Even better than expected UK GDP seems unlikely to stop the Bank of England cutting interest-rates

Today brings the UK back into focus as we have what is called a theme day with data across a wide range of economic influences such as production, manufacturing,services ,construction. trade and most of all GDP ( Gross Domestic Product). Yes it is too many in one go and monthly GDP has already demonstrated a track record of being erratic but that has not deterred our official statisticians. But before we get to that the Bank of England has continued its campaign to talk the UK Pound £ lower over the weekend. Here is the Financial Times from yesterday.

An influential member of the Bank of England’s monetary policy committee has said he would vote for a cut in interest rates later this month if key data do not show a bounce in the economy following the December general election.

Have you guessed who it is? I have to say I would be far from sure as my view is that the other 8 members of the monetary policy committee or MPC exist to say “I agree with Mark (Carney)”. Mind you the Financial Times does love to flatter the establishment as we note that my theme that the other 8 members serve little or no useful purpose these days gets another tick in the box. Anyway here it is.

Gertjan Vlieghe, an external MPC member, said his view on whether to keep waiting for an economic revival or vote to lower rates from 0.75 per cent to 0.5 per cent would depend on survey data released towards the end of January.

That does not rule out a move this month as the meeting is at the end of it with the announcement on the 30th although of course they vote on the evening before. For “live” meetings this so-called improvement by Governor Carney is a really bad idea which has been reinforced recently by the news that hedge funds were receiving an “early wire” during press conferences.

We then get more of an explanation.

“Personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live,” he told the Financial Times. “I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”

You might think that after the post EU leave vote debacle when it mistakenly rushed to cut interest-rates because of the surveys  the Bank of England might steer clear of relying on them so much.

We will get a lot of information as soon as the end of January,” said Mr Vlieghe. ““We’ll get a lot of business and some household surveys that cleanly relate to the period after the election, so that will give us an initial read as to how people are responding.”

We do get a slightly odd section which suggests that someone at the Financial Times has actually believed all the Forward Guidance mumbo-jumbo.

Financial markets are not currently pricing any movement in rates above the current 0.75 per cent over the next five years.

If you look at the five and two year Gilt yields in a broad sweep they have been suggesting a cut for some months now as regular readers will be aware.

Of course the media keep fooling for this as they get their moment in the headlines as we recall this from Dharshini David of the BBC last May.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for 

She fell for the promises of the unreliable boyfriend hook line and sinker and in response has blocked me on Twitter.

Forward Guidance

It is hard not to have a wry smile at the Bank of England moves as the basic data has turned out better than expected. Let is open with today’s main number.

Rolling three-month growth was 0.1% in November 2019, down from an upwardly revised 0.2% in October.

Not much I admit but in the circumstances any growth is okay. Also that sentence is both true and misleading because October was originally reported as 0% but there have been ch-ch-changes since.

The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

We previously were told that both 3 monthly and monthly growth were 0% whereas now they are 0.2% and 0.1% respectively. So we are ahead of where we thought we were in spite of this.

Monthly gross domestic product (GDP) fell by 0.3% in November 2019, driven by falls in both services and production. This followed growth of 0.1% in both September and October 2019.

The monthly numbers are unreliable and are showing hints of a downwards bias as explained below.

However, both September and October 2019 have been revised up by 0.2 and 0.1 percentage points respectively, giving extra strength to the most recent rolling three-month estimate. The revisions to September were predominantly driven by new construction data, whereas October’s revisions were driven by new data in services and production.

It is good that the numbers are improved but the truth is that the variation is presently too high for them to be useful.

As to upwards surprises well the GDP number reinforces one from later on last week.

The latest survey of UK Chief Financial Officers shows an
unprecedented rise in business sentiment. The fourth quarter survey took place in the wake of the UK general election, between 13th December and 6th January. Confidence has seen the largest increase in the 11-year history of the survey taking it to its highest
ever level. ( Deloittes )

Manufacturing

If we look for the other side of the coin there is this from this morning.

