is not just being driven by the weakness of domestic market strength, with growth in new exports having also slowed sharply since the start of the year as the global economic recovery drifts into a softer patch.

"It is also disappointing to see that the easing in supply chain delays has yet to feed through to a much hoped for revival in manufacturing growth.

"With strong headwinds already in place and austerity measures likely to put increasingly counteractive pressure on domestic and consumer demand, it looks as if manufacturing has entered a slower growth phase which could be with us for some time. With manufacturing growth in the first quarter having been revised down from an earlier buoyant estimate of 1.1% to a far less impressive 0.7%, the survey data will call into question the sector’s ability to play a major role in delivering a robust and sustainable economic recovery."

Thursday, June 30, 2011
Housing flat, credit conditions flat
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

There will be no revival in the availability of credit to households or businesses in the next three months, apart from unsecured credit, according to the Bank of England's latest credit conditions survey, here. It says:

"The availability of secured credit to households was reported to have been broadly unchanged in the three months to early June 2011. Lenders expected availability to remain flat in the next three months.

"Lenders reported that the availability of unsecured credit to households was little changed in 2011 Q2. Availability was expected to increase in Q3.

"The availability of credit to corporates of all sizes was reported to have been broadly unchanged in 2011 Q2. And availability was expected to remain broadly unchanged in Q3."

The Nationwide said house prices in June were flat compared with May and down a modest 1.1% on a year earlier. Not much change there either.

Wednesday, June 29, 2011
Soggy services, modest money supply growth
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

Only second rank data today but none of it very strong. Service sector output fell by 1.2% between March and April, largely reflecting the additional bank holiday. April's level of service sector activity is 0.5% down on the first quarter average, so will need a decent May-June bounce to show growth between the two quarters. Q2 service sector growth is unlikely to match the first quarter's 0.9% expansion. More here.

Also released, Bank of England data showing that M4 rose by £5.2 billion in May but was up by a modest 1.7% on a year earlier. More on that here. Mortgage approvals rose slightly to 45,940 in May, compared with 45,447 in April but were slightly below their six-month average. Still very weak.

Weak productivity growth has been a feature of the recovery and it continues. Whole economy productivity grew by just 0.1% in the first quarter and was a mere 0.3% up on a year earlier. Hence strong employment. More here.

Tuesday, June 28, 2011
Overstating real income weakness?
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

A clutch of data from the Office for National Statistics, of which the least notable was the first quarter gross domestic number, which was unrevised at 0.5%, following a 0.5% drop in the final quarter of 2010. So the "flat" story is maintained, though this is a strange way of presenting the figures.

GDP was hit by 0.5% by poor weather in Q4 2010, made up part of this loss in Q1 2011, but some of the loss was permanent. Underlying growth in Q1 is suggested by the 0.9% growth in services and a 0.7% expansion in manufacturing but was knocked back by weak construction and weak energy output. The first looks implausible, the second temporary.

There were some back revisions in the GDP numbers. Growth in Q1 2010 was revised up by 0.2 percentage points, while growth in Q3 was revised down by 0.1.

The most eye-catching number, however, was for real household disposable incomes, down 0.8% in Q1, following a 0.9% drop in Q4 2010. Incomes were 2.7% lower than a year earlier. This looks implausibly large? Why, because other ONS figures show that employment rose by 1.4% over the year to Q1.

Unless all these jobs were very low paid, the rise in employment should have compensated, at least in part, for the drop in per capita incomes. Once again, the GDP numbers sit uneasily alongside the labour market statistics. More here.

Also released, first quarter balance of payments statistics, which show that the current account deficit narrowed to £9.4 billion, 2.5% of GDP, from £13 billion in Q4 2010. More here.

Friday, June 24, 2011
The Bank of England's financial stability report
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The Bank's financial stability report has always been a little harder to interpret than its sister publication, the inflation report. This one is slightly sifferent, in that it accompanies the recommendations of the interim financial policy committee (in the form of a series of detailed recommendations to the Financial Services Authority).

In time, when supervision has been fully transferred to the Bank, the financial stability report will be a summary/justification of the financial policy committee's own actions.

In the meantime, there's plenty in the report, with the main risk probably best summed up in Sir Mervyn King's opening statement: "The most serious and immediate risk to the UK financial system stems from the worsening sovereign debt crisis in several euro-area countries.

"As the Report makes clear, direct UK bank exposures to those economies are limited. But experience has shown that contagion can spread through financial markets especially when there is uncertainty about the precise location of exposures. A UK bank could have lent to a bank that itself had lent to a bank that in turn was exposed to sovereign risk.

"The Committee therefore judged that greater clarity about the extent of these exposures would help to limit the transmission of problems to UK banks, and that this extra transparency should be a permanent part of major banks’ reporting."

The Bank's systemic risk survey, conducted for the report, finds that the biggest risk to the UK financial system is an economic downturn, cited by 69% of respondents, followed by sovereign debt risks, 65%. However, the downturn factor is down from 83% in October, while the number citing sovereign debt fears is up from 39%. More here.

Wednesday, June 22, 2011
MPC 7-2 for no change, endorses sterling fall
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee voted 7-2 for no change in Bank rate, as expected, with one of the seven, Adam Posen, voting for a further £50 billion of quantitative easing. The vote was as expected, with the more dovish Ben Broadbent replacing the hawkish Andrew Sentance. Even the two hikers, Spencer Dale and Martin Weale, acknowledged that growth was coming through rather weaker.

Two interesting aspects to the minutes. One was the risks to growth from the eurozone sovereign debt crisis: "While activity in the euro area as a whole had remained resilient, sovereign debt and banking problems could intensify, perhaps significantly, to the detriment of economic activity and the financial system."

Also of interest to me was that the MPC appears to accept that sterling's crisis-related fall is both necessary and here to stay. It said: "The sterling effective exchange rate index had been broadly stable since the beginning of 2009, suggesting that its earlier depreciation had been a step adjustment to the real consequences of the financial crisis and the necessity for economic rebalancing."

I disagree, and would argue that sterling's performance is closely linked to the stance of monetary policy. But it is good to have the view spelt out. More here.

Tuesday, June 21, 2011
Britain's public finances on the slow road
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

Public sector new borrowing (excluding financial interventions) was £17.4 billion last month, compared with £18.5 billion in May 2010. It is an improvement but a painfully slow one. Indeed in the first two months of the current fiscal year (April-May), borrowing was £27.4 billion, up from £25.9 billion a year earlier.

The current budget deficit, £15.3 billion, also showed a small improvement on May 2010's £16.5 billion. But April-May (£24 billion) was also marginally worse than April-May 2010 (£22.3 billion). Public sector net debt rose to 60.6% of GDP, on the narrow definition.

Two months is too early to call a trend but there's work to be done to get down to the Office for Budget Responsibility forecast of a £122 billion net borrowing number for 2011-12, from an upward revised £143 billion for 2010-11. More here.

Friday, June 17, 2011
UK growth and financial services
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

A section in George Osborne's Mansion House speech on Wednesday, which was widely picked up, also caught my eye. This was it:

"Here is a striking fact about the British economy over the last six quarters since the recession ended – a fact little understood but crucial to understanding our challenge. For five out of those six quarters, the financial sector has continued to contract.

"While our economy as a whole has grown by 2.5%, the financial sector has shrunk by 4%. Take the financial sector out of the equation, and economic growth in the rest of the economy during the recovery has actually been above its average rate of the last two decades. Put the financial sector into the equation, and economic growth has been below trend."

This struck me as surprising. Could one sector accounting for only 8% of gross domestic product - financial services - really drag down growth that much. So here's the Treasury's explanation:

Between 2009q3 and 2011q1: GVA (gross value-added) grew by 2.6% over the six quarter period, an annualised rate of 1.7%. The quarter on quarter growth rate was positive in every one of those quarters except 2010q4. GVAf (gross value added in financial services) grew by -4.0% over the six quarter period, an annualised rate of -2.7%. The quarter on quarter growth rate was negative in every one of those quarters except 2011q1. GVA-xf (excluding financial services) grew by 3.2% over the six quarter period, an annualised rate of 2.1%.

Between 1991q1 and 2011q1: The compound average rate of growth for GVA was 2.1%. The compound average rate of growth for GVA-xf was 2.0%.

So it works, although by only including the recent period of financial sector weakness in the 20-year comparison. For me there are two interesting things about this. The first is that the contribution of financial services to growth over that 20-year period was smaller than sometimes thought. It boosted growth but not by as much as is commonly supposed.

The second was the chancellor's reference to "trend". The Treasury has always maintained that trend growth is rather stronger than 2%, around 2.75%, and the Office for Budget Responsibility uses a higher figure, 2.35% until 2013, then 2.1%. 2% trend growth, if that is what the UK has, would have implications (adverse ones) for the public finances.

Thursday, June 16, 2011
Retail sales slump in May
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The volume of retail sales dropped by 1.4% in May, more than reversing the 1.1% rise in April. The Office for National Statistics says the weakness reflects concerns among consumers over the economic climate, including rising food and fuel prices. The trend, however, looks flat, with sales volumes up by 0.1% over the latest three months and by 0.2% on a year earlier. Retailers will be hoping the May rise in consumer confidence is reflected in higher sales over the summer.

Take out automotive fuel and the retail sales picture was even weaker: down 1.6% in volume in May and by 0.1% over the latest three months.

Sales values also fell by 1.4% in May but were up by 3.8% on a year earlier, reflecting higher prices. More here.

Wednesday, June 15, 2011
Strong employment, weak pay
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The employment numbers continue to surprise on the upside, with an 80,000 rise in the Labour Force Survey measure (to 29.2m) in the latest three months and an 88,000 drop in unemployment to 2.43m, 7.7% of the workforce. Employment is up by 376,000 over the past year, and is now only 333,000 below pre-recession levels.

Pay growth, however, remains weak, with total pay up by just 1.8% over the past 12 months and pay excluding bonuses up by 2%. You might say people are pricing themselves into jobs.

The claimant count rose by 19,600 to 1.49m last month. Normally a good indicator, it is unclear how much this is being distorted by deliberate action to move claimants off other benefits. More here on the numbers.

Also released, figures for public sector employment which showed a 24,000 first quarter fall, with a 27,000 drop in local government employment but, interestingly, a 7,000 rise in the number of civil servants.

Tuesday, June 14, 2011
Inflation takes a temporary breather
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The May inflation figures were OK, with consumer price inflation and retail price inflation stuck at 4.5% and 5.2% respectively. Still well above target, and above acceptable levels, of course, CPI inflation remaining at its highest since October 2008.

There is more inflation to come, barring a sudden drop in energy and commodity prices. The domestic fuel price rises announced by the utility firms have yet to feed through into the numbers. The May numbers benefited from a reduction in air fares (Easter timing effects) but were boosted by higher food prices.

This was a month when everything was unchanged, including RPX inflation, 5.3%, inflation excluding indirect taxes, 3%, and inflation at constant tax rates, 2.8%. More here.

