Today brings the “unreliable boyfriend” centre stage as we come to the moment when he gave Forward Guidance that he will raise interest-rates. Of course he would not be the unreliable boyfriend if things did not look very different by the time the event arrived! Sadly that has been the history of Bank of England Forward Guidance under Governor Mark Carney which has been anything but. From the initial false start of flagging up an unemployment rate of 7% that was supposed to be like the “train in the distance” sung about by Paul Simon but actually then arrived at high-speed it has been an error strewn path. Reuters have put it like this.
The BoE governor’s guidance on the path for interest rates has repeatedly been knocked off course by surprises in the economy, hence the accusation of unreliability from a lawmaker.
Care is needed as there are always going to be surprises and in a way that is a good thing as fans of the novel Dune will know. But there are themes that can be got right and sadly Governor Carney grasped the wrong stick right from the beginning. If we think back to yesterday’s article on Japan its unemployment rate of 2.5% is relevant here as tucked away in the original Forward Guidance was the Bank of England saying the natural rate of unemployment ( which some take as the equilibrium one and others even as a guide to full employment) was 6.5% The utter hopelessness of this view is shown by looking at the UK unemployment rate or even worse the Japanese one. Or if you prefer the natural rate in the UK has been 6%,5.5% then 4.5% and more recently 4.25% which illustrates the words of Oliver Hardy.
That’s another fine mess you’ve got me into
Sadly I do see teachers on social media referring to such views at the Bank of England and fear for what their students are being taught.
Also of course the media do need to keep their place in the pecking order for questions at press conferences and interviews which I think we should keep in mind as we read this from Reuters.
Drab data show Bank of England’s Carney a ‘sensitive boyfriend’
The data view was highlighted here.
Carney’s highlighting last month of “mixed” economic signals shocked investors who had bet the BoE would raise rates to a new post-financial-crisis high of 0.75 percent on May 10.
Since then, almost all the gauges of Britain’s economy have disappointed. Financial markets now point to a less than 10 percent chance of a rate hike on Thursday, compared with 90 percent a month ago.
Britain’s economy barely grew in the first three months of 2018 and bad weather was not the only reason why, official statisticians said last month.
The opening salvo was again drab.
In March 2018, total production was estimated to have increased by 0.1% compared with February 2018.Manufacturing fell by 0.1% in March 2018 compared with February 2018.
Maybe the weather had an impact but not a large one according to our official statisticians. If we look for some perspective we find ourselves continuing the recent theme of a slowing down economy.
>In the three months to March 2018, the Index of Production increased by 0.6% compared with the three months to December 2017, due mainly to a rise of 2.5% in energy supply; this was supported by rises in mining and quarrying of 2.2% and manufacturing of 0.2%.
It is kind of an irony that we find a positive impact from the weather! Although of course for domestic consumers this is a cost and a likely subtraction from other output for those whose budgets are tight.
If we step back and consider the credit crunch era then unless you raise the counterfactual to heroic levels then the £435 billion of QE and an emergency interest-rate of 0.5% seem to have failed here.
Since then, both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.1% and 0.8% respectively in the three months to March 2018.
The news here was better but only in the context of not being quite as bad as we had previously thought.
Construction output continued its recent decline in the three-month on three-month series, falling by 2.7% in March 2018, the biggest fall seen in this series since August 2012.
Here there was much more likely to have been an adverse impact from the weather and the recent pattern has been grim. However the overall picture is rather different to that shown by the production sector.
Construction output peaked in December 2017, reaching a level that was 30.3% higher than the lowest point of the last five years, April 2013. Despite the month-on-month decrease in March 2018, construction output remains 22.7% above this level.
If we consider monetary policy then supporters of the QE era have a case for arguing that there was a boost here from easy monetary policy and perhaps the Funding for Lending Scheme which did so much to reduce mortgage rates. So the implicit bank bailout did help one sector perhaps. The catch comes with the slow down as it was already happening before the Bank Rate rise last November and of course the Term Funding Scheme only ended in February. Even in the wildest dreams of Mark Carney and he has had some pretty wild ones monetary policy does not act that quickly.
Here the news was ( fortunately) better.
The UK total trade deficit (goods and services) narrowed £0.7 billion to £6.9 billion in the three months to March 2018, due mainly to falling goods imports from non-EU countries.
Even data over 3 months is not entirely reliable but the longer data was better too.
In the 12 months to March 2018, the total trade deficit narrowed £13.3 billion to £26.6 billion due to 9.2% export growth exceeding 6.4% growth for imports.
There is some genuine good news for the UK economy there in the growth achieved by our exporters. Because of our long-running trade deficit we need export growth to exceed import growth for us to make any progress. Also I am pleased to point out that earlier this week news appeared that confirmed my theme that our services exports have been badly measured and if we put more effort into recording them we were likely to get some good news.
provisional revisions to the UK trade balance range from a downward revision of £1.2 billion to the total trade deficit (goods and services) in 2001 to an upward revision of £9.8 billion in 2016 (Table 1). The £9.8 billion upward revision to the total trade deficit in 2016 means the deficit has been revised from £40.7 billion to £30.9 billion
As you can see the ch-ch-changes make quite a difference. If we factor in the impact of the lower UK Pound £ since the EU leave vote the narrative shifts somewhat. My opinion is that we have had long-running deficits but they have not been as bad as the numbers produced. As ever care is needed because do we really know this even now.
The main driver of the revision in 2016 came from improvements made to methods used to estimate net spread earnings, which feed into exports of services. The net spread earnings improvement revised trade in services exports back to 2004.
Well done to the Office for National Statistics for making a new effort something I asked for in my response to the Charlie Bean review. Of course the former Bank of England Governor Mervyn King was always keen on some rebalancing although it did not happen on poor Mervyn’s watch. By poor I do not mean financially poor as I am sure Baron King of Lothbury will be enjoying the benefits of his RPI-linked pensions as well as his other work.
The simple fact is that if we look at past Forward Guidance from the Bank of England then its conventional view would be moving towards a Bank Rate cut rather than a rise today. So yet again it has tripped over its own feet. The only factor heading in the other direction is the higher price of crude oil ( Brent Crude is over US $77 as I type this) which will push inflation higher further down the line. Although of course such influences are usually described as “temporary” however long they last and thereby get ignored.
An actual cut would be silly because as I have pointed it before the drop in the UK Pound £ since the unreliable boyfriends latest public U-Turn has been the equivalent of a 0.5% Bank Rate cut as it is. You could argue that would aid a Bank Rate rise but with monetary and economic data slowing I think that now would be a case of bad timing and I am someone who wants Bank Rate back up between 1.5% and 2% to provide a better balance between savers and depositors.
I would not worry too much about Governor Carney’s future though as those at the top of the establishment have a Teflon coating. After his role in the Libor scandal you might think that ex Bank of England Governor Paul Tucker should be in obscurity if not jail and yet apparently his thoughts are valuable. From the Brookings Institute.
Paul Tucker, drawing from his 33 years as a central banker, says that Congress should be much more specific about the objectives it wants the Federal Reserve to achieve and the Fed should try harder to explain what it’s doing
Me on Core Finance TV