Firstly today let me offer my sympathies to those affected by the earthquake and tsunami which hit Northern Japan this morning. The phrase “Ring of Fire” for some of the Pacific seems particularly appropriate recently does it not? From a personal point of view I did wonder about the implications of working on the 22nd floor when I worked in the Ark Mori building in Tokyo! In terms of implications for her financial markets it is hard to say much about the 179 point fall in the Nikkei 225 equity index to 10,254. The reason for this is that the American Dow Jones Industrial Average had closed down 228 at 11,984 so the Nikkei may well have fallen by this sort of amount pre the influence of the earthquake.
The Implications of the latest figures for Chinese inflation and output growth
In addition to a natural disaster we got some significant economic news from the Far East this morning. From the Chinese statistics bureau we received this.
In January 2011, consumer price index rose by 4.9 percent over the same period of the previous year………The price of foodstuff increased 10.3 percent year-on-year……
In January 2011, Producer Price Index (PPI) for manufactured goods was up by 0.9 percent month-on-month and 6.6 percent year-on-year; purchasing prices for industrial producers rose by 1.2 percent month-on-month and 9.7 percent year-on-year.
Industrial Production:In the first two months of 2011, the total value added of the industrial enterprises above designated size was up 14.1 percent year-on-year, or 0.6 percentage point higher than that in December 2010.
Is China still overheating?
If you look at the figures quoted above the answer still looks like yes in spite of the measures applied by the People’s Bank of China with its increases in interest-rates and banks reserve requirements. It is important to point out,however that many of these moves were recent and will take time to have an impact. Whilst consumer price inflation was the same in February as January there had been hopes it would fall back which were dashed by these figures. Sticking with the inflation theme it is plain from the producer price inflation figures that there is still considerable inflationary pressure towards the beginning of the price chain. I added the figures for foodstuff inflation to show that in addition to her own inflation problems China is also being affected by wider trends which are evident elsewhere.
If we look at the industrial production figures they almost define overheating do they not? Year on year growth of 14% is fierce enough before we factor in that this comes up top of previous high growth rates. Accordingly here too we see that more inflationary pressure looks likely as we go forwards from this source. This leads to the fundamental question will China over-tighten monetary policy in response? To which comes the answer it looks like so far she may have not done enough.
Further problems in the Euro zone
Whilst the next main meeting of Euro zone ministers is not until the 24th of March Euro zone politicians are meeting today and we may get some more news on their plans (assuming they have some!). The usual course is for all sorts of plans to be promised plenty of hyperbole and then some combination of unrealistic expectations and dissent shooting it down! I notice that the German Chancellor Angela Merkel has said that there could be “moderate reductions” in the interest-rates on the “rescue” for Greece and Ireland. So far so good until you here that in return Ireland will have to give up her lower corporation tax rate and Greece will have to sell off some of its state assets. Seeing as the last suggestion out of a German parliamentarian about selling Greek assets which referred to some of her islands was about as well received as Arsenal manager Arsene Wenger received the sending of Robin Van Persie on Tuesday night the prognosis is not optimistic! I was asked a while ago about the impact of the recent Hamburg elections where Chancellor Merkel’s party did badly and I feel that this is it, she is hemmed in by the need to appeal to her electors. Whatever you think of the policy that results it is at least a function of democracy something the EU often lacks.
More reasons why the Bank of England was wrong not to raise interest-rates yesterday
Regular readers will be aware that I have argued since I started this blog back in November 2009 (which seems like yesterday!) I have consistently argued that the UK economy needed and needs an increase in interest-rates to help ward off the inflationary pressure that looked as if it was on the horizon. That is my first message on this subject, in my opinion when setting monetary policy you find yourself having to look forwards some 18 to 24 months because that is the period over which whatever policies you implement usually take to have a full impact. It is also my first criticism of the Bank of England as its forecasting has been appalling and accordingly policy based on an incorrect forecast is likely to be incorrect too. Just to give one example of this (and there have been many) according to the February 2010 Inflation Report then Consumer Price Inflation should be just below 1% right now. It is in fact 4% which means that rather than being 1% below target it is in fact 2% over.
So we now find ourselves in a position where inflationary pressure is increasingly looking like it is inbuilt in our economy. Let us now look at the most recent data.
Manufacturing and Industrial Output in the UK
From the Office for National Statistics (ONS)
Year on year, overall (industrial) production output in January 2011 was 4.4 per cent higher than in January 2010. (This was in spite of the fact that) Output in the mining and quarrying sector decreased by 4.8 per cent in January 2011.