Friday, June 10, 2011
Wedding day blues for industry
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The April industrial production figures were far worse than analysts expected. Not only was there a fall of 1.7% on the month but production was down by 1.2% on a year earlier. Manufacturing output fell by 1.5% and was up by only 1.3% on a year earlier.

Looking at some of the analysts' interpretations and those from industry, as well as the Office for National Statistics, it is sensible not to be too gloomy about these figures. The ONS release is here and here are a couple of pertinent points from it: "The additional April royal wedding bank holiday is likely to have had some impact on the April manufacturing data. Following standard ONS seasonal adjustment practice, which involves estimating and removing repeating calendar effects from the data, for example Easter, no adjustments have been made to the published data to remove the effect of this non-recurring bank holiday.

"We received feedback from a number of companies indicating shut downs were the reason for sales figures being lower than expected ... In June 2002, an extra bank holiday was created for the Queen’s golden jubilee. The late May bank holiday was also moved to the start of June. Between May 2002 and June 2002, manufacturing fell by 5.4 per cent, with changes in working patterns causing the fall.

"A number of car manufacturers have provided feedback indicating that the after effects of the tsunami in Japan reduced production levels in April 2011, due to a lack of parts. The transport equipment sub sector fell by 4.1 per cent compared to March 2011, the largest month on month decrease since July 2010. Within this sub sector, motor vehicle production fell by 7.6 per cent, also the largest month on month decrease since July 2010.

"In addition to this, we had feedback from some companies in the machinery and equipment sub sector and the other manufacturing sub sector that the tsunami had impacted on their production levels.

"April 2011 was the warmest April since records began. This affected both electricity and gas supply output due to reduced demand. Between March and April 2011, electricity supply output decreased by 4.3 per cent and gas supply output decreased by 11.2 per cent."

The National Institute of Economic and Social Research seems untroubled by the data, according to its monthly GDP estimate, which feeds in these figures. It reckons that GDP rose by 0.4% in the three months to May. Not strong, but not collapsing.

Thursday, June 09, 2011
On hold again, and again
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

Bank rate on hold at 0.5%, quantitative easing maintained at £200 billion. The easiest prediction ever, as it will be for a while. The vote was probably 7-2 but we'll have to wait a couple of weeks to find out.

Trade deficit in goods narrows
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

The economy's quiet and so is the trade picture. The overall trade deficit in goods and services remained at £2.8 billion in April, though the originally reported £3 billion deficit for March was revised down. The deficit in goods narrowed from £7.7 billion to £7.4 billion as a result of a £0.1 billion rise in exports and a £0.3 billion fall in imports.

Otherwise, the trends were muted. As th4e Office for National Statistics put it: "Excluding oil and erratic items, the seasonally adjusted volume of exports was 2.6% lower and the volume of imports was 1% lower in April, compared with March. Export prices of goods rose by 1.5% and import prices of goods rose by 1.1%, compared with March." Interesting to see export prices rising faster than those for imports, though that may be a compositional effect. More here.

Tuesday, June 07, 2011
Can you have a short-term plan for growth?
Posted by David Smith at 11:30 AM
Category: Thoughts and responses

What would you do if you wanted to boost economic growth in the short-term? You might slash interest rates, possibly cutting them to a record low level. A sterling devaluation would also help. But that's already happened. If you believe in the efficacy of fiscal policy as a short-term growth booster (something that was out of favour before the global financial crisis) you might cut taxes and increase public spending.

What you would not expect is to be able to achieve a growth boost through supply-side reforms, at least in the short-term. Such reforms, whether they are improving education and skills, cutting red tape, eliminating restrictive practices and increasing competition are not hard to think of. They are popular, particularly with businesses, as this note from the Institute of Economic Affairs' makes clear.

I don't disagree with any of it, but we should be honest about the time lags involved. The Thatcher union reforms of the 1980s did not really benefit Britain's labour market until the 1990s. These things take time. Plans for growth are welcome but long-term.

Meanwhile we have further evidence of a soggy consumer sector. Retail sales values in May were down 0.3% on a year earlier, according to the British Retail Consortium. Halifax house prices rose 0.1% in may but were down 4.2% on May 2010.

Monday, June 06, 2011
IMF backs Osborne - with strings
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The International Monetary Fund's Article IV consultation backed the coalition government's fiscal plans, as expected. It says: "The weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks. The inflation overshoot is driven largely by transitory factors."

Interestingly, snow does not play a part in the IMF's assessment of the recent slowdown: "Growth was flat over the last two quarters, as the inventory cycle—which helped power growth through much of 2010—came to a close and with consumer confidence impaired by spiking commodity prices, a soft housing market, and headwinds from necessary fiscal consolidation."

Growth will be around 1.5% this year, it says, then picking up to 2.5%. The report, while supportive, is littered with warnings. One of which relates to the output gap: "In the more difficult case in which weak growth and high inflation result from a much narrower-than-estimated output gap (which would be indicated by rapid wage growth), policies will have little choice but to tighten to re-anchor inflationary expectations. A narrower output gap would also imply a higher-than-currently-estimated structural deficit and therefore would require further fiscal tightening over the medium term."

The report is here.

Sunday, June 05, 2011
Shadow MPC votes 6-3 for rate hike
Posted by David Smith at 08:59 AM
Category: Thoughts and responses

In its most recent e-mail poll, the Shadow Monetary Policy Committee (SMPC) voted by six votes to three that Bank Rate should be raised in June. Five of the rate hawks wanted to raise Bank Rate by ½% to 1%, while one member (who had previously worked as a central banker in Hungary) wanted an increase of 1% to give a Bank Rate of 1½%.

The other three members of the shadow committee voted to hold Bank Rate at the ½% originally set in March 2009. There were several reasons why a majority of SMPC members wanted to see a rate hike in June. One was concern that the persistent overshooting of the inflation target – and the Bank of England’s less than convincing response – was undermining the credibility of the monetary framework. Another was the worry that the increasingly negative real interest rate paid on UK money holdings would induce further downward pressure on sterling, and that this would be fully reflected in domestic prices in the long run.

A third reason for a rate increase was the belief that the monetary authorities would have more flexibility in both directions if Bank Rate was raised to 1% or 1½% in June and, perhaps, 2% to 2½% in the longer term. This would allow the use of rate cuts as a stimulus in the future, if the economy turned out to be weaker than anticipated.

The main reason that three SMPC members wanted to hold Bank Rate at ½% was the concern that the UK recovery was not firmly established. There was also a belief that the banking system remained so weak that there would be a long period of sluggish money and credit growth ahead and that this would further limit the scope for recovery. This meant that the current negative real interest rates coexisted with abnormally tight money and credit conditions.

Comment by Roger Bootle
(Deloitte and Capital Economics)
Vote: Hold.
Bias: To increase Quantitative Easing (QE).

The economy remains very weak and there are serious doubts as to whether even a meagre pace of expansion can be sustained. The public sector job cuts are yet to bite and recent rises in inflation without compensation in pay increases are eating into disposable income. Meanwhile, there is no sign of either inflation expectations or wage increases taking off and the government bond market is quiescent. Inflation is likely to fall sharply next year.

In the circumstances, Bank Rate should remain on hold for the foreseeable future. Although it should not be deployed yet, the Bank should be prepared to do more Quantitative Easing (QE) if the economy weakens and inflation subsides rapidly.

Comment by Tim Congdon
(International Monetary Research)
Vote: Hold.
Bias: Neutral.

The early part of 2011 has seen broadly satisfactory macroeconomic conditions in the UK. Demand, output and employment have all been growing, and unemployment is edging down, even if the official estimates for Gross Domestic Product (GDP) in the final quarter of 2010 and first quarter of this year indicate stagnation in this six-month period. As so often in the past, the data almost certainly understate growth. When the Office for National Statistics (ONS) does eventually attempt its so-called ‘triangulation’ (i.e. to reconcile data on output, income and expenditure, which theory tells us should be identical), national output could well be revised up by ½% or so for this six-month period. Business surveys and employment numbers are the most reliable short-term guides to the economy and they argue that the economy is making steady progress.

However, inflation has been disappointing. Annual increases in retail prices of 5% plus take us back to the 1980s, as if the achievement of the so-called ‘Great Moderation’ period of low steady inflation was as nought. On the other hand, the majority view on the Monetary Policy Committee (MPC) is correct that special, non-recurring factors are responsible for the bulk of the above-target inflation number. In the year to April, the consumer price index was up by 4.5% but the ‘transport’ category was up by 9.6%, accounting for a 1.53% upwards movement in the Consumer Price Index (CPI). This means that over a third of the CPI increase was due to this one category, with the huge increase in the oil price being the main factor at work. The ONS now calculates a CPI-CT. This is a constant-tax-rate CPI, which is not quite the same thing as the more familiar CPIY, which excludes indirect taxes. As this CPI-CT index was up by 2.8% in the year to April, it is evident that – without the oil price change and increased VAT – the CPI number might well have been more or less on target. The warning here is that – if interest rates were now raised by, say, 1.5 percentage points, and oil and commodity prices were to fall sharply over the year to April 2012 (as might happen) – the annual increase in the CPI in that year might be beneath 1%. The target would be breached again, but now on the downside.

Non-oil, non-commodity-price cost pressures are weak. In the year to 2010 Q4 unit labour costs for the whole economy were up by a mere 0.7%. In a cost-accountancy sense, the underlying pressures on inflation are under good control and do not argue for strong counter-measures. Money growth is also subdued, in both the UK and elsewhere. The M4ex broad money measure rose by only 1.7% in the year to March 2011. Furthermore, there is little evidence that the last few months have seen an upturn in the growth of private sector credit. In fact, the recent withdrawal of state guarantees on some of their liabilities has obliged several UK banks and building societies to continue to shrink risk assets. Because Bank Rate is a mere ½%, and other short-term interest rates stand at historically very low levels, negligible money growth has been compatible with the steady macroeconomic improvement noted earlier. But it is laughable to claim – as, for example, Liam Halligan did in his Sunday Telegraph columns – that the upward blip in inflation in late 2010 and early 2011 is explicable in terms of ‘the printing of money’ due to QE.

My view remains that this is not the time to tighten monetary policy. The Great Recession was caused by officialdom’s determination to punish the banks, which had the predictable - but not widely noticed or predicted - consequence of checking growth in the quantity of money. The recovery from the Great Recession is being held back by officialdom’s continued determination to punish the banks, which will constrain the growth of bank balance sheets and the quantity of money for a few years yet.

Comment by Andrew Lilico
(Europe Economics)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate further, and stand ready to do more QE.

To understand how to set monetary policy at the moment, it is important to distinguish between ‘quantitative’, ‘signalling’, and ‘referencing’ effects. ‘Quantitative’ effects mean those changes in monetary policy which have a more-or-less direct impact on the amount of money in circulation in the economy, or upon the speed at which it circulates. If, for example, interest rates are 10% and we cut them to 5%, then we should expect the quantity of money to increase (ceteris paribus). ‘Signalling’ effects describe the way in which changes in interest rates indicate to the market the MPC’s view about various aspects of the state of the economy, which then allow the market to update its own views. ‘Referencing’ effects denote the fact that Bank Rate is referred to in various contracts, with the prices or interest rates charged dependent on the level of Bank Rate (e.g. certain forms of tracker mortgage).

