Will the Bank of England ignore the UK GDP data and raise the Bank Rate in May?

We find ourselves facing another day where far too much pressure will be put on a GDP ( Gross Domestic Product ) print which is partly driven by the fact that the UK produces the numbers too quickly. That is about to change this summer and that change is for the better although I have to confess the addition of monthly GDP numbers is not helpful. They cannot be accurate enough and are more likely to confuse than enhance understanding I think.

Moving to prospects there was a downbeat tone on the first quarter provided yesterday by ECB ( European Central Bank) President Mario Draghi. At first we were presented with this in the Introductory Statement.

Following several quarters of higher than expected growth, incoming information since our meeting in early March points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro area economy.

But later as he replied to questions Mario left the marked runs and seemed to be going off-piste. The emphasis is mine.

 It’s quite clear that since our last meeting, broadly all countries experienced, to different extents of course, some moderation in growth or some loss of momentum. When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators. Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction. Then we had declines in industrial production, in capital goods production. The PMI in exports orders also declined. Also we had declines in national business and confidence indicators. ( PMI is the Markit Purchasing Managers Index)

There seems to be a lot of this sort of mood music around from central bankers today as earlier we got this from the Bank of Japan. From the Nikkei Asian Review.

The Bank of Japan kept monetary policy unchanged at Gov. Haruhiko Kuroda’s first meeting of his second term on Friday. At the same time, the central bank deleted from its statement the date for achieving 2% inflation, which had been targeted for “around fiscal 2019.”

Now of course this had been always just around the corner on a straight road but Japan is ploughing ahead in what we are told is a boom. Continuing the theme the Swiss National Bank has joined the (bloc) party.

 The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential.

That is from a speech by Thomas Jordan its Chairman in Berne this morning and I also note this.

Tightening monetary conditions would be premature at this juncture, and would risk unnecessarily jeopardising the positive economic momentum that has been established.

That makes you wonder when he might ever tighten does it not?

A labour market perspective

Ed Conway has pointed out this in The Times.

Delve deeper into the data and you find something even more remarkable. During the recessions of the 1980s, nearly half of all unemployed Britons were jobless for more than a year. In other words, scarring was rife. In the 1990s recession the proportion dropped to just over 45 per cent. In this recession it peaked at 36 per cent and it is now below 25 per cent — the lowest level since the recession and, for that matter, lower than at any point in the 1980s or 1990s, boom or bust.

 

And here’s the really interesting thing: this improvement was UK-specific. In every other G7 country the share of long-term unemployed people flatlined or rose in the decades since the early 1980s. Indeed, the long-term share of unemployment in France is 44 per cent. In Italy it is 58 per cent, more than double Britain’s level. In Greece it’s a staggering 72 per cent and rising.

Put like that we are doing really well as I have noted in my updates but there are undercuts to this. For example it does not cover the issue of underemployment where the data we get is poor nor does it cover the weak levels of wage growth we keep seeing. There is for example an element of truth to this from David ( Danny) Blanchflower.

“In the gig economy they fear that they are going to lose their jobs. Other groups of workers fear that if they ask for higher wages, the employer will bring in workers from Poland or farm everything out overseas.”

Today’s data

The opening salvo from the release will make the headlines.

UK gross domestic product (GDP) was estimated to have increased by 0.1% in Quarter 1 (Jan to Mar) 2018, compared with 0.4% in Quarter 4 (Oct to Dec) 2017. UK GDP growth was the slowest since Quarter 4 2012.

So a weak number which was basically driven by this.

construction being the largest downward pull on GDP, falling by 3.3%……..However, construction contracted by 3.3%, contributing negative 0.21 percentage points to GDP.

Thus we see that in essence it was construction which was the player here and we get a confirmation that it is in recession.

This marked the second consecutive quarterly decline in construction output and the sharpest decline since Quarter 2 (Apr to June) 2012.

As we drill deeper we see that the issue was probably more related to the collapse of Carillion than the weather but both were factors.

The latest published monthly path for construction shows that output fell by 3.1% in January 2018, the largest monthly fall since April 2012. This was due mainly to an 8.3% fall in private new housing, following a historically high level of output in December 2017.

The campaign to blame the weather needs to note that it also had a positive effect on the numbers.

Production increased by 0.7%, with manufacturing growth slowing to 0.2%; slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures.

Comment

The headline number had the power to shock and will no doubt be emphasised by the media. Coming with it was the implication that there was no growth at all on an individual or per capita basis. However if we apply some critical analysis we can note that construction and agriculture subtracted from the numbers as we might have expected by a total of 0.22%. Accordingly rather than the “plummet” advertised by some the real situation is much more like what has taken place in the majority of our economy.

