The Bank of England will be worried about the UK suffering from Industrial Disease

Today is the day that the Bank of England Monetary Policy Committee meets and votes on what to do next. Us mere mortals do not get to know the result until midday tomorrow which means sadly that there is plenty of scope for some to be more equal than others over the next 24 hours or so. Also next year they plan to switch to 8 meetings a year rather than twelve so I hope that they reduce the lectures on UK productivity!

Much has happened this week alone in terms of UK data but first let me point out a change in emphasis from Bank of England Governor Mark Carney. from the 29th of September.

The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.

Yes around Forward Guidance 5.0 as Governor Carney moves to something which cannot go wrong in his five-year term! There was no repeat of his interest-rate rise mantra although something from those speeches was borrowed.

While there is still time to act, the window of opportunity is finite and shrinking.

Just as a reminder here is an example of the mantra from his Mansion House Speech on the 12th of June 2014.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.

Unless he can avail himself of the services of Dr.Who and his TARDIS those hints and promises were unfulfilled.

Is the UK economy slowing?

This is a question the Bank of England will be debating so let us get straight to the latest business surveys on the UK economy. First manufacturing.

The performance of the UK manufacturing sector remained lacklustre in September, rounding off one of its weakest quarters during the past two years. The generally subdued trends in both output and new orders during recent months filtered through to the labour market,

So the initial report disappointed as we awaited the crucial data for the much larger services sector.

The dominant UK services sector continued to experience a slowing rate of growth at the end of the third quarter,…. Total business activity rose at the slowest pace since April 2013, as did the volume of incoming new work.

Not inspiring to sat the least and a strong construction reading of 59.9 was unable to prevent this being the conclusion.

The survey data indicate that GDP growth slowed to 0.5% in the third quarter, but that the economy is entering the fourth quarter at a pace down to just 0.3%.

Ouch! Not what the Bank of England or any of us would have wanted to hear/read as we mull how much closer Andy Haldane has moved to voting for a Bank Rate cut.

The Official Output Data

This was released this morning and it continued a recent series of disappointing and indeed poor numbers for manufacturing.

Manufacturing output decreased by 0.8% in August 2015 compared with August 2014. The largest contribution to the decrease came from the manufacture of machinery & equipment not elsewhere classified, which decreased by 13.0%.

So on an annual basis it contracted rather than grew and this was in spite of a month on month increase of 0.5%. This leaves us mulling this number and how long it will take us to regain such heights.

In the 3 months to August 2015, production and manufacturing were 9.4% and 6.5% respectively below their figures reached in the pre-downturn peaks.

Actually the production numbers were much better but there is a twist that in some ways is unexpected.

Total production output is estimated to have increased by 1.0% in August 2015 compared with July 2015……Total production output is estimated to have increased by 1.9% in August 2015 compared with August 2014.

The twist comes from what has driven this. Below is an annual comparison.

with mining & quarrying having the largest contribution, increasing by 17.7% and contributing 2.2 percentage points to total production. This was the largest increase since May 1994 when it rose by 23.7%.

So we have 2.2% of a 1.9% rise explained by what is in essence North Sea Oil & Gas so the rest of our industrial production was singing along to Dire Straits.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease’

I wondered about the numbers as the oil price is of course much lower than a year ago so I asked the Office of National Statistics directly. There are two main factors at play here. Firstly UK gas output has pushed higher. Secondly oil output is being compared to last year when there were major shut downs in what is a 3 year cycle for them, also this years summer maintenance shutdown has not happened yet. So it is being compared to what were depressed levels back then particularly compared to February and March.

Oh and some may think this is an apt summary of the state of play!

an increase in water supply, sewerage & waste management output, which increased by 6.0% and contributed 0.5 percentage points to total production.

Inflation Inflation Inflation

Or perhaps not if we listen to the British Retail Council this morning.

Overall shop prices reported deflation of 1.9% in September from a 1.4% decline in August…Food reported annual deflation of 0.5% from a 0.2% rise in August…..Non-food deflation accelerated further to 2.9% from 2.4% in August.

As volumes are rising then it is disinflation and not deflation but it would appear that not only are prices falling but they are falling more quickly than they were.

On the subject of inflation I noted this from the Guardian earlier this week and can due to organising matters for my late father in February vouch for some of the numbers.

The average price of a funeral now stands at £3,702, up £140 (3.9%) on the 2014 figure of £3,562, life insurer Royal London said in its latest National funeral cost index.

However some care is needed as claims that it is not measured are inaccurate as the cost of a basic funeral/cremation is in both CPI and RPI. One area where I was caught out yesterday was in using the London Tube – it was too wet for a Boris Bike- when I discovered that my Oyster Card was broken and that it costs £4.80 for a single ticket in Zone One now.


