As we see a (hopefully) sustained burst of sunshine and good weather for much of the UK we are also in a period where much of the economic news has taken its hint from this change to better conditions. In essence the house price and consumer borrowing boom created by the Bank of England from the middle of 2012 with its Funding for (Mortgage) Lending Scheme or FLS has been added to by the fall in the oil price and indeed other commodities that started in late summer 2014. I had previously wondered if the fading effects of the house price boom would mean that the current UK establishment had mistimed their efforts in terms of the electoral cycle but what in economics is called an exogenous factor means that in this regard they can sing along with Daft Punk.
We’re up all night to get lucky
We’re up all night to get lucky
Another stroke of luck comes for the way that the ECB has reduced Euro area bond yields via its QE purchases which has put downwards pressure on UK Gilt yields too.
This morning has seen a boom area of the UK economy produce more good news. From the Society of Motor Manufacturers and Traders or SMMT.
Figures released today show 492,774 cars were registered in March 2015 – the best month since the twice-yearly number plate changes were introduced in 1999……… Registrations so far this year have increased by 6.8% to 734,588. The 37th month of consecutive growth for the new car market……
It appears that this is also boosting the UK car production numbers.
With 257,300 UK-built cars rolling off production lines in the first two months of 2015, UK car production is expected to exceed pre-recession levels this year, buoyed by a strong export market that delivered revenues of £26.2 billion in 2014.
Whilst this is overall good news there are in fact concerns. You see if we ignore the hype the UK car production numbers for the first 2 months of 2015 show a fall of 2% which must pose questions for the already troubled trade figures as registrations rise. Also in a familiar theme for the UK economy and another effect of FLS we see that car sales are being driven by this. The emphasis is mine.
New products and attractive finance packages underpinned by low interest rates helped deliver this record result.
The Bank of England’s Credit Conditions Survey released this morning backs up the impression of relatively easy credit availability and price.
Lenders reported that spreads on other unsecured lending products, such as personal loans, narrowed significantly in Q1 and were expected to narrow significantly further in Q2.
Lenders reported that the availability of unsecured credit to households increased in 2015 Q1.
So we have an old-fashioned UK style boom at play here as the effects of the credit easing come to play. We will have to see if it leads to old-fashioned style problems or just a sub-prime one. One difference of course is the way that some of this was originally financed with money received from PPI payment redress funds. Of course that also comes from the banking sector albeit by an often taxpayer backed route as we yet again observe rather a tangled web.
More hopeful and clearcut was the news from the UK services sector yesterday.
The Index rose to 58.9 in March,from 56.7 in February, indicating a marked pace of expansion that was the fastest since August 2014.
So something of an acceleration with the future also looking bright.
Moreover, the rate of growth in new contracts accelerated to the highest since last September….The heightened positivity for the future resulted in new marketing campaigns, and new products as competition increased.
If we add in the already positive news received from the construction and manufacturing surveys then the conclusion was this.
The UK economy moved up a gear in March,
recording the strongest pace of growth since last
August. The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter,
reviving from the slowdown seen late last year.
Faster growth of new business and improved
expectations of prospects for the year ahead also
bode well for the upturn to retain strong momentum
as we move through the spring.
Disinflation in the retail sector
It is perhaps a little concerning that the British Retail Consortium confuses prices with inflation but nonetheless the numbers will be welcomed by shoppers and consumers.
Prices in Britain’s shops reached another new low, this month by -2.1 per cent. That’s the deepest deflation rate since our records began in December 2006.
Oh and sorry they have also confused deflation with disinflation! Otherwise they completely contradict themselves here.
Consumer confidence has also soared to a near 13-year high……With strong consumer confidence and relatively benign macro-economic conditions we can expect the nation to respond with their feet or with a mouse click in the coming weeks.
What could go wrong?
The first thing that might go wrong is possibly already happening. For example as I type this the price of crude oil is pretty much unchanged in 2015 so far. However the UK Pound has lost around 6 cents so far this year against the US Dollar meaning that the petrol price falls of late 2014 and earlier this year are now over. For example petrol and diesel prices at the pump have risen for the last 8 weeks and average petrol prices have risen 6 pence to £1.1206 per litre.
If we factor this into overall upwards pressure for energy prices then we see that one of the factors which has boosted our economy is on its way out if oil prices remain here. This poses its own problems as you see if we look at what one might call underlying inflation in the UK economy or services sector inflation then it has been chugging along even in these disinflationary times at just over 2%. So we would return to target and end the “deflation” scare? Yep but of course we would also end the turbo-boost for the economy. This was reinforced by this from the UK Economic Review released today.
The median rise in weekly pay for continuously employed employees has remained at around 2% since 2012.
So if inflation returns to circa 2% and wage growth is same as it ever was (in the credit crunch) then we have more stagnancy for real wages. Or we have a long-term problem that we continue to struggle with.
So we see that the UK will cruise into the May General Election with economic growth likely to be solid/good and inflation close to zero. In Goldilocks terms the porridge will be “just right”. However unless we see further falls in the oil price then the UK tendency to institutionalised inflation will mean that real wages will come back under pressure again making the porridge in this area a bit cool. Just to add to the mixture the situation concerning trade and unsecured borrowing looks a case of porridge which is too hot to me and of course this has been a familiar feature in UK economic history.
So what does a new UK government want? For all the hot political air the best tonic would be a further fall in the oil price! Albeit that it would come with its own problems if the Scottish Nationalist Party were part of the government via the impact it would have on North Sea Oil and Gas. But by the standards of UK economic electoral situations it could be worse.
The Generation Game
Today’s Economic Review had some rare and welcome news for younger readers.
The median growth rate of earnings for those aged 18 to 24 is substantially higher than for other age groups, suggesting that young workers who stay in employment are relatively likely to move towards more highly paid jobs.
Big equity bids and deals
The £47 billion purchase of BG Group (British Gas) by Shell reminds me that such large deals are usually a sign of an equity market peak.