The monthly decrease of 1.7% in manufacturing output was because of downward contributions from 10 of the 13 subsectors; led by notable falls from transport equipment (3.4%), chemicals and chemical products (4.7%) and food, beverages and tobacco (1.8%).

The November data meant that the last 3 months were poor too.

 compared with the three months to August 2019; this was led by manufacturing output, which fell by 0.8%.

If we look into the detail of the November data there is more than a little hope that it was driven lower by factors which we have got used to and in the latter case has been doing well overall.

the motor vehicles, trailers and semi-trailers industry (6.1%), which was impacted by factory shutdowns during November 2019…….widespread weakness from chemicals and chemical products (4.7%), following on from the impact of maintenance and shutdowns.

But the reason I have pointed this out is not only to show the other side of the coin but because this area is seeing quite a severe depression.

Manufacturing output in the UK remained 2.9% lower for the three months to November 2019 than the pre-downturn peak for the three months to March 2008.

It looked for a while that we might escape it but the impact of the trade war left our fingers grasping at air as we now face this.

Additionally, the current three-monthly rolling index level is the lowest since July 2017.

Comment

Regular readers will be aware that I thought the Bank of England was readying itself for an interest-rate cut last year. Now with its usual impeccable timing it seems to be forming up as a group just as the economic news shows a hint or two of being brighter. In addition to the data above this months Markit PMI showed an improvement as well albeit to somewhere around flatlining. The Deloittes survey was potentially especially revelant as it relates to business investment which has been weak and thus could have a spell of “catch up” now the political  and Brexit element looks clearer. As ironically Gerthan Vlieghe pointed out.

His main expectation was that the UK outlook would improve because there was a reduction in no-deal Brexit risks, plans for increased public spending and better news about a stabilised global economy.

But there is more to it than this as there is the fundamental issue of whether another 0.25% cut will make any difference. Having watched the latest prequel to the Alien(s) series of films over the weekend I am reminded of the words of the little girl Newt.

It won’t make any difference.

If we look at the weakest sector manufacturing all the interest-rate cuts we have seen have not turned things around and prevented a depression. Indeed if we look to Germany as we did only last week even an official interest-rate of -0.5% has not shielded its sector from the present trade war.

Podcast

20 thoughts on “Even better than expected UK GDP seems unlikely to stop the Bank of England cutting interest-rates

  1. When I popped my head above the parapet last week and suggested the BOE needed to cut now there was only a 60% chance of cut in May and got shot at, but my helmet can take the shots!

    A day or two later there is now a 50% chance of a cut this month:

    https://uk.reuters.com/article/uk-britain-economy/uk-economic-growth-weakest-since-2012-in-november-idUKKBN1ZC0S9

    The economy is still weakening however

    I maintain my stance the BOE is behind the trend a rate cut now is needed for a shot of adrenalin and help business investment and personal finances.

    • Hi Peter

      You know my view that I am not a fan of another interest-rate cut but that I have been expecting it for a while.

      Thank you though for the tweet about the UK trade figures which were really rather good.

      “The total trade surplus (goods and services) widened £0.6 billion to £1.1 billion in the three months to November 2019, largely driven by rising exports of unspecified goods (which includes non-monetary gold); excluding unspecified goods, the total trade deficit narrowed £1.0 billion to £1.1 billion.”

      Services exports did particularly well. As ever the main danger is the (in)accuracy of the numbers.

  2. Certainly looks like business as usual at Threadneedle St.The usual bunch of sycophants and cronies all going along with whatever the governor says, which is always lower rates, negative guidance and fears for the economy going forward(to help keep downward pressure on the £) and following the mass insanity of central bankers worldwide as they try and inflate us out of a debt fueled bubble in financial assets by inflating them even further. However the false hope of our new government delivering BREXIT is now fading and being reflected in lower sterling again, now that Barnier,Coveney et al have more or less said the EU’s bargaining position(read dictating to the UK and reusing to concede anything)is still in place and not changing, and admitting that a trade deal is virtually impossible to be achieved before 31st December.

