UK industrial output disappoints: Plus complacency from the Monetary Policy Committee

Yesterdays poor Balance of Payments figures will be added to today by figures for industrial and manufacturing production, so we should have a reasonable idea of the state of the UK economy as we began 2010. However returning to the trade figures there are two interesting further developments. Firstly I wish to demonstrate some evidence now available  to reinforce  the subject I mentioned yesterday that the main exporting nations are doing much better than us. Exports from China rose by 45.7% in February 2010 which followed a rise of 21% in January and such good numbers put ours for January to shame. The trade surpluses registered were US dollars $7.6 billion for February and $14.2 billion for January.If you look at this as a theme it is a disturbing one as one of the global imbalances in the world economy does not appear to be getting any better as a debtor nation (us) appears if anything to be deteriorating whilst a surplus nation (China) is improving. Looking forward there was some other concerning news as the change in the deal for the tanker contract for the US AirForce where Airbus/EADS has pulled out will cost British Aerospace some £4 billion of business which would have been exports according to the FT.

Kate Barker Speaks

In case you do not know Kate Barker is about to leave the Monetary Policy Committee (MPC) after a nine-year term and on Monday night gave a speech reviewing events. You might think that there would be a some form of mea culpa or at least an acknowledgement of policy mistakes such as failing to respond to asset price bubbles in the earlier part of this century (which was on her watch). Sadly this was absent but her speech was revealing in showing what the MPC thinks.

Given the scale of the recent financial crisis and consequent recession, it is not possible to look back over my lengthy period as a policymaker with the degree of satisfaction I would have wished

 

Really Kate? How inconvenient of the economy (you are charged with managing). However we then get two very revealing- as opposed to complacent- sections in her speech.

During the pre-crisis period, MPC members recognised in a number of speeches the possibility that the upward trends in property prices and in the growth of credit were increasing the risk of a period of economic instability.

Firstly, it is unclear how much higher UK interest rates would have needed to be to have kept the expansion of credit and debt to an acceptable level.

It would appear that because she was unsure of the exact answer then it was fine to do nothing at all. Although then we got something rather contradictory as

However, modestly higher Bank Rate might have had the merit of discouraging households and firms from increasing their own debt levels, and therefore left the economy somewhat more resilient in the face of the crisis

So even she admits that  taking some modest  action in the pre crisis “bubble” period might have helped. Then we get a mention of a part of economic theory that I have been very critical of because during the credit crunch period it has had nothing useful to tell us.

there seems little doubt that a sizeable output gap has opened up

I have warned before that we are likely to get more and more excuses and different reasons for Quantitative Easing and we got.

quantitative easing might have longer lags before it reaches maximum effect than do changes in Bank Rate

Which if you think about it is a curious explanation for an emergency monetary policy which by its definition surely should be aimed to act quickly. In fact to now say (I have commented before on how many changes there have been in how QE is supposed to have worked) it works slowly is somewhat bizarre. However we do get a further explanation.

There have been a number of positive effects from the policy of injecting additional money into the economy– including a sharp fall in corporate bonds spreads, a rise in equity prices, and the fall in three-month LIBOR back towards expected Bank Rate.In addition, the MPC’s continuing strong commitment to support the economy and therefore achieve of the inflation target over the medium-term has had a positive effect on confidence

A bit weak and wishy-washy for £200,000 million you might think and in my view you would be right. However there is a much more revealing part and it is me who has put some of it in bold type.

A significant part of the transmission mechanism has been via the rise in the prices of riskier assets. As yet, I don’t consider the evidence suggests that this rise in asset prices has gone too far, and therefore do not believe that this has become another risk to future economic stability

The problem with this is that Kate did not think that the bubble of 2002-07 was a problem either. At least in this period she was not actively trying to create an asset price bubble.

There is also a section which gave me a wry smile which refers to a problem in the first two years of her membership and one which she certainly has contributed to solving.

it may however also have been the period in which a large error was made in allowing the belief to become established that policymakers had solved the issue of economic instability. 

Comment

This is a very complacent speech but does give quite a few insights I feel into the workings and views of the Monetary Policy Committee.

1. We will continue to receive new explanations of how QE has worked and “succeeded”

2. They will continue to employ output gap theory regardless of the fact that it does not explain what is happening in our economy.

3. There will be no explicit apology for policy errors made over the period 2002/07, or perhaps more importantly an acknowledgement of the errors made.

4. Kate’s speech does not cover the most crucial issue. As inflation targeting failed in the period running up to the credit crunch one might expect an analysis of inflation targeting itself.By this I mean that the theoretical construct proved to have failures so we need a new one which makes an allowance for asset price bubbles.For example going forward asset prices and for the UK residential property need to be included explicitly in monetary policy deliberations. I have put this is bold type as it is so important, one can argue about policy in the past but the most vital element is to learn something for the future and of this there appears to be none in Kate’s world.

5. It seems quite acceptable in her mind to for a Central Bank to create asset price bubbles. Look at the UK residential property market and tell me that its current position is not an even worse bubble than it was in 2007 with high prices and very little actual buying and selling. Look also at the rally in the stock market over the past 12 months which has been extreme. How can we be sure that our Central Bank is not creating a whole new set of bubbles?

Industrial Production

Sadly there is not a lot of good news in todays industrial and manufacturing output figures. Industrial production was 1.5% lower in January 2010 than it was a year earlier and was down 0.4% on a month earlier. Manufacturing output was up 0.2% on a year earlier but disappointingly it was 0.9% down on a month earlier. The month on month figures for Manufacturing and Industrial output had both been expected to rise. To give some more detail on the Manufacturing figures it is divided into 13 categories and of these 11 fell.

Comment

Following on from disappointing balance of payments figures these two economic updates are not only disappointing but when combined together we have to face the fact that there are disturbing implications for growth in the UK economy in January 2010. To me Kate Barker’s speech looks even more complacent after these figures.

Also I wish to reinforce the fact that monthly trade figures are unreliable which is why yesterday I also looked at 2008 and 2009. Also today’s figures do tend to reinforce them.