The UK Public Finances give the UK economy a positive message

The focus returns to the UK economy today and as the sunshine pours through my windows let us remind ourselves of one of its strengths. From the BBC.

Ed Sheeran was the big winner at this year’s Billboard Awards, held in Las Vegas.

The singer took home four awards: top artist, top radio songs artist, top song sales artist and top hot 100.

Yes it was overall a good weekend for those of the ginger persuasion as we got a reminder of a successful part of our economy. From the UK Music website.

The UK music industry grew by 6% in 2016 to contribute £4.4 billion to the economy, a major new report reveals today…….Successful British acts including Ed Sheeran, Adele, Coldplay, Skepta and the Rolling Stones helped exports of UK music soar in 2016 by 13% to £2.5 billion.

Millions of fans who poured into concerts ranging from giant festivals like Glastonbury to small bars and clubs pushed the contribution of live music to the UK’s economy up by 14% in 2016 to £1 billion.

There was a time that the success of the industry was frittered away by the use of Columbian marching powder but of course in a masterstroke that is now added to the GDP numbers. Although exactly how to measure this is a mystery to me and when I have checked appears to be something of a mystery to our statisticians too. As Fleetwood Mac would put it “Oh Well!”

Bank of England

No doubt Governor Mark Carney will be cheered by this week;s headlines assuming of course he has spotted them. From Graeme Wearden of the Guardian

FTSE 100 hits record high as US and China call a trade war truce 🇺🇸🇨🇳

Perhaps he will take the opportunity when he gives evidence to Parliament today to claim yet more wealth effects from higher asset prices as following that headline yesterday the FTSE 100 has pushed even higher to 7868 this morning. This would be in not dissimilar fashion to the way that the Bank of England has done so with house prices after it made a policy switch back in the summer of 2012 to explicitly boost them with the Funding for Lending Scheme. Of course a full exposition of the state of play in the equity market would need to allow for dividends and inflation.

Meanwhile the last week has seen the Bank of England and Mark Carney hit troubled water again on this issue of what we might call “woman overboard”. This is where the intelligent one ( Kristin Forbes) did not want a second term and the much less intelligent one ( Minouche Shafik)  had to be made a Dame to cover up her early departure. That is before we get to this. From the BBC

Charlotte Hogg has spoken of learning lessons after the “mistake” that ended her career at the Bank of England.

A former deputy governor – and tipped to take the top job – she says in her first interview that the experience made her a “different kind of leader”.

Somehow the BBC economics editor Kamal Ahmed seems to have forgotten the way she broke the rules she had set and the implied effort to in essence ride it out in a manner suggesting such rules were not for “one of us”. Also it is hard to know where to start with this.

Since her resignation in March 2017, Ms Hogg has remained out of the public eye.

It is a lesson in the way the UK establishment operates as I note the daughter of a baroness and a Viscount has the chutzpah to tell us this.

As a leader of Visa, I want it to be a more diverse organisation.

This was combined with an even more important issue that her lack of knowledge about monetary policy was no barrier to being appointed to the Monetary Policy Committee (MPC) for what Sir Humphrey Appleby would no doubt call “One of Us”.

As to Governor Carney I do hope that the Treasury Select Committee will grill him on his Forward Guidance. Here he is from August 2013 on the BBC.

So that people watching this at home, so that people running businesses here across the United Kingdom can make decisions about whether they are investing or spending with greater certainty about what’s going to happen with interest-rates.

What this has meant in practice is that the Unreliable Boyfriend has regularly promised interest-rate rises but these have not turned up.However when the opportunity came to cut interest-rates he did so immediately. Even that went wrong and had to be reversed after long enough had been left to try to avoid it looking too embarrassing.

Oh and they could also ask how he seems so often to talk for the whole MPC when the other eight members are supposed to be of independent mind especially the four external members?

Public Finances

These have been performing pretty well recently and this morning’s data continued on this happier theme.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £7.8 billion in April 2018, compared with April 2017; this is the lowest April net borrowing since 2008.

