Today brings the UK into focus and we can start with something rather extraordinary. The recent position for the UK has improved as forecasts of recession for the end of 2022 foundered somewhat on the relatively strong GDP report for November. It is still possible but according to our official statisticians December would have to be worse than -0.5% for GDP. Also as we have been noting the energy situation has been seeing quite a lot of improvement symbolised this morning by the UK having an electricity surplus of 2.5 GW at 8.30 am. As a figure of note we had a record export to France of 4.08 GW so the damaged interconnector must have been repaired and both we and they have a little more energy security.
However one organisation seems to have ignored that.
The UK economy will shrink and perform worse than other advanced economies, including Russia, as the cost of living continues to hit households, the International Monetary Fund has said.
The IMF said the economy will contract by 0.6% in 2023, rather than grow slightly as previously predicted. ( BBC News )
The next bit is rather bizarre unless of course they want the UK economy to weaken.
However, the IMF also said that it thinks the UK is now “on the right track”.
Also the BBC seems to have changed what the IMF does in a curious description.
The IMF, which works to stabilise economic growth, said it had downgraded its forecast for the UK because of its high energy prices, rising mortgage costs and increased taxes, as well as persistent worker shortages.
Actually those who recall last autumn can remember that the IMF was against the UK lowering taxes! Anyway this is a pretty regular occurance from them and unless we did grow by 4,7% as they forecast we need not worry too much.
IMF chief economist Pierre-Olivier Gourinchas told the BBC that last year, the UK had “one of the strongest growth numbers in Europe”.
There is something a little more hopeful in that the BBC has realised its economic coverage has been a problem and has reviewed it.
We think too many journalists lack understanding of basic economics or lack confidence reporting it. This brings a high risk to impartiality.
I think they are trying to change and on a personal level I was interviewed on The Nihal Show on BBC Radio 5 Live towards the end of last year. But to really step forwards they need to start at the top and they have had a succession of economics editors more interested in politics than economics. This has got worse with self-proclaimed “Brexitologist” Faisal Islam.
The Bank of England
This week the Bank of England will raise interest-rates again so let us start with the numbers from this morning from what is always its number one priority.
Net borrowing of mortgage debt by individuals decreased from £4.3 billion to £3.2 billion in December . Gross lending fell from £25.1 billion in November to £23.3 billion in December, while gross repayments were broadly unchanged at £21.0 billion.
It is simply bad luck for the research student who came up on the rota as presenting the morning meeting and they are probably already checking the job ads page. Such checks may get frantic after having to present this next bit.
Approvals for house purchases, an indicator of future borrowing, decreased to 35,600 in December, from 46,200 in November. This was the fourth consecutive monthly decrease in approvals for house purchases, and the lowest since May 2020.
Perhaps Governor Andrew Bailey may be concentrating on his morning espresso as this gets announced.
If the onset of the Covid-19 pandemic and period immediately thereafter is excluded, house purchase approvals are at the lowest level since January 2009 (32,400).
Actually as this is the first time that the Bank of England has increased interest-rates on any scale ( the previous peak was 0.75%) that is hardly a surprise. But inside the Bank of England we are looking at a situation where house prices are the one thing they can influence quite easily and then claim Wealth Effects. So they are no facing the opposite of that. On that road the hits keep coming.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 32 basis points to 3.67% in December, the largest monthly increase since December 2021, when Bank Rate increases began. The rate on the outstanding stock of mortgages increased by 12 basis points, to 2.50%.
With mortgage rates where they now are only those who have to remortgage will be doing so.
Approvals for remortgaging (which only capture remortgaging with a different lender) fell to 26,100 in December from 32,600 in November, the lowest level since January 2013 (25,800).
Unsecured Credit
I have to confess I was expecting more borrowing here as a response to the increased cost of living whereas in fact we were told this.
Individuals borrowed an additional £0.5 billion in consumer credit in December, on net, following £1.5 billion of borrowing in November.. This was lower than the previous 6-month average of £1.2 billion.
The impact of that echoed further as I noted this.
The additional consumer credit borrowing in December was split between £0.5 billion of repayments on credit cards, the first net repayment since December 2021, and £1.0 billion of borrowing through other forms of consumer credit (such as car dealership finance and personal loans), the highest since October 2019 (also £1.0 billion).
In terms of the structure we can easily see why people would switch to personal loans if they can.
The effective interest rate on interest-charging overdrafts in December fell by 116 basis points, to 19.77%. Conversely, the effective rate on new personal loans to individuals increased by 29 basis points, to 8.16% in December. The effective rate on interest bearing credit cards also rose to 19.55% in December, from 19.24% in November.
But the lower total is interesting and will further concern the Bank of England.
Money Supply
We saw a further washing out of the September impact on these numbers.
