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

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

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

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

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

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

We then get more of an explanation.

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

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

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

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

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

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

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

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

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

Forward Guidance

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

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

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

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

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

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

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

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

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

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

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

Manufacturing

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

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

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

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

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

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

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

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

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

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

Comment

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

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

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

It won’t make any difference.

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

Podcast

Central Banks have a big problem with the future

A feature of 2019 so far has been a succession of U-Turns by central banks and by two of the world’s major central banks in particular. This has been most marked at the US Federal Reserve where it was not so long ago that some were suggesting we would see four interest-rate increases ( of 0.25%) this year on the road to what was called normalisation. Regular readers will recall that we were one of the few places that were troubled by the fact that we simply do not know what and where normal is anymore. But for our purposes today the main issue is that the US Federal Reserve looks set to cut later this month and perhaps one more time in 2019. Should that scenario come to pass then the previous concensus will have been wrong by a net 6 interest-rate changes. Seeing as interest-rates are so low these days that is quite an achievement.

This is on my mind because if we take the advice of Kylie Minogue and step back in time just under 7 years central banks were heavily influenced by this from Micheal Woodford and Jackson Hole.

The first of these is forward guidance — explicit statements by a central bank about the outlook for future policy, in addition to its announcements about the immediate policy actions that it is undertaking.

This was always going to be adopted as it flattered central banking egos and provided an alternative at a time when central bankers were afraid of being “maxxed out”. But as my opening paragraph pointed out it has been a complete failure in recent times in the United States where it began.

Europe

This has been something of a two stage failure process for Forward Guidance. The opening part got some intellectual backing last September from Benoit Coeure of the ECB.

Communicating our expectation that the ECB key interest rates would remain at their present levels at least through the summer of 2019 was therefore consistent with the “risk management” approach to monetary policy that the Governing Council has repeatedly applied in recent years,

This had two steps as it was perceived like this.

Yet, on my next slide you can see that, at some point in early 2018, markets expected the ECB to hike its deposit facility rate one month after the expected end of net asset purchases.

So that was a bit of a fail and it continued long after this speech. It was something I found hard to believe but the idea that the ECB would raise interest-rates in 2019 was like these lyrics from Hotel California.

And in the master’s chambers
They gathered for the feast
They stab it with their steely knives
But they just can’t kill the beast.

It seemed to exist in an evidence-free zone but somehow survived. But events recently took a dreadful turn for it and by implication ECB Forward Guidance.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required……..This applies to all instruments of our monetary policy stance. Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.

So the interest-rate rises had not only morphed into unchanged but now we were being forward guided to a cut. Could that be any worse? Apparently it can as the incoming ECB President switches to downplaying the size of the interest-rate cuts on the horizon.

*IMF SAYS THERE MAY ONLY BE LIMITED ROOM FOR ECB RATE CUTS ( @lemasabachthani )

But apparently forward guidance is another beast that our steely knives cannot kill.

We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.

Bank of England

Gertjan Vlieghe has given a speech on this subject and he is in the mood for change and I do not blame him but sadly it does not start well.

In particular, communicating more about the Monetary Policy Committee’s preferred future path of interest rates
would be easier to understand than our current approach.

Preferred? I would prefer England to win the cricket world cup final on Sunday but a balanced reality involves looking at the strengths of New Zealand. Also it is not often central bankers do humour and when they do it is mostly unintentional.

Global central banks have changed their outlook for policy significantly in recent months.

He has a go at placing a smokescreen over events as well.

and the UK outlook for monetary policy continues to be materially affected by Brexit uncertainty.

This is misleading in my view mostly because none of us know what will happen so we cannot allow for it. Even if you think there is an effect right now then it is too late to do anything about it because an interest-rate move takes around 18 months to fully impact.

It feels for a while that we are getting some honesty.

Before diving into the details of the argument I want to stress that a far bigger challenge to monetary policy is
that the future is uncertain, and my suggested communications improvement will not change that. Today’s
preferred path of interest rates will change tomorrow, if the economy turns out differently from what we
expected.

But sadly as so often with Gertjan he drops the ball at the crucial point.

