There is much to cover about the UK economic situation and let me start with the latest which is good news.
Retail sales volumes are estimated to have risen by 0.3% in May 2023, following a rise of 0.5% in April 2023 (unrevised from our previous publication).
We have been following a pick-up in UK Retail Sales and it continued in May which provides another boost for UK economic output and hence GDP in this quarter. For some reason the Office of National Statistics have omitted the usual three monthly comparison but it too is positive at 0.3%.
So we can start with a theme which is in line with what has been said in the comments section that the UK economy is doing better than the “doom and gloom” in the media would make you think. As I look at the numbers I see that my theme about lower inflation being good for retail sales is in play here. Whilst consumer inflation was at 8.7% for the CPI measure and 11.3% for the RPI my ersatz measure for retail inflation recorded 0.8% for the last 3 months. So an annual rate of 3-4% should it persist. The annual rate by the same method of 6.9% suggests a slowing too.
To this we can add something ignored by the present media obsession with mortgage rates and mortgages. Yes we have seen rises but on the other side of the coin savers will be getting higher interest-rates and there are more savers than mortgagees. So perhaps they are spending it. Economic theory assumes that borrowers spend more than savers but after the equivalent of a nuclear winter for savers since 2009 we can now see what Bank of England Deputy Governor Charlie Bean was talking about.
“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.
As he said it back on the 28th of September 2010 savers have had to eat into their capital by rather more than the “bit” he suggested. He meanwhile has picked up plenty of roles including one at the Office for Budget Responsibility where his forecasting skills fitted in nicely. However, care is needed as inflation is higher than savings rates so real rates remain negative.
The underlying picture for UK Retail Sales may be slightly better due to the Coronation.
Food stores sales volumes fell by 0.5% in May 2023, following a rise of 0.6% in April 2023, with some anecdotal evidence of increased spending on takeaways and fast food because of the extra bank holiday.
So we may see a pick up from this in June.
Finally for this area we see the reverse side of my inflation theme and quite a correction for conventional economic theory.
When compared with their pre-coronavirus (COVID-19) level in February 2020, total retail sales were 17.0% higher in value terms, but volumes were 0.8% lower.
Not much sign of people buying extra to get ahead of inflation as theory argues is there? The numbers tell a different story.
The Public Finances and QE
I thought I would look at these in a different way and we can bring in the Bank of England and its dithering ion interest-rate rises. This after a longish road led to what was something of a panic move with a 0.5% increase in interest-rates to 5% yesterday. Let me take you back to some issues I raised back on September 23rd 2021.
One is the move the fixed-rate mortgages and the other is the fact that the Bank of England QE book is effectively financed at Bank Rate so they are not keen to raise it. Also any rise in bond yields will be expensive for the government which is already facing more debt costs due to the rise in inflation it and the Bank of England have worked together to create.
You can see part of my argument that they needed to start interest-rate rises due to the fact that the increased number of fixed-rate mortgages would mean that monetary policy lags would be increased also. The Bank of England turned a blind eye to this as part of its mishandling of the situation. But my main point about the public finances is that as I highlighted back then QE was being shown up as being a bit of a confidence trick. When Bank Rate was low ( especially when it was 0.1%) then they looked like masters ( and mistresses) of the universe as they bought government debt and had a funding cost of 0.1%. Virtually anything looks good at a finding cost of 0.1% doesn’t it?
If we go back to those days this is why the Bank of England set thresholds of 0.5% and 1% for Bank Rate and all its QE bond buying. Also it was arrogant and did not believe it would need to exceed them. Whereas it had lit the inflationary fires by pumping up the money supply. But returning to the public finances it made itself very popular with politicians when it remitted the “profits” of QE and ignored that these were another form of carry trade. It took the interest gains and ignored the capital risk, Let me give you a specific example of how this has gone wrong. It sold some of its holdings of our 2071 bond last week at 46. It will have paid more than 100 and at times a fair bit more.
So the Bank of England has capital losses just as the UK faces higher debt costs.
In May 2023, the interest payable on central government debt was £7.7 billion, £0.2 billion less than in May 2022,
The fall in inflation has flattered the annual numbers and the real picture is shown by the fact we paid £4.3 billion in May 2021 and £3.4 billion in May 2020. So this year we paid what was previously enough for two years. If we look ahead there will be an issue from UK bond yields being higher as we will be committing ourselves to higher future payments each time we issue new debt. Having borrowed so much for the pandemic we need to issue more new debt that we did simply to replace maturing bonds. For example we sold some five-year bonds earlier this week and had to offer a yield of 4.9% on them.
