Comments: Imbalances make the economy look wobbly

Mervyn King was dead on in his speech this week.

We have had an economy based mostly on consumer spending for the past several years, encouraged by ultra-low interest rates and borrowing on the back of a house price bubble.

So, now this is over, the economy has to swing further back to business investment and exports.

Oh - but look what's happened in the meantime - we have been deteriorating in the face of the sweatshop economy in China and India who are getting stronger than they ever have before, and business in this country have no loyalty anymore to Britain, they just want the cheapest and that's what these countries give them.

It seems to me that now we are going to be relying in future on both manufacturing imports, and now energy imports as well since North Sea oil has peaked and we must also bring in gas from other countries.

What have we got left ? The house price bubble doesn't look so clever now, does it ?

Posted by Warwickshire Lad at October 16, 2005 09:51 PM

It was good of the ITEM Club to put the boot into Gordon as well this week by blaming the UK’s problems on the house price bubble, consumer borrowing2spend and public spending – rather than the oil price excuse:
http://www.ey.com/global/content.nsf/UK/Economic_Outlook

It’s also worth mentioning another peculiarity about British trade. In Q2, yes we did have a massive trade in goods deficit of £14.6bn and a tiny trade in services surplus of £4.8dn – but we also had a whopping surplus of £9.2bn in investment income. That took our current account deficit down to 1% of GDP, rather than 3% of GDP a year ago. So perhaps those financial bods in the City really are worth their bonuses after all.

But now we have the Sept. inflation figures. A lot is being made of CPI inflation being ‘only’ 2.5%, up from 2.4% in Aug. But RPIX fans will have noticed that RPIX took a bigger leap, up to 2.5% from 2.3%. RPIX has now reached the old target level, taking away any easy excuse to cut rates.

There’s also a simple explanation why the rise in inflation was ‘surprisingly’ low – those moaning retailers have delayed introducing their expensive autumn/winter lines until October again, just like last year.

Looking at the graphs:
http://www.graphicinvestor.com/econo/UK/INFLATION/Inflation.htm

The first one shows monthly RPIX inflation. Sept. this year (black bar) is above last year (red bar) but well below the long-term average (blue bar). Sept. is usually a high-inflation month, when retailers introduce new lines. But last year they delayed that introduction until October – (see red and blue bars). It looks as though the same will happen again this year.

The second graph shows how retailers cope with the January and July Sales. They had a very good July ’05, hardly reducing prices at all. But January ’05 was a disaster – almost as bad as the 2001 near-recession. Then again, the Jan. ’05 disaster was entirely the retailers’ fault. From the first graph we can see they really pushed up prices in Dec. ’04 (red bar). It’s not surprising they were stuck with stock and had to discount heavily in Jan. and Feb. ’05 (black bars).

A last point; the fourth graph shows the ‘real’ interest rate – base rate minus RPIX inflation. This has fallen from near 3% a year ago to 2% now. From what we now know, this seems to show that a real 3% is no longer stimulative – but my guess is that a real 2% is stimulative. If inflation keeps rising, interest rates should rise too.

Posted by David Sandiford at October 18, 2005 01:02 PM

What about the workers?

“24 Perhaps the most quantitatively important impact of higher oil prices on potential supply could come indirectly if workers resisted any deterioration in real wage growth… If workers tried to bid up their wages in response to the higher oil price, then it was likely that there would be lower employment.”

From the October MPC minutes – this means presumably that interest rates would rise until worker resistance was crushed.

But, otherwise, the MPC gave us a 9-0 vote for no change. It was interesting that Charles Bean kept his head down this time, after leading the charge for the previous rate cut. He must have been shocked by the media attention surrounding the August rate cut decision. He must also have been relieved that a sleepy press didn’t hold him to account in the August press conference.

Posted by David Sandiford at October 19, 2005 12:06 PM