Total manufacturing output increased by 6.8 per cent in January 2011 compared to the same month a year ago…..Between December and January, manufacturing output increased by 1.0 per cent.
For those interested in the detail the strongest components of the manufacturing growth were electrical and optical equipment industries which increased by 14.6 per cent, the transport equipment industries which increased by 12.0 per cent and the machinery and equipment industries which increased by 12.7 per cent.
These figures are good and should be welcomed with a smile I feel. After the disappointing official figures for economic growth in the last quarter of 2010 these will be a positive influence on the first quarter of 2011 especially if the current trend continues into March which seems likely. For foreign readers it has become a British tradition to beat ourselves up over the apparent decline in our manufacturing sector over time, well for now we can stop as it is doing well! It may only be 13% of our economy these days but it may soon be 13% and rising.
In terms of economic theory I have discussed on here at times my theory that manufacturing/industrial production may respond to exchange rate moves which are “sustained”. This might mean that we are seeing some benefits from the devaluation of 2007/08 perhaps if companies now feel that the devaluation experienced then is now relatively permanent. As so much has changed since then it is virtually impossible to prove but I still feel that conventional economic theory is wrong in this respect and does not distinguish enough between temporary moves and those which become to be perceived to be permanent.
UK Producer Price Inflation
This has been a consistent problem for the UK economy and our numbers for this have consistently predicted the inflationary issues that we have been suffering from. Here is today’s update from the ONS.
Output price ‘factory gate’ annual inflation for all manufactured products rose 5.3 per cent in February 2011.
Input price annual inflation rose 14.6 per cent in February compared to a rise of 14.1 per cent in January.If you let the shock effect of such figures die down there are clear ways of analysing these numbers. As you can see the output measure’s annual growth is ahead of the level recorded by retail price inflation (5.1%) and above that of our consumer price inflation measure (4%).So it indicates further acceleration in our inflation on the official measure. On an annual basis, all 10 sub categories recorded increases If we now move to the beginning of the price chain we can see that the position here is truly worrying as an annual rate of 14.6% is higher than that of (overheating) China! This may not be the end of it as it sometimes slips the ONS’s mind to point this out but last months figures were originally reported as being 4.8% and 13.4% and have now been revised to 5% and 14.1%. That is quite a revision for the input price figures.
Those of a nervous disposition may wish to look away now as earlier this month I looked at some figures for input price inflation produced by the Confederation of British Industry (CBI). If you look at the past record these have correlated quite well with the official numbers from the ONS and they are now showing input price inflation in excess of 20%. So rather than reducing it would appear that pressures are building up at the beginning of the UK price/inflation chain. and remember we are starting from a very high base.
In reality the situation is in fact worse than this as the numbers have been “recalculated” by the ONS. I wrote on the 19th of November, the 14th of December, the 14th of January and the 11th of February about a change in the way that the ONS calculates these figures. My conclusion is illustrated below.
This seems innocent enough but I have looked at the numbers for 2010 and this is its impact on the headline output number for produced price inflation for the months of this year so far. They are -0.3%,-0.4%,-0.5%,-1%,-0.5%,-0.7%,-0.8%,-0.5% and -0.6%.
I will leave you to draw your own conclusions! Official recalculations of inflation figures leading to a fall in reported inflation lead to a reduction in the credibility of the figures. Looking at the previous trends for this my calculations lead me to believe that on the old basis we would be reporting output price inflation of 5.9% this month and input price inflation of 14.9%.
I think that the figures are rather eloquent. We have an inflation problem which appears to be building further and at the beginning of the price chain the problem looks ever more serious. We also have a manufacturing sector which is going very well and an industrial sector which is doing well. The Monetary Policy Committee continues to forecast falling inflation and use phrases such as “temporary” and “one-off” when reality is quite different. We need a change in my view which was particularly highlighted by the appointment of a Goldman Sachs banker and ex-alumni of Harvard Business School to the MPC this week. It remains my opinion that it would be likely to lead to better policy outcomes if the MPC was directly elected. Frankly it would struggle to do much worse…..
UK Pensions Policy
There have been quite a few changes mooted this week and I would like to canvass readers thoughts on them. Not only from the UK as I am intrigued what the international perspective is on moving to a flat rate state pension and restricting public-sector pensions.