jka on economics UK

pro.manchester economics review Q1 - rebalancing the economy or dans la flotte?

My pro.manchester economics review for the first quarter of 2011 is available on line and in hard copy. I love economics, it is a passion. It is with great pleasure, I offer the review to lovers of economics. Through last year, I was suggesting that growth would be above trend, inflation would remain stubbornly high and interest rates would have to rise to offset the inflation threat and mitigate the impact of import prices, particularly dollar denominated commodity prices. 

In January 2009, I cautioned the devaluation of Sterling would have little impact on the trade deficit. There would be a cyclical fall of around £10 billion in the trade in goods deficit, (it was £11 billion) but as the economy recovers in 2010, the trade deficit would continue to increase.(it did).

The theme of the first quarter review is rebalancing the economy. The Chancellor is on track to meet the spending target, the Governor is off track in his belief Inflation will fall to target and Sterling will rebalance the economy towards net trade growth. 

Interest rates are set to rise, doves on the MPC are flying the coop. Spencer Dale Chief Economist at the Bank of England is the latest hawk to squawk and join Andrew Sentance (with us in April) and Martin Weale. Rates are set to rise.

“Despite the best efforts of policy makers, the recovery will remain on track for 2011. We continue to expect above trend growth, stubborn inflation and a steady rise in base rates”

The pro.manchester outlook is slightly contrarian. The review is produced on the basis that growth in the current year will be ahead of expectations at 2.6%, inflation will be around 3.6% by the end of the year but will not fall to target thereafter. Government borrowing will fall faster than the consensus forecast but there will be no improvement in the current account as outlined.

As expected the GDP figure for Q4 was revised. It went down rather than up! Who would be a forecaster. Even so snow adjusted growth was over 2%. All eyes will be on the first quarter GDP performance.

The on line PDF can be found here : 

http://www.pro-manchester.co.uk/promanchesterquarterlyeconomicsreview

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is Chief Executive of pro.manchester, a director of Marketing Manchester and a visiting professor at MMU Business School. An economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK retail sales January, Britain isn't eating or are we eating each other?

The seasonally adjusted value of retail sales in January 2011 rose by 8.2 per cent compared with January 2010 and the seasonally adjusted volume of retail sales in January 2011 rose by 5.3 compared with January 2010. It’s a retail boom or is it?

Too hot, too cold,

Too wet, too dry,

This is why my sales won’t fly.

Christmas too early, Easter too late,

Missed sales targets that’s my fate.

This is an old retail mantra to explain retail sales. I have always found this to be extremely useful in scientific retail analysis.

This January sales are booming in comparison with 2010 because compared to last year, there is just not enough snow. Sales are up by over 5% in volume terms but this is against a snow bound comparison, when sales actually fell last year by three per cent.

There is no boom, the underlying trend rate of growth in January is around 1%. Sales were hit last year by snow and an increase in VAT from 15% to 17.5%. This year sales have been hit by light rain and the VAT increase from 17.5% to 20%.

Non food stores are up by 9.5% and household goods stores experienced sales growth of 9.8%. The large increases occur because of the weak figures last year rather that an illogical response to VAT rise and the sluggish housing market. Sector sales offer little assistance to understanding what is happening within the economy.

On line sales increased by 22% and now account for 10% of total retail sales. In sectors such as books and DVDs the figures must be heading for 50%. 

What is happening to food? Britain isn’t eating according to the official figures. Consumers having emptied the freezer in December must have started eating each other in January as sales fell by a further 2.7%. I love data and I love the ONS but something is happening to the numbers. Can it be that more and more food sales are going on line.

The Governor of the Bank of England will love the ONS too. Retail prices increased by an estimated 2.7% in January compared to the horrible headline CPI 4%. Using the CPI - ONS data, he wouldn't have had to write a letter to the Chancellor.

Sign up today and "subscribe" for e-mail notification of updates. The pro.manchester economics review for the first quarter is out next week.