As you can see from the data above there are hints of a slow down in the UK economy and that disinflationary pressure is still present. The slow down seems to be something which is happening much more widely than just in the UK as September looks to have been a bad month for the world economy. What of course we do not know is how long-lasting it will be and whether it is merely a feature of a mature growth spurt or an oncoming recession? Also should the oil price continue its recent rise to above US $52 in Brent Crude terms we will see more inflation but less of a push to output.

I do not know about you but I think that the current crop of Bank of England policymakers will not be voting for a rate rise anytime soon as their chance was missed. Indeed as I hinted at earlier Andy Haldane may be singing along to Donna Summer.

I’ve got my finger on the trigger

Except it would be for a Bank Rate cut.


23 thoughts on “The Bank of England will be worried about the UK suffering from Industrial Disease

  1. Shaun,
    I see history repeating itself Corbyn replacing Foot. Cameron/Osborne replaying Blair/Brown saga. Meanwhile Osborne now attempts austerity 2 in these even more economically fragile times whilst trying to resolve EU membership. More QE and rate cut then in these interesting times!

    • Hi Chrislongs

      In the short-term it now depends on the services sector. We have some momentum from construction but Manufacturing and quite a few other components of Industrial Production are struggling. Later today the NIESR told us this.

      “Our monthly estimates of GDP suggest that output grew by 0.5 per cent in the three months ending in September after growth of 0.5 per cent in the three months ending in August 2015. ”

      They expect a pick-up the Markit business surveys are less hopeful.

  2. Shaun,
    I see history repeating itself Corbyn replacing Foot. Cameron/Osborne replaying Blair/Brown saga. Meanwhile Osborne now attempts austerity 2 in these even more economically fragile times whilst trying to resolve EU membership. More QE and rate cut then in these interesting times!

  3. Hi Shaun
    Thanks once more for your blogs,I have read them regularly
    since the early days.

    Carneys arse covering abilities seem to be unsurpassed. hows this for
    todays song


    • Hi JRH

      Thanks for the link. I have the feeling that Dire Straits have been forgotten but I guess these things go in cycles so maybe they will be back in vogue. They had some good songs and some great guitar playing.

  4. Hi Shaun

    As you say things are weakening markedly and whether we reach recession or merely a growth slowdown is just a matter of degree; the fact is we’ve had seven years of “recovery” and page 1 of Economics for Dummies must mention the business cycle so why should this be a surprise?

    What will this do to the UK PSBR surplus forecast by 2020? blow it out of the water is my guess! Even if we have only a mild slowdown the automatic stabilisers will see a marked deterioration in the PSBR and all the forecasts and the “Long Term Economic Plan” will be consigned to the waste bin – where of course they always belonged. “Austerity” would be overwhelmed by the economic cycle and we then have a further ratcheting up of public debt which puts the prospect of an IR rises even further away and pushes us yet nearer to the point of collapse.

    As you have said before the next move in interest rates might well be down rather than up.

    David Cameron is saying “We’re on the brink of something special in our country” and that the 2010s may well be a defining decade; he may well be right but not for the reasons he suggests!

    BTW I’m sure you’ve seen the latest Tory wheeze on housing which, whatever the rhetoric, will result in higher prices, more debt and less housing. The only good thing about it that it will double up on the failed policies and bring the ultimate bust on that much sooner and, for that we should perhaps be grateful.

    • ‘I’m sure you’ve seen the latest Tory wheeze on housing which, whatever the rhetoric, will result in higher prices, more debt and less housing. ‘

      You can imagine George wetting himself when he manages to achieve all three at the same time.

  5. “…..September looks to have been a bad month for the world economy…..”

    And now oil prices are firming up

    but with all possible levels already pushed , MIRP and QE to infinity and beyond!!

    Just exactly can anyone else here think of what Joe Public will do if they’re told their pension schemes will return -3% ?

    Then add in being charged -1 to -3% for their savings?

    The Great Charlie Bean may get what he wanted , then some !

    Next bail ins on your bank account ……..

    hold on to your hats , folks ! Wil-e-coyote has run off that cliff and is still treading air….. dont look down!!

    Are we ready for the Great Banking Bail out mk II yet ?


    • Funny you should mention Pension Schemes Forbin
      Paul Hodges interview with Moneyweek
      ‘This is where the Fed unfortunately has had a role to play, because by driving down interest rates it’s forced asset managers to take on risks in foreign markets about which they know very little. But they say, look, I can’t possibly take in money from people and take in a fee if I’m just putting it in a bank account at 0%.
      Whenever I talk to asset managers and fund managers, this is what they say, we feel trapped by the Fed and the central banks. We have to go and do these things even though in our heart of hearts that we shouldn’t be doing it.’