The net flow of sterling money (known as M4ex) decreased to -£34.7 billion in December, from -£24.0 billion in November. This was mainly driven by net flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money decreasing to -£34.2 billion in December, from -£24.4 billion in November.
That brings the annual growth rate for broad money back to 2.7%. So we are seeing the brakes being applied by the Bank of England here.
Comment
These numbers are pretty consistent.We have a weaker mortgage market and money supply growth and maybe people unwilling to pay a higher interest-rate for unsecured credit. To my mind that again points to the Bank of England raising interest-rates by 0.25% this week rather than the 0.5% many still seem to expect. There is of course the US Federal Reserve in the meantime as a potential wildcard but I expect the same from them.
Meanwhile there is another cleat sign of inflation and indeed financial exhuberance around. Let us look at a timeline for receipts by Brighton football club.
At the time £50 million ( Arsenal) for Ben White seemed a lot
Then £62 million ( Chelsea) for Marc Cucurella seemed a lot
Now £75 million ( Arsenal) for Moses Caicedo is apparently not enough
There are successes here for The Premier League as a whole and for the transfer policy of Brighton which has been quite a profit centre. But there is quite a bot of inflation as well……
Notayesmanseconomics's Blog 
There’s a half a trillion’s inflation to come.
If we have 0-25% rise now, inflation will pick up again in the summer (if it ever lets up at all)
There’s no political reason to mark this post down, so it would be great to no the reason(s) why those who marked me down did so.
I’d be grateful to see & consider it (them).
“I know you’d like to move nearer to your family, but there’s no call for your skills within 15 minutes of your planned new address, so your application to move has been rejected.”
Ministry of Housing 2035.
I’d rather die.
So its down to Charles to stop this and protect us then ? Oh my god, it really is all over then. How did the royal family intervene in the replacement of our population over the last 70 years? we weren’t consulted or allowed to vote on that either were we? And they did absolutely NOTHING.
And I hear they are rolling out the 15 minute city in Bath as well, I leave it to Richard Fairbrass to continue with the warnings:
Hi Shaun
Great article as always. With mortgage approvals reaching rock bottom and the IMF indicating that mortgage costs are a risk, I’m expecting the boe to pull out an FLS style operation.
Mainly because I’ve just remortgaged and they always reduce rates after I do so ;-). But also because the masses dont understand the effects this has and the media dont report on it. Although they will report on how lowering mortgage rates and rising house prices will benefit us all 😉
The wailing about mortgages has only just started and will get louder as the year goes on. We reap what we sow.
Hi Anteos and thank you
For them to reintroduce another FLS they need interest-rates to be much lower. With mortgage rates where they are there isn’t any great gain in the banks getting money at 3.5% today and probably 3.75% later this week.They would need to get it back to 1% or below.
Please do not give them ideas like that…
Hello Shaun,
yup thats the myopic BoE for you , a rate rise in the face of a cost of living crisis…
crisis , what crisis?
Christmas bills due along with rampent food inflation and the fuel bills are coming in ….
if mine are bad then so is everyone elses ..
Forbin
Forbin, I am reading an article in the FT right now. Its about the exit od Simon Case, as head of the civil service. They cite a real salary chart for those servants of the people, in real terms their income is falling… who da thunk it?
Have some sympathy for others.
More anecdotal evidence of our bipolar economy,went to a shopping centre near me to look at TVs at the weekend,there was a queue to get in the carpark and then an hour later a queue to get out, admittedly in a fairly prosperous area,but that’s my point,those who own an expensive house with hundreds of thousands in equity still feel rich,even after the recent spike in inflation,and they were nearly all driving new or nearly new cars/SUV’s,contrast those with the people a few miles away struggling to pay rent or a mortgage and buy food,earning close to minimum wage.
Those in the first group think they are safe with that buffer of equity but should be very worried that they won’t be joining the second group as if there is a long period of high interest rates all that ephemeral wealth will disappear,where will all our national wealth be then ?
Thanks Shaun, the fall in property sales mimics the USA. Its like GFC2… regardless of the BBC spin and gerry mandering of statistics.
Hi Paul C
Seeing your comment I thought you might like this which was rather a burn to Conor Sen of Bloomberg.
Hi Shaun, the Fed ‘dots’ suggest 3 0.25% hikes to come. But services inflation now at 4 decades high after accelerating in December. 0.5% is not off the table, close call.
US housing market in free-fall.
ECB definitely going with 0.5% hike, way way behind the curve with inflation at 9%.
BoE worried about housing, so 0.25%, but if Fed did go with 0.5% this ‘should’ cause fresh move in cable and feed into inflation.
“services inflation ”
yah been hearing about that , $12 Latte with 75% , 100% or 125% service tick boxes 😉
US aint so cheap anymore
Great blog as usual, Shaun.