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK Inflation Report - the model is flawed - it's time for a futile gesture

The inflation report made for gloomy reading, the bank has adjusted the forecasts for growth this year to around 2% and inflation is heading the wrong way towards 5%. Not to worry, in the medium term, inflation will revert to target 2% because that is the way the Bank of England model works. The Governor is creating a new law of inflation, it is the “homing pigeon” model. Buffeted by the strong winds of commodity prices, imported inflation and energy costs, sooner or later inflation will revert to target, the pigeons will come home to roost to join the doves in the MPC coop. 

The Bank of England model is fundamentally flawed in three dimensions. Firstly, an over dependence on gapology, the belief that an output gap will inhibit price rises. Note, that manufacturing output prices increased by 4.8% in January against an estimated output gap of 4% to 6%. There is some correlation between earnings and the output gap but not enough to hold the theory given the challenge of weaker sterling and rising commodity prices.

Secondly, the failure to recognise the step change in the world economy, China has passed the critical tipping point. It is the second largest economy in the world but still ranks just within the top one hundred in terms of GDP per capita. Think of it now as a vast hoover, sucking in a disproportionate share of food, energy, and raw materials particularly hot metals. In turn this enhances the earnings and incomes of commodity blessed emergent nations, enriching the appetite for basic foodstuffs, pushing up pressure on world prices. The Bank of England achieved target despite the fact that service sector inflation has averaged over 3.6% for the past twenty years. Cheap manufactures from China flattered the target rate as manufacturing prices hit a zero rate. This pigeon has flown the roost. 

Thirdly, the Governor still believes the economy will rebalance towards exports “although we are still waiting for the boost to net trade”. This is very concerning. The graph shows the continuing deterioration in net trade in goods. It is getting worse not better as has been explained in earlier posts. 

“Rebalancing the economy, “waiting for the day the boats no longer come in” will be as probable as Miss Haversham’s trip to the registry office. It is time for the Old Lady to take off the cobwebbed wedding dress, dust off the cake and get out more.”

The Governor said it takes one year or even as much as three years for reliable trade stats to emerge. This is even more concerning. The data state clearly there is no rebalancing in trade in goods. The Governor cites tourism as a way in which devaluation is benefitting the economy. OK, tourism is modelled as a function of domestic wealth and does have a high price elasticity with a short lead time. Manufacturing is relatively price inelastic with a limited “pass through” ratio. Consider the twenty per cent devaluation in 1992 produced a muted eight per cent change in relative export prices.

The Governor cracked a joke, suggesting a rate rise from such a low floor would be a futile gesture to manage the economy. For savers in the economy whose earnings have been severely damaged, this would be a positive gesture to reward the prudent. JKA

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Relying on Keynes is about as useful as switching off Sky News and reading Nostradamus.  The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK inflation rises to 4% - the hawks are circling, will rates have to rise?

Inflation CPI basis in January increased to 4%, that’s twice the level of the Bank of England target. The Governor has had to write yet another letter to the Chancellor explaining why the MPC was failing in the challenge to curb inflation. In his letter to the Chancellor, Mr King said three primary factors were behind the increase, the fall in sterling, the rise in VAT and recent increases in the prices of commodities, particularly energy. 

Ultimately, he said, “inflation was as likely to be below target as it was to be above target in two to three years’ time”. Well here is the problem, as we have often said, Service sector inflation in January was 4.1%. It has averaged 3.6% for almost twenty years! That’s half the index. This was creating a problem for policy long before the fall in Sterling, the rise in VAT and the prices of commodities. Service sector inflation accounts for half the index. Goods inflation will have to fall to zero, to meet the 2% target. It doesn’t seem probable given the step change in China and the Far East. 

RPI and RPIX inflation were over 5%. This is a very uncomfortable number for policy makers. Major increases in the twelve month CPI inflation rate were Food (6.3%) , Alcohol (6.7%) Transport (7.7%) Education (5.3%) and restaurants (4.5%).

The inflation alphabet includes, the CPI, the RPI, the RPIX, the RPIY, the CPIY, and the CPI-CT. Gradually all have exceeded target rate in recent months.

Expect to see anytime soon, the CPI-MK. This is the Mervyn King special inflation index which excludes indirect taxes, housing costs, local taxes, commodities, imported prices, energy costs, core and non core items but includes anything around the 2% CPI target by special Hodrick-Prescott filter process.

