Will it be slow growth and low inflation for the UK economy in 2015?

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.


26 thoughts on “Will it be slow growth and low inflation for the UK economy in 2015?

  1. You are right to note that trade weighted sterling has fallen only slightly, despite falling by around 10% against the US$. That is because the US$ accounts for only 17% of the TW basket. The Euro accounts for 47%, and it has fallen against sterling over the past year. Any sterling strength should be seen more as Euro weakness – in the contest of the uglies, the Euro is ahead right now. As I argued recently, the political pressures – from the upcoming election – all point to a significant fall in the attractiveness of sterling in 2015. In other words, the fortunes of the Euro over the coming months will be the major determinant of the value of sterling – and hence the outlook for the UK economy.

    • Hi Drderrick and welcome to my corner of the blogosphere.

      Thanks for the reminder of the relative trade weights for the currencies. However if we were to weight for inflationary impact then it would be the US Dollar at 50%+ would it not?

      I wonder at what point the media will catch onto the implications of the fall in the UK Pound against the US Dollar which is not far off the levels of March 2013? Oh and is there anyone who likes the value of their currency right now?

      • “Oh and is there anyone who likes the value of their currency right now?”

        Yes, me. Whilst the dollar strength took me by surprise (I have stated on MM that imo the “real” dollar/sterling value should be trading in the $1.50 – $1.60 range) as I had seen no change in fundamentals I observed 2 years ago which originally led to the conclusion re $1.50 – $1.60 range I have quite a few dollar denominated investments which I was happily adding to throughout last summer and have now done very nicely thank you with S+P performance plus FX.

        Just taken 14% profits today and what a great start to the New Year! So it’s an ill wind and all that…..

  2. Hi Shaun,

    My view is that the USD will continue to strengthen on the back of a robust US economic recovery, where they are so dependent on the price of energy and US production is still rising. US Fracking has a lights off price (after exploration and setting up of production is amortised) of about $40 a barrel, so established fields will continue to pump into the marketplace at a profit at current oil prices.

    The growth of the US economy and the hints by the Fed of higher interest rates in 2015, suggest there is going to be much onshoring of dollars to invest in more attractive investments in the US, with no exchange rate worries, at the expense of oversea investments (QE money?) that have been chasing better returns in emerging markets. Are we going to see a major currency crisis in India, Indonesia, Brazil again, which is joined by Russia etc, where USD denominated loans become more difficult to service as their currencies continue to fall and companies trading in their local markets struggle to service and payback them back? Will this strong USD and onshoring of funds also spread to more mature markets, including UK and Europe?

    The economic stagnation in the Eurozone where it is our biggest single trading partner, I’m sure this is going to continue to be a drag on growth, but a resurgent strong dollar, hopefully means the US is going to provide new opportunities for UK businesses.

    Overall, I’m not sure what is going to happen, but lets hope we remain the fastest growing economy in Europe and can hang on the the US shirttails to stay the second fastest growing Western economy after them in 2015.

    • … Or a not so rosy view for the US$…

      This was recorded in December and some of his figures (targets) have already been surpassed. Though he broadly agrees with your comments on EM economies.

      sorry Rods, not saying you’re wrong at all, just that there are other views of what is occurring and what could unfold in the near future.

      I’d also be interested in where you get the profitable at $40 figure for US fracking. I had read figures between $70-80 were their break even point?

      • Get two people together talking about economics and the will have at least three different opinions, that’s half the fun, when trying to predict the future. My answer is always: “Time will tell!” as the future is revealed and we see who is right and who is wrong. Most people, who like me have economics as a hobby, will not have the knowledge or understanding of most full time professionals and therefore like me will have a so, so record when making predictions.

        I am a subscriber to Mauldin economics newsletters, very smart group of people there and in their contributing networks, they publish regular outstanding articles with a US prospective. Their Patrick Cox, daily tech newsletter is also well worth subscribing to.

        The $60-$80 per barrel price, includes all costs for establishing a well, from exploration, dry and wet well drilling, establishing the production platform etc., etc. Once these are set up and amortized (many will be from previous high prices), the cost of continuous fracking and extracting the oil and gas is about $40 a barrel.

        The price comes from this article: http://www.bloomberg.com/news/2014-11-30/oil-at-40-possible-as-market-transforms-caracas-to-iran.html

        • Thanks for the link Rods. Of course the very nature of fracking, as I understand it, is that the wells dry up pretty fast (relatively speaking).

          As a fellow economics hobbyist it’s an interesting start to the year though eh!?

      • about $64 for LTO , Bakken , N.Dakota , etc was the figure I had been lead to believe , current production from USA fields will continue as CAPEX has already been spent and cash flow is king ………. but as these fields have horrible depletion rates you need to re-frack , and that can only cost and can only be done so many times before you need to re-drill.

        I worked out 6 months lag thus I stated we’d have issues around May for the USA and the world as the production drops off, recession again that is, mind you I’m not so certain we’re really out of one now considering the unreliability of today’s Gerry Mander’ed figures but hey ho they are the ones we have….

        I may have been too pessimistic , some in-filling and re-drilling have already been paid for and will go head unless the companies go bust , even then if they are picked up cheap we still could see a less of a fall , but there will be one and the emotional that will bring will cloud things…… ( to say the least

        thus I am reminded that predictions are difficult – especially about the future !

        Shaun , great play is made of the economic boost this oil price drop has made , I dont think I saw much in the comments about how high oil prices caused a problem before the drop – why the difference ?


        • Hi Forbin

          As I have just replied to Zak maybe there were too many vested interests benefiting from a higher oil price….The link between the closure of many bank commodity trading desk and the falls in prices comes back to mind again.