Adding to this costs here is the way that QE in my opinion meant that the Bank of England was afraid of raising interest-rates which meany that we will see more inflation and higher debt costs.
Our national debt is in relative terms not too bad but on its way to subsidising the banks the Bank of England inflated it too via the Term Funding Scheme.You may have read that our debt to GDP ratio passed 100%. Whereas.
Public sector net debt excluding the Bank of England (BoE) was £2,298.6 billion, or around 89.6% of GDP, £268.6 billion (or 10.5 percentage points of GDP) less than the wider measure.
Some of that represents QE losses so a running figure would be more like 95% I think.
Comment
The UK economy is doing much better than the Bank of England expected. I am no great fan of the PMI numbers but they continue to show growth.
At 52.8 in June, down from 54.0 in May, the headline
seasonally adjusted S&P Global / CIPS Flash UK
Composite Output Index signalled only a moderate
expansion of private sector business activity. ( S&P)
Plus there was this.
UK consumer confidence improves to the strongest in 17 months ( Bloomberg)
Switching back to the Bank of England I note that a past Financial Secretary to the Treasury ( David Mellor) is calling for the Bank of England Governor to be sacked. He has a point as we mull that the higher you climb the greasy pole the less you seem to be made responsible for your actions.
Notayesmanseconomics's Blog 
Hello Shaun,
It would be nice to have some independance in the figures , like Shadow stats. Until then I’ll take anything HMG publishes with a large amount of salt given their track record to tell lies when they think they can get away with it or to tell half truths if they think they cannot.
Anecdotal but it seems like a 2 speed economy again.
Anyway a nice weekend ahead so break out the BBQ & Beers !
Forbin
Hi Forbin
The problem with Shadow Stats is that it does not update its numbers. Whilst there are bad changes in the numbers ( usually called “improvements” by official bodies), there are also ones that need to be made because the world and people’s economic patterns change.
Actually I have bought a bottle of prosecco as a friend is returning to the exercise class I do Saturday mornings after she had the same ACL knee injury as me. Time for a small celebration…..
shaun,
“The underlying picture for UK Retail Sales may be slightly better due to the Coronation.”
I don’t think it just the “coronation” effect the weather has been warmer as well and warm weather makes people feel better so they tend to shop more for fashion in particular.
As you say consumer confidence has improved the downside to all this is while there is a demand out there it will tend to push up inflation. There have also been some good wage rises they may not make up for inflation but still place more money in peoples pockets bear in mind more people own their own homes.
However as mentioned above the further downside of an improved economy and healthy consumer spend we could end up with more interest rate rises, some analysts are forecasting 6% or even 7% as tops now, moreover no cuts this year and possibly no cuts early next year.
As to how this will affect the propery market I don’t expect a crash but I do see more falls to come and most people will like some reality in relation to propery as house prices are 50% too high in some cases.
Most retail shares were down this morning presumably due to interest rates concerns which will in due course slow down consumer spend.
Note how many mortgages are now 35 years.
So, say you go into tertiary education, then get a job, where, in order to save for a mortgage deposit you allow no money for fun.
That’s likely to mean you’ll be well past 25 when you get your mortgage; well past sixty when you finish paying.
A lifetime of servitude to the banks just for decent, secure shelter.
If the borrower is able to sustain their payments inflation will of course reduce the debt in due course so it isn’t as bad as it sounds.
Tell borrowers that now.
Hi therrawbuzzin
I noted the mention of a 40 year term in the message below. These things have a habit of coming to fruition…
better start calling that “rent” then 😉
So if I wanted interest rates as high as possible, I’d want the rate rises as big as possible, without it being absolutely obvious, so that I could get my raises in before the economic news turned?
Question: since up to now, the elites have wanted as much inflation as they could get away with, as it lowers debt/gdp ratios & the value of that debt, why is it all hands on deck, now?
They could have got away with a 0.25% rise, or even keeping the same rate, why go 0.5%.