The last bit is of course going to be true every time now until the next downturn but behind it has been a consistent stream of improvements  which have contradicted some of the other data which have been weaker. For example receipts from Income Tax were strong rising from £11.4 billion last year to £12.8 billion this. Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated. Also debt costs fell which seems likely to reflect the fading of the rate of inflation as the main player here will be the impact of the Retail Price Index on index-linked debt costs.

The good news continued if we look back for some more perspective although you may note not very everyone as my first rule of OBR club hits another winner.

Public sector net borrowing (excluding public sector banks) in the latest full financial year (April 2017 and March 2018) was £40.5 billion; that is, £5.7 billion less than in the previous financial year (April 2016 to March 2017) and £4.7 billion less than official (OBR) expectations; this is the lowest net borrowing since the financial year ending March 2007.

So we have passed the time which regular readers will recall saw the economy apparently improve but the public finances struggle to one where the tables have been reversed. If April was any guide then the Income Tax data suggests a better economic situation than we have seen elsewhere and was quite an improvement on 2017/18 when it struggled. But of course one month;s figures are unreliable.

More problems for the Bank of England

The 2017/18 financial year saw a rise in UK debt costs of £5.9 billion which will essentially be the rise in inflation ( RPI) triggered by the fall in the UK Pound £ after the EU leave vote. This is an actual cost often ignored of the Bank of England not only “looking through” the likely inflation rise but adding to it with its Bank Rate cut and Sledgehammer QE of August 2016.

Also there is something rather embarassing in terms of number-crunching.

n compiling debt estimates for March 2018, there was an error in the treatment of data for the Asset Purchase Facility (APF), which incorrectly recorded the data relating to two events in the compilation process:the closure of the Term Funding Scheme in February 2018….the maturation of a tranche of gilts held by the APF.

Okay so what?

However, correcting this error has reduced PSND ex as at the end of March 2018 by £11.0 billion, equivalent to 0.5 percentage points as a ratio of GDP.

Comment

The news from the UK Public Finances is good and was particularly so in April. In addition we were told that the last financial year was around £2 billion better than we had previously calculated. So we now qualify for the Stability and Growth Pact in something of an irony and face the issue of what happens next? We have seen economic stimulus via the ongoing deficits but also austerity for many as funds have been switched between areas and different groups sometimes hurting the poorest. Of course we are several years already behind the planned surplus.

Maybe the numbers tell us we are doing better economically than some of the others although there is a catch and that is the way the numbers have been manipulated. Many of you will recall the Royal Mail pension fund saga where adding future liabilities supposedly improved the public finances and the housing associations who have blown into and then out of the numbers like tumbleweed in the wild west. More recently there is the issue of Bank of England involvement.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,583.2 billion at the end of April 2018, equivalent to 75.8% of GDP, a decrease of £10.5 billion (or 2.8 percentage points as a ratio of GDP) on April 2017.

Meanwhile over at the Treasury Select Committee

 

 

 

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Is the Bank of England on a road to another Bank Rate cut?

Yesterday was a rather extraordinary day at the Bank of England and in some respects lived up to the Super Thursday moniker although by no means in the way intended. The media dropped that phrase at exactly the wrong moment. The irony was that for once they may have done the right thing in not raising interest-rates but what this exposed was the ineptitude and failures of their past rhetoric promises and hints. The regime of Forward Guidance can not have been much more of a failure as it found itself being adjusted yet again.

the MPC judges that an ongoing, modest tightening of monetary policy over the forecast period will be
appropriate to return inflation sustainably to its target at a conventional horizon.

Let us mark the obvious problem with the use of ongoing when the Bank Rate is still at the emergency level of 0.5% the Term Funding Scheme is at circa £127 billion and we have £435 billion of QE Gilt holdings and look at what they said in February and the emphasis is mine.

The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report,

So the timing element was wrong and so was the amount which doesn’t really leave much does it?

