The UK economy has been in a relatively sweet spot for a while now. Since the beginning of 2013 it has maintained relatively solid and stable economic growth and now with real wages improving hit a Goldilocks’ style state of play in the summer. However nothing makes those with knowledge of UK economic history more nervous than such a position which in the past has usually meant trouble is ahead! One issue is the possibility of us being bounced about as we are “stuck in the middle with you” (H/T Share Radio) between the expansionary monetary policy of the Euro area and the promised interest-rate rise of the US Federal Reserve which if it arrives on time will be here in just over a week.
What about UK monetary policy?
On a Champions League day it is kind of appropriate that this is a story of two halves. If we start with a difficult first half then this is the story of the rise of the UK Pound £ on the foreign exchanges. If we use the old Bank of England rule of thumb then since its nadir in March 2013 its rise has been the equivalent of a 3.5% rise in Bank Rate. Also 1.25% of the rise has come in the last 12 months. Put like that it is quite a tightening when Governor Carney has been spinning like a top over a 0.25% rise is it not? One factor to note is that the squeeze applies to our exporters and price-competitive ones in particular.
If we move to the second half then this is an expansionary tale of attacking football from domestic monetary policy. After all Bank Rate remains at the “emergency” 0.5% and Operation Twist is being deployed this afternoon to lengthen the maturity of our £375 billion of QE. It will buy £1.045 billion of long-dated Gilts and if history is any guide our longest dated conventional Gilt (2068). I told you it was “To Infinity! And Beyond! Also the Funding for (mortgage) Lending Scheme chugs along with another £2.2 billion net in the third quarter making it £63.6 billion of cheap lending for banks. This is a cause of poor deposit rates for savers if you think about it.
If we look at the monetary data we see that all this translates into these numbers. Here is broad money or M4ex.
The three-month annualised and twelve-month growth rates were 3.7% and 4.5% respectively.
If we look at this one needs to recall that the usual subtraction for inflation leaves us with the same answer right now! Looking at it the other way we have net mortgage lending and approvals rising as well as surging (~8%) unsecured credit on the personal side. Parts of the business sector have plenty of cash and others (sadly still not much from smaller businesses) are borrowing so not only have we an expansionary policy it seems to have picked up. In the credit crunch era we have learned to be cautious of velocity changes but there are no great signs of another shift. I guess the cautionary note right now would be a blow-up in the oil and commodity sector.
These should continue to be solid. After all we have real wage growth of the sort we have not seen for ages. However there was a slowing in November according to the British Retail Consortium.
With growth of 0.7 per cent, November was quite a slow month overall for retail.
Of course November is heavily affected these days by the spread of Black Friday to the UK in recent years. But if we look at the big picture I am reminded of my article on the 29th of January when I pointed out that low and indeed zero inflation would boost retail sales and have this effect too.
This could not contradict conventional economic theory much more clearly.
Remember when what was called deflation was being presented as “the end of the world as we know it” in more than a few quarters? That period is on my mind again as I note the rout in oil prices yesterday which has left Brent Crude Oil at US $41 as I type this and this too.
The Bloomberg Commodity Index has plunged to its lowest level since 1999, is down 24% so far this year. (Lisa Abramowich).
Should commodity prices stay down here we will see consumer inflation stay low and maybe slightly negative for longer which should boost retail sales again. Just when the boom should be fading! Perhaps it will fade more slowly.
Production and manufacturing
This mornings data release was yet another story of two halves so this time let is open with the positive bit.
Total production output is estimated to have increased by 1.7% in October 2015 compared with October 2014.
However as I pointed out on the second of this month the path for UK manufacturing is sadly much weaker than that.
Manufacturing output decreased by 0.1% in October 2015 compared with October 2014…….Manufacturing output decreased by 0.4% in October 2015 compared with September 2015.
The strength of the UK Pound £ comes to mind here as we mull its possible impact especially its rise against the Euro. In this respect the monetary policy of the ECB and Mario Draghi has exported some deflation (manufacturing output has fallen) to the UK.
Also the production figures are flattering to deceive somewhat. The reason for this is that of the 1.7% annual rate of growth some 1.2% is due to North Sea Oil and Gas. If that seems odd due to the falling oil price you are correct and it has been driven by 2014 being a year of a heavy maintenance cycle being due. So unless something changes for the better than as that drops out of the numbers production growth will wither away quite a bit.
This is an issue as we see here where the domestic monetary expansion has gone. The official consumer inflation figures avoid this by omitting owner-occupied housing costs but the Halifax has reminded us this morning.
House prices in the latest three months (September-November) were 1.4% higher than in the preceding three months • Prices in the three months to November were 9.0% higher than in the same three months a year earlier.
There was a small dip in the erratic monthly series of 0.2% but the beat goes on here. Also it would be remiss of me not to point out that the house price to earnings ratio is at 5.31 seeing a return to 2006 levels. What happened next?
Later today the NIESR publishes its monthly GDP report for the UK and last month it produced a mildly positive 0.6% reading. That reminds us of the Goldilocks’ scenario where our economic porridge is neither too hot nor too cold however there are familiar issues around which have tripped us up in the past. It is hard not to laugh at an official measure of consumer inflation (CPI) which is negative when house prices are rising at an annual rate of 9% according to the Halifax or 6.1% according to the Office for National Statistics. The latter numbers are a clear result of Bank of England policy.
As we have boosted the financial sector we have been in a situation where the manufacturing sector has been squeezed a little by a higher pound. Also perhaps more seriously so much of our economic effort goes into the housing market manufacturing is likely to have been crowded out. This means that a long-term shift in our economy continues as the numbers below highlight.
reflect the falling share of the labour force employed in manufacturing, which fell from 16.5% to 9.8% between 1997 and 2014.
Also it would appear that production in general is struggling and that reminds us of the overall position of both sectors.
In the 3 months to October 2015, production and manufacturing were 8.9% and 6.1% respectively below their figures reached in the pre-downturn GDP peak in Q1 2008.
We would have hoped to be making substantial inroads into these but look where we are. However another sector is powering ahead as we consider if we are heading towards a post industrial age and maybe being the first to do so on this scale?
This is consistent with the historical trend of services growing at a faster rate than production and manufacturing,
They must be 80% of our economy by now surely? The official estimate of 78.6% is based on 2012. So “march of the makers” should be “march of the services” and the “rebalancing” of Baron King of Lothbury the former Bank of England Governor was an example of this.
Never believe anything until it is officially denied.
These developments are simultaneously an opportunity and a danger.