When interest rates fall below a certain level, the normal factors lying behind quantitative effects fall away. This happens for a variety of reasons, but the most important is that new constraints, that are normally loose, begin to bind. A well-known one is that, if interest rates were to become negative, so that people were charged for keeping money in the bank, some individuals might prefer to keep money in a safe at home – an option that always exists, but is not normally relevant. But, in fact, some such constraints begin to bind even before interest rates fall below zero.

The existence of such factors, and differences between countries and cultures and institutional arrangements, is an important reason why different central banks have varying ideas about what is the effective ‘minimum’ level of interest rates. For example, until the crisis of 2008 and 2009, Bank Rate had never been reduced below 2%, even in the depression of the 1930s. Nevertheless, Bank Rate was reduced to ½% (but not to zero) in 2009. However, the European Central Bank (ECB) regards its ‘minimum’ level as 1%, and has not cut below this figure. It is now fairly clear that Bank Rate is below the level at which it has material quantitative impacts. So raising Bank Rate from ½% to 1%, 1½%, or perhaps even 2% would not lead to quantitative tightening.

That does not necessarily mean that Bank Rate was cut too low in 2009. It was useful to provide signals to the financial markets about the willingness of policymakers to respond, for example via QE. However, one problem with Bank Rate being at ½% is that the ability to provide further signals by cutting rates is all-but absent. Monetary policy would provide more of a cushion if there were the capacity to cut rates if necessary. That could become highly relevant if, for example, there were to be further financial market problems triggered by a Greek default.

So, Bank Rate could be raised to 1%, 1½%, perhaps even 2% without that involving quantitative tightening. Doing so would also allow greater scope for signalling to deal with a crisis should one arise. That leaves only referencing effects. Bank Rate serves as a reference in certain tracker mortgages and other contracts. Raising Bank Rate would thus have an impact on mortgage-holders. There are two possible observations about this. First, macroeconomic policy has spent far too long trying to spare mortgage-holders from the consequences of their own folly. It is one thing if policy smoothes an eighteen-month transition, by retarding a fall in prices in order to allow mortgage-holders to better manage themselves out of short-term cash-flow problems. However, UK macroeconomic policy has been fixated on avoiding house price falls and mortgage defaults since 2004. Seven years, and no apparent end! Such interventions create losers as well as winners. People that did not over-extend themselves by borrowing absurd sums to pay inflated prices in 2004 and thereafter have been the unsung victims. It is morally wrong to indefinitely punish the prudent to aid the profligate. Even setting this point aside, however, the reality is that those most closely tied to Bank Rate are typically on extremely low interest rates – such as 2.5%, 0.99%, or even less. Those on mortgages of 4.5%, 5%, and so on, that would be most exposed to even modest rises in mortgage rates, are those least likely to be impacted by the referencing effects of a rise in Bank Rate.

We should be aiming to get Bank Rate up to a more natural ‘minimum’ level at which quantitative effects start to bind. It is not proposed that Bank Rate should be raised relative to inflation. The CPI figure is headed for 5%, at least, now. In November 2010, the possibility that CPI inflation could reach 5% was at the outer envelope of the Bank of England’s fan charts. Now it is the main case, whilst 7% is the outer envelope. On even the most hawkish of (credible) proposals, interest rates will not rise as rapidly as inflation. So, interest rates will be falling, not rising, in inflation-adjusted terms. Insofar as there is a signalling effect from rate increases, such signals will be useful. They would indicate (mirabile dictu!) that the Bank of England still had some vague fleeting interest in keeping down inflation, even if it long ago lost all interest in keeping to the official inflation target.

Some argue that the quantity of money is not rising rapidly enough. The backlog of extremely rapid monetary growth in 2005 to 2007, and the quadrupling of the monetary base since 2007, both suggest there is ample monetary room for prices to grow. Nevertheless, in the event that further pathologies arise in the financial sector – which is by no means implausible, they could indeed happen any time, and very probably will happen shortly after Greece’s impending default – the correct monetary policy responses will be: 1) relaxation (not tightening) of regulatory capital adequacy requirements; and 2) more QE. Interest rates are not the tool for all problems. We need to try to restore a little focus of interest rates on what they can affect: the quantity of money, inflation, and - if there were a credible monetary policy framework, which there is not - macroeconomic stability.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate again, and for QE to be held with a bias towards reversal.

Inflation is now taking hold across the world economy. Western central banks still have their official interest rates at close to zero and are printing money as demanded at this cost. The demand for this money is growing very fast in the developing world, mainly in Asia; so money is being borrowed at this very low rate in the West and lent in the East in virtually unlimited quantities. Because the Asian economies do not want their exchange rates to go up against the US$ and other western currencies, their central banks buy the US$s, Euros, pounds etc and swap them for their own currency as fast as this money flows in. This means that the expansion of money and credit in the Eastern world is fast and furious. This is fuelling rapid credit-fed growth, in turn.

Much the same is true of other emerging market countries. All of them are enjoying a credit boom, fed by western money. This worldwide boom has renewed the upsurge in commodity prices evident in 2006 to 2008, before the Lehman crash. Since these economies are also short of labour, the boom has led to a general inflation, with prices and wages rising generally, and not just a pass-through of higher commodity prices.

How will this all end? This ‘carry trade’ (whereby dollars at low interest rates are ‘carried’ and lent in higher interest rate economies) is very low risk in the sense that the dollar is being systematically kept down by the emerging market countries’ central banks, with only a few central banks allowing a little bit of appreciation of their currencies. To stop this flow entirely would require these emerging currencies to float upwards until they were too expensive to lend to. However this will not be allowed to happen, so nervous are their governments of the chilling this might bring to growth, particularly of their exports.

At the same time the paradoxical thing is the weakness - or sluggish growth, at best - of the western economies whose interest rates are so low. Hence, commodity price increases have so far produced no sympathetic rise in wages in these countries, as labour is in excess supply and job growth is weak; high unemployment is forcing labour to take big real wage cuts. Profits growth is strong however since capital is in short supply, because it is needed for growth in the emerging world. So we observe growing western profits, and rising stock markets, falling real wages, and limited western inflation. One could describe this as rising world inflation accompanied by lagging wage settlements which are currently holding down western inflation. However once this terms-of-trade/real-wage correction has run its course, inflation in the West will equal world inflation. Already in some countries such as the UK inflation is substantially higher than it has been and closer to this equality than elsewhere. However both Euro-zone and US inflation is now rising. The ECB has now raised interest rates for the first time since the crisis. The US Federal Reserve has not yet done so; but it cannot be far off. As for the UK, a rise is surely imminent if the Bank of England is not to become a laughing stock.

Meanwhile emerging country central banks are trying all sorts of controls to prevent this tide of money from coursing through their economies. However, these efforts are futile in the end; as fast as the last tide has been ‘controlled’, the next one is rolling in and the operation has to be repeated. In the end, the controls cannot restrict the huge availability of money by back door or front. Corruption becomes rife as opportunities for massive profits from lending this money illegally become irresistible.

So far the main actors in this drama, western central banks, have been complacent about worldwide inflation because they think it is not their problem. However this must stop within the next year, it would seem, if inflation is not once more going to become embedded in expectations in the West as it has already in the East. As labour markets tighten, real wage cuts could well be reversed and this would temporarily add to future western inflation as the terms of trade losses are also reversed. Furthermore, these central banks must be concerned about the inflation they are indirectly causing in the East. They may complain that eastern central banks ‘ought’ to allow currency appreciation; but the fact is they do not. In these circumstances, western central banks are creating world inflation, which must spill over back to their own economies in time.

Accordingly, it is reasonable to look for a tightening of western monetary policy, and rising interest rates over the next two years. By the end of 2012, this ought to get world inflation under control. During 2012, there should be a general world slowdown. Growth in developed countries will therefore be slower even than now. Commodity prices will keep rising until the end of 2012 when they should start to level off; commodities are in short supply after the massive world growth of the 1990s and 2000s. Their shortage was the main factor in triggering the crisis of 2007 to 2009 and this shortage remains the underlying factor limiting world productivity growth. My recommendation for UK monetary policy is to raise Bank Rate at once by ½%, with a bias to further rises, and for QE to stop, with a bias to reversal (i.e. sales of the Bank’s portfolio of bonds).

Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Raise Bank Rate to 1%; hold QE at present level.
Bias: To raise Bank Rate in repeated small steps until it reaches 2½%.

Recent newspaper interviews given by its officials suggest that the Bank of England has been so traumatised by the financial crash – and its consistent underestimation of future inflation – that it has lost its intellectual self confidence. Like Mr Micawber in Charles Dickens’s novel, the Old Lady of Threadneedle Street appears to be simply waiting for something to turn up – or rather, in this case, for CPI inflation to turn down spontaneously, without any action on the part of the Bank. Since the first duty of a Doctor is not to exacerbate the patient’s condition by inappropriate treatment, monetary inaction can be defended using the argument that the uncertainties are so great that anything that the MPC does risks doing more harm than good. One can sympathise with this view. However, if one looks back to the 1998 Bank of England Act, which established its operational independence, the Bank was given three specific responsibilities:
1) to hit the inflation target; 2) to maintain the stability of the banking system (in conjunction with HM Treasury and the Financial Services Authority), including acting as an effective lender of last resort, and 3) to nurture the wellbeing of the financial sector in order to maximise its contribution to the wider economy.

It is hard to avoid the conclusion that the Bank of England has significantly underachieved with respect to all three objectives. It is also time the ‘greedy bankers’ alibi for this underachievement was squashed on two grounds. First, bankers have always been ‘greedy’. However, this does not explain why the greed was allowed to get so out of hand in the first decade of the 21st Century, and why monetary policy was not tightened then – perhaps by a call for special deposits if the Bank was concerned that a rate increase would unduly strengthen sterling. Second, only some 5% of the 186 members of the International Monetary Fund (IMF) – or the 192 members of the United Nations (UN) – suffered from the incipient banking sector meltdown experienced by the UK and the US. Many comparable countries – including Canada and Australia – emerged virtually unscathed. An important reason for the inept British response to the 2008 global financial crisis was the tripartite dismemberment of the Bank that resulted from the 1997 settlement. This faulty institutional structure meant that no one was properly ‘minding the store’ and must take a large share of the blame. A concerted attempt is now being made to remedy the institutional problems caused by the 1998 Bank of England Act. However, people will need convincing that the UK monetary authorities: 1) now know what they are trying to do from an intellectual perspective, and 2) are in effective control of the situation.

One aspect of the general loss of nerve on the part of media and other commentators since the financial crash has been the tendency to over-interpret highly fallible official economic statistics and to react in a manic-depressive mode to random wobbles in the data. This is particularly true of the GDP figures where revisions are large, and there often appears to be no close predictive relationship between the official estimate of GDP on one base year and on another. This year, also, the ONS have announced that the annual ‘Blue Book’ changes to the national accounts will be so major that a breakdown of the expenditure and income measures of GDP in 2011 Q2 will not be available until 5th October. This will cause huge problems for anyone trying to monitor, let alone model or forecast, the UK economy during the intervening period. It may also be significant that, while the annual increase in the CPI fell from 4.4% in February to 4.0% in March before rebounding to 4.5% in April, the ‘double-core’ retail price index – which excludes both mortgage interest payments and house prices – has shown a far steadier course, going up by 5.8% in the year to February and the same 5.6% in the twelve months to March and April. This suggests that the reported CPI inflation rate has suffered from chance fluctuations, which should not be taken too seriously.