But things got worse at the press conference because in his attempt to explain this Governor Carney exposed Forward Guidance as an emperor with no clothes. In an exchange with Harry Daniels of LiveSquawk Governor Carney told us that his words were really only for financial markets and implied that they were big enough boys and girls to make their own views. He then contrasted with the ordinary person clearly implying they would not. Seeing as Forward Guidance was supposed to connect with the ordinary person and business Governor Carney torpedoed his own ship there. Also when he later tried to claim people and businesses do listen to him he unwittingly admitted he had misled them,

The people we speak to first and foremost are households and businesses across the country. [They] don’t trade short-sterling. They are not fixated on whether we raise rates on May 10 or at the end of June ( The Times).

They might reasonably have been fixated on his rate rise rhetoric back in June 2014 after all if they could have nearly taken out a couple of 2-year fixed-rate mortgages since then to protect themselves against the interest-rate rises which never happened.

A bizarre element was added on the issue of him talking at 6 pm to the BBC when many UK markets are closed as the Governor tried to claim it was okay because some markets such as the UK Pound £ were traded 24/7. This of course did not address at all the ones that are closed or the lack of liquidity at such times in the ones that are.

Weather or whether?

This got the blame.

The MPC’s central assessment is that it largely reflects the former, and that the underlying pace of growth remains more resilient than the headline data suggest.

The problem here is of course if they really believed that then they should have raised interest-rates! Also it directly contrasted with what our official statisticians had told us a few hours before.

Today’s figures support previous estimates showing the economy was very sluggish in the first quarter of 2018, with little impact overall from the bad weather.

Unreliable Boyfriend

This subject was raised several times and one of them got a rather bizarre response.

Shade from MC: “The only people who throw that term [unreliable boyfriend] at me are in this room” ( @birdyworld )

We do not even need to look beyond the boundaries of this website to know that such a statement is untrue and even the BBC uses the term. The Governor had opened the press conference by shiftily looking around the room before as several people rather amusingly suggested to me talking out of both sides of his mouth. Indeed the man formerly praised for his good looks and for being a rock star central banker seems to have lost the female vote too if this from Blonde Money is any guide.

Carney the ever unreliable boyfriend

There was an alternative view which I doubt the Governor will prefer.

The people outside the room say “who are you” ( @birdyworld )

Especially as it is from someone who thinks he has done a good job.

Wages

There was another odd turn here as Governor Carney went into full Ivory Tower mode and said that the Monetary Policy Committee only looked at regular wages. As it is not that frequent an event let me echo the words of Danny Blanchflower on this subject.

idiotic – workers only care about what is in their pay packet – so you take out the part of pay that varies and then tell us what is left doesn’t vary No other country in the world uses such a dumb measure.

Even worse the Governor tried to say that wages had progressed in line with the forecasts of the Bank of England but this is only if you cherry pick the data. For example the latest month for which we have figures is February and if you take the Governor’s line and look at private-sector regular pay the annual rate of increase was 3%. However if you look at pay across the economy ( and as it happens the private-sector)the annual rate of increase was 2.3%. Will people ignore what was once called “the pound in your pocket” and instead break up the notes and coins into separate piles?

The absent-minded professor

Ben Broadbent is called into play at the press conferences if the going gets tough. His role is twofold being partly to expound widely on minor details to waste time and in a related effort to make the viewers and attendees drowsy if not numb. Sadly I was not that to point out that his rhetoric on Asia ignored Japan where many fear a contraction in the first quarter GDP data due you guessed it to the weather.

He has also been on the Today programme this morning on BBC Radio Four. This seems unwise as people have just got up and do not want to be sent back to sleep but if we move on from that there is this.

BoE’s Broadbent: Message Is That Rate Hikes Will Be Gradual ( @LiveSquawk )

How long can you keep saying that when in net terms there have not been any?

It is entirely the sensible thing to do, to wait to see whether we are right that the economy will bounce back from here, and for me the decision was straightforward

So it was the weather or it wasn’t? Moving on from that is the contrast with August 2016 when Ben appeared somewhat panic-stricken and could not cut rates fast enough where was the waiting for a ” bounce back from here,” then Ben? He also wanted to cut further in November 2016 before of course even he was calmed by the actual data.