The services industries were the largest contributor to GDP growth, increasing by 0.3% in Quarter 1 2018, although the longer-term trend continues to show a weakening in services growth.

So we have shifted lower but perhaps from 0.4% to 0.3% especially if we remind ourselves that the UK economy has in the credit crunch era tended to produce weak first quarter numbers.

However the Forward Guidance of the Bank of England from as recently as at the time of the February Inflation Report is in disarray. From the MPC ( Monetary Policy Committee ) Minutes.

The Committee judged that the prospect was for continued growth in 2018 Q1, although the balance of
evidence at this early stage pointed to growth being a touch lower, at 0.4%, than in 2017 Q4………The Committee’s latest central projection for GDP growth had the economy growing at a steady pace,

It would seem that the May Bank Rate rise will find itself being deferred to 2019. Here is the economics editor of the Financial Times Chris Giles who  you may recall was telling us that the road to a Bank Rate rise this May was a triumph of Forward Guidance by the Bank of England.

Poor GDP figures today means the cost of keeps growing and hopes of a snap back more urgent

 

30 thoughts on “Will the Bank of England ignore the UK GDP data and raise the Bank Rate in May?

  1. No, it will be Carney’s latest excuse to print money as even the ever-optimistic Nationwide says house prices only rose just over 2% in the last year.

    I was at a CISI meeting last night and the future events list includes a “Bank of England update” probably from the local agent. Think I will go along with a badge saying “Steve Priest for Governor” and I will namecheck Shaun as the Unreliable Boyfriend will not have put up rates.

    • Great news if Carney does more QE (which I think it what you mean by money printing). Inflation is clearly at risk of falling below the target and long term interest rates are indication slow growth for decades to come.

      • Yes always a good idea to print money. But seriously do you actually believe what you write about more QE or are you just economically illiterate?

        • I support more QE yes. So far it has been a big success, we have been able to retire significant amounts of debt without creating inflation. So very much a free lunch for the British taxpayer, not including any stimulus benefits. A good counter factual would be if QE had not been done, we probably would be looking at Greek style deflation and depression. Better than QE would be some kind of level targeted NGDP growth to stabilise money supply over the long term, with the forecast used being from market instruments rather than by wise men in the ONS, which as our esteemed host often points out, are rather fallible.

          • Yes a great success so successful they have to keep interest rates at emergency rates and print forever more, making the rich vastly richer by inflating their asset prices at the expense of workers aka the consumer. What a way to run an economy, but its good to see some financial illiterates still think all is tickityboo.

            Your free lunch has been paid for by someone else, but you’re so exceptionally ignorant you lack the basic intellect needed to see this.

          • Having kept rates below where they should be since 2001, the CBs were trying to avoid the inevitable bad recession and house price falls (esp in UK). So, there was not much room to cu rates before we fell through the liquidity trap at about 4%, when money poured into assets as a quick way to make money.

            The idiots at the BoE thought that minimal savings rates would prompt savers to spend and others to borrow. In fact, once savings return fall below inflation, savers merely save more. as house prices rise, disposal income falls and especially in tricky times, people also get nervous. Consumption collapses and with it GDP, so private sector wags do not rise. We have now reached the point where asset prices have topped out and GDP has stalled. Consumption is only maintained with rising unsecured debt.

            If you have a recession like the early 80s and 90s, you clear out the dead wood and debts are sorted out. It is painful, but only for 3-5 years.

          • Ok – two things – explain to me how printing money, or expanding the money supply in technical speech causes low market interest rates – surely printing money causes higher inflation which makes people lending money want to have a higher interest rate? So isn’t the more likely theory that if there are low interest rates it must mean too little money printing? And where is the asset price inflation you keep talking about? I am in investor in property and shares and I don’t see much growth since 2009 compared with what I saw previously when inflation was higher and so were interest rates (and there was no QE).

            Again, this is absolutely standard economics, if you want high market interest rates you must have high inflation.

            On reflection, re-reading your posts I think you are both confusing market interest rates with the short term BOE target rate. You realise they are not the same right? The BOE can directly set interest rates for the economy, they do so by adjusting the money supply to keep the short term rate at their target. But if the BOE sets the money supply at too low a rate than the market demands, then long term market rates will fall.