The UK’s fundamental problem is that the massive increase in the socialisation of the economy between 2000 and 2010, and Mr Osborne’s misguided decisions to raise VAT and implement Labour’s 50p income tax rate and higher national insurance contributions have severely damaged the supply side of the British economy. Pouring monetary stimulus into a supply-debilitated economy is a recipe for stagflation not growth. Britain’s economic openness also means that sterling has a far greater impact on the domestic price level than the MPC, with its over-reliance on an ‘output-gap’ model of inflation, has appreciated.

In contrast to the official approach, the properties of the author’s Beacon Economic Forecasting (BEF) macroeconomic model imply that a 1% decline in the exchange rate is associated with a 1% increase in domestic prices in the very long run. Furthermore, each 1 percentage point drop in the real interest rate differential in favour of sterling is associated with a 5.2% decline in the sterling index. This means that the Bank’s decision to ignore the reduction in the real rate of interest caused by rising inflation is placing downwards pressure on sterling and adding to the price level in the long run.

Fortunately, having shown a peak-to-trough contraction of 16% in the recession, the volume of UK private domestic expenditure, which is the subset of the economy on which monetary policy predominantly operates, had recovered by 5.6% from its 2009 Q4 trough by 2011 Q1. There are also encouraging signs that UK exports are benefitting from the marked recovery in the volume of world trade since its collapse in the Great Recession. My recommendation remains that Bank Rate should go up by ½% immediately and that it should then be raised in a series of small steps until a figure of 2½% or so is achieved. After which, there should be a pause for breath. If the economy does turn out to be weaker than expected, there would then be scope to use rate cuts once more to provide a monetary stimulus to the wider economy.

Comment by Akos Valentinyi
(Cardiff Business School, Cardiff University)
Vote: Raise Bank Rate by 100 basis points to 1½%.
Bias: To raise Bank Rate again.

The British economy is slowly, but steadily, recovering from the Great Recession. Output and employment are growing. Private business investment in manufacturing has been growing in the last two quarters faster than at any time since the 1990s. Similarly, private business investment in distribution services has been growing strongly since the second quarter of 2010. Investments in non-manufacturing production sectors and non-distribution service sectors are weaker. However, investment activity overall suggests that companies expect the demand for their product to grow in the future. The recovery is underway, and it is less fragile than many may claim.

Inflation is a cause for serious concern. The annual monthly inflation measured by the target CPI reached 4.5% in April. The picture is even darker if we consider the change is 1.1 percentage points higher now than it was in May 2010. Moreover, if we calculate a three-month moving average of the CPI, we then find that this figure has not only been rising since October 2010, but that it has been above target since December 2009.

It is also useful to look at the twelve CPI categories. Eight out of these twelve categories have higher annualised monthly inflation now than they did in May 2010. In contrast, only six out of these twelve categories had higher inflation in April 2010 relative to May 2009. Inflation is picking up speed and it does so in more and more CPI categories. Inflation is driven by expectations. The pattern of the UK inflation indicates that inflation expectations are picking up slowly. Once they do so, they will be very costly to break.

In my opinion, monetary policy should be tightened. My vote is for a 100 basis points rise in the official interest rate to give a Bank Rate of 1½%. Given the excess liquidity in the economy, this hike is unlikely to have significant implication for the real economic activity. It would signal that the policy maker takes inflation seriously, and would keep inflation expectations anchored. Experience shows that successful monetary policy requires a ‘conservative’ central banker, who never takes undue risks with inflation. Given the dynamics of inflation, a conservative central banker would now raise rates in Britain.

Comment by Peter Warburton
(Economic Perspectives Ltd)
Vote: Raise Bank Rate to 1%.
Bias: To raise Bank Rate again.

The thrust of the argument presented in the author’s earlier SMPC submissions for some time now has been that a delayed economic reaction to extremely favourable monetary conditions should not to be mistaken for a weak or insignificant reaction. Real short-term interest rates have plunged over the past year as inflation outcomes have greatly exceeded expectations. The UK forecasting consensus has been chasing the game on inflation for more than a year now. The average forecast for calendar 2011 CPI inflation has shifted from 1.7% in April 2010 to 4.1% in May 2011, according to Consensus Forecasts Inc. The Bank of England’s MPC has conceded, little by little, that the annual increase in CPI is unlikely to drop back into its 1% to 3% target range until 2013 at the earliest.

The materialisation of noticeable headline inflation this year has been common to all the seven leading industrial (G-7) economies. However, the UK strain of this particular virus remains more vigorous. While the UK has at least a greater potential for inflation to recede into 2013, this extended aberration translates into a steeper fall in real interest rates this year and next than elsewhere. This is one potential source of domestic economic stimulus. A second potential stimulatory factor for the UK is its high broad money to GDP ratio. While recent broad money growth trends have been weak, this correction leaves the trend growth of money, in relation to nominal GDP, on the same underlying growth path as the one that has been observed since 2005. A third source of potential stimulus is that the UK continues to derive competitive advantage from the depreciation of sterling in 2008-09. A phase of rapid unit labour cost growth eroded part of the advantage in 2009, but latterly these costs have moderated. Over the past year, the annual inflation rates of UK unit labour costs contrast favourably with those of other major economies.

The impact of unexpectedly high consumer price inflation on the purchasing power of employee remuneration has been progressive. Real average weekly earnings growth has declined from 2% in 2008 to minus 2% currently. It is anticipated that average earnings inflation will narrow the shortfall with the retail price inflation measure next year. However, for 2011, the employer has the upper hand, enjoying profit margin protection. This means that the final item on the list of potential stimuli is the fact that the financial surplus of private non-financial corporations (PNFCs) is running at an extraordinary and possibly unprecedented rate, equivalent to almost 5% of nominal GDP. Notwithstanding the poor terms on which small- and medium-sized enterprises can finance themselves externally, there is a plenitude of free cash flow in the wake of the fixed investment recession. Our relatively upbeat assessment of the prospects for the economy rests on the progressive disbursement of this surplus in higher corporate expenditures on equipment, labour and bought-in services.

It is a measure of the fear that the credit crisis has engendered that every ‘soft patch’ in the real economy data is greeted with predictions of gloomy relapse towards the deflationary abyss. This fear also plays a key role in maintaining the extraordinary laxity of economic policy. Rather than dwelling on the risks of a near-term relapse, it is more sensible to weigh the impact of the protracted engagement of extremely favourable policy settings. There are minimal risks to the UK economic recovery from a staged increase in Bank Rate. It is high time for the MPC to take its inflation mandate seriously.

Comment by Mike Wickens
(Cardiff Business School)
Vote: Raise Bank Rate to 1%.
Bias: Then to hold.

Over the last few months - including the last month - the dilemma for monetary policy has steadily worsened: inflation has continued to increase and is now more than double the target rate, while output has fallen, if anything. To make matters worse, the MPC has forecast that inflation will rise further and the OECD has recently revised downwards its growth forecast for the UK. With inflation driven by rising costs and demand stagnant, this is a classic stagflation.

The MPC, however, does not appear to see it this way. Each month it forecasts that inflation is about to fall and so a tighter monetary policy is deemed unnecessary. The government – which appears more concerned with output than inflation and is, perhaps, conscious that the VAT increase has caused prices to rise and the expenditure cuts are about to come through - has not objected to the MPC’s persistent reluctance to tackle inflation despite its mandate. The MPC has claimed that much of the higher inflation is imported as a result of higher world food and fuel costs and so there is little that the MPC can do about it. It is therefore striking that other European countries have had lower inflation and higher growth despite facing the same world prices for commodities.

A possible explanation for the difference is that while the euro has got stronger, sterling has got weaker. This contrast is likely to widen as the ECB has decided to tighten monetary policy even though it would worsen the fiscal stances of the heavily indebted nations in the Euro-zone by raising debt-service costs. If the MPC takes its mandate seriously, there seems to be no alternative to raising rates in the UK too in order to strengthen sterling and reduce the domestic price of imported goods and services. The dilemma for macroeconomic policy more generally is that this would hit exports the hardest, which has been the best performing sector due to sterling’s weakness. In the absence of a clear guideline from the government on how to resolve this dilemma, one can only presume that the Chancellor of the Exchequer is content to live with the higher inflation. The Chief Economist at the Bank of England has hinted at higher interest rates in the not too distant future. The danger is that this is left so long that much higher interest rates will then be required than if there were a timely, but small, increase immediately.

Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold.
Bias: Neutral.

The revised ONS figures show that UK economic growth in the first quarter was 0.5%, the same as the previous estimate. Over the six months to March 2011, however, the economy was flat. Given the severity of the downturn – when output fell by over 6% peak to trough – this is a pretty poor performance. There was some good news in the data: rebalancing away from domestic demand might finally be underway. Growth was driven by a 1.7 percentage point contribution from net exports, the largest single quarter boost post war. Volume exports rose by 3.7% in total, while volume imports fell by 2.3%. Now, this might not be repeated in the second quarter but it took the goods and services deficit to its lowest level since 2001. And exports are rising faster than at any time since the export boom post the UK’s expulsion from the European Monetary System in 1992.

However, the rebalancing of the economy should also mean that investment rises with net exports, and this is not happening yet. Instead, investment fell by 4.4% in 2011 Q1, after a fall of 1.8% in the final quarter of 2010. Moreover, government spending contributed 1% to growth in the first quarter. With the cuts in spending just about to kick in, the prospects for strong economic growth are still poor. Growth this year is now on track for 1.5%, little different from the 1.4% recorded last year. For 2012, a combination of weak consumer spending, held back by continued private sector balance sheet restructuring, and public sector debt reduction, suggest little more than 2% or so economic growth at best.

Hence, the overriding message from UK data in the last few months is that the pace of the recovery is slowing. This is why financial market expectations of interest rate hikes have fallen back so sharply, despite the rise in inflation in the interim. In the year to April, CPI inflation was 4.5%, up from 4% in March and well above the 2% target. In this weak growth environment, higher prices are not translating into higher pay, so unit labour costs are low, keeping price pressure weak in the medium term and helping export competitiveness.

Looking at other inflation indicators – such as pay settlements, the level of unemployment and demand for skilled workers – suggests that wage inflation pressure will remain low for some time. Add in the recent data for broad money expansion – a fall of 1.1% in the headline rate of M4 in the year to March and growth of just 1% in the three month annualised rate of M4ex excluding other financial institutions – and the picture is one of severe constraints on the ability of the economy to generate inflation in the true sense. That is, continually rising prices led by demand or wider profit margins, rather than once-and-for-all shifts in the price levels caused by changes in excise duties, VAT and commodity prices. Without these influences, CPI inflation would be close to the 2% target.

