The road to a Bank of England Bank Rate cut

Today sees the production of the UK service-sector Purchasing Manager’s Index for February and this is eagerly awaited. The main reason for this is that the recent data on the UK economy has shown signs of a further slowing in the rate of economic growth. Yesterday’s Economic Review reminded us that whilst 2015 was a relatively good year it was not as good as 2014.

GDP growth for the final quarter of 2015 was unrevised at 0.5%, resulting in a level of GDP 1.9% higher than in the same period in 2014. While growth has continued for the sixth successive year, it moderated somewhat between 2014 and 2015, dropping from 2.9% to 2.2%.

So we were slip-sliding away to quote Paul Simon although the UK ONS did present anew perspective on the credit crunch era.

GDP growth has averaged 2.0% per year since 2009, making growth in 2015 slightly above the recent average.

It hasn’t always felt like that as I recall the fears back in the day that there might be a triple-dip! As time passes revisions tend to mark the numbers higher and such a concept has disappeared. According to the ONS now we have had this.

this continues a six-year period of continuous expansion,

Some care is needed here as there were two quarterly falls in 2012 either side of the Olympics boost.

Also I am reminded of the view that 2% economic growth per year may well represent standing still in the modern era. The GDP per head figures largely support such a view.

A little help from my friends

Regular readers will be aware that I have long criticised the change referred to below which according to analysis presented at the Royal Statistical Society has improved our annual growth rate by something of the order of 0.5% per year. The ONS puts it like this.

The UK shows larger revisions to GDP growth estimates than many other countries over this longer period, but this is mainly due to the switch from RPI- to CPI-based deflation in 2011, a methodological improvement that was not implemented in other countries at the time.

It seems to have slipped their mind to tell us which why it impacted on economic growth! Something to hide?

Something familiar?

This welcome period of UK economic expansion has had two familiar features which have ended up causing trouble in the past.

Much of the growth in the expenditure measure of GDP in recent years has been driven by household consumption and investment

Is investment a euphemism for buying houses? Anyway this tends to be followed by a persistent bugbear.

Net exports have tended to act as a drag on GDP growth, and this trend continued in 2015, with a downward contribution of 0.5 percentage points (against GDP growth for the year of 2.2%).

I was reading a hopeful analysis yesterday from Nordea bank using our effective exchange rate as a predictor. They forecast a boom in UK exports on that basis. Let us hope so but I also note that their chart missed out the 2007/08 devaluation which of course saw a disappointing export response.

Oh and the definition of austerity in my financial lexicon for these times chalks up another victory.

Government consumption made modest, positive contributions to growth in 2014 and 2015 of 0.5 and 0.3 percentage points, respectively, compared with an average of 0.2 percentage points over the past 6 years.

Up is again the new down.


Only last weekend the man responsible for monetary policies which were supposed to rebalance the UK economy away from services and towards manufacturing returned to the news. Apparently a £8 million pension pot does not buy what it used to even when it is indexed to the Retail Price Index ( the lower CPI being for the likes of us….) and so Baron King of Lothbury has written a book. Having not read it I cannot say if it explains this development.

In Quarter 4 (Oct to Dec) 2015, production and manufacturing were 9.8% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008……….Manufacturing output decreased by 0.2% in December 2015 compared with November 2015.

If we look at Monday’s PMI we see this.

The breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall.

So expansion in January was followed by stagnation in February and it came with an ominous side-effect.

The slowdown was also reflected in the labour market, with job losses registered for the second straight month.

Thus we see that the picture for UK manufacturing remains troubled. There are dangers in relying on such business surveys but the truth is that they are timely and official data is not what it was once perceived to be. As it happens both are playing the same song right now its Dire Straits.

There’s panic on the switchboard tongues are ties in knots
Some come out in sympathy some come out in spots
Some blame the management some the employees
And everybody knows it’s the Industrial Disease

The Service Sector

The pattern here has been of rebalancing towards it as opposed to the away promised by Baron King.

The service industries increased by 0.7% in Quarter 4 2015 (Figure 3), unrevised from the previous estimate, marking the twelfth consecutive quarter of positive growth. This follows a 0.6% increase in Quarter 3 2015.

Putting it another way if we put Q1 of 2008 as 100 it is now at an index level of 111.6 with the 2008/09 dip consigned to history.

Today’s catch is that according to the PMI data even it may be slowing.