          • Simple – once you drop rates below the liquidity trap level and then onwards with QE, money goes into assets as there are no returns in safe assets. If you think there has been no house price and share inflation since 2009 and indeed since 2001, then Insuggest you look at Rightmove’s house price information. The bulk of assets are bought with borrowing (the effect is similar to derivatives), the capital value of which will have to be paid back in any conditions. When prices are 5x incomes and more, it follows that there is less money for consumption and inflation demand pull fails. If policy is based on consumption inflation(let alone fiddles used by the BoE) , rates are further reduced in the failed belief (or standard economics you refer to) that it will raise consumption.
            Long-term rates are based on short term rates and time risk plus inflation expectations. With. Consumption inflation on the floor, why should long-term rates be expected to rise.
            If you act on policy to raise rates, savers will start to spend as their savings maintain value, while higher rates reduce house prices and so that drag on consumption reduces. With greater demand, inflationary pressures will build to maintain rate expectations in the long term.
            Inverse rate curves are simply a reflection of long term gloom, created by bad policy, but as I said before, to change anything, Carney would have to admit he has been wrong.

          • I think we’ve spent almost 10 years proving it (near Zirp +QE) doesn’t work as hoped and has unintended consequences – – which some see as benefits.

            Will it work eventually? I don’t think so. Eventually the zombies- The bust banks, businesses and households -will eventually actually go bust. The economy will cease to be supported by a sort of ‘Chapter 11 protection ‘ monetary policy.

            As always I could be wrong

          • ChrisA, have you noticed the increase in Asset prices. Alomost entirely driven by QE and the disenfranchisement of the young too. I suggest that you use a looking glass at your own asset portfolio, shrink it by 65% and then come back on the forum say, oh yeah I’m cool with that.

          • Looking at the various posts here, I would make the following comments:
            1. The reason why QE drives interest rates down is that the BoE uses the money to buy government bonds. Thee then go up in price and the yield is then reduced, ie the bond only pays out say 1% yield even with a nominal coupon of 2% if the bond has gone up in price
            2. The government then takes this very cheap yield and issues more debt, this time with a smaller nominal yield
            3. Simultaneously the BoE offers unlimited credit to the banks at 0.25%, thereby removing the incentive for banks to pay much interest to anyone else
            4. People then go and buy houses etc as the interest on the debt is so low that they can afford large mortgages.
            The reason why people have generally been against it are to do with the two extreme examples of Weimar Germany and Zimbabwe, where so much money was created that people lost faith in the currency resulting in hyperinflation and collapse.

          • James, I agree with your points, and I for one am against the current policy but not because I think we’re headed for hyperinflationary hell. For years attempts to support the banks and the economy through ultra loose monetary policy has resulted in rising asset prices and loads of cheap debt. Now finance is all powerful, growth is miserly; Labour can’t compete with Capital, and we have too much wealth inequality. We have a zero-hours gig economy going nowhere.

            OTOH things don’t look too bad. Riding high on a bubble and making money looks smart – Amazon is the retail king. Technological advances (Apple, Google, Netflix), cheap Asian tat in the (on-line) shops and high house prices make people feel wealthy but that wealth can pretty easily disappear with a downturn in house prices, earnings and the ‘almighty’ GDP. If that happens monetary policy has nowhere to go – except into negative rate territory with more QE. Carney in Wonderland becomes the new reality!

            So I think a crushing downturn is more likely than high inflation. Plus – the policy hasn’t really worked anyway; if it had the emergency would be over.

  2. Hi Shaun
    I’m still betting the emergency will keep plodding along into its eleventh year.

    Are CBs hoping a little more of the same treatment just might work? Or maybe they think it won’t make things worse and it’s safer to look busy and do do nothing.

    • Indeed – we all need to be agitating for a change in approach, the current “discretionary” approach where everyone has to guess whether or not Carney had a good breakfast or an argument with his wife and the impact of this on his decision making on raising short term interest rates is just not working. We need a formula like NGDLT where everyone can understand the rules.

      • small correction

        ” Guess whether or not Carney had a good breakfast and seen Mrs M memo, or an argument with his wife and did not …..”

        Forbin

  3. Hello Shaun,

    Well as you need to take of 2 off the annualized GDP figures then we’re recession again…

    will he raise rates ? is wage inflation taking off ?

    or will ” Masterly Inaction” come to the fore ?

    can we trash the economy a little bit and then declare Brexit an own goal and cancel it ?

    stay tuned , same bat time , same bat channel…………

    Forbin.

    • Hi Forbin

      Well of course the Bank of England had been telling us that wage inflation was on the rise. I think Gertjan Vlieghe was the one who pressed the case in a recent speech but several of them have referred to it. But sadly just like in so many recent years there is not much of a sign of it. If we look at private-sector wages they did rise at an annual rate of 3.4% in December but have gone 2.9% and 2.3% since. The numbers are erratic but that is not a rise.

  4. Hi Shaun

    The idea that this is a temporary dip in the UK has to be taken in the context of softening figures in areas like construction for some time now and the picture generally in Europe.