For these reasons, my vote is to keep rates on hold at 0.5% for now. If the Bank of England's preferred measure of M4ex money supply turns negative, the MPC may even have to do more QE. However, the risk is that inflation two years ahead becomes an issue later on this year. This prospect could then mean a rate rise will be necessary, but only if the economy is recovering in a sustainable way by then.

Note to Editors

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

Current SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other members of the Committee include: Roger Bootle (Deloitte and Capital Economics Ltd), Tim Congdon (International Monetary Research Ltd.), Jamie Dannhauser (Lombard Street Research), Anthony J Evans (ESCP Europe), John Greenwood (Invesco Asset Management), Ruth Lea (Arbuthnot Banking Group), Andrew Lilico (Europe Economics), Patrick Minford (Cardiff Business School, Cardiff University), Gordon Pepper (Lombard Street Research and Cass Business School), Akos Valentinyi (Cardiff Business School, Cardiff University), Peter Warburton (Economic Perspectives Ltd), Mike Wickens (University of York and Cardiff Business School) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that exactly nine votes are always cast.

Friday, June 03, 2011
Overdoing the gloom
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

The central debate is about whether Britain's fiscal tightening is killing the economy and the comparison is made with America's more relaxed attitude towards its budget deficit (which is causing concern at the rating agencies).

Looking at the latest numbers, you might conclude that it was America which is introducing tough, growth-stunting measures, rather than Britain. Most recent US data has been notably weak, culminating in today's payroll numbers, which showed a rise of only 54,000 in non-farm jobs in May and a rise in the unemployment rate from 9% to 9.1%.

What about Britain's slowdown? This week we've had a fall in the manufacturing purchasing managers' index, a rise in the construction PMI and a small drop in the service-sector index. All three are consistent with expansion. Markit, which produces the numbers, says they are consistent with only a 0.3% second quarter rise in gross domestic product.

That may be understating it, given that the Office for National Statistics has to apportion construction growth somewhere, following its strange first quarter numbers. Given that the first half of 2011 was always the period of greatest risk in the recovery, however, 0.5% followed by 0.3% wouldn't be that disastrous.

Wednesday, June 01, 2011
Manufacturing growth weakens
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Separating the underlying trend in manufacturing from the impact of extra bank holidays, supply-chain disruptions in Japan and other temporary factors is tricky but growth does appear to be weakening, mainly as a result of very subdued domestic demand. The purchasing managers' index for manufacturing dropped from a downward revised 54.4 in April to a 20-month low of 52.1 in May.

Markit, which produces the index for the Chartered Institute of Purchasing and Supply, offered this interpretation: “The UK PMI suggests that manufacturing has moved from rapid expansion to near-stagnation. The headline index slipped to a twenty-month low in May as production and new orders contracted slightly following near-record growth in the opening quarter. Domestic market weakness was the main drag on order books and output. However, this was exacerbated by the additional bank holidays in late April, which fell during the early part of the latest survey period, and ongoing supply-chain disruption following the Japanese earthquake. Consumer goods producers and small-scale manufacturers have been hit hardest by the slowdown.

“On the plus side, job creation held up comparatively well in May, while inflation of input costs and factory gate prices moderated following recent declines in the price of oil and other commodities. However, continuing the increase in employment will be reliant on the trends in order books and output improving.”


Friday, May 27, 2011
Overdoing the income gloom?
Posted by David Smith at 06:15 PM
Category: Thoughts and responses

Everybody knows that household incomes are being squeezed hard now but not many people know that the squeeze started before the crisis. A new report from the Resolution Foundation, "Growth Without Gain?" produces the striking result that average (median) incomes in 2015 will be no higher than in 2001. It also highlights the fact that there was no rise in real incomes between 2003 and 2008.

Let me take a look at that, beginning with the 2003-8 claim. Median full-time earnings grew by 18.6% between 2003 and 2008. This was comfortably ahead of consumer price inflation over that period, 11.3%, but many people (and the Resolution Foundation) prefer the retail prices index, which rose by 18.1%. So only a fractional rise in real median full-time earnings.

Sometimes, however, the choice of time period can be quite important. 2008 saw a spike in inflation, which rather affects the story. If we take, for example, the 2003-9 period, median earnings rose by 21%, retail prices by 16.7%. A more significant rise in median real earnings.

What about the claim that median real earnings in 2015 will be no higher than in 2001? This is based on official forecasts from the Office for Budget Responsibility, which project a very wide gap between RPI and CPI inflation throughout the forecast period - 1.5 to 2 percentage points in terms of inflation rates. Will that happen? Who knows? But it would be unusual. The Resolution Foundation's interesting report is here.

House prices, consumer confidence up
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The Nationwide Building Society said house prices rose by 0.3% in May, more than reversing their 0.2% fall in April, for a rise of 0.6% over the latest three months. Prices in May were, however, 1.2% down on a year earlier. Turnover remained weak and Nationwide said: “Overall, the modest pace of house price growth in May suggests that the property market is continuing to mirror the lacklustre trends evident in the wider economy." More here.

More impressive was the bounce in consumer confidence reported by GfK-NOP. It jumped 10 points in May to -21, prompting Nick Moon of NOP to say: “We have seen an almost unprecedented jump in consumer confidence this month. May’s figures show the second largest rise ever – only May 1993 was higher, when it improved by 12 points. In the 449 months that the index has been running, single-month movement on this scale – either up or down – has only occurred on ten occasions.". This could be significant. The weakness of consumer confidence this year has been a big concern for policymakers.

Wednesday, May 25, 2011
GDP unrevised at 0.5%
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The second estimate of GDP for the first quarter would only have been revised if there had been new news on the production side. As it was, a downward revision of non-manufacturing industrial production was offset by an upward revision of construction data (which still look strange at 4% down on the quarter) to leave the quarterly GDP rise unchanged at 0.5%.

On the expenditure side, household spending is very weak - down on a year earlier - while net exports and investment are making a contribution to growth (although investment in the latest quarter suffered a construction-related plunge). The growth on the quarter in manufacuring, 1.1%. and services, 0.9%, still points to a better rate of growth than 0.5%. More here.

Tuesday, May 24, 2011
Public borrowing still uncomfortably high
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The good news in the latest public finance figures was that public sector net borrowing for 2010-11 was revised down to £139.4 billion, £6.5 billion below the Office for Budget Responsibility's March forecast and some £17 billion below the outturn for 2009-10.

The bad news was that borrowing for April 2011, £10 billion, was well up on the £7.2 billion figure for April 2010. There are, as always, special factors but the big picture is that spending is still rising quite rapidly in cash terms. More here.

Thursday, May 19, 2011
Retail sales bounce
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

The timing of Easter and the royal wedding helped retail sales to a 1.1% volume increase in April, up 2.8% on a year earlier. Sales value showed a 6.2% year-on-year rise. Probably a fairer picture is provided by the three-monthly volume data; up 0.2% on the previous three months and 1.6% on a year earlier. More here. The Nationwide said consumer confidence in April remained close to March's lows, which were similar to the all-time recession lows.

Wednesday, May 18, 2011
Good job figures, 6-3 vote at the Bank
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

A drop of 36,000 in the unemployment rate to 2.46m, and a drop in the unemployment rate from 7.8% to 7.7% in the January-March period was good news. Employment rose by 118,000 in the first three months of the year and by 416,000 over 12 months. It is only 332,000 below pre-recession levels. More details here.

The minutes of the May meeting of the Bank of England's monetary policy committee, also released, showed a 6-3 vote in favour of holding Bank rate at 0.5%, with one member, Adam Posen, again favouring a further £50 billion of quantitative easing. Expectations had been that one or more of the three hikers would change their vote after the first quarter GDP figures but they did not. For the MPC's hawk, Andrew Sentance, this was his last meeting. For the six in the majority, there will be a case for higher rates in time, but not yet. The minutes are here.

Tuesday, May 17, 2011
Inflation at 4.5%, Another Letter from the Governor
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

It was indeed a lull. March's inflation rate of 4% (still double the official target) offered a hope of this year's inflation outturns getting better. That was dashed by the April number, 4.5%. It would be reassuring if you listened to the Office for National Statistics' line that a lot of this was to do with the timing for Easter, which is no doubt correct. On the other hand, we have the Bank of England itself warning that inflation will hit 5% later this year. More here.

Mervyn King's letter to George Osborne in response does not, unsurprisingly, break any new ground following last week's inflation report. We will know more about the wide range of views on the MPC tomorrow, when the minutes are published. But the arguments in the letter - particularly the claim that inflation would be below target if not for VAT, energy prices and import prices - are looking rather tired. The letter is here.

Friday, May 13, 2011
Franco-German boom
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

Whichever way you look at them, the French and German GDP figures are stunning, with first quarter rises of 1% and 1.5% respectively, compared with just 0.5% in the UK. German GDP is up by an adjusted 4.9% on a year earlier. Both quarterly rises followed increases in the fourth quarter of 2010, of 0.3% and 0.4% respectively. So if the UK has been flat over six months - on the official figures at least - these economies have grown significantly. This will further energise the UK debate.

Thursday, May 12, 2011
A slow start to the second quarter?
Posted by David Smith at 09:00 PM
Category: Thoughts and responses

The National Institute's record in predicting the GDP figures has been pretty ropey recently but its latest estimate, that GDP growth in the three months to April was just 0.3%, chimes in with other evidence of modest growth. The National Institute (of Economic and Social Research) produced its estimates, as usual, after the release of the latest industrial production figures, here, which were disappointing.

Wednesday, May 11, 2011
Downgrading growth, upgrading inflation: Just another new Bank of England forecast
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

"In today's Report, the recent pattern of revisions of projections over the next year - downward to growth and upward to inflation - has continued," said Mervyn King. "But looking further ahead, the horizon relevant for policy, the big picture has not changed much since February."

The big picture is that inflation will be above target through next year as well as this, and that the 1.5% growth the Bank expected over Q4 2010 and Q1 2011 together did not happen. If there was one word used more than any other it was uncertainty, although King was certain that Bank rate will have to go up at some stage.

Labour will seize on the weakness of growth as evidence that the coalition strategy is failing. More here.

Tuesday, May 10, 2011
Strong April retail sales
Posted by David Smith at 08:00 AM
Category: Thoughts and responses

The effect of the timing of Easter did not get enough attention when the retail sales figures were published a month ago, but the impact is clear. Today the British Retail Consortium says like-for-like sales in April were 5.2% up on a year earlier while total sales rose by 6.9%. It still detects a weaker trend, sales up only 0.1% like-for-like in latest three months (1.8% total) but this was a good bounce. More here.

Meanwhile RICS - the chartered surveyors - said more sellers are coming onto the housing market, as are more buyers (though rising by less). House prices fell at their slowest rate since June last year.

Monday, May 09, 2011
Halifax shows 1.4% fall in house prices
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

It was the Halifax which led the way with sharp monthly falls in house prices three years ago, so April's 1.4% drop will make some people sit up and take notice. Note that many media outlets are reporting this as a 1.2% fall, but that is the drop over the latest three months. On this basis prices were 3.7% lower than a year earlier.