But I am arguing that we can achieve a modest improvement in the understanding that
businesses, households and financial markets have of what our objectives are, and what we think we need
to do to meet those objectives.

Most people only vaguely know who they are at best, so they idea they will be hanging on their every word is laughable. Financial markets do, of course, but how much of the real economy gets missed out?

The next bit reminds me of this from Queen.

Is this the real life?
Is this just fantasy?

Here is Gertjan pedalling hard.

Moreover, the Swedish central bank reported that the quality of its own internal deliberations and discussions
with staff had improved, and that discussion of monetary policy by external observers had become “less
speculative”

Meanwhile if we go back to real life.

The Riksbank has become pretty much a laughing-stock.

Comment

As you can see Forward Guidance has been one of the failures of our times. On an internal level down keeps being the new up but also it is part of a framework where the environment keeps getting worse. What I mean by that is after all the policy accommodation economic growth now has a “speed limit” of 1.5% and 2019 is proving to be a difficult year for the world economy. It flatters central banking egos, gives markets a hare to chase and journalists something to copy and paste, but not so much for the real economy.

The piece de resistance to all this is provided by Gertjan who you may recall has been Forward Guiding us to interest-rate increases for a while now. He has another go.

This would justify further limited and gradual rate increases, such that we might reach 1.00% in a year’s time,
1.25% in two years’ time, and 1.75% in three years’ time, with large uncertainty bands around this central
path.

You may notice the use of the word “might” here. Whereas he seems a lot more sure about this road.

On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to 0% in the event of a no deal scenario.

Just for clarity the Bank of England now thinks this is at 0.1% after assuring us for quite a long period ( Governor Carney repeated it more than once) that it was 0.5%.

So if we just look at Gertjan’s career at the Bank of England he looks ro be pointing us towards a situation where he has twice “Forward Guided” us to interest-rate increases and then cut them! I await your thoughts on how useful you think he will have been in such a scenario?

What is the purpose of the Monetary Policy Committee of the Bank of England?

This week has been one where we have found ourselves observing and analysing the both the reality and the consequences of the global economic slow down. Yesterday gave us an opportunity to peer into the mind of a Bank of England policymaker and first Gertjan Vlieghe was keen to establish why he is paid the big bucks.

When the global economy is doing well, the UK usually tends to do well too. When the global economy is
sluggish, the UK economy tends to be sluggish too.

Thanks for that Gertjan! Next comes something that has been an issue since the credit crunch hit which has been the issue of what David Bowie called ch-ch-changes.

We are in a period of unusual uncertainty around the economic outlook.
There is a tendency to say every quarter that things are more uncertain than before, and of course that
cannot always be true. It must be that sometimes uncertainty is less than it was before.

Now put yourself in Gertjan’s shoes as someone who has been consistently wrong and has turned it into something of an art form. The future must be terrifying to someone like that and indeed it is.

Setting monetary policy requires making decisions even when the outlook is uncertain.

Actually the outlook is always uncertain especially if we look back for Gertjan and his colleagues.

The Forward Guidance Lie

Here is Gertjan making his case.

Rather, we need to respond to news about the economy as
we receive it, in a systematic and predictable way that agents in the economy can factor into their decisions.

There are several problems with this. Firstly how many people even take notice of the Bank of England. Secondly that situation will have only have been made worse by the way that the Forward Guidance has not only been wrong it has been deeply misleading, For example in August 2016 after more than two years of hints and promises about a Bank Rate rise Gerthan voted instead for a Bank Rate cut and £60 billion of Sledgehammer QE. So those who had taken the Forward Guidance advice and for example remortgaged into a fixed-rate were materially disadvantaged.

Not content with that Gertjan seems on the road to doing it again. So let us remind ourselves of the official view.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Yet Gertjan has got cold feet again.

I will discuss what news we have had about the economy in recent quarters, and how that has changed my
thinking about the appropriate path of monetary policy.

Why do I have a feeling of deja vu? Here is the old Vlieghe.

When I first spoke about the future path of Bank Rate a year ago, I thought one to two quarter point hikes per
year in Bank Rate was the most likely central case

Here is the new Vlieghe.