On a deeper level I would just like to point out that it was wrong to move Professor Broadbent from being an external member to an internal one. Otherwise external member of the MPC may be influenced by potential sinecures from the Governor which makes their existence pointless.

Comment

The road to a Bank Rate cut and possibly more QE Gilt purchases is simple and it merely involves the current weak patch for the economy persisting. As I have pointed out before the monetary growth numbers have been weakening which suggests the summer and early autumn may not be that good. It is also true that more than a few of our trading partners are seeing a weaker phase too as for example we saw this from France on Wednesday.

Manufacturing output fell sharply over the first
quarter of 2018 (−1.8%)

That leaves it with a similar position to the UK where a better phase seems to have ended at least for now. We know from August 2016 that it will not take much more of this for the Bank of England to look at easing policy in sharp contrast to the nearly four years of unfulfilled Forward Guidance about rises.

I don’t care if you never come home,
I don’t mind if you just keep on
Rowing away on a distant sea,
‘Cause I don’t love you and you don’t love me. ( Eric Clapton)

Meanwhile the consequences continue to build up.

Forty-somethings are now almost twice as likely to be renting from a private landlord than they were 10 years ago.

Rising UK house prices have left many middle-age workers unable to afford a first home,  ( BBC )

 

 

 

 

The unreliable boyfriend has tripped over his own feet again

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.

Today’s data

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.

Construction

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.

Trade

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.

Comment

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

Tucker’s Luck?

Me on Core Finance TV

youtu.be/GtrmZbRPTgY

How long will it be before the Bank of England hints at a Bank Rate cut?

After Friday’s disappointing UK GDP release this morning brings the beginnings of the first snapshot into the economy in the second quarter. Also there is in the Financial Times a reminder of the problems experienced by the Governor of the Bank of England Mark Carney.

“>Quiz: Do you have what it takes to study economics?Mark Carney wants teenagers to understand how the economy works. Do you measure up?

A laudable plan but first it would help if the Governor understood what was going on! After all it was as recently as a few months ago that he told us this. From Bloomberg.

But it was February’s Inflation Report, and Mark Carney’s statement that rates needed to rise “somewhat earlier and to a somewhat greater extent” than previously thought that really solidified investors’ view.

Only a couple of months later he fully lived up to his reputation as the “unreliable boyfriend”

That confidence soon expired when Carney used a BBC interview to damp expectations for an imminent interest-rate increase.

Mind you as recently as the 8th of April the Telegraph seemed to be in a 2013 time warp.

Mark Carney is known as the George Clooney of central banking…………have all served to reinforce what former Canadian colleagues term his “star quality”. ……The glamorous governor of the UK’s central bank will soon depart, however.  ( h/t PeterHoskinsTV )

The media seem to have a natural deference to authority as the Financial Times has had to do a screeching U-Turn from the analysis that told us the road to a May Bank Rate rise was a triumph of Forward Guidance.

The UK Pound £

One area which has kept much more up with the times has been the foreign exchanges. The UK Pound £ headed down against the US Dollar by more than a cent as soon as markets were aware of Governor Carney singing along with Luther Vandross.

But now I know
I don’t need you at all, you’re no good for me
I’ve changed my mind
I’m taking back my love

This has now been added to by the weak GDP report and we find ourselves noting that the effective exchange rate at 79.48 is a fair bit lower than the 81.24 of the 17th of April. Or to put it that is the equivalent of a 0.44% Bank Rate cut. Amazing isn’t it when we are told a 0.25% change is such a big deal?

Not all of this is Governor Carney;s fault as for example the US Dollar has rallied but the “rockstar” as he was once called got this completely wrong.

Manufacturing

This has been a bright spot for the UK economy over the past 18 months or so. However there is some food for thought in today’s Markit PMI business survey.

The upturn in the UK manufacturing sector slowed
further at the start of the second quarter. Rates of
expansion eased for output, new orders and
employment, in part reflecting a weakening in the
pace of expansion of new work from abroad.

The monthly reading did this.

fell to a 17-month low of 53.9 in April, down from 54.9 in
March. The PMI has signalled expansion in each
of the past 21 months.