Most evidence we have suggests a gradual softening of prices rather than an big fall, so this many be an outlier. Indeed the Halifax is examining its methodology. Martin Ellis, its housing economist, interprets what's happening as modest decline: "The latest figures show that the underlying trend in house prices continues to be one of modest decline. Prices in the three months to April were 1.2% lower than in the previous three months. There was a 1.4% fall in prices in April following no change in March." More here.

Friday, May 06, 2011
A producer price inflation peak?
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The producer price numbers look pretty awful, with output price inflation at 5.3% and input prices up a scary 17.6% on a year earlier after another surge in April. Details here. There's now a light at the end of the tunnel, if yesterday (and today's) fall in oil and other commodity prices is sustained. Brent crude currently sticking below $110 a barrel.

Thursday, May 05, 2011
Making Bank rate history
Posted by David Smith at 09:00 PM
Category: Thoughts and responses

The May decision to keep Bank rate at 0.5% and the amount of quantitative easing at £200 billion was, in the end, no surprise. Much stronger GDP data and a much higher April inflation reading would have been needed to provoke a rise.

With Bank rate on hold for the 26th month, and at a record low, the Bank is making history. You have to go back to the period October 1939 to November 1951 for a longer period of unchanged rates. Half of that was in wartime but the whole of Clement Attlee's peacetime premiership occurred under unchanged Bank rate. It must have been quite a moment in November 1951, when the rate was eventually raised, from 2% to 2.5%.

Three in a row as service sector slows
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Following declines in the manufacturing and construction purchasing managers' indexes, there was also a significant drop in the service sector PMI, from 57.1 to 54.3, suggesting a slowdown across the board. This was attributed to the impact of the spending cuts.

The details, however, look reasonably perky, as described by Markit and the CIPS: "Following March's surge, growth of the UK service sector eased in April but nonetheless remained marked as levels of new business rose to the greatest extent in over a year."

Amd: "Despite the slowdown, attributed by a number of panellists to government budget cuts, growth of the service sector remained solid." Overall, Markit thinks its surveys are consistent with modest, 0.4% quarterly GDP growth.

Wednesday, May 04, 2011
House prices flat, construction growth weaker
Posted by David Smith at 09:50 AM
Category: Thoughts and responses

House prices slipped by 0.2% in April, according to the Nationwide building society, and were down by 1.3% on a year earlier. In cash terms prices are flat but factor in inflation and a real price fall is occurring of perhaps 5%-6%. This is the kind of adjustment we saw in the first half of the 1990s. Interestingly, Nationwide now has real house prices below their long-term trend. More details here.

Housing is not helping the wider economy. According to Markit and the CIPS, the construction purchasing managers' index dropped from 56.4 in March to 53.3 in April, with weak housebuilding and civil engineering to blame for this slowing in the pace of growth. The construction numbers were similar to those for manufacturing, suggesting a slower start to the second quarter.

Tuesday, May 03, 2011
Slower manufacturing growth, modest retail sales
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

Manufacturing has been driving the recovery so the news that the purchasing managers' index for the sector dropped to a seven-month low of 54.6 in April is not good. Domestic orders appear to be the culprit but one or two doubts have also crept in about the global recovery. Manufacturing is still growing but more slowly than it was at the start of the year, when the index was over 60.

Meanwhile, a balance of 21% of retailers said high street sales were up on a year earlier in the first two weeks of April, according to the CBI, but expectations for May are much weaker. The CBI's distributive trades survey is hit by unfortunate timing. The first two weeks of April excludes Easter, while the first two weeks of May will exclude most of the recent splurge of holidays. More here.

Wednesday, April 27, 2011
Q1 GDP shows decent underlying bounce
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

A 0.5% first quarter rise in gross domestic product looks disappointing but, given the record of the Office for National Statistics it could have been a lot worse (or better) and the underlying picture was rather stronger. Service sector output grew by 0.9% in the quarter and manufacturing was up by 1.1%. That suggests an underlying growth bounce of close to 1%.

So why only 0.5%? An odd-looking 4.7% drop in construction output (which looks like a carry-over from Q4 2010), a shutdown in North Sea production and a 3.5% drop in utilities' output - reflecting milder weather - dragged down the overall number.

It is wrong to say the economy didn't grow taking the fourth and first quarters together. Some of the snow losses of Q4 were never going to be made up. Even with these numbers, 1.8% growth over the past 12 months is not bad. More here.

Tuesday, April 26, 2011
Sentance's last bow (almost)
Posted by David Smith at 05:15 PM
Category: Thoughts and responses

As time has gone on, Andrew Sentance's arguments in favour of higher interest rates have got stronger and more sophisticated. As he says in today's speech, what started as tactical differences have evolved into something more fundamental. He disagrees with the monetary policy committee majority on the global economy, the role of sterling, the output gap and infllation expectations. His speech is here.

A flavour of his conclusions: "The MPC is now approaching its fifteenth year and has provided the UK with its most durable framework for monetary policy since the 1950s and 1960s. And it is a great credit to our current system that it has shown that it is capable of dealing with some formidable challenges. In my time on the Committee I believe our most significant achievement has been to help to stabilise the UK economy in the wake of the global financial crisis and provide a platform for economic recovery. I am very proud to have been able to contribute to the policy discussions and decisions which led to that outcome. But the rapidly changing world economy we now inhabit is always throwing up new challenges. And now the MPC faces the task of bringing inflation back to target in the face of continuing global inflationary pressures, with the recent experience of persistent above-target inflation providing an unhelpful backdrop.

"A great strength of the MPC is that its members can honestly express differences of view in an open and transparent way, and that means we are not forced to agree and minority opinions are respected. Over time, that should make for a better decision-making process. So while I have not been in agreement with the majority view on the Committee over the past year, I hope that the arguments I have made have not been in vain. And I suspect the issues I have raised in today’s speech – the impact of the global economy and the pound, the role of the “output gap” and the importance of expectations and credibility – will continue to be key issues for the MPC over the years ahead, as the Committee continues in its vital role of maintaining monetary stability in the United Kingdom."

Mixed bag from the CBI
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The CBI's industrial trends survey is an important indicator and today's speaks to several parts of the current debate. Manufacturing is still enjoying a decent recovery though there is some evidence of a weakening in the pace of that recovery. The survey's employment balances are at their best since 1974, suggesting the sector is recruiting significantly.

The worry is inflation, with domestic prices rising at their fastest rate since 1995 and export prices since 1985. Price expectations are at their highest for 21 years. That March fall in inflation may have taken the heat out of the interest rate debate too soon. More here.

Thursday, April 21, 2011
Retail sales surprise on the upside, public borrowing undershoots
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Following dire warnings from the British Retail Consortium there was a pleasant surprise in the retail sales figures, with sales volume up by 0.2% on the month and 1.3% on a year earlier. Sales value, which the BRC measures, was up by a hefty 4.5% on the Office for National Statistics' figures. It is, to be fair, a very mixed picture, as the ONS says. Computer and technology stores are doing well, as are internet retailers, while household goods stores are doing very badly, presumably reflecting housing weakness. More here.

Meanwhile, there was a welcome undershoot on public borrowing for 2010-11. The outturn of £141.1 billion compared with £156.5 billion in 2009-10 and the Office for Budget Responsibility prediction of £145.9 billion. Given that many expected a higher 2010-11 number than in 2009-10, this was pretty good (to the extent that borrowing on this scale can ever be regarded as good news). More here.

Wednesday, April 20, 2011
Bank stuck on hold
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

The 6-3 vote for no change in Bank rate this month was no surprise and is likely to be repeated again in May. The Bank is wrestling with a number of factors - the weakness of consumer spending (in spite of the need for rebalancing), the prospect of an upward revision in its inflation projections in May and the puzzling strength of imports.

Having looked to be moving towards a hike, the tone of the latest minutes suggests the monetary policy committee is some way away. The markets don't expect a move until the autumn. The minutes are here.

Wednesday, April 13, 2011
Good news on unemployment
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The latest labour market statistics are encouraging, following better-than-expected inflation numbers. Taken together with the trade figures, this is turning into a good week for the economy.

Employment in the December-February period was up by 143,000 in the December-February period compared with September-November. The unemployment rate fell from 8% to 7.8% as unemployment fell by 17,000 over the period. The claimant count was flat in March, up by just 700 to 1.45 million.

Though we do not yet have any figures for the early months of 2011, it looks as though the picture for 2010, in which private sector jobs' growth easily exceeded public sector cuts, is holding up. Average earnings growth excluding bonuses slipped from 2.3% to 2%, half the rate of inflation. More here.

Tuesday, April 12, 2011
Inflation down, trade better
Posted by David Smith at 11:15 AM
Category: Thoughts and responses

For once there was a logic in the latest data releases. Overnight the British Retail Consortium told us that there was a record drop in retail sales value in the 12 months to March, 1.9%. Weak demand should mean inflationary pressures ease and, sure enough, consumer price inflation dropped from 4.4% in February to 4% in March.

It is hard to understate the importance of this release for the Bank. It provided a reminder that not all the inflation surprises are on the upside - the markets had expected no change in the rate - and it provided hope that eventually inflation can come back down in a decisive way.

Retail price inflation eased from 5.5% to 5.3%, CPI inflation excluding indirect tax changes dropped from 2.8% to 2.5% and CPI at constant tax rates from 2.7% to 2.4%. Though the biggest reason for the inflation drop was a record fall in food prices, which are volatile, this was good news. More here.

Completing the picture was a drop in Britain's trade deficit to £2.4 billion in February, from £3.9 billion in January. Weak demand should trim imports, at a time when exports are benefiting from global strength. More here.

Monday, April 11, 2011
Vickers sets a new course for banking
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

An executive summary of the Independent Banking Commission's interim report is available here. Much of what the Commission says makes sense and should make the banks safer. Putting riskier activities into separate subsidiaries and requiring more capital is preferable to break-up. I still have doubts about orderly resolution - winding down troubled institutions in a way that avoids systemic damage and recourse to taxpayers.

When a bank or one of its divisions gets into trouble, it is unlikely because of an isolated event only affecting that bank or division. Systemic problems are likely to be the cause. The Vickers' reforms should help prevent such problems but when panics start, all bets are off.

Thursday, April 07, 2011
Bank on hold (again)
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

After more than two years of a 0.5% Bank rate, a rise is plainly closer than it was. Even so, it is hard to remember a month when expectations of a move were lower. So on hold at 0.5% (again) and quantitative easing maintained at £200 billion. May will be closer but the markets don't currently expect a move, European central Bank hike from 1% to 1.25% or not.

Wednesday, April 06, 2011
Surprisingly weak manufacturing data
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

A flat manufacturing output number and a 1.2% drop on overall industrial production in February were not in the script and should have snuffed out any faint prospect of a hike in Bank rate this week. Industrial production was hit by North Sea maintenance but the weakness - relatively - of manufacturing was harder to fathom.

The good news is that manufacturing still showed a healthy 4.9% growth over 12 months, while overall industrial production was up by 2.4%. Taking January and February together, both series were above their fourth quarter averages. More here.