    You also now have the ludicrous scenario where the Swedish central bank, who had been lowering rates during the overheating boom phase of their economy, is now raising rates going into the inevitable downturn, the ECB, having discovered that negative rates are making things worse by driving down demand and inflation are going to cut them even more and make them more negative, the Fed have convinced the entire world that share prices can never go down, and are watching over the melt up of the US stockmarket as they prepare to add more stimulus via NotQE4 almost on a daily basis, and push its withdrawal back further into the future as its temporary nature becomes err… more temporary.

    And so what is the good “old lady” to do but join in, it would be impolite not to what? As Shaun says, what possible difference can a quarter or even a half point cut make here now to literally anything?
    Regarding the podcast, building here in Birmingham is booming, with construction around the centre resembling London type levels, mainly conversion of old office blocks and factories into apartments, so any talk of a looming recession can be taken with a large pinch of salt, in fact I am getting bombarded with adverts every time I go on YouTube telling me what a good investment buying these new apartments is, which makes the decision to cut rates even more difficult to understand, but central banks are now in the business of keeping shares and property prices inflated and NEVER EVER allowed to go down – the real economy doesn’t even come into it.

    Here is a video of a typical property investor these days, I work with loads, just like him, I defy you to watch this video and not throw up.This is what our central bank believes is its role today, to keep arseholes like this in business:

    • I got to 48 seconds which took some effort, but i thought only mockney wide boys of the late 80s wore red suits. Seems i know nothing!

  3. Better if you look at the three month rolling rate but weaker by -0.3% in November and weakest since 2012 !

    November data did in fact miss most city forecasts but they are hoping a bounce back in December and business optimism improving.

    mmm

    Its been the worst Christmas for many a year however and its not just clothes, the public cut down on food less waste and concerned about sustainability.

    Over 3,000 jobs are going in the retail industry this month, and with the minimum wage going up in April more jobs will be lost in retail this year.

    Well I am not fully convinced the UK economy is on an upward trajectory and I said last week the BOE should have already cut the BOE rate. maybe it wouldn’t make a lot of difference to most mortgage holders but business finance is also tied to BOE rates.

    There were two BOE members voted for a cut the last time around and another 3 been vocal since .It will be a very close call no imo and I think the BOE should cut at the next meeting I still feel they are behind the trend.

    Now for the down ratings!

    • Hi Peter

      No down ratings so far!

      As to Christmas we do not yet know the full picture and anyway there is a catch which is that an interest-rate cut does not fully work for around 18 months. So the real question is what will 2021 and beyond be like.

      In other news I expected Danny Blanchflower to be active today but I did not notice him.

  4. Isn’t right that changing an interest rate takes 12 to 18 months to impact, so waiting for this month’s fantasy figures to be announced, is a bit late!

    • Foxy

      It does take time to feed through that is why 2 members voted for a cut a number of times.

      That is why I would have voted for a cut last month.

      Put it this way the cheaper borrowing will make a deference to variable rate mortgages and bank loans.

      I take the view every bit helps however small.

      I also take the view the world economy has changed it is slowing down and people are changing their views due to warnings of consumerism damaging our world.

      Inflation is less of a worry now and its a new world of economics high interest rates a distant past.

      • Why do you think constantly kicking the can into the future is the way to go?

        Why do you think recessions must be avoided at all costs?

        What do you think is going to change in 2 years. when zombie companies and the over inflated property market are still drawing in sums that are stopping the economy from being reborn?