On the assumption that global growth does not slow materially further than it has so far, that the path to Brexit
involves a lengthy transition period in line with the government’s stated objectives, that pay growth continues
around its recent pace, and that we start to see some evidence of pay growth leading to upward consumer
price pressure, a path of Bank Rate that involves around one quarter point hike per year seems a reasonable
central case.

As you can see Gertjan is trying to present himself in the manner of an engineer perhaps fine tuning an aircraft wing design. The first problem is that last time he tried this his aircraft crashed on take-off as a promised Bank Rate rise turned into a cut. Next comes the issue of why you would raise Bank Rate once a year? After all it would feel like forever before anything materially changed. Five years of it would get Bank Rate to only 2%!

The reality is that if we look at his view of a slowing world economy it is hard to believe that he wants to raise interest-rates at all. Also as his speech is very downbeat about Brexit as the Bank of England consistently is then it is hard not to mull what he told the Evening Standard back in April 2016.

“Theoretically, I think interest rates could go a little bit negative.”

Even that was an odd phrase as of course quite a few countries had them including the country where he was born. Anyway here is my immediate response on twitter to his speech.

Shorter Gertjan Vlieghe : Can I vote for a Bank Rate cut yet please Governor?

If we step back and look at the overall Bank of England picture we see that the Monetary Policy Committee is becoming an increasing waste of time. We are paying eight people to say “I agree with Mark” and flatter the Governor’s ego.

Retail Sales

Here Gertjan Vlieghe had almost impeccable timing.

Domestic growth has slowed somewhat more than expected, especially around the turn of the year.

Just in time for this official release today about UK Retail Sales.

Year-on-year growth in the quantity bought in January 2019 was 4.2%, the highest since December 2016; while year-on-year average store prices slowed to 0.4%, the lowest price increase since November 2016.

Those figures confirm my theme that lower inflation leads to better consumption data via higher real wages. This is a very awkward issue for the Bank of England as it wants to push the 0.4% inflation above up to 2% in what would be a clear policy error.

In the three months to January 2019, the quantity bought increased by 0.7% when compared with the previous three months.The monthly growth rate in the quantity bought increased by 1.0% in January 2019, following a decline of 0.7% in December 2018.

A good January has pulled the quarterly numbers higher and the driving force is show below.

The quantity bought in textile, clothing and footwear stores showed strong year-on-year growth at 5.5% as stores took advantage of the January sales, with a year-on-year price fall of 0.9%.

Comment

This speech just highlights what a mess the situation has become at the Bank of England. A policymaker gives a speech talking about interest-rate rises whilst the meat of the speech outlines a situation more suited to interest-rate cuts. The economy is smaller due to Brexit morphs into world economic slow down and yet Gertjan apparently thinks we are silly enough to believe he intends to raise interest-rates. Even in a Brexit deal scenario he doesn’t seem to have even convinced himself.

If a transition period is successfully negotiated, and a near term “no deal” scenario is therefore avoided, I
would expect the exchange rate to appreciate somewhat. The degree of future monetary tightening will in
part depend on how large this appreciation is.

Also 2018 taught us how useful the money supply data can be in predicting economic events and yet they have been ignored by Gertjan as we see a reason why he is groping in the dark all the time. That brings me to my point for today which is that the Bank of England has become one big echo chamber with a lack of diversity in any respect but most importantly in views. External members are supposed to bring a fresh outlook but this has failed for some time now. So it would be simpler if we saved the other eight salaries and let Governor Carney set interest-rates as really all they are doing is saying “I agree with Mark”. After all even the Bank of Japan with its culture of face manages to produce some dissent these days.

 

 

The Bank of England is struggling badly on the subject of the impact of QE

This week has brought us more opinions from the Bank of England.Yesterday saw the man who Time magazine decided was one of the 100 most influential people in the world in 2014. Sadly it has been rather a slippery slope since then for the Bank of England’s Chief Economist Andy Haldane who did at least offer some variety on the apochryphal story about the two-handed economist. From Reuters.

Bank of England Chief Economist Andy Haldane said on Thursday that the central bank could decide to raise interest rates or to cut them if there was a disorderly, no-deal Brexit.

Although much more of a clue was given in the follow-up detail.

