Today will or depending when you read this has seen the return of something which if not an old friend is at least something familiar. From the Bank of England.
As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).
Just as a reminder it will buy short-dated Gilts today, longs tomorrow and mediums on Wednesday, with just under £1.3 billion being reinvested each time. The large Gilt redemption may have an effect on the UK Public Finances because the £2 billion discrepancy in July that the Office for National Statistics is still unable to explain to me will be over £7 billion if we pro rata Gilt maturity size.
As to the wider QE issue the Resolution Foundation has been on the case. I have to say they start with what looks a load of rubbish to me.
First, QE works by signalling that the policy rate isn’t going to rise anytime soon, affecting longer-term interest rates which move with expectations of future movements in policy rates. Put simply, QE convinces people that policy rates are going to stay low for a long time;
That view can only come from an Ivory Tower. After all nobody seriously thinks interest-rates are going to rise anyway. They are on better ground with the portfolio rebalancing effect as we have seen rises in asset prices.
Overall they conclude this and the emphasis is mone.
There is also evidence linking QE to improvements in the economic outlook. Many of the studies listed in Table 1, as well as others, find that QE has led to falls in a broad range of interest rates, rises in other asset prices, and falls in exchange rates. In turn, economic models of different types imply that these effects boost economic growth. For example, for the UK, Churm, Joyce, Kapetanios and Theodoridis estimate that QE had a cumulative macroeconomic effect equivalent to a short-term interest rate cut of 1.5 to 3 percentage points (or around 1 per cent of GDP).
Only an imply?! Also 1% is not much frankly for all that effort and the distortions it created. To be fair they admit this issue with wealth effects for the already wealthy.
Around 40 per cent of the aggregate
boost to wealth from changes in financial asset prices, property prices, and inflation went to families in the highest wealth decile, while only 12 per cent of the benefit went
to the bottom half of the distribution.
They claim that the income distribution improved but this is essentially based on the rise in employment we have observed. It is true that we have seen that but we simply do not know what would have happened without QE so it is a Definitely Maybe.
The impact of QE on employment and wages provided a 4.3
per cent income boost to those in the bottom half of the income distribution, compared to a 3.2 per cent boost across the top half.
Also those are relative numbers so care is needed as 4.3% of not much is, well I am sure readers can figure that out for themselves.
Still some employment prospects have genuinely improved because if the authors of this report ever want to work at the Bank of England it will love this on their CV.
I have to admit that I had a wry smile when I saw the number as at the end of last week there were more than a few on social media telling us that the UK was in recession and one told me my argument that we may not be was “idiotic”.
GDP grew by 0.3% in July 2019, with all components apart from agriculture showing growth.
If we go to the breakdown we see this.
Production output rose by 0.1% between June 2019 and July 2019; manufacturing provided the largest upward contribution (0.3%),
The latter development was welcome in these times especially after what we have seen in Germany and was caused by this.
pharmaceutical products (3.8%); following two strong monthly growths……the weapons and ammunition industry, which rose by 12.1%, owing to the completion of high-value contracts.
We know that the pharmaceuticals sector has been an overall strength albeit an erratic one. We have noted this from the ammo sector before and I suspect the flow is more regular and is missmeasured. of course some will think it is not a good idea anyway.
The main player as ever was this.
The Index of Services (IoS) increased by 0.3% between June 2019 and July 2019……The administrative and support services sector made the largest contribution to this growth, contributing 0.09 percentage points.
Actually this number suggests it is running just about everything as that is pretty much our annual rate of growth.
In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018.
Tucked away in the detail was something of a critique though as to my mind it may explain at least some of the problems with the construction data as this was in services.
services to buildings and landscape activities, which increased by 4.0%, contributing 0.03 percentage points
More GDP Perspective
Here the news was good too as we recall where we started from.
Rolling three-month growth was flat in July 2019, following growth of negative 0.2% in Quarter 2 (Apr to June) 2019.
This time around it was all services though.
The services sector continued to show subdued growth in the three months to July 2019, growing by 0.2%.
However our official statisticians then get themselves into something of a mess by saying this.
This longer-term weakening has been most notable in “other services”, which has declined from the start of 2019.
As we saw a strong July after a weaker phase.
However, this relatively large growth for services in July follows four consecutive months of flat growth in the sector.
Whilst the numbers below are true we may just have seen a change in trend.
In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018. This continues a weakening from the three months to April 2019 (2.1%). The growth in the three months to July 2019 was last lower in the three months to October 2013 which grew by 1.3% (was equal in April 2018).
In the end it was all services as the numbers below highlight.
For the three months to July 2019, production output decreased by 0.3%, compared with the same three months to July 2018; this was because of a fall in manufacturing of 0.7%, which was partially offset by rises from mining and quarrying (1.7%) and water and waste (0.7%).
Whilst we should welcome today’s news it does come with various perspectives. The first is that monthly GDP data needs refining and is subject to particular revision. However as it stands July was not a good month for the Markit PMI business survey which at 50.3 showed no growth at all rather than the 0.3% recorded. Also security needs to be tightened as there was a noticeable rally in the exchange rate of the UK Pound £ about 15 minutes before the official release.
Next up comes the sudden flood of research telling us that economic policy needs to be more active, for that is the gist of the Resolution Foundation report. As to monetary policy that deserves a good laugh as whilst at 1% rise in GDP is welcome it is not a lot when you consider all the efforts gone to. Frankly it makes me worry that once you throw in the side-effects such as zombie companies we may be worse off.
Lloyds Banking Group is facing an extra bill of up to £1.8bn to cover a late rush of claims for the mis-selling of Payment Protection Insurance (PPI)……..
Last week, RBS said it expected to take an additional charge of between £600m and £900m, while shares in CYBG fell sharply after it warned it could take a hit of up to £450m
Estimates suggest that the last-minute rush of claims means that banks will ultimately have set aside well over £50bn in total to pay for the PPI scandal.
Was that the 1% of GDP boost? Some of this is simply a transfer but with such large sums only a small discrepancy can be a big factor.
There is some scope for fiscal policy but everyone seems to have forgotten the long lags involved. I guess we will have to learn them all over again.