        • Partly because Joe Public is in dire straits:

          TSB from BBCA business live|:

          “We borrowed a staggering £6.6bn to pay for Christmas; some £435 each.
          That’s according to a TSB survey of 2,000 people.
          The bank reckons a fifth of people overspent on their festivities and consequently put themselves into debt.
          And the debt woes will continue for most of the year as almost a third of people will pay the amount off in monthly instalments on their credit card.
          “Credit cards and other forms of borrowing can be a vital lifetime in helping spread these costs yet can leave us with debt hangovers as we enter the new year,” warned TSB’s Craig Blundell.

          • So quite simply as we’ve over a decade of ZIRP which has enabled people to borrow more than they should, when from 1997-2008 they borrowed more than they should, you want even lower interest rates to fix the problem, so they can continue to borrow even more.

            Why can’t you just accept we need a recession and that people will have to lose jobs and houses, and that endless socialism for these people doesn’t work?

            You do realise your and the BoE way of thinking ends with far worse consequences when “the can” can no longer be kicked into the future.

            I think its abhorrent that people who have benefited from the absurd state of the economy over the last 2 decades wish to push what should be their financial pain onto the young/non asset owners.

        • Back To The Future! Arthur,
          Back to a time when we had an emergency base rate.
          And we can’t wait to get there.
          Kick it into the future with a good dose of jawbone (aka Forward Guidance). And never ever look back to try to understand why it hasn’t worked for over 10 years.

          And as for the counterfactual. It couldn’t be worse if it depended on Alice trying to find a path out of the woods.

          What a mess.

  5. I agree Joe Public over borrowed but do we really want the UK economy to crash which may cause more harm than good?
    We have to face it interest rates are falling around the globe and I think we need to follow and negative rates at that!

    Popcorn anyone?

    • dunno about need but its game,set ,and match!

      here , theres space on da sofa, , have some popcorn……

      the show gonna be a long one !

      Forbin

    • If it crashes-and it should to punish those who have held the country to ransom in order to enrich themselves, it will and should teach those greedy fools(like the geezer in the youtube video above) a well earned lesson that there is no such thing as a guaranteed investment – but central banks are now trying to do just that – guarantee every speculator never loses – at the expense of those who either could not afford to participate(thus widening the wealth and inequality gap) or those who chose not to, thinking rather naively that central banks and governments would eventually come to their senses, the problem is they haven’t, and are now doubling down on previous errors.

      In your world, we can never allow a crash or a fall in asset prices as “it will create a recession”, well I’ve got news for you, recessions have always occurred and are part of the natural cleansing in the economic system that clears away excess capacity that should never have been allowed to have been created, and allows well run company’s with low debt to flourish,and reduces asset prices to where they should be based on fundamentals like supply and demand and that are not artificially stimulated by central bank money printing, you have been totally brainwashed into thinking we cannot have another recession – however slight, ever again by the mainstream media, perhaps you need to read a bit more Zero Hedge?

    • Recessions should be a part of life, just as the boom part is … sadly liars, thieves, financial illiterates and scum like Mark Carney make the boom part far more extreme than it should be.

      But what you’re saying is you trust Mark Carney and his lying, thieving incompetent chums to create a system where there is no more recessions.

      Do you really think they are such intellects and magicians that they can do this?

      You want a continuation of the world where people like me have to go to work and have our money taken off us to fund the financial retards who lack the courage to tell their kids they’re getting a little less this year, and fat fools like Mr Red Suit who makes a living out of being an over leveraged docile version of Mr Rachman.

  6. Manufacturing is suffering not just because of the trade war and Brexit uncertainties. A key element is consumer uncertainty about the purchase of new cars and the most appropriate fuel.

  7. Of course, the other explanation for an interest rate cut is for the BoE to muddy the counterfactual by lifting rates early to take the plaudits for ‘saving the world’ post the election by their prompt action…or indeed taking the credit for stopping things from being even worse. The Bankers are more politicians than economists to my mind. They could just leave them as they are and we could clearly see the effect of any election/Brexit clarity bounce, or otherwise, but that wouldn’t suit their nefarious purposes.

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