Tuesday, April 05, 2011
Service sector strong, Chambers of Commerce downbeat
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Reading the economy from the surveys is never easy. The Chartered Institute of Purchasing and Supply and Markit have come up with a strong service sector purchasing managers' index for March. It rose from 52.6 in February to 57.1 and, reassuringly, firms raised their prices at a slower rate.

This was Markit's summary: "UK service sector activity growth surged in March to its strongest for thirteen months, as companies benefited from improved business conditions, higher sales and increased enquiries. Capacity levels were tested, leading to a slight rise in employment for the first time in nine months. However, optimism regarding future activity was slightly down since the previous month.

"On the prices front, input costs continued to rise at a marked pace, with the rate of inflation only slightly lower than January’s two-and-a-half year peak. Nonetheless, the degree of pass through remained muted – output charges rose at their slowest pace of the year so far."

This upbeat survey, said to be consistent with 0.8% first quarter growth, contrasted with a downbeat British Chambers of Commerce survey. It described its first quarter survey as disappointing, with the recovery mediocre. Its press release can be accessed here.

Friday, April 01, 2011
Manufacturing growth slows
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

The purchasing managers' index for manufacturing fell in March, suggesting that while the sector is still expanding fast, it is being hampered by weak consumer demand and, possibly, slower growth in export markets. It is still the hot sector of the economy, but slightly less strong than it was. This is Markit's take:

"The seasonally adjusted Markit/CIPS UK Manufacturing PMI™ fell to a five-month low of 57.1 in March, down further from January’s record high of 61.2, but well above its long run average of 51.3. The PMI has signalled expansion in each of the past twenty months.

"Work on new and existing contracts led to a solid increase in UK manufacturing output in March. Over Q1 2011 as a whole, output growth was the fastest since Q3 1994. However, the latest survey period saw the rate of expansion slip to a five-month low, mainly reflecting a sharp slowdown in new order growth.

"Incoming new orders rose at the weakest pace since last October. Companies continued to report higher order intakes from domestic and overseas clients, but noted that inflows from both sources were less marked than in recent months. The extent of the easing was centred on the domestic market, particularly in the consumer goods sector."

Thursday, March 31, 2011
House prices rise, credit flat
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

It may be a very low activity market - and likely to remain so - but house prices aren't doing much either. In fact, according to the Nationwide building society they have been as flat as the proverbial pancake over the past 12 months. A 0.5% rise in March put prices 0.1% up on a year earlier. More details here.

Things aren't going to change much in terms of credit availability, according to the Bank of England's credit conditions survey. Credit supply is slowly increasing but not so you would notice. For business, there is better availability for large firms but no change in the picture for small and medium-sized enterprises. The survey is here.

Wednesday, March 30, 2011
On course for a decent first quarter bounce
Posted by David Smith at 01:30 PM
Category: Thoughts and responses

The Office for Budget Responsibility raised eyebrows with its prediction of a 0.8% bounce in gross domestic product in the first quarter and, in truth, only something bigger than the 0.5% fourth quarter drop will do.

For the OBR, and the rest of us, it is a case of so far, so good. Service sector output rose by 1.3% between December and January, to a level 0.6% above its fourth quarter average. If the service sector does no better than hold at these levels it will make a good contribution to Q1 growth. Also today, the CBI said retailers are having a pretty good March. The service sector data is here.

Tuesday, March 29, 2011
Fourth quarter GDP - the devil's in the detail
Posted by David Smith at 06:00 PM
Category: Thoughts and responses

Some interesting aspects to the second revision (the third release) of the fourth quarter gross domestic product data. Household disposable income fell by 0.5% in Q4. matching the revised drop in GDP. GDP grew by 1.3% in 2010 (just) on the basis of the revised figures.

What's striking about the household income figures is how much they jump around. So the quarterly sequence during 2010 was plus 0.3%, minus 1.4% (a quarter when GDP grew by 1.1%), plus 0.5%, minus 0.5%.

If you were to conclude that it is hard to get a handle on the disposable income numbers you would be right. There was similar volatility during 2009. The big picture of a squeeze on incomes remains intact, as does the fact that we are still waiting for net trade to boost growth. Gross domestic expenditure was flat in the fourth quarter. More here.

Martin Weale of the Bank of England's monetary policy committee has given a speech on "Uncertain Uncertainty". Interesting and, as far as the markets are concerned, he is sticking to his call for a rate hike. The speech is here.

Thursday, March 24, 2011
Retail sales drop in February
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

George Osborne might have hoped for better news either side of his budget than Tuesday's inflation figures and today's retail sales numbers. These showed a drop of 0.8% in sales volume, following January's downward-revised 1.5% increase. Taking January and February together, sales volume was 0.5% higher than the average for the fourth quarter of 2010. Assuming there is not another fall in March, there will be modest first quarter growth.

The overall retail sales picture is a bit odd. Sales value in February 2011 was a healthy 5% up on a year earlier. Take out inflation and that reduces to volume growth of just 1.3%. Sales volume for food stores was down 2.2% over 12 months (puzzling), while non-food was up 2%. Are we eating less in the age of austerity? More here.

Wednesday, March 23, 2011
A budget for detail
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

There are three elements to George Osborne's second budget, the budget document itself, The Plan for Growth and the Office for Budget Responsibility's Economic and fiscal outlook. All three, and supporting documentation, can be accessed here and here.

What can one say amid all the reams of analysis? Politically it looked quite astute. Fuel prices are a toxic political issue and both cancelling the planned 5p petrol duty rise and going further with a 1p cut was smart. Unless oil prices fall below $75 a barrel the fuel duty escalator won't be reactivated in this parliament. North Sea companies, who are paying for the chancellor's largesse, will of course hate it.

The other household-friendly measure was the promise to go further towards the target of a personal tax allowance of £10,000, with an increase to £8,105 from April next year. There will be a corresponding increase in the higher rate threshold to avoid more taxpayers being dragged into the higher rate net.

For business, apart from North Sea oil companies who will pay for the fuel duty concessions, there was quite a lot, notably the new aim of getting corporation tax down to 23%, lifting lifetime entrepreneurs' relief to £10m, and the creation of 21 (as opposed to the expected 10) enterprise zones.

The growth forecasts from the Office for Budget Responsibility will be criticised for being optimistic, though not excessively so. The OBR needs a growth bounce of 0.8% in the first quarter to achieve its prediction of 1.7% this year. Next year it has 2.5%, followed by 2.9% in both 2013 and 2014. There will be debate about that, particularly as high inflation has forced up its medium-term borrowing numbers.

Another four-way split at the Bank
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

In theory it would be possible for the nine different members of the Bank of England's monetary policy committee (MPC) to vote in nine different ways. In practice, the current four-way split - one 0.5 point hike (Sentance), two 0.25 (Weale and Dale), five no change and one for more quantitative easing (Posen) - is about as divided as it gets.

This is quite an interesting paragraph: "For several months, one of the key risks to the inflation outlook had been that the persistence of inflation above the 2% target might cause businesses and households to expect higher inflation in future, leading them to set higher prices and wages, and making it more costly for the Committee to meet the inflation target in the medium term. The increase in oil prices during the month had exacerbated that risk."

And this suggests that some but not all of the five "no-changers" are getting a bit uneasy: "There remained differences of view between these members on the likelihood of the upside risk associated with an increase in inflation expectations materialising. Some thought that this risk remained limited, given that the near-term outlook for inflation could be explained by reference to changes in energy and other
commodity prices, VAT and the sterling exchange rate. Others thought that this risk had risen, given further upwards revisions to the near-term outlook for inflation, and that the case for an increase in Bank Rate had strengthened in recent months."

We can guess that Mervyn King is in the former category. The question is how many are in the latter. The minutes are here.

Tuesday, March 22, 2011
Public finances bad, CBI good
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Perhaps very good public finance data for February would have been too much of a temptation. Even so, the numbers were disappointing, with net borrowing of £11.8 billion in February compared with £9.5 billion in February 2010. The cumulative undershoot compared with last year is still a significant £13.1 billion on net borrowing but only £4.8 billion on the current budget deficit. So an undershoot, but these are still very big numbers. More details here.

In contrast to the disappointing public finances (and inflation) data, the CBI had some cheer. Its industrial trends survey showed domestic orders' balances at their best since March 2008 and output expectations their best since February 2007. More here.

Inflation soars further away from the target
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The Bank of England's trials and tribulations continue. 4.4% consumer price inflation - at a time of weak retail demand - and 5.5% retail price inflation are embarrassingly high numbers, and they won't get better (may get worse) any time soon.

These figures won't make any of the monetary policy committee's rate hawks change their minds and could persuade others to join them. May is the key month still, I think, though there'll be tension around the April meeting.

Not much reassurance in the detail. The only component of the CPI showing annual inflation of less than 2% is recreation and culture, 1.3%, all the others are significantly above. CPIY, excluding indirect tax changes, is now up to 2.8% (from 2.4% in January), CPI at constant tax rates is 2.7%. Details here.

Friday, March 18, 2011
Very weak consumer confidence
Posted by David Smith at 08:30 AM
Category: Thoughts and responses

Consumer confidence was very weak last month, according to the Nationwide Building Society. Its index fell by 10 points to 38 between January and February, to its lowest level since the index began in 2004. That's not a very long track record but it does cover the period of the worst post-war recession.

The index isn't yet up on the Nationwide website, but spending intentions and consumer expectations were particularly weak. High inflation, rising taxes and fear of spending cuts are taking their toll. The squeeze on incomes is going down like a lead balloon with households, even without international instability.

Wednesday, March 16, 2011
Unemployment rate edges up to 8%
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Another set of fairly benign labour market numbers, suggesting a winter surge in unemployment has been avoided. Though the Labour Force Survey unemployment rate edged up to 8%, the rise over the latest three months, 27,000 to 2.53m, was modest.

LFS unemployment remains locked at close to 2.5m, as it has been for more than 18 months, while the claimant count dropped by 10,200 in February to 1.45m.

Employment rose by 32,000 to 29.16m in the latest three months, rising private sector employment compensating for a fall in the public sector total. While the Office for National Statistics is still claiming a dubious "record" for youth unemployment, another record was that employment among 50-64 year-olds hit 7.32m, up 25,000 on the quarter, while employment among over-65s was a record 900,000, up 56,000 on the quarter. The young will no doubt think the old are taking their jobs, but a lot of this is due to this age group getting older and staying longer in work.

Earnings growth including bonuses rose from 1.8% to 2.3%. Excluding bonuses it was 2.2%, down from 2.3%. More here.

Monday, March 14, 2011
The looming housing shortage
Posted by David Smith at 08:30 AM
Category: Thoughts and responses

There are bigger issues in Japan, but we shouldn't lose sight of other things. This IPPR report on Britain's housing shortage is a reminder of a long-term problem.

It says: "IPPR analysis shows how housing demand responds to three different economic scenarios and projects that even a faltering economy will lead to demand for more than 200,000 additional homes each year. The best case scenario for the economy will require more than 280,000 extra homes each year. But if housing supply continues at the rate of the last twenty years – around 160,000 additions per year – the gap between the number of households and the number of available homes ranges from 255,000 and 1.2 million by 2025."