“on the balance of factors such as a fall in the value of the pound and the reduction in supply………just as it did pre-referendum,”

If we assume he has confused the word pre and post we see he is signalling us towards a fall in the pound £ he ignored and the way he panicked and demanded a cut in interest-rates as well as more QE. Also according to @LiveSquawk he told the audience this.

BoE Haldane: Impact Of Rate Hikes So Far Modest

That might be because in net terns there has only been one as the move in November simply reversed the 2016 mistake.

I note these days that those who tell us how intelligent he is, seem to have disappeared, and even the Reuters piece is accompanied by a picture of him looking a bit wild-eyed. The mainstream view that he is/was a deep thinker has been replaced by the view he is deep in something else. As to his campaign to be the next Governor of the Bank of England? You find out all you need to know by the way he was at Symonds College on Monday. His idea of a Grand Tour around the country to a chorus of acclaim has morphed into giving talks to sixth-form colleges and please do not misunderstand me I mean no offence to the students of Winchester. However I do suggest they ignore the failed output gap theory that he keeps trotting out.

QE

Earlier this week Gertjan Vlieghe was more revealing than I think he intended about QE and its effects. Let me illustrate with his view on how it works.  First he tells us that unwinding QE is no big deal.

This view of how QE works implies that unwinding QE need not have a material impact on the shape of the yield curve, or indeed on the economy, if properly communicated and done gradually.

There is an obvious problem here which is that if taking it away does not have a material effect on the economy then how did applying it have a positive effect? Also if it is so easy to do there is the issue of why the Bank of England has not done any? Let us see how he thinks it works.

I argue against the view that QE works primarily by pushing down long-term interest-rates directly, through compressing the term premium  ( the portfolio balance channel)……..my view that QE works primarily via expectations, with powerful additional liquidity effects which are temporary and mainly relevant during periods of market stress.

We note immediate;y that he downplays the most obvious effect it has had with is the lowering of many bond yields around the world to what have been unprecedented levels. Odd when that was so clearly in play when Gertjan applied QE in August 2016 and the UK ten-year Gilt yield plunged to an extraordinary 0.5% and some yields in the short to medium range went negative for a while. No doubt economic historians will call that “Haldane’s heights” or the “Carney peak” for Gilt prices because unless the Bank of England has another go at impersonating a headless chicken such levels are extremely unlikely to be seen again.

Rather than the route above where bond yields fall and have an impact via lower fixed rate mortgage and company borrowing costs he seems to prefer the expectations fairy. Here individuals and companies are supposed to respond positively to something the vast majority do not understand and more than a few either have not heard of or do not care. This sort of thinking has been notable in the rise of Forward Guidance where central bankers seem to believe or at least be willing to claim and imply that the population hangs on their every word.

The view on liquidity is interesting as it is another clear area where there is an impact as money is indeed created in electronic form and the money supply raised. This particularly affects narrow measures of the money supply as for example in Japan an initial target was to double the amount of base money.  The problem comes when we try to follow the trail of where the liquidity created went? In the early days of Bank of England QE much of it seemed to get deposited straight back to the Bank itself. But over time we can spot clear signs of its impact on the financial system in two ways. The first is the impact on asset prices and especially house prices with London in the van. But even that is complicated as credit easing most recently in the form of the £126 billion or so of the Term Funding Scheme was also required. Next is the way that the Bank of England so often denies any such impact these days which relies on us forgetting the research produced by it around 2012.

Also you note that Gertjan seems to have forgotten the meaning of the word temporary as in “liquidity effects” as not one penny of the £435 billion of Bank of England QE has ever been withdrawn. So on the state of play so far it has been permanent and furthermore there is no apparent plan to change that.

Comment

As we note yet more attempts from the Bank of England to tell us that up is the new down another issue has popped up this morning that they will have hoped we have forgotten. Here is Ben Broadbent on the first quarter of 2018 from the May Inflation Report press conference.

they’re nonetheless consistent with growth much stronger than 0.1%………do not point to anything like as weak as 0.1%

Next here is the announcement this morning from the Office for National Statistics.

This follows a soft patch earlier in the year, where the UK economy grew by a revised 0.1% in Quarter 1 (Jan to Mar) 2018.