    I am amazed that we’ve gone so long without a marked slowdown or recession but we will have one sometime. I think the BOE would be chancing it to increase rates in May; they’ve already backtracked once as the last increase was simply correcting the mistake they made at the time of the referendum and I don’t think they want a repeat of that episode. It will of course be uncomfortable for Carney but to most observers he cannot lose face over this as his reputation is in tatters already.

    I’m betting on status quo until shipwreck time.

    • Hi Bob J

      You might be right about a recession or to be more precise that one may happen soon, as of course we will have another one which will be presented as such a surprise that it could not be anybody’s fault. Oh and if we are about to go into one Mark Carney will have none of the reticence about cutting Bank Rate that he has had about raising it. After all he enjoys an August cut.

      For now the evidence is just for a slow down in the first quarter but should service sector growth continue to decline then to coin a phrase, all bets are off.

  5. Hi Shaun,
    really interesting as usual. On the unemployment figures:
    1. Although you are undoubtedly right as to underemployment in the UK, I imagine that this will be even more of a feature in the other countries listed;
    2. Not only is long-term unemployment as a percentage of overall unemployment higher in France, Italy and Greece, but it is of course a percentage of a higher number. On my basic maths, I think that long-term unemployment in France is greater than total UK unemployment.
    As to Greece, I just weep at the numbers. 72% of unemployed have been so for more than a year. What a mountain of personal tragedies and poverty that must mean. I am actually surprised that revolution isnt in the air.
    Have a good weekend

    • Your right James.This country is a basket case economy nothing is long term,everything is for sale even Wembley Stadium ,prostitute Britain with its news delivered by presstitutes

  6. 2 points about long-term unemployment:
    1) When people become unemployed, they tend to get into debt, as they restructure their finances. Debt which takes far longer to clear than build, and means that, for some time after resuming employment, their debt-clearing means that they do not fully take part in the economy.
    The fewer long-term unemployed as a % of the out-of-work, the higher the relative rate of non/under-participation in the wider economy, and has the effect on the economy of a higher rate. Obviously exacerbated by under-employment.

    2) Govt. benefit sanctions. With approx. 1-in-4 targeted, and the increased likelihood of the long-term unemployed falling foul of, what can be, extremely petty rules, you end up with a million extra self-employed window cleaners on universal credit and no intention of working.

    https://www.theguardian.com/society/2016/nov/30/benefits-sanctions-a-policy-based-on-zeal-not-evidence

    • Apparently an unspecified number of the self-employed will be hit by changes due to Universal Credit, as in the case of a friend of mine who lost his long term job through no fault of his own. Rather than continue with the hell he described to me of being on JSA, he has since been scraping by working long hours at basically anything he can get. I am sure he is not alone, except of course for those who have the handy stereotype of they all being nothing other than shirkers

      Some government spokesperson when tasked on this replied that it was not their job to support unviable enterprises – I had long hollow laugh at that one.

      There but for the grace of the market…………

      • “Some government spokesperson when tasked on this replied that it was not their job to support unviable enterprises …”

        I bet no one in earshot blurted out ” what ? like the Banks ? ”

        frankly the Banks are the economy – or so they think….

        Forbin

        • Open goal…..sadly true the money that has been spent supporting these criminals…as they used to say a criminal record as long as your arm…..yet they still contrive to lose money yet they create it out of thin air as loans…..the most incompetent criminals imaginable

      • I meant no disrespect whatsoever to anyone without a job, nor did I mean that the self employed, or the unemployed, are lazy. My point was that in order to avoid the petty-minded nastiness of the DWP, it is simpler to become a window-cleaner or similar, even if there are already a dozen in your street.

  7. I can just imagine Chris Giles’s hand shaking as he pens his latest biased FT opinion piece, fearing the inevitable ridicule and barbed observations from our Shaun.

  8. Replying to Eric above (the sub-replies won’t let me reply direct), I didn’t mean that I expect QE to lead to hyperinflation – I was just trying to clear up some of the earlier queries as to why QE cuts interest rates and why people don’t like it (or used not to like it).
    For what it’s worth, I do think that QE has created doubt as to what money really means, since an electronic creation such as QE seems to break the link between “real” money,taxes and debt and deficits. After all, if the government can simply run vast deficits and get the BoE to buy the debt, why bother to have any fiscal discipline. When people ask Corbyn where he gets his magic money tree, I am amazed that he doesn’t just say “QE”.
    I think that these doubts have also led to crypto currency popularity, as why should governments have the only printing press.
    When you add:
    1. All of Shaun’s comments about governments removing cash from consumers;
    2. The fact that millennial etc hardly ever pay in cash
    I think that we have gone a long way done the path of money just being a computer entry, totally unrelated to any other form of store of value/taxes/income etc. Where that leads, I have no idea!!

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