Today sees the UK production numbers released and they will be poured over on two counts. Firstly they have shown signs of weakness and more recently decline. A fall of 0.4% for production in December reduced the annual rate of growth to a mere 1% whilst manufacturing fell by 1.7% on a year before. This was quite a setback to the claimed “march of the makers” and indeed the “rebalancing” of former Bank of England Governor Mervyn King. Instead we continue the shift towards the service sector which will only be exacerbated by the outright decline in manufacturing.
Also if the business surveys are any guide then January was a good month for manufacturing as shown below.
UK Manufacturing PMI at three-month high of 52.9 in January……Moreover, the rate of expansion in output accelerated to a 19-month high.
Now the picture on the Purchasing Managers Indices has changed as we now see 49-51 as stability but there was some growth recorded and it was backed up by the second statement. This is made more significant by the fact that if February was any guide this was as good as it gets.
February saw the rate of expansion in the UK manufacturing sector slow back towards the stagnation mark. Output growth eased sharply………..The slowdown was also reflected in the labour market, with job losses registered for the second straight month.
The reading of 50.8 is back in the stagnation zone and this time around also had a worrying tinge for the UK economy as it was accompanied by reports of slowing growth in both the construction and services sectors.
The Bank of England
I have pointed out that there has been something of a bipolar response to recent economic news by the Bank of England and this was perfectly illustrated by the speech given by the hapless Martin Weale yesterday evening.
As we said in our most recent set of minutes, we collectively believe it more likely than not that the next move in rates will be up. I certainly consider this to be the most likely direction for policy.
So likely in fact that he has stopped voting for it! That makes it two seperate sequences now where Dr.Weale has searched for the interest-rate increase button and then retreated after giving-up. Awkward to say the least. Anyway Dr. Weale wanted to talk about the Doppelganger of interest-rate rises which is policy easing.
However, I want to discuss unconventional policy options today because the Committee does not want to be a monetary equivalent of King Æthelred the Unready
Like in 2007/08 Martin? And many will be wondering “Unready” for what? With the Bank of England’s appalling forecasting record calling something “unlikely” means that it in fact has quite a good chance of actually happening.
What does Dr.Weale suggest?
He is quite a fan of Quantitative Easing as shown below.
I do now think that the policy was highly effective, and indeed that it may have contributed more than previously thought to the rate of inflation in 2010-2012.
Ah the same burst of inflation that so depressed real wages back then as both CPI ( Consumer Price Index) and RPI (Retail Price Index) peaked at annual rates of over 5%? Odd to claim success via reducing real wages and it is something for the “desperate business” cartoons of Private Eye. This attempt to blow his own trumpet has produced a dirge for the UK economy rather than the hoped for celebration.
Still Dr. Weale threatens more of it may come.
Furthermore, it seems to me that the second and third rounds of asset purchases were as effective as the first round. That is not to say that any new purchases would remain as stimulative to the economy, but it does give grounds for optimism.
So stimulative in fact the Bank of England had to introduce the Funding for Lending Scheme to kick the housing market into action! Also Martin seems untroubled by this feature.
Theoretical analysis has had some difficulty in identifying the channels through which asset purchases work……. the Bank of Japan has been doing so since 2001.
Since 2001 but apparently still not working!
We do get something of a warm-up on this subject.
At home, banks’ balance sheets have improved since the early part of this decade and we now take the view that there is room to reduce Bank Rate below ½ per cent should that become appropriate.
Of course the sequence of bad banking results released in 2016 provide a disturbing back drop to the hype here but Dr.Weale is plainly preparing us whilst hurriedly skipping by the issue of if now why not back then?
There are obvious problems here as we advance of UK Forward Guidance Mark 15.
In these circumstances, it turns out that a commitment to keep interest rates low in the future has a powerful immediate effect on both output and inflation
Really? Even in the world of Dr.Weale there is a problem.
Of course, one reason why the promise might not be effective is that it would not be believed.
Well that might be because there is confusion here as to whether they were promising to keep interest-rates lower for longer or as it quickly changed to promises of an increase. Of course the former was true although there were credibility casualties on the way.
In fact, as you know, unemployment has fallen well below our threshold of seven per cent
I thought 7% was not a threshold? Mark that bit for the next time we are told it was not one.
Dr.Weale does not call it this I guess because if your natural environment is high up in an Ivory Tower who needs a helicopter? You just open the window and shower people with notes. Just as a tip for him and the many other Ivory Tower proponents of Helicopter Money no coins please as they may hurt someone falling from that height. Still look who pops up.
Turner is very aware of this problem and he suggests that, to make the policy work, bank reserves, or at least the major part of them, should not receive interest.
Ah Adair Turner who has proposed every form of monetary easing under the sun in recent times. You may note we are being warned about lower not higher interest-rates under the plan from the man who was gloriously described in the comments section on here as having a “talentless ascent”.
The good news is that January did see the predicted uptick in manufacturing with the monthly comparison doing this.
manufacturing (the largest component of production), having the largest positive contribution, increasing by 0.7%.
However the annual comparison whilst better still tells its own story.
Manufacturing output is estimated to have decreased by 0.1% in January 2016 compared with January 2015. Output decreased in 7 of the 13 manufacturing sub-sectors compared with a year ago.
If we move to the wider production numbers we see this.
Total production is estimated to have increased by 0.3% between December 2015 and January 2016…….Total production output is estimated to have increased by 0.2% in January 2016 compared with the same month a year ago. The only main sector to rise was water supply, sewerage & waste management, which increased by 9.3%.
As you can see the annual comparison is disappointing and not far off the “sewerage” mentioned as we continue to shift the emphasis of our economy towards the service sector.
There is an awkward element as North Sea Oil and Gas output contracted as it has ebbed and flowed recently as past maintenance periods have boosted the annual comparisons. Still one thing remains consistent.
Anecdotal evidence suggested that stormy weather was a contributing factor to the decrease in output observed in the oil and gas production facilities in the North Sea.
It is good news that the production figures improved somewhat in January because the surveys for February are not good. Meanwhile the Bank of England continues to mark our card about monetary policy easing and interest-rate cuts whilst its Forward Guidance promises an interest-rate rise. Should the economy slow further how long will they wait?
Meanwhile we find out some more about Zero Hours Contracts.
The latest estimate of the number of people who are employed on “zero-hours contracts” in their main employment, from the LFS, a survey of individuals in households, is 801,000 for October to December 2015,
Up by 104,000 on a year before but another measure shrank.
there were around 1.7 million contracts that did not guarantee a minimum number of hours, measured with regard to work carried out during the fortnight beginning 9 November 2015. For the May 2015 reference period (the fortnight beginning 11 May), the equivalent estimate was 2.1 million.
It seems that getting to the bottom of that is a long and winding road to say the least. RIP George Martin and thanks for all the music.