Thursday, March 10, 2011
Bank rate on hold again
Posted by David Smith at 12:10 PM
Category: Thoughts and responses

When Bank rate does eventually go up, it will shake us out of our slumbers. The second anniversary of 0.5% Bank rate has passed without incident. No change, no surprise. May still looks like the earliest.

6.8% manufacturing growth
Posted by David Smith at 09:40 AM
Category: Thoughts and responses

Other parts of the economy can only envy the boom manufacturing is enjoying, admittedly after a nasty recession. the 12-month growth rate for manufacturing in January confirmed the sector's bounceback after December weather effects. Monthly growth was 1%. Some parts of manufacturing are enjoying extraordinary annual growth rates - of as much as 36%.

Overall industrial production rose by 0.5% in January, for a 4.4% 12-month rise. January's index level was 1.1% above the fourth quarter average, suggesting it will make a strong contribution to first quarter GDP growth. More here.

Wednesday, March 09, 2011
A welcome trade bounce
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

Maybe it was too early to write off the export-led growth story. January's overall trade deficit narrowed to £3 billion, from £5.5 billion (revised up from an initial £4.8 billion) in snow-distorted December. All of this - and slightly more - came from a narrowing of the deficit on goods from £9.7 billion to £7.1 billion.

Underlying export volumes rose by 6.1% in January, while imports rose by 1.9%. Compared with a year earlier, export volumes were up by 13.9%, while imports were up by 9.7%. Moving in the right direction. More here.

Tuesday, March 08, 2011
A post-VAT squeeze
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The British Retail Consortium says stores had a weak February, with overall sales up by just 1.1% on a year earlier, while like-for-like sales were down 0.4%. Remember these are figures for sales value, so the udnerlying picture was weaker. As it was the BRC said this was the softest performance since May 2009.

Food sales held up better than non-food, suggesting either that higher VAT depressed non-food sales, or that higher food prices (and petrol) diverted spending away from discretionary items. There's tentative evidence that the very recent picture is a little stronger but these were weak figures. More here.

Monday, March 07, 2011
Ben Broadbent appointed to the MPC
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

The appointment of Ben Broadbent as the latest member of the Bank of England's monetary policy committee (MPC) is controversial for two reasons. 1. He's not a woman, so the MPC remains the preserve of middle-aged men. 2. He's from Goldman Sachs.

He is, however, a very good economist. He won't be as hawkish as Andrew Sentance, but he will approach the rate debat from the same side of the fence. This is from a piece he wrote for the FT on February 9, under the headline "Expect King to Raise Rates Sooner Rather Than Later".

"With inflation rising and growth stalling, Mr King faces a dilemma about how to respond. The situation is less bad than headlines suggest. Recent negative growth in the UK was a weather-related blip, while strengthening global growth and a weak exchange rate will absorb some of the fiscal consolidation. In short, it looks as if rates should rise sooner than Mr King would like ...

"Surveys suggest the credit crunch may have damaged productive capacity to a greater degree than first thought. More importantly, the rise in commodity prices might be part of an continuing trend. As a result, inflation this year will  average about 4 per cent – the highest rate since targeting began in 1993, and more than twice what the MPC forecasted a couple of years ago."

"Some on the MPC are understandably nervous about losing their reputations as guardians of price stability. With bond markets still relatively stable, raising rates to pre-empt such a loss of credibility might be premature. Yet whatever happens, we should remember that the MPC cannot do much about the real forces buffeting the economy. During the good times too many analysts heaped praise on monetary policymakers for trends that were beyond their control. Today the danger is the opposite: wrongly blaming them for the years of famine that have followed."

Saturday, March 05, 2011
King gees up the banking commission
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

In his interview with the Telegraph, here, Mervyn King has another blast at the banks. Having not taken much notice of the banks before the financial crisis, and adopted "moral hazard" indignation at bailing them out, the governor is still seething.

Some would say he's got plenty on his own plate, given the persistent overshoot in inflation, others will see it at putting pressure on the Independent Banking Commission, chaired by the Bank's former chief economist, Sir John Vickers, not to come up with a damp squib.

A quote: “We allowed a [banking] system to build up which contained the seeds of its own destruction”, and this has still not been remedied: “We’ve not yet solved the 'too big to fail’ or, as I prefer to call it, the 'too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.”

Friday, March 04, 2011
Halifax - house prices drifting down
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

The Halifax says house prices fell by 0.9% in February (unlike the Nationwide's 0.3% rise), by 0.4% over the latest three months, and by 2.8% over the past 12 months. This is a market gently drifting lower, though there was a hint in the latest mortgage approval numbers of a pick-up in activity.

Martin Ellis of Halifax said: Martin Ellis, housing economist, said:
"House prices, as measured by the underlying trend, continue to fall slightly with prices in the three months to February 0.4% lower than in the previous three months. There has, however, been little change in house prices over the first two months of 2011 as a whole. February's monthly decline of 0.9% offset January's 0.8% gain.

"Overall, we expect a modest 2% decrease in house prices in 2011. Uncertainty over the economic outlook is likely to weigh down on housing demand this year. Fewer properties have been coming onto the market in recent months. This trend, if sustained, should improve the balance between demand and supply and help to prevent a more significant fall in house prices." More details here.

Thursday, March 03, 2011
Service sector bows to manufacturing
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

There's no doubt what is driving the economy at the moment, and it is not the service sector. The purchasing managers' index for the sector dipped from 54.5 in January to 52.6 in February. That's growth but, as Paul Smith of Markit points out, not very rapid growth.

"February saw growth of the UK service sector return to the modest rates seen prior to the weather related readings of December and January, leaving it on course to deliver around 0.3% q/q growth for Q1," he noted". Even with strength in manufacturing and the upside surprise to February construction data, the economy looks likely to deliver a rate of expansion that only offsets the decline in Q4 2010 to leave the underlying trend in GDP ‘flattish’.

“Although there were some positive elements from the forward-looking indicators from the survey – new business is rising at a solid clip and confidence reached a nine-month high – net employment continued to fall. With activity not rising sufficiently to generate jobs growth, there remains concern that the private sector as a whole will struggle to offset public sector employment cuts."

Not for the first time, it is a pity we don't have a bigger manufacturing sector.

Tuesday, March 01, 2011
Manufacturing doing very nicely
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

After years in the doghouse, Britain's manufacturing sector is doing well, on the back of global economic revival and a competitive pound (a pity about our demand for imports). The latest composite purchasing managers' index, 61.5 (the same as in January) is consistent with manufacturing growth of 10% a year, according to Goldman Sachs. The eurozone manufacturing PMI was also strong, at 59.0.

This was the take of Markit, which produces the numbers:

"The UK manufacturing sector continued its strong start to the year in February. Rates of growth in output and new orders were only slightly less marked than January’s sixteen-and-a-half year peaks, leading to a further series record increase in employment. Manufacturers also benefited from stronger inflows of new export business. Cost inflationary pressures continued to build, however, as input prices rose at a near record high rate."

House prices edge up
Posted by David Smith at 07:45 AM
Category: Thoughts and responses

The housing market is pretty flat, though it is the nature of these things that small house price rises get ignored while small falls are regarded as harbingers of a new crash.

The Nationwide said prices edged up by 0.3% in February and were 0.1% lower than a year earlier. There was a similar flat message from the Land Registry on Monday. More details of the Nationwide figures here.

Friday, February 25, 2011
Implausible GDP figures
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

The Office for National Statistics had an opportunity to produce a more realistic set of gross domestic product figures for the final quarter of 2010 and, in typical ONS fashion, gave us something even more unrealistic than its first estimate.

Is it plausible that, after growing since the final quarter of 2009, and particularly well in the second and third quarters of 2010, the economy shrank by 0.1% - taking out the weather effect - in the fourth? In circumstances like this you look for explanations.

Was it the tightening of fiscal policy? No, apparently government spending provided the only support for the expenditure-based measure of GDP in the fourth quarter. Was it monetary policy? No, at the time there was no hint that the monetary policy committee was starting to move towards a rate hike.

So the ONS is telling an implausible story. As I wrote after the first estimate, a plausible picture is that growth slowed to an underlying 0.5% in the fourth quarter and was knocked back to minus 0.5% (now minus 0.6%) by the weather.

Details of the GDP figures are here. Also worth looking at the monthly service sector data, which showed a 1.3% fall between November and December. On the basis of 2009's experience, also before a VAT hike, service sector output rose between November and December. Details here.

Wednesday, February 23, 2011
Three futile gestures?
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Mervyn King last week dismissed a small rise in rates for credibility reasons as a "futile gesture". Three members of the Bank of England's monetary policy committee (MPC) disagree, inlcuding the Bank's chief economist, Spencer Dales, who joined Martin Weale and Andrew Sentance in voting for a rate hike.

Sentance upped the ante by voting for a half-point rise, while Weale and Dale wanted a quarter. Adam Posen continued to favour more quantitative easing, so a four-way split. The minutes are here.

Tuesday, February 22, 2011
Public finances getting better
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

When you are borrowing well over £100 billion a year these things are relative but there are clear signs of improvement in Britain's public finances, which will comes as a huge relief to the Treasury, and the coalition. It isn't that long since forecasters were predicting 2010-11 borrowing to be worse than 2009-10.

As it is, January saw the public finances back in the black for the first time in two years, £3.7 billion on the public sector net borrowing measure. VAT helped but other underlying revenues were also stronger. Cumulative borrowing in this fiscal year of £113 billion compares with £127.2 billion in the corresponding period of 2009-10. More here.

Friday, February 18, 2011
Bouncing sales
Posted by David Smith at 11:00 AM
Category: Thoughts and responses

Most retailers would rather have a good December than a bumper January. Even so, January's 1.9% bounce in retail sales, following a downward-revised 1.4% fall in December, was better-than-expected news. Retail sales volume in January was 5.3% up on a year earlier, while sales value increased by 8.2%.

Clearly these figures aren't sustainable, representing both the weather effect - December down, January up - and pre-VAT buying. But the consumer is not dead yet. More details here.

Thursday, February 17, 2011
The Financial Crisis Inquiry Report
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

fincrin.jpg

Having been down this road myself, with my book The Age of Instability, I was interested to read the "official" American version, The Financial Crisis Inquiry Report, just published in Britain.

It agrees with me (at least the majority of commissioners do) that trying to pin the blame on successive American governments' home-ownership policies and the Community Reinvestment Act (CRA) does not wash. CRA loans only accounted for 6% of all subprime loans and were half as likely to default as the others.

Where I disagree is over Lehman Brothers. It says the failure of Lehman was only one of many events in the dark days of September 2008, I say it was the pivotal one. It says the US authorities could have done nothing to prevent Lehman failing; I say a guarantee to Barclays would have satisfied the UK regulators.

Anyway, the book is worth reading, and is available here.

Sentance: Selling England by the pound
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Andrew Sentance is one member of the monetary policy committee who has not been deflected from his belief that a rise in interest rates is needed. We will see this week whether there are others. In his latest speech he argues that the lev