So we have seen a downwards revision to 0.1% meaning that the antennae of Ben Broadbent now have a 100% failure rate. So it is way past time for him to stop relying on surveys which keep misleading him. Actually if we look at the source of the change we see that the ONS is also finding itself in quicksand.

Construction output fell by a revised 1.6% in Quarter 1 2018, marking its weakest quarterly growth since mid- 2012. It was previously highlighted that the adverse weather conditions earlier in the year had some impact on the construction industry.

I guess they are hoping we have forgotten that they told us the weather was not much of a factor! More serious is the fact that for the past 4/5 years their measurement of construction output has been a complete mess. The have told us it was in recession ( now revised) and then that it was doing much better ( which also seems to have now been revised). Along the way we have had a large company switched from services to construction and modifications to the deflation measure of inflation. I can tell you that my Nine Elms crane index is still at its peak of 40.

So there have been much better days for both the ONS and the Bank of England. Returning to the issue of QE I would like to remind you of Wednesday’s article on the drawbacks from it which look rather more concrete than the claimed gains. As for Governor Carney he has been too busy this week flying to North America and back so he can lecture people on the dangers of climate change.

 

 

Gloomy Gertjan of the Bank of England could easily vote for another Bank Rate cut

Yesterday gave us another opportunity to discover what a Bank of England policy maker is thinking. This was because former hedge fund manager Gertjan Vlieghe gave a speech at the headquarters of Bloomberg in London in . Sadly Gertjan is yet another policy member of the Bank of England who has had trouble with his ethical radar. From the Guardian in July 2015.

“Despite the fact that there would be no conflict of interest between my future role and any continued passive stake in Brevan Howard, we have now come to an agreement whereby I shall be bought out of my remaining interest in the partnership before taking up my position on the MPC. As of 31 August I will have severed all financial and other ties with Brevan Howard. I have taken this step to avoid any mistaken impression of a conflict of interest,” said Vlieghe.

If Gertjan had wanted to avoid the impression that he was focused on the City of London perhaps Bloomberg was not the best place to give his speech.

What did he say?

Forecasting problems

Gertjan is obviously troubled by the fact that the Bank of England got the post EU leave vote economic forecasts wrong.

I will argue that there is an important distinction to be drawn between good monetary policy and making accurate forecasts………..And there have been times, just recently, when forecast errors were small and policy was broadly right.

Ah so he was right by being wrong apparently! If we go back to August we were told this by the Bank of England in the monetary policy minutes.

the outlook for growth in the short to medium term has weakened markedly.

Now the medium term has yet to happen but in the short-term the error was not small as the UK economy mimicked the film “Carry on Regardless” . If you had looked at economic growth without knowing about the referendum vote you would have seen 2016 as a pretty constant year.

Staying with the forecasting problem Gertjan is keen to put in our minds the view that it does not matter.

But the existence of forecast errors per se, whether large or small, is not necessarily a sign of either wrong policy or of using the wrong framework

Also in an increasingly desperate effort he tries to claim that it was unpredictable.

Sometimes forecast errors simply tell you things happened that could not have been foreseen.

All you have to do is look back to last summer on this website when I pointed out the powerful effect of the then lower UK Pound £. Either Gertjan is not aware of that or he chose to ignore it.

Also if we step back for a moment Gertjan also offers a critique of his own policy because this below is one of his own central planning policies.

We only have an imperfect notion of how the economy works, we only have partial information about the state of the economy at any point in time, and the economy is constantly hit by unanticipated shocks.

Yet he charged in with policy easing on August 4th 2016 anyway. Apparently as he splashed around in his speech this policy easing was the equivalent of this from a doctor.

a doctor can perform life-saving procedures, such as administering blood-thinning medication, widening the coronary artery, or performing a coronary artery bypass.

What about policy then?

This is where the forecast errors came in as Gertjan explains his thinking back then.

First and foremost, short-term indicators of the economy, such as business surveys, consumer confidence, housing indicators, had turned down sharply. We always monitor published data that, historically, has given a decent but not perfect signal of where the economy is heading in the near term . And these data were falling rapidly in the immediate aftermath of the referendum. For example, the Composite PMI, an indicator of business activity growth, had fallen to its lowest level since 2009.