      • Hi Zak

        There is seldom a shortage of vested interests and those willing to support them is there? Also there is a factor in human psychology I think where after a fundamental change in facts/events there is a lag before human expectations change.

    • Hi Rods2.
      I don’t give a flying monkey’s if we’re the fastest growing economy in the World if the 99% don’t share in that growth.

      In fact, I’d rather see it crash and burn than benefit solely the 1%, as has been the recent case.

      • One certainty is that if an economy is stagnant or declining with unemployment going up, then wages will almost certainly be falling! The problem for the UK is that for unskilled, semi-skilled workers and other categories that aren’t in demand, there is a ready pool of unemployed or lowly paid workers in Europe, especially Eastern Europe, who are happy to work here, take the massive pay rise to the UK minimum wage and so depress the wages of people who have been working for the minimum wage, plus a bit. If you want to stop this then you need to vote to leave the EU in a future referendum!

        The fastest growing wages in the UK are currently, skilled construction workers, where there is a big shortage with the upturn in the construction industry and in IT where there have been long term shortages for years. Wages are rising in both these industries. Wages, like all markets are priced according to demand, surpluses (unemployment) and shortages, so the best short term way to raise them in the UK is to stop immigration, so there is a shortage of workers.

  3. Hi Shaun,
    Talking of Rolls-Royce sales (and ignoring the Rolls cars currently dangling sideways in that beached container ship and which are now insurance write offs and the orders will have to be fulfilled again) I can’t recall if I mentioned I was recently talking to a German guy who lives in our village. He is a Big Cheese (ein grosser Kase?) at the Rolls-Royce factory at Goodwood. During a chat we discussed their booming sales, and he asked me to guess how many cars Rolls sold in France last year. So I scratched my chin, pondered on the malaise economique, factored this against the desirability of a bronzed French lothario driving one around the Grande Corniche and I reckoned about twenty cars. You know, nothing fancy, just the cheap ones at £150,000, with a free set of gold RayBans and some floor mats thrown in.

    Naturellement I was a bit surprised to be told, due to the frighteningly high levels of French wealth taxes, the answer is zero. Not one new Roller sold in France. Of course there’s plenty of sales in Monaco and Switzerland, so whilst I was recently surprised to learn the concept of the Laffer Curve was actually first noted by a 14th century Arab, the story is an object lesson in excess taxation levels.

    On the other side of the coin, Rolls-Royce recently announced they are opening a new technology centre in Bognor Regis, employing 200 people. Yes, I know, Bognor! It comes to something when German engineers turn to Bognor Rejects (local phrase) for car design over the trendy denizens of say Paris.

    Joking aside, it seems there are still some things we can do well in this country but for the UK economy to properly prosper – as opposed to suckling on a QE teat – in my view major changes are needed to the supply side which the coalition really hasn’t looked at in its five years in power. The annoying thing is, we were at such a point in 1997 when Tony Blair took over. They brought in the social chapter, softened the supply side and ignored industry. We’d have been a proper competitor to Germany, who ironically were moving their supply side in the opposite direction to the UK. The results are now obvious…

  4. “UK petrol prices at the pump are £111.06”. No doubt that is what Osborne, Carney, and the MPC would wish for, but they seem to be having some trouble getting there.

  5. Hello Shaun,

    “The surveys suggest the economy grew by 0.5% in the fourth quarter.”

    thats the coke and hookers effect , right ?

    So did we grow at all , or just shrink less than before?


    • Hi Forbin.

      If you’re having a lack of growth/shrinkage problem you may have to adjust the coke/hooker ratio.

      I’m sticking to popcorn myself although this may just be an age thing!. 😉

    • Hi Eric and thanks for the link.

      Today the Bank of England offered its view on unsecured credit. Firstly supply.

      “Lenders reported that the availability of unsecured credit to households increased in 2014 Q4, with a further slight increase anticipated in 2015 Q1”

      And then demand.

      “Lenders reported that demand for both credit card lending and other unsecured lending products, such as personal loans, increased significantly in Q4. Further increases in demand were anticipated in 2015 Q1.”

  6. The oil price will fall an stay low as the U.S. give will write off the fracking debt as it’s still better net net for the US than closing the wells and importing oil. The fun starts now with the emerging markets. We shall see who has been swimming naked.

  7. Hi Shaun
    In the US again so late with comments.
    US GDP growth rally about 2.5-3% , the 5% Q3 figure was 50% plus inflated by an Obamacare cost number hanging around all year waiting for a Q to dump it in, someone decided its best before Xmas!
    USD strengthening because no QE and world looks dangerous again. Expect GBP and Euro to fall re USD to 1.2 and parity respectively, but not in ‘straight line’. Why? simply because there is no reason they shouldn’t.
    Brent on its way to $40 ( same logic), and will stay there until the peak lopping producers ( US frackers) stop acting like ‘base’load’ producers ( which should logically be Saudi). Then merit order will produce a marginal price of around $60-65 which should be relatively stable. US frackers can live with this, Russian/Nigerian producers will find it difficult.
    The French like to buy French cars , if they go elsewhere for cheap ones its to Korea/Japan. Expensive means German. Apparently there are over 4000 people in London with assets over $30m more than the whole of France, but outside London the next biggest concentration is Greater Manchester with 350. Two thoughts, how many in London are Britsh and/or actually live there; and just how big are United and City’s squads?

  8. In France Val d Isere late last year and I think with it being a mainly Brit ski resort , the locals have looked at the exchange rate and decided instead of the Brits having the benefit of an improved exchange rate, and a cheaper holiday they have banged the prices up accordingly, to make just as expensive as ever!!

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