Today Statistics Canada published its November 2022 real GDP update. Canadian real GDP showed a 0.1% increase from October, just like UK real GDP. While real GDP was 3.1% higher than it was in February 2020, the peak month prior to the pandemic recession, real GDP per capita based on the LFS active population was -0.03% lower. Since the preliminary estimate for December 2022 is for no growth, the December 2022 per capita preliminary estimate falls 0.13% short of the February 2020 peak. With the social engineering immigration policy of the current government, the economy must grow every month by at least 1.0% at an annualized rate to keep real GDP per capita from falling. In December, for which only a preliminary GDP estimate is available, an annualized growth rate of almost 1.3% would be needed to keep real GDP per capita from falling.
Last week, PM Trudeau and his cabinet had a three-day retreat in Hamilton, Ontario’s third largest city, to discuss policy:
https://www.theglobeandmail.com/politics/article-former-bank-of-canada-senior-deputy-governor-to-brief-trudeau-cabinet/
Carolyn Wilkins gave a presentation there. She would be known to many Britons as an external member of the Bank of England’s Financial Policy Committee, but formerly she was senior Deputy Governor of the Bank of Canada. Prior to the renewal of the 2021 renewal of the inflation-control agreement she was musing about raising the target inflation rate to 3% or 4%. This never happened on a de jure basis, although arguably it, or something worse, has happened on a de facto basis. In Hamilton, she apparently argued against any strong fiscal stimulus if the economy should suffer a downturn in the current year. She believed a $5B to $7B increase in federal spending, i.e. about 1.3% of federal revenues, would have about the same inflationary impact as a ¼% decrease in the overnight rate. She believed that our central bank would not ignore such a change, but would raise the overnight rate to maintain its commitment to bring inflation down, rendering the stimulus self-defeating. UBC economics professor Kevin Milligan, one of Canada’s foremost tax experts, also was skeptical about the wisdom of an important fiscal stimulus this year, given the very high debt level carried by the federal government. Kevin was perhaps the major architect of two of the Trudeau governments signature policies of its first term: the Childcare Benefit and an additional tax bracket for high-income earners, so his advice should carry some weight with Liberal policy makers, as it doesn’t come from a rock-ribbed conservative. However, it is not true, as many believe, that Kevin is a Liberal partisan. He has often said that he has never publicly backed any political party and he would be willing to offer advice to other political leaders on fiscal policy.
https://www.theglobeandmail.com/business/commentary/article-ottawa-will-have-to-pay-more-than-lip-service-to-fiscal-prudence-in/
I first met Kevin when he spoke at the Chateau Laurier in Ottawa after the Trudeau government brought down its first budget. I came to jeer but stayed to cheer. He was asked hostile questions about why the new tax bracket he had recommended conspicuously failed to raise the revenues he had said it could. Kevin said that his projection was realistic and he stood by it. It was not his fault if the Minister of Finance had failed to make the straightforward fiscal adjustments to avoid tax evasion that he could have made to collect those revenues.
Hi Andrew and thank you
The immigration issue and its impact on per capita GDP regularly gets hidden under the carpet by establishments. It suits them but they ignore the impact on wages for groups that compete with immigrants for jobs.
As to Carolyn Wilkins after your mention of “Prior to the renewal of the 2021 renewal of the inflation-control agreement she was musing about raising the target inflation rate to 3% or 4%.”. I can see how she git a role at the Bank of England!
Appointing people from abroad can be a strength especially from friendly nations like Canada. But sadly the establishment will pick someone they consider to be “One of Us” every time.
Most analysts and forecasters get it wrong, the IMF got it wrong at latter end of last year so on their track record will get it wrong this year.
Having said all that it does look to me like the UK will struggle to grow this year not helped with all the strikes which will slow down consumer spend and hurt business.
As for the BOE well they cannot do right for doing wrong it is their job to control inflation but I don’t believe they are truly independant there must be pressure from GOV.
If rates go up business isn’t happy if rates go down savers arent happy. In fact lets face it when you look at some of the BOE members they can be so far apart on rates some wanting a cut and some wanting to hike rates far higher than the majority one has to question why that happens but lets face it economics isn’t a precise science.
As for rates you are probably right Shaun a 0.25% rise looks like it is on the cards which is lower than those forecasts for future rates before Rishi became PM if my memory serves me correct.
The UK is not in a good place at the moment but even a slight fall in GDP is not as bad as the economy was expected to perform according to all those economists who predicted mass unemployment in the UK post BREXIT.
Hi Peter
The issue with the Bank of England is as Sir Humphrey Appleby pointed out that you appoint people who do not need influencing. It makes a mockery of claims of independence but that to quote Abba is The Name of the Game.
As to the IMF they have been consistently wrong about the UK since Brexit and always the same way