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 #Brexit keeps growing and hopes of a snap back more urgent