(Remember, in Shaun’s post yesterday was a quote from Gov Bailey, in 2021 about the risks of not raising then, so Hanlon’s Razor CANNOT APPLY)
buz,
“They could have got away with a 0.25% rise, or even keeping the same rate, why go 0.5%.”
Some were calling bigger hikes previously and as inflation is remaining sticky and the previous hikes made no difference the BOE is now thinking a bigger hike is needed now.
Unfortunately not only does a hike effect borrowers it also affects highly debted companies as well.
If companies are highly indebted, after a decade of extremely favourable conditions, then it is only those favourable conditions that kept them going in the first place.
Not a good month on borrowing but on the other side of equation the FY23 borrowing was reduced by another 3B and even the first month of FY24 was reduced by 2.7B after just over four weeks so the accuracy of this data leaves a lot to be desired. In fact last month was largely due to a 3.5B increase in income. Furthermore the OBRs FY23 forecast now undershot 18B or nearly 15% however given where rates have gone perhaps it was just as well DMO sold more gilts than it needed to as its got them at a lower rate. The DMO still getting over twice bids for gilt auctions albeit rates are creeping up at least they can sell them as a lot to shift this year.
Hi Nickrl
One of the lessons that looking at the monthly UK public finances is actually how little they know. In the era of big data and all the IT advances you would think that they would know basic tax receipts ( VAT, Income Tax etc). But as your reply indicates they do not so each month is in what in modern terms is called beta for several months.
As these yields I am not surprised the DMO is seeing more bids. I am sure there will be some international buyers around with £ bond yields relative to others.
Everyone is falling for the MSM message that central banks are drastically fighting inflation and raising rates so high that they might actually cause a recession/depression or financial meltdown. If they did it would be because they encouraged and nurtured the biggest asset and debt bubbles in the history of the planet, if they were causing as much damage as they are making out:
1. Why is it difficult to get table reservations at restaurants.
2.Why are second-hand car prices at the same ludicrous levels as covid mania two years ago, when there was supposed to be a chip and parts shortage(that no longer exists).
3.Why are stockmarkets at or close to all time highs?.
4. Why is most call buying in the US zero days to expiry – i.e outright gambling on same day share price rises?.
5. Why was last Friday a record for the number of call options bought in the US?.
6.Why is there frantic speculation in the next big thing – i.e the next bubble – AI?
7.banks have got around tougher lending standards by now offering 35 year mortgages.
They are not even close to fighting inflation, and as we predicted on here years ago, they would never threaten the housing bubble by raising rates in the event of an inflation spike. Yes they are causing massive pain to many who overstretched themselves and food and energy inflation has made this pain worse, but they know exactly how far to push this and the calls for government assistance are getting extremely loud. Hunt has had meetings with bank bosses and told them to go easy on those in arrears to avoid repossessions at all costs. So yes there is pain but if they were serious they would have to raise rates a lot more that they have, yes it would mean the asset bubbles would burst and the economy would be severely damaged but that is the price to pay for all the decades of keeping rates artificially low.
People can’t have it both ways, they can’t complain about inflation destroying their finances and then complain about rising interest rates, this artificial bubble economy has been built by successive governments and the Bank of England, as prices try to correct they will again try to interfere and cause even more damage and cause bigger problems down the road.
Kevin,
Why is the 2 year bond yield now at 5.2325 ?
Because both the US and UK interest rates going up further yet and Andrew Bailey has done as much good as he did fecking up the FCA !
Shaun,
Danny Blanchflower still banned from twitter looks like he upset someone really big, funny enough read a post he had written around the time Liz Truss was in power and he called shorting the £ !
The UN is looking at getting consensus for a $100 charge per tonne for shipping freight to help poor nations fight climate change ( and no doubt their politicians with their Swiss bank accounts). Meeting next month. That will not help the inflation problem!!
The UN should be shut down.
It is a sad parody of what it was intended to be.
Totally agree. Too many organisations get mission creep (including the BOE) as they just can’t keep their noses out of matters that aren’t their primary purpose.
Remember, all these squealing mortgage holders were stress-tested to interest rates at SEVEN PER CENT!
The reason they are squealing is that they do not want to have to spend all the money KEVIN alludes to, on their mortgage instead.
A risk they KNEW they were taking.
It should be stated that KEVIN is right about interest rates not being raised enough to stop protecting the housing market precisely because of these stress tests.