Also there was news from an area of the economy that has been particularly robust.

Manufacturing employment increased in April.
The rate of job creation eased to the weakest in 14
months.

If we look for some perspective we see that UK manufacturing did not seem to pick up in April. A change from 54.9 to 53.9 may or may not mean something due to the errors in the estimates but whilst growth compared to our past history is good ( the overall average is 51.2) compared to the recent period it is not.

Inflation

The burst driven by the post EU leave vote fall in the UK Pound £ is passing us by now.

However, the rate of output charge inflation eased
for the third straight month to the slowest since
August 2017.

But the new weaker Pound £ will not help and the fact that the Sugar Tax is back in the news and Scotland now has a minimum price for alcohol reminds us of our tendency towards institutionalised inflation. Each individual change may have its merits but we can be sure we will face higher prices and inflation as a result.This is especially significant at a time of weak wage growth.

This has been added to recently by the issues in the Middle East raising the price of a barrel of Brent Crude Oil to around US $74. Although not all commodities are on the rise as this from the Reserve Bank of Australia reminded us earlier today.

Preliminary estimates for April indicate that the index decreased by 3.8 per cent (on a monthly average basis) in SDR terms, after increasing by 0.4 per cent in March (revised). Iron ore and coking coal prices led the decrease……Over the past year, the index has decreased by 1.4 per cent in SDR terms, led by lower iron ore prices.

There is an Australian bias to the commodities chosen but it does show that some are not adding to price pressure.

Unsecured Credit

This was an area that received what looked like praise from Mark Carney as the annual rate of growth pushed past 10% following his Sledgehammer QE of August 2016.

The stimulus is working

The problem is twofold. Firstly he has shifted his language to being “vigilant”. Secondly and much more importantly it has continued on something of a tear.

Consumer net credit rose by £0.3 billion in March 2018. Annual growth of consumer credit fell on the month to 8.6%

Not doubt someone will be trying out a PR release calling this a success as in annual growth shows the stimulus whilst the monthly drop is a success for vigilance. Actually the Bank of England will be worried here as they did not want a lurch downwards like this! Care is needed as the numbers are erratic but if this is an example of macroprudential policy it is also a sign of the problems as you tend to lurch from boom to bust rather than applying the brakes and slowing down.

Anyway even the 8.6% compares with wage growth that has been a bit over 2% and economic growth at 1.2%. Which number looks out of line?

Money Supply

Yesterday we noted that the growth of broad money had fallen to 3.7% in the Euro area and today we discovered that in the UK it had fallen to 3.8%. Thus both have seen a slowing which continues the theme of the last few weeks. If we look at the likely mixture between growth and inflation that currently looks worse for the UK as we start with a higher rate of inflation so lat us hope that drops and soon.

Comment

Today’s data is more fuel for the theme that the UK economy has slowed in 2018 and ironically even the news that consumer credit growth lurched downwards in March will worry the Bank of England. Be careful what you wish for is a theme of macroprudential style policies that so many seem to have forgotten. Anyway that may be a one month mirage so let us simply note that recent economic evidence would ordinarily have Mark Carney mulling a Bank Rate cut and not a rise.

We have covered the problems of his Forward Guidance many times so let us now take a different tack which is to compare it with the ECB and Mario Draghi. They face what are similar situations which is broad money growth slowing to as it happens pretty much the same rate of growth. They both will now have the occasional sleepless night wondering of the chance to change policy passed them by and that the boat sailed without them in it. But Mario will sleep better I think as whilst I am no fan of negative interest-rates and large-scale QE he had the Euro area crisis to contend with whereas Mark Carney has had at least a couple of chances to hop on the boat but in a nervous unreliable boyfriend state missed them.

Much of the stimulus in the UK was supposed to boost business borrowing, how has that been going?