    • I think you made a Freudian slip there; it won’t be a bank bail “out” it will be a bank bail “in” as now sanctioned by the EU Good Housekeeping Guarantee.

      The govt have decreased the deposit protection to £75K but I wonder if this would hold if we had a really systemic crisis and not just a Northern Rock. Lower the 75K; wealth tax (with the richest exempt of course) anyone?

  6. I lost faith in the Central Banks back in 2007/8 when they were unable to foresee the finacial crisis that they helped create.

    We then had the ultimate victory of hope over experience when all the people who failed to see it coming were put in charge of sorting the mess out.

    The problem for the CB’s at the minute is that they’ve been through their playbook and nothing’s really worked.QE/ZIRP has actually made the problems worse.

    At least we all now know what it felt like to watch Canute trying to turn back the tide.

    • so true about the Banks , Dutch

      But Canute was battling his advisers who were telling him he could anything , he was a god of sorts

      thus he put himself in front of the sea to show them he could not command the sea to go back……

      The Banks are still telling us they can do anything – they are The Masters of the Universe…… ( and the tax payers pocket is obviously infinite in dept….)

      such is life …


  7. Great column, Shaun, as usual.
    I read Governor Carney’s speech to Lloyd’s of London too, and was particularly struck by his reference to a global carbon budget that would leave the “vast majority of reserves ‘stranded’ – oil, gas and coal”. Here, he seems to be of the same mind as New Democratic Party star candidate Linda McQuaig, who said on August 7, that “[a] lot of the oilsands oil may have to stay in the ground if we’re going to meet our climate change targets.” Her chief, Opposition Leader Tom Mulcair walked her remarks back, saying the NDP wanted to develop the oil sands with the costs of production properly internalized.
    Oddly, Opposition Leader Mulcair finds himself once again on the opposite side from Mark Carney in a policy debate, three years after they last locked horns. On September 7, 2012, when Governor Carney was still testing his wings as the future leader of the Liberal Party of Canada, he gave a speech in Calgary called Dutch Disease, which confidently predicted that oil and other commodity price would rise steadily for decades to come. (I’m not joking.) Although Mr. Mulcair’s policy of a cap-and-trade regime for carbon dioxide emissions was never mentioned in the speech, the Opposition Leader has been saying for years that the Canadian economy was suffering from Dutch Disease that was hollowing out our manufacturing sector.
    The disgraced host of the CBC radio program The House, Evan Solomon. left a Twitter handle telling his followers to go to The House website “[t]o hear Gov Mark Carney talk about why the Dutch Disease does NOT affect Canada”, adding that the central bank governor “contradicts #ndp critics”. (If you remember, Mark Carney, showing appalling judgement, purchased at least one painting on which Mr. Solomon earned a commission.)
    That was then, where he seemed to see himself taking over from Liberal leader Michael Ignatieff. Now Governor Carney clearly sees his own future is better ensured by attacking the oil sector instead of defending it. Maybe he wants Christine Lagarde’s job, as you have hinted at in your own postings. No-one would accuse Governor Carney of intellectual consistency, but he does pretty consistently look out for number one.

    • Hi Andrew

      i realise now that Governor Carney has been failing at the Forward Guidance game for some time now! Perhaps it should have been Forward Guidance 6.0 or 7.0? Or perhaps specifying that it is UK only…..

      it is an interesting point that the climate change theme would not have gone down so well back home in Canada, or part of it. However his climate change credentials have now been established which would be another step on the ladder to heading the IMF.Presumably he can claim some French ancestry?

      Oh and I wonder if he is also looking out for his former employer the Vampire Squid.

  8. The sewage production from Carnage is of the bovine variety.
    This idea that climate change, which is, in itself a wheeze, will suppress economic output is bizarre.
    The movement is not to reduce emissions, but to capture them, and huge amounts of r&d in this field are taking place, with production to follow.

    • Hi therrawbuzzin

      I think that the Volkswagen scandal will mean that all emissions claims will be checked a lot more carefully in future, don’t you? Who knows what other misrepresentations may now be uncovered…

      • Note that the VW models in question have been voluntarily withdrawn from sale.
        No outrage from our politicians and no outrage (coverage) from green movement in this country.
        I suspect that EU Govt’s want it both ways: the taxes and GDP growth from “climate change” industry, and convenient excuses for missing emissions targets, or worse still, tacit approval of forms of cheating which falsely indicate emissions progress.
        Allowing self-proclaimed cheats to self-regulate is typical UK Govt. attitude.

  9. Pingback: Is the UK just another victim of Industrial Disease? | Notayesmanseconomics's Blog

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