He then makes another step.

actual published data on economic activity  and uncertainty

You see if you look at what he was using yes they were published but in the main they were sentiment indicators rather than actual numbers. Acting on sentiment is of course a feature of a hedge fund manager but a central banker faces many other issues.

If we add into this that Gertjan seems a naturally gloomy chap then an easing was on the cards.

I already saw considerable weakness in nominal growth as we headed into the referendum, and I was starting to think the economy might need more stimulus even in the status quo scenario of a remain vote.

and

We have gone from expecting a short and sharp slowing, to pencilling a much milder and more protracted slowing.

Indeed he is so troubled by accusations that he is gloomy he feels the need to deny it.

My main point regarding our August forecast is that we were not possessed by some innate feeling of gloom,

This gloom led Gertjan to being completely wrong.

we put in place a stimulus package in August, of a 25bp Bank Rate cut, a funding scheme to make sure the rate cut was passed on, additional gilt purchases, and corporate bond purchases……. I thought our August package would be the start, and further stimulus would be needed.

Not only was that completely wrong the Forward Guidance ( to the November meeting) was wrong as well.

We get four explanations of why he was wrong and none of them mention the impact of the UK Pound £ so having given him the benefit of the doubt at the beginning I do not do so now. This is rather poor. Also his claim of a “fiscal reset” is contradicted by the UK fiscal statistics as I have reported on here.

Future policy

Oddly the lower exchange rate now does get a mention! Accordingly we will get higher inflation and there is also a mention which if you blink you will miss of an economic boost too. But of course gloomy Gertjan has a couple of other things to worry about. The first is wage growth.

 Let’s be clear, wage growth has picked up somewhat from the sub-1% pace in 2013 and 2014, but not nearly as much as we had expected, given the fall in the unemployment rate

 

Ah another forecasting error. Anyway this will lead to a consumer slow down.

The consumer slowdown, which initially did not materialise, now appears to be underway…….. I think the slowdown is more likely to intensify than fade away.

Added to this I note that the inflation will be in Gertjan’s words.

Inflation is set to rise, but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade as long as inflation expectations remain well anchored.

Of course we all ultimately fade along the lines of the famous statement by JM Keynes “In the long run we are all dead” but I have no idea how that helps in the intervening period.

Comment

Gloomy Gertjan seems to be in denial here. He placed his faith in the wrong factors last August and made a mistake based on unsurprisingly for him a gloomy forecast. Is it not intriguing to wonder why a financial sector insider ( ex-hedge fund manager) is so gloomy? Of course we can add to that the issue of why the Bank of England needed another representative of the financial sector onboard?

Sooner or later he will be right as of course economic slow downs eventually arrive a like a watch that has stopped gloomy Gertjan will then claim he was right all along. But in his speech was a single sentence which explains in my opinion where he has gone wrong.

Until mid-2016, inflation was close to zero, courtesy of the earlier drop in oil prices and the strength of sterling. That meant that real household labour income growth was close to 3%, despite subdued nominal wage growth.

Lower inflation led to an economic boost via stronger real wage growth so in my opinion the objective is to keep inflation low, as wage growth seems set to be subdued. However whilst claiming he has provided an economic boost the expectation and then arrival of the Bank of England easing last August pushed the Pound £ lower and inflation higher. Thus via the real wage effect the likelihood is that gloomy Gertjan has created his own future gloom by repeating the errors made in 2010/11. If he continues on that road he will probably cut Bank Rate again in spite of his talk of a rise.

Also if we continue his rather bizarre medical analogy the side-effects are growing.

Consumer credit growth has been accelerating over the past few years, and has accelerated further in the second half of last year, suggesting that the resilience of household spending was in part financed by credit,

Chocolate bars

We have been through a phase where prices have risen and chocolate bars have suffered from shrinkflation due to higher costs and a lower £ .Well there is this.

Cocoa futures in London have slumped by about a third since reaching a six-year high in July. ( Bloomberg).

Any chance of an extra Toblerone triangle?

Me on TipTV Finance

http://tiptv.co.uk/look-nova-banco-mess-czech-currency-peg-not-yes-man-economics/