Tomorrow sees the UK Budget as the new Conservative government in the UK sets out its plans for this Parliament. However it would appear that one subject cannot be entirely avoided right now. From BBC News.
The government will do “whatever is necessary” to protect the UK’s economy against the fallout from Greece’s bailout referendum, George Osborne has told MPs.
Amazing isn’t it how such a small economy such as Greece’s can have such an apparent impact! I suspect that the truth is that our banks are not as stable as we are being told and that problems and contagion there is the real fear. So far the main impact has been on the currency as we have pushed to 1.41 versus the Euro which is good for holiday makers but not so good for exporters. Also we have seen the UK ten-year yield drop back to 2% as the main bond markets rally on a flight to safety move. Whether they actually are safe is a moot point but there you have it.
More hidden in the shadows in terms of public pronouncements is that the Eruo area overall is no longer being a drag on UK economic growth. It also grew at 0.4% in the first quarter of 2015 with the Markit business surveys (PMIs) predicting the same for the quarter just completed.
The survey data point to GDP rising 0.4% in the second quarter,
So the “headwinds” from the Euro area have gone for now at least which is why perhaps official attention is focusing on Greece!
What about the UK?
Here we see what used to be called moderate growth but for the credit crunch era we are seeing a good run. The 0.4% growth of the first quarter with the latest Market business surveys (PMIs) telling us this.
The survey data are indicating an acceleration of economic growth to 0.5% in the second quarter,
We await this afternoon’s update from the NIESR ( National Institute for Economic and Social Research) but as of last month it was a little more optimistic.
Our monthly estimates of GDP suggest that output grew by 0.6 per cent in the three months ending in May after growth of 0.5 per cent in the three months ending in April 2015.
One factor in the recent surveys is that there does not seem to be much of a “march of the makers” going on as they observe another tilts towards the services sector.
Markit: The UK manufacturing sector had a disappointing second quarter overall.
This was reinforced by this morning’s official data.
Manufacturing output decreased by 0.6% in May 2015 compared with April 2015………Manufacturing output increased by 1.0% in May 2015 compared with May 2014.
If you are looking for a cause of the monthly decline it is shown below.
The largest contribution to the decrease in manufacturing came from basic metals & metal products, which decreased by 3.7%.
Some caution may be needed as they may be struggling with their inflation measurement (deflators) in this area but there is little sign of a boom. Although oddly and against the theme I have just mentioned we are seeing this.
The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 7.3% and contributed 0.8 percentage points to total production
Another episode of disinflation?
The UK may get another burst of commodity price disinflation. Yesterday saw sharp falls across the commodity sector which reminded me of Friday’s update on the problems in China’s equity market. The price of Brent Crude Oil fell 6%, Dr.Copper fell by 4% and Iron Ore fell by 5%.
Of course this is a very recent shift and may end but should the China crisis continue we could find ourselves returning to this particular theme. Contrary to the central banking view of this it does provide a boost to the UK economy via its impact on real wages. Should ages continue to increase at anything like the 2.7% seen in the June labour market report then another disinflationary episode could make 2015 a really good year for UK real wages and hence the retail sector.
There have been instances of this long-running theme emerging over the past couple of days. This morning has seen evidence of it in a familiar area published. From the UK Competition and Markets Authority.
the report has found that dual fuel customers could save an average of £160 a year by switching to a cheaper deal.
Of course one could also argue that energy consumers are letting themselves be ripped off to some extent although I would counter that with the argument that energy companies deliberately keep their tariffs complicated. Also the impact of such an issue gets higher the poorer you are.
We note that the poorest 10% of the population spend almost 10% of total household expenditure on electricity and gas, while the richest 10% spend about 3% of total household expenditure on electricity and gas.
If you want some context for all of this here is the trend over the decade they reviewed.
Average domestic electricity prices rose by around
75% in real terms between 2004 and 2014, and average domestic gas prices rose by around 125% in real terms over the same period.
The last quote really exposes the current philosophy of central bankers. Finally in late 2014 we saw something which would make that situation better yet they treat it as if it is an enemy stirring up fears of some sort of Nightmare on Elm Street deflation.
Also I note this from Sally Copper.
The Euro has depreciated v. Sterling by 20% + the Swedish Krona by 40% since 2013.Why haven’t the prices of Swedish + European cars dropped?
It seems a fair point, have companies returned to importing cars from dealers abroad to take advantage of the mis-match?
The Public Finances
The essential issue to be faced tomorrow is based on this which is much more political than economic. From the Chancellor’s Mansion House speech.
in normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.
If we move from rhetoric to reality by stepping back five years in Dr.Who’s TARDIS to the same Chancellor at the beginning of a Parliament we would have heard rhetoric about a Budget Surplus about now. Instead his own words tell a different story.
We have a budget deficit that remains, at just shy of 5% of national income, one of the highest in the developed world.
So whilst we have seen a recent improvement in the Public Finances via am improved income tax take for example there is pressure on the Chancellor to raise money tomorrow. If he is going to do so then the beginning of a Parliamentary term gives the voters the maximum time to have forgotten it by the next election. This would also fit the pattern of the last Parliament where the austerity reins were loosened about two years in.
We also need to consider the concept of austerity as whilst we all know that individuals have suffered government spending overall has continued to climb.
We know of one change which is that £175,000 will be added to the Inheritance Tax threshold if it relates to a property. Rather than taking away the tax distortions on our housing market we seem determined to increase them especially as the Help To Buy ISA arrives.
Meanwhile in other news deposit insurance will be a victim of the Currency Wars.
For the majority of depositors currently covered by the FSCS, the existing level of deposit protection (£85,000) will be maintained for six months before changing to £75,000 after 31 December 2015.
Although temporary balances (6 months) of up to £1 million will be protected.
The Chancellor faces a much happier economic situation than he did in 2010 when the UK had just been hit by a severe recession and banking collapse. However in the subsequent five years he has in terms of the public finances only made around half of the progress that he hoped. If we continue to grow then this will help him in this Parliament as revenues get boosted and expenditure falls. Should we see another recession then as the film Snatch told us.
All Bets Are Off!