We are only a few days or so into 2015 and already the economic news for the UK is flowing and building. Let me begin with something which seems to be happening without much media comment as if it was a stealth bomber or fighter. The UK Pound has found itself in an especially weak phase against the US Dollar and the fall has accelerated as 2014 has moved into 2015. This is a particular issue not only because of the trade volumes we have with the United States but also because it is the reserve currency in which many commodities and other products have a base price. On the last day of 2014 the UK Pound briefly nudged above US $1.56 and yet as I type this it has fallen by since then to just below US $1.52 at one point today. These markets ebb and flow in detail but it leaves us wondering if a pattern for 2015 is in place. Also we are left wondering if those trading the UK Pound have been influenced by the poor balance of payments figures which were discussed on here on the 23rd of December.
The United Kingdom’s (UK) current account deficit was £27.0 billion in Quarter 3 2014, up from a revised deficit of £24.3 billion in Quarter 2 2014. The deficit in Quarter 3 2014 equated to 6.0% of GDP at current market prices, up from 5.5% in Quarter 2 2014.
The broader UK Pound picture
If we move to an overall picture of the position of the UK Pound we see something that has at times dogged us in the past. Whilst we have fallen against the US Dollar by some 11% since the peaks of last summer we have seen an overall trade weighted or effective exchange rate which has only nudged lower. So we have risen against other currencies as we have dropped against the US Dollar by an amount which nearly compensates. The problem with that is an old situation of importing inflation whilst reducing price competitiveness of our exports and making imports more attractive. Whilst the inflation is offset by the disinflationary theme of the times it has sung along to Britney as an influence on UK economic history.
Don’t you know that you’re toxic
Don’t you know that you’re toxic
UK monetary policy
The Bank of England meets tomorrow and Thursday and when it looks at the situation will see the following. A change in the composition of the UK’s exchange rate which is both inflationary and deflationary. Also it will note that UK Gilt yields have been falling again as for example it was 3% at the opening of 2014 and nudged over 2% early in December but is now 1.62%. So there is an expansionary influence here which is added to by the fall in the five-year UK Gilt yield to 1.04% which is quite a drop from the 2.1% or so peak last summer. the reason why I am focusing also on the five-year is because it is something of a benchmark for mortgages and fixed-rate mortgages especially.
Perhaps also Governor Mark Carney will ask if anybody has advice about writing explanatory letters to the Chancellor of the Exchequer about official consumer inflation being more than 1% below target?!
The UK economy
The initial business survey data for 2015 has been disappointing as highlighted below.
The UK services economy experienced a loss of
growth momentum at the end of 2014, with both
activity and new business rising at their weakest
rates in over a year-and-a-half.
As this is by far the largest part of the UK economy this was not much of a late Christmas present and it followed weak reports from the other components of the UK economy.
Robust overall output growth continued across the
UK construction sector in December, but the
strength of the recovery moderated further from the
peaks seen earlier in the year.
The UK manufacturing sector ended 2014 on a
softer footing, as December saw rates of expansion
in production and new orders ease to the second slowest
for over one-and-a-half years.
There are general themes there which add up to a slowing rate of growth which is confirmed by the overall assessment.
The surveys suggest the economy grew by 0.5% in the fourth quarter.
If true this would mean that the UK economy is continuing to see economic growth but at a rate weaker than the heights of 2014 when we thought for a while that a quarterly growth rate of 0.9% had been achieved. Added to this is the fact that the data for our largest trading partner which is the Euro area shows little if any economic growth at all.
There’s some relief in that the rate of growth picked up slightly in December, rather than easing further, but the PMI reading was still the second-lowest seen for 17 months,
highlighting another disappointing lacklustre performance. GDP looks set to rise by a mere 0.1% in the fourth quarter.
Of course business surveys can be wrong but the foot seems to have slipped from the accelerator to the brake.
The 0.1% seem to be doing okay
Whilst it is welcome that one UK manufacturer at least had an excellent 2014 there are of course implications as we mull who the customers were. First the good news from the BBC.
Rolls-Royce Motor Cars sold a record number of cars last year, breaking through the 4,000 mark for the first time in its 111-year history. The luxury car maker sold 4,063 cars, up 12% on last year, and marking the fifth consecutive year of record sales.
On the other side of the coin is that at a time when many are struggling this part of the news may not be so bright.
The firm said it sold more cars worth more than €200,000 (£157,000) than any of its rivals, with demand for bespoke customisation remaining high.
There is much to consider in only a few days of economic news for the UK. The theme of a slowing economy has been reinforced and the UK Pound has dipped against the US Dollar. The media theme has been along the lines of this from the Markit business survey.
the loss of momentum towards the year-end will no doubt fuel worries that the upturn is too fragile to withstand higher interest rates.
The higher interest-rates chimera is something that the Bank of England needs to think through. After ignoring inflation of more than double its target it would be extraordinary in my view if it raised interest-rates with the official consumer inflation rate at 1% and falling and signs of a slowing economy.
Looking forwards further into 2015 then there are more optimistic signs as we hope that the lower oil prices feed into consumers and producers pockets and finances. Where it will settle is of course unknown but we do know that currently a barrel of Brent Crude Oil costs less than US $52 and is some 51% lower than a year ago. We also can observe a direct consequence of it from today’s official figures. UK petrol prices at the pump are £1.1106 which is just under 15% lower than this time last year and diesel prices at the pump have fallen by a similar amount. Let us hope it gives the UK economy a solid upwards shove after the downwards impact on North Sea Oil and Gas is offset.