Net finance raised was £0.0 billion in March

Yet if we switch to mortgages the beat goes on. If we go back to February 2016 the rate for new mortgages overall was 2.49%. So with the Bank Rate back at 0.5% since November it should be back there? Er no it is 2.04%. As we are told in the Matrix series of films “some things never change…”

 

 

 

 

 

 

 

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 keeps growing and hopes of a snap back more urgent

 

The return of the unreliable boyfriend causes carnage for the Pound £

Yesterday was not one of the better days for the Bank of England. To explain why let us take the advice of Kylie Minogue and step back in time. We go back to its house journal or the economics editor of the Financial Times Chris Giles on the 22nd of March.

The Bank of England has set the stage for an interest rate rise at its meeting in May, saying that pay growth was picking up and inflation was expected to remain above its 2 per cent target.

For Chris this was an example of deja vu and another success on its way for Forward Guidance.

Michael Saunders and Ian McCafferty broke ranks and voted for an immediate increase in interest rates, in a replay of events last September, when their dissenting views foreshadowed the MPC’s policy tightening announced in November.

The hits kept coming for the rise in May and go away camp.

The remaining seven MPC members argued that while nothing had changed significantly enough since the February meeting to justify an immediate move, they still believed rates would have to rise faster than markets had expected at the last meeting.

So the view advanced that an interest-rate rise in May was pretty much a done deal and markets moved towards suggesting a 90% chance of it. This was further reinforced by a speech given by Gertjan Vlieghe which I have mentioned before. From April 6th.

But last month Gertjan Vlieghe, an external MPC member, broke ranks with his colleagues on the nine-member committee when he said that rates could rise above 2 per cent over the same period.

So the stage was set and if there was a warning from the FT it was heavily coded and looked at something else.

The Riksbank has had some difficulties with its predictions. Until last year, it had been persistently over-optimistic about its ability to raise interest rates, always expecting rates to start rising soon

A bit like the England batsman James Vince who plays some flashy eye-catching shots but then gets out in the same familiar fashion.

Yesterday

Unfortunately for Governor Carney all his troubles were not so far away and it looked as though they were about to stay. He gave an interview to the BBC.

The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.
Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.

There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.

All those events would weigh on how fast interest rates rises would occur.

This poses more than a few problems. Firstly there is the issue of Brexit about which of course there are opposite views. But whichever side of the fence you are on the truth is that the water has been much less choppy recently so the Governor is flying a false flag. This adds to the problem he has in this area because he has been consistently too pessimistic on this subject, From the Guardian in May 2016.

That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.

Of course the difficult balancing act suddenly became cut as fast as he could with a promise of a further cut that November which was later abandoned. This contrasts in polar fashion with the pace at which interest-rate increases arrive as we are still waiting for the one promised back in the summer of 2014. From the Wall Street Journal.

Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, sending the clearest signal yet that Britain’s central bank is inching closer to calling time on five years of record-low borrowing costs.

Well not that clear as it turned out to be comfortably numb.

A distant ship, smoke on the horizon
You are only coming through in waves

This was something which created quite a disturbance in the markets as they scrambled to move interest-rate and bond futures. It is easy to forget now but the words of Governor Carney caused quite a bit of damage as the move eventually reversed. Also there was this.

And he warned the BOE intends to be vigilant over any risks to the recovery emanating from the housing market, where rising prices are stoking fears that Britons could become too indebted.

Indeed

Term Funding Scheme. Our Term Funding Scheme (TFS) provides funding to banks and building societies at rates close to Bank Rate. It is designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses.

Oh sorry not that £127 billion one nor the extra £60 billion of QE Gilt purchases. anyway as there is nothing to see here let;s move along.

How fast?

This issue is something which just gets ever more breathtaking so let me take you to the Bank of England Minutes.

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The problem here is that whilst this is repeated by the media like a mantra nobody points out that we have had years of such hints and promises now with us remaining at the “emergency” Bank Rate of 0.5%. We did of course get a panic cut in the summer of 2016 followed after what was considered to be a suitable delay to avoid embarrassment an overdue reversal but no increases at all.I am reminded of the explanation of what minutes mean by the apochryphal civil servant Sir Humphrey Appleby which was along the lines of “Whatever you want” from Status Quo, But feel that this from June 2014 was more accurate.