The UK’s dominant service sector lost momentum in February…… Growth of both total business activity and new business were the weakest since March 2013, leading firms to raise employment at the slowest pace in two-and-a-half years.

So growth but not as we know it to coin a phrase and it was driven by this.

The weaker increase in services activity mainly reflected a slower expansion in the volume of incoming new business.

In terms of an explanation there are some already blaming Brexit which seems to have replaced the weather these days as the scapegoat. So much so in fact I have been surprised that Arsene Wenger has not brought it into play.

The irony is that even at a PMI of 52.7 we are still rebalancing towards the service sector and if it slows as this survey predicts then there is a kicker to this below.

However, the slowdown in services is arguably the most worrying, as the sector has provided an important support to UK economic growth in recent years, not least due to its sheer size


There is much to consider here but if the UK service sector is slowing and the PMI survey is correct it adds not only to the construction and manufacturing surveys but also to the signs of slowing in the official data as described above. Now let me remind you of the words of the Bank of England’s most recent recruit Gertjan Vlieghe that I reported on the 24th of February.

I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.

How quickly Gertjan? Perhaps a little more quickly if he looks at GDP per head as opposed to aggregate GDP. Oh and those who remortgaged on the back of Forward Guidance on interest-rate rises from Governor Carney may be wondering what this from that day means.

We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,

Down is the new up and I await the 5.45 pm speech from Andy Haldane on this subject although of course he may have written it some days ago. You see I would expect him to vote for a cut first.

Just to be clear as I hinted at yesterday this would be a bad idea in my opinion but it is looming larger on the horizon.

Number Crunching

The Bank of England Funding for Lending Scheme is still ongoing so let is look at this.

Net lending by FLS Extension participants to SMEs was £0.6bn in the fourth quarter of 2015

At least the number was positive albeit weaker by £200 million than in the previous quarter. How much did this cost?

Of these, ten participants made total drawdowns of £6.6bn during the fourth quarter of 2015. Participants also repaid £0.7bn, taking total outstanding drawings to £69.5bn.

Now if I gave you £10 at ultra low interest-rates you would probably be happy to loan £1 to a small business at a much higher interest-rate. I do hope this is not funding the record low mortgage rates that keep being announced.





16 thoughts on “The road to a Bank of England Bank Rate cut

  1. So many things to say on this and so little time.

    Firstly,how much have imputed rents gone up as a per centage of GDP?

    Secondly,’Is investment a euphemism for buying houses? ‘,yes!

    Thirdly, ‘Perhaps a little more quickly if he looks at GDP per head as opposed to aggregate GDP.’First rule of BoE fight club,don’t talk about GDP per capita.

    Fourthly,change from to CPI from RPI,ranks up there with imputed rents for sheer ‘Arthur Daley’ accounting practices.

    I’m not sure what there’s left to trust the ONS on counting.There are huge holes in inflation,GDP and population measures.

  2. Hi Shaun

    It is pointing in the direction of an interest rate cut isn’t it?

    But you have to ask: to what effect? This will make absolutely no difference to anything except it will give another fillip to house prices and thereby enhance the possibility of a crash.

    What I find intriguing is that this is not only an obvious point of view but almost mainstream these days. There is a widespread recognition by many that such a move would be not only ineffective but counterproductive, a recognition even by such august bodies as the BIS and underpinned by years of actual policy experience; it is manifest and not the arcane theoretical ramblings of some economist.

    This, to my mind, is so obvious one has to ask why? Is it that the authorities actually want a crash because it’s then easier to extract real sacrifice from a gullible populace, a sacrifice that is necessary if we are to get to any sort of grip of the issues? If you think this is the ranting of a conspiracy theorist I refer you to the late, great Mervyn King whose new book floats the hypothesis that the EU bureaucracy wants a depression in Europe as means to creating a crisis out of which would come: more Europe!

    Conspiracy theory? It’s looking less and less likely by the day!

    • Politicians love a crisis.
      You are no consp. theorist.
      I have been saying that the next interest rate was more likely to be down than up when forward misguidance began..
      See UN Agenda 21.

    • A crisis brings opportunities but also brings risks. A crisis can end political careers.

      The current state pension liabilities look like a Ponzi scheme and it is not politically possible to cut the cloth to match tax revenue due to voters demands.

      However a crisis may result in much more painful cuts and politicians playing blame games.

  3. Pual Hodges on brexit rate rise.As I have opined before,the BoE will defend the value of it’s pension fund ………….first job of any CB..