The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising. The dependence on “gapology” is anachronistic. Two hawks are on the wing already but more doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK trade figures - the J curve is down the U bend ..

The trade (in goods) figures this week dashed the hopes of analysts and policy makers hoping for a rebalancing of the economy to export growth. Exports surged by 17% in the final quarter of the year but so did imports up by 18.5%. As a result the trade deficit ballooned to over £26 billion compared to just £21 billion in the final quarter of 2009.

For readers of this blog, the result will come as no surprise. We have long explained why exports increase in response to world trade with little impact from sterling devaluation. On the other hand, devaluation pushes up the cost of imports, including food, energy, raw materials, semi manufactures and export components. 

For those in business, the principle is easy to understand. Devaluation is reducing prices whilst agreeing to pay more to suppliers for import components. It doesn’t make sense for a company and it doesn’t make sense for an economy, the volume requirement will never offset the margin squeeze.

The Governor of the Bank of England said recently in Newcastle, each unhappy economy is unhappy in its’ own way. [apologies to Tolstoy]. The tragedy is our unhappy economy is unhappy, not in its’ own way but because of the persistence of policy makers to pursue strategies dominated by theories of yore, incorporating folklore, mythology, runes and ritual. Relying on Keynes is about as useful as switching off Sky News and reading Nostradamus. It is time to switch on to and accept the reality of, real time economics.

Rebalancing the economy, “waiting for the day the boats no longer come in” will be as probable as Miss Haversham’s trip to the registry office. It is time for the Old Lady to take off the cobwebbed wedding dress, dust off the cake and get out more.

Manufacturing output prices increased to 4.8% in January and input prices increased to 13.4%. The CPI and RPI figures out next week will be further bad news for the economy. Interest rate rises are inevitable. Rate rises will lead to an increase in Sterling, offsetting dollar denominated import inflation with little impact on export volume.  

The trade deficit will continue to deteriorate and for those lovers of ancient trade theory, the J curve is heading for the U bend along with the Phillips curve, the meandering NAIRU, obsession with the TROGS, (trend rates of growth) and the capacity gap. JKA.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

The FTSE set to rise higher but what of interest rates in the UK ..

Equity markets around the world have rallied from the lows of 2009 offering 60% gains for bottom feeders brave enough to take stock. The FTSE World Wide index now stands within 25% of the 2008 peak. In developing markets, the gains had been even higher, rallying from a low of 160 to around 340 according to the FTSE index, with the market now ready to test the 2007 high of 360. Markets had been supported by a strong growth in corporate earnings and a period of low interest rates.

Challenges to equity markets will be high levels of growth in the developing world, generating higher inflation. In turn this will require central bank action to push interest rates higher. Commodity prices, especially food prices are being pushed higher by world demand, with demand price effects exacerbated by supply shocks from natural disasters. China as the second largest economy in the world has pushed world trade beyond the tipping point. Demand for commodities is enhancing the incomes of commodity endowed developing countries, food spend is increasing in line with GDP growth changing the supply - demand balance in the short term.

Within Europe, fears over central bank default are easing despite the increasing spreads on gilt rates for the PIGS. Portugal, Ireland, Greece and Spain. Gilt yields on Greek bonds had risen to 13%. An olive branch of the Euro no longer appears to be on the horizon.

Our forecast for the FTSE end of 2011 is 6,500, that’s an eight per cent rise from current levels. Markets are set to test the 6,500 high before the end of the year but any push beyond in the Autumn will return to find support by year end.

In the UK we expect above forecast growth, with inflation remaining a challenge to policy in 2011. As for base rates, the market consensus is for rates to end the year at 1.25%.

If GDP growth is as high as we anticipate in the first quarter of the year, the shocking inflation figures could force the Bank of England to act earlier. Rates could begin the rise as early as April or May pushing beyond 200 basis points by year end. 

Sign up today and "subscribe" for e-mail notification of updates. Thanks to Mike Lenhoff, Chief Strategist, Brewin Dolphin for the pro.manchester presentation on the 3rd March inspiring this post.

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.