Part of that normalisation would be a rise in Bank
Rate at some point

The some point has never arrived but of course the hot air rhetoric carries on regardless. From Bloomberg.

Bank of England Governor Mark Carney says the U.K. should prepare for a few interest-rate increases over the next few years.

Perhaps he means after June 2019 when he leaves.

Comment

We find ourselves looking at a familiar theme which is the woeful forecasting record of the Bank of England. In this instance we see that it has changed its mid again about pay growth and inflation if we look through the Brexit inspired smokescreen. This matters because the present Governor Mark Carney has placed enormous emphasis on so-called Forward Guidance which of course has turned out to be anything but. It is a feature of his tenure that he is a dedicated follower of fashion but in his private moments he must regret following that particular central banking one. His forward guidance on climate change also has its troubles.

Carney said in the comments, made on the sidelines of the International Monetary Fund meetings in Washington.

This morning another member of the Bank of England Michael Saunders has demonstrated what a land of confusion they live in.

because the economy’s response to
changes in interest rates, especially rises, is more uncertain than usual.

Is it? Maybe one day we will find out! Also there is this rather bizarre statement and the emphasis is mine.

He also discusses why any further tightening is likely to be at a gradual pace and to a limited extent.

So there you have it. As to the decision well the Bank of England has led itself and the markets up the garden path and now is having second thoughts. The real problem is not the current view which is more realistic but why it keeps being wrong?

A new Governor?

An ability not to see anything inconvenient seems a good start and of course the ability to deny almost anything would be of great help. Some have suggested he has gone because he wants to be in Europe next season but personally I think we should remember the positive influence he brought to English football in the early days. A big change to the drinking and eating cultures for a start.

The Bank of England is continuing its Forward Guidance crisis

Yesterday brought Bank of England policy into focus. Firstly there was something rather familiar as its Governor Mark Carney took his seat at the Treasury Select Committee. Yet again he spent quite some time trying to tell us that his August 2016 Bank Rate cut and £60 billion of QE in August 2016 was a success. Yet tucked away in it was this confession of forecasting failure.

Activity has, however, proved stronger than anticipated in August 2016.

Regular readers will recall that back in August 2016 I was pointing out that this was not only predictable but likely. From August 5th 2016.

On Wednesday I wrote that I would have voted for no further stimulus on two main grounds. Firstly the fall in the UK Pound £ at that point was broadly equivalent to a 2% reduction in Bank Rate. Secondly I feel that moves which are badged as stimulus have such side effects that the can easily turn out to be both deflationary for demand and inflationary for prices for the economy.

How might the fall in the UK Pound £ have boosted the UK economy? Well let us return to the Governors written evidence.

Whereas it usually drags on growth, net trade is currently
contributing substantially.

Governor Carney tries to cover this up but as you see only by confessing the Bank of England got the world economy wrong as well!

In part, that reflects a stronger global economy. The global economy began picking up, ultimately quite robustly. Global growth is now stronger, broader and healthier than it has been for some time.

Returning to August 5th 2016 there was this.

Also if we move to the Bank of England press conference there was one glaring bit as Bank of England Deputy Governor Broadbent told us that they were looking at sentiment measures and downgraded “hard data” such as GDP.

The sentiment measures ( Markit PMI) have seldom been so completely wrong and the Bank of England changed its reaction function at just the wrong time.

But my point is that the Bank of England is now “cherry-picking ” the data to confirm its pre-existing view.

It did this and got it wrong and confirmed my point about how easing policy could make things worse with this.

Overall, real wages are 3½% lower and consumption around 2% weaker than projected immediately before the referendum, in the May 2016 Report. ( Governor Carney )

By easing policy and contributing to an even lower Pound £ real wages were pushed lower. They would have fallen anyway but not by as much as expectations that are easy to forget now – and the Bank of England certainly will not be reminding us – that it was also promising even more easing in November 2016 including a rather bizarre 0.15% Bank Rate cut.  This was why the UK Pound £ fell below US $1.20 and fed inflation and the fall in real wages. Once some actual hard evidence on the UK economy emerged and revealed the scale of the Bank of England’s error the November policy easing became part of something of a handbrake turn and disappeared in a puff of smoke.