    ‘What could this mean for the UK economy? History suggests that the Bank of England would be forced to raise interest rates to defend the value of the pound. ”But that’s impossible today”, you might reply. ”The Governor of the Bank of England is said to be considering negative interest rates, not raising them”.

    This is the key issue. What the financial markets expect, and what politics may cause to happen, could – and I use the word “could” – be quite different.’

  4. Hi Shaun,

    Where there still seems to be a race to the bottom and to get savers to spend their money, it still looks odds on to me for your prediction to be correct with the next BOE interest change being downwards.

    • Hi Rods

      We will find out more next week when the ECB acts. With Jens Weidmann of the German Bundesbank rotating out of the voters I think there will be an effort for a more substantial easing. This will put pressure on the Danes,Swedes ( who to some extent have got in 1st) and the Swiss.But in the end on the UK as well….

  5. seems to me Shaun that TPTB want us to spend everything , pension pots, Home ATM, savings and borrow to the hilt

    why one might ask?

    Are the Banks that really bust , still?

    and once do that and it doesnt work , thne what?

    When does MIRP/BIRP become effective after 1.5% ( minus that is) ?

    tenths dont seem to do it , and god only knows what will happen when savers are even told of -0.1% on thier savings yet alone -0.5 or -1.0 % !!

    and then -3.0% on pensions…….

    getting scary now


    • Hi Forbin

      The Bank of England may well be getting into the Lewis Carroll swing.

      User Actions

      BoESouthEastVerified account
      Jam today! Thanks to @tiptree for hosting MPC member Jan Vlieghe today and for the insightful factory tour

    • It’s interesting that when rates are positive the incremental change is normally .25% but when they are negative the incremental change is .1%. Why not take -0.5% to -0.75% then -1.0% ? what’s wrong with going all the way to -5% If they really think it will stimulate lending, growth and inflation why not bring out the big guns? Why? Because TPTB know it won’t work. The last 7 years – almost to the day – has proved that expansionary turns contractionary at around +2 to +1%. Below that you enter the world of Alice in Wonderland and start to believe in as many a six impossible things – before breakfast. No.1 We are not lost deep in the woods. We are on the right track. Just a little longer. Just a little more. And we will be out of the woods by the turn of the year. Then rates will rise. You can bet your mortgage on it.

      Rant over. Keep going Shaun. Don’t let up. Not even for a minute…… Thanks for all your efforts to bring sense and enlightenment to this crazy Lewis Carroll world…..Eric in NZ

  6. Great article.

    I do frequently read of the resulting house price boom and subsequent crash from cheaper lending. This may be the case for the South East. However for those of us in the North there has not yet been a boom. In fact there hasn’t been a return to 2007 prices in many areas. Without funding for lending we may not even have returned to today’s levels. We are building houses in the North West with an inflated cost of materials but not selling them at increased prices. The margins have shrunk. The MMR has made the market inaccessible for many, a 2per cent loan is no good if the MMR factors in a rate of 7 percent.

    House building and sales is a vital part of the economy in the North that has been choked by legislation.

    We could certainly cope with a boom up here. It doesn’t need cheaper credit just for credit to be available.

    • Hi Dan thanks and welcome to Notayesmanseconomics

      You are right to point out that there are many different housing markets in the UK. For example prices have recently been falling in Scotland which makes me wonder how much of that is the effect of the oil price plunge on Aberdeen. Also house prices in Northern Ireland followed those down south and had quite a drop in a manner unlike pretty much anywhere else on the mainland.

      Your description by the way echoes the experience of the ECB where the liquidity provided avoids the areas it is most needed except they are whole countries.

      I am interested on your point about the cost of materials are they not falling?

    • I used to be in the trade in the North West and the formula was simple – sell the house for 3 times the cost of labour, materials and land.

      Consequently, even moderate sized builders have large land banks which they can afford to sit on for years and decades.

      Materials are falling in price I don’t know where you’re looking but try builders yards (not nationals with websites like Jewsons, B & Q, Wickes and Travis Perkins) like Firwood , Manchester Building Supply and Builders Supplies West Coast. I find it impossible to believe that builders would allow their margins to fall – they’d rather go bust than do that!

      • Yep. I knew a small North West based builder in the late 1990s. If he could buy a good plot of land for £25,000 he would spend not less than £75,000 building a large, quality house – and expect to get up to £300,000 for it on the market. (Illustrative figures).

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s