Oh and remember when the UK economy was going to be sucked lower by a fall in investment?

Business investment has been stronger than projected in August.

Perhaps if the Governor entered the real world a little more often as this does not seem much for an 18 month period.

I have made eight visits around the United Kingdom to hear from business leaders from a range of sectors on their perspectives on the economic outlook.

However as someone who has emailed him this week on the subject of inflation measurement I was pleased to read this bit.

In total the Bank has received and responded to almost 1000 letters to the Bank about monetary policy
from members of the public.

Confusion

At first the Bank of England was in tune with the Governor’s written evidence. From the Guardian with Chief Economist Andy Haldane thinking he was on message.

A combination of the weaker pound, and a stronger global economy, has worked its magic.

That has meant that net trade has been a significant contributor, and expect those effects to continue over the next two or three years.

Depreciations work, and that’s how they work.

But then the Governor performed another U-Turn.

Depreciations don’t work. The have an economic effect, but they’re not a good economic strategy.

They may be an outcome of various things… but it’s how you make yourself poorer.

That was a fascinating intervention from a man who has regularly talked the UK Pound £ lower especially during the late summer of 2016 but sadly he does not get challenged or called out on this.

As for Chief Economist Haldane I do wonder what will happen next as already he keeps being sent to children;s schools and indeed has recently returned from the Orkneys? None of this coincides with his campaign to be the next Governor as the only place he could be sent to that are further away are Gibraltar and the Falkland Islands.

Bank Rate Rhetoric

We got something rather familiar.

Mark Carney said the U.K. is headed for higher interest rates, but policy makers are reluctant to give clearer guidance on the timing of any future increase. ( Bloomberg)

The reason he does not want to give clearer guidance is because of this from June 2014 when he pretty much guaranteed a Bank Rate rise.

could happen sooner than markets expect’

This was translated immediately by markets that a Bank Rate rise was on its way as any inspection of price changes shows. Central bank governors speak in a coded language and in that the message was clear. Sadly those who took the Governor at face value lost their dough and of course his next move was a cut not a raise. Those who had followed his record in Canada or indeed the shambles over trying to use the unemployment rate as an indicator – 6.5% anyone? – would have been more sanguine and cautious.

QE

It might be time to pension off ( RPI indexed of course) the absent-minded professor.

BoE’s Broadbent: I Do Not See UK Asset Prices As Pumped Up By QE

A casual observer – say our Martian economist – might turn his/her mind from why we have put an electric car into orbit to how you can buy £435 billion of assets without changing the price? Especially if he/she reads Bank of England research.

Increasing asset prices, providing a ‘wealth effect’ to firms
and consumers as their assets increase in value, potentially
leading them to spend more.

Or more recently this signed off amongst others by Ben himself when he was voting for more of it in August 2016.

. It is also likely to trigger portfolio
rebalancing into riskier assets by current holders of government bonds,

Comment

There is much to consider right now as the Bank of England faces external and internal pressure. The external pressure was provided by the US Federal Reserve again last night. It seems set to continue its policy of doing what Governor Carney keeps promising which is gradual increases in the official interest-rate whilst he only cries wolf.

On the other side of the coin is the UK economy where the chance to reduce the inflation overshoot was not only missed but in fact the overshoot was exacerbated as I have explained above. Now there is the issue of UK growth which has been as suggested by Julian Jessop as pretty much steady as she goes.

After today’s revisions. UK growth in the six quarters since the EU referendum has averaged 0.45% q/q, compared to 0.5% in the six quarters before.

Ironically this takes us back to the Mansion House speech where if he thought this was overheating then he should have kept his word. Meanwhile those with doubts about his commitment to interest-rate rises might note this.

Capital & Counties Properties Plc lowered the value of a major west London housing project by about 12 percent as prices fell across the capital and the development faces political protests. It had written down the value of the Earls Court project by 20 percent a year earlier.

Although Bloomberg has an interesting view on Earl’s Court, does the journalist live there?

Land values in one of London’s swankiest districts are crashing.