jka on economics UK

The UK is in a liquidity trap - say no to more QE on planet ZIRP

Last week, the Governor of the Bank of England said This is the most serious financial crisis we have seen since the 1930s, if not ever. Well is it? Just like the 1930s the UK is in what we call a liquidity trap, a situation where monetary policy is unable to stimulate the economy either through lowering of interest rates or increasing money supply.   

Liquidity traps occur when rates are reduced to the zero bound or thereabouts and cannot be reduced further. In real terms UK rates (base rate minus inflation) are negative 4% plus.

The liquidity trap is compounded when expectations of adverse events, either deflation or in the current situation, a lack of aggregate demand, are manifest. Firms are loathe to invest, households are constrained to spend, government spending is limited by a desire to resolve a fiscal debt crisis.

In the UK, the first round of Quantatitive Easing or asset purchases was essential to improve liquidity in the banking system at a time of crisis. 

Inter bank lending was dessicated, LIBOR spreads were extending. The central bank was becoming not just the last lendor of resort but the only lender of resort. Action had to be taken to inject cash into the economy by undertaking a series of asset purchases predominantly gilts. The programme of some £200 billion was equal to 14% of GDP it had to be done.

This is not an argument for more asset purchases, for the exercise came at a price. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending, actually reduces demand and leads to lower growth.

Ten year gilt yields have fallen to 2.4% and thirty year gilt yields have fallen to 3.4%. But what does that mean? Gilts are mis priced, the real risk return on ten year gilts is negative. Effectively investors are paying the government to hold bonds.

Policy makers assume that lower interest rates at the longer end of the curve will lead to a higher level of investment. This is not the case. Any return on investment or payback calculation is a function of cash flows from a determined demand horizon. 

Cost of capital does not feature in the basic investment model. Until the uncertainty about the forward level of demand and growth is cleared, investment plans will remain on the shelf. 

The Bank of England suggests that QE increased GDP by between 1.5% - 2.0% but also led to an increase in inflation of between 0.75% and 1.5%. [Joyce M et al in the September Bank of England Quarterly Bulletin.] This is a highly speculative analysis.

If it were right, this would mean, that at best, the QE2 round of £75 billion would kick growth by just over 0.5% but increase inflation by over 1% on a pro rata basis according to the banks own figures.

One cannot be entirely confident in the bank’s hypothesis. QE led to a fall in gilt yields as a first round effect but thereafter the relationship between QE and the effect on growth and inflation is tenuous. The argument for further QE is intellectually weak and at best the potential economic impact minimal. The risks outweigh the return.

In fact I would argue that a further round of asset purchases merely oils the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.

In 2008, writing about a zero interest rate policy, I wrote “Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantatitive easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system." We just don’t really know what is achieved. So in the meantime we should say no to more QE and or asset purchases.

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UK Economics : Is the march of the makers, a case of lions led by donkeys?

"Lions led by donkeys" is a phrase used to describe the British Infantry of the First World War and to condemn the generals who commanded them. The contention is that brave soldiers (lions) were sent to their deaths by incompetent and indifferent leaders (donkeys).

"The English Generals are wanting in strategy. We should have no chance if they possessed as much science as their officers and men had of courage and bravery. They are lions led by donkeys." According to the German Command Headquarters.

Strategy in business and in war is key. Which battles at which time, with what resource. SWOT profiling, constant benchmarking is key to success. Understanding this makes it more difficult to understand the present coalition strategy in expecting so much of the manufacturing sector and denying the contribution of the business, financial and professional services sector, especially banking,  to the British Economy

The march of the makers, rebuilding the workshop of the world to finance the big society is  a battlefield folly. The march is faltering, the trade deficit continues to expand. The analysis of forty years of UK trade amply demonstrates the UK needs a strong service sector to finance the trade in goods deficit.

According to a recent paper by Yiping Huang and Bijun Wang, 2011 China’s manufacturing sector accounts for 41% of output compared to just 12% in the UK. With a world average of 13% China’s relative share is 3.2 compared to the UK’s 0.9. That’s tough competition.

China’s revealed comparative advantage for manufactures is 1.13 compared to the UK’s 0.79. A larger competitor, tough competition, with a significantly higher competitive advantage will provide a difficult challenge.

In financial services, the reverse is true, China’s revealed competitive advantage is 0.03, compared to the UK’s 3.01. The world average is just 0.5. The UK is the strongest player in the world of exports in financial services with the highest revealed comparative advantage. So why not promote and support the sector instead of suggesting an evil imbalance exists within the economy?

Why place so much hope in an ill equipped manufacturing sector in trend decline long before Gandhi promoted homespun? The renaissance just will not happen. Play to your strengths may sound facile in terms of strategy but it should be something even donkeys can grasp.

Notes
The revealed comparative advantage was first proposed by Balassa (1965).The comparative advantage of a country's industry could be revealed by the ratio of the share of an export sector's exports in total exports to that share  for the world. Balasa, Bela 1965 Trade Liberalisation and revealed comparative advantage" Manchester School of Economic and Social Studies Bulletin Vol 33 No 2 pp 99 - 117

Yiping Huang, Bijun Wang Chinese Outward Investment: Is there a China Model. China & World Economy Volume 19 No 4 Jul - Aug 2011

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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 GDP - if the recovery is on track, I am on the wrong train!

On track delivering the growth plan to rebalance the economy. I have just been watching the Faisal Islam interview with the Chancellor of the Exchequer and everything is OK. The economy is rebalancing, the supply side is improving, the Chancellor is not for turning because there is no alternative. The borrowing figures are on track and growth in the British Economy is welcome.

If this recovery is on track, then I am on the wrong train. Growth in the second quarter was just 0.8% year on year compared to 2.5% in the third quarter of 2010. The economy is slowing and it is difficult to see the impetus to growth in the second half of the year. Slow growth is already impacting on government borrowing and the targets for the year will not be achieved.

The UK economy has grown by just 0.2 per cent (quarter on quarter), with the Japanese tsunami, Royal Wedding, and April bank holidays all having an impact, according to the ONS.

“The latest gross domestic product figures for the second quarter of 2011 suggest the economy has grown by just 0.2 per cent following an increase of 0.5 per cent in the first quarter of 2011. The April bank holidays, the royal wedding, and the effects of the Japanese tsunami, all had an impact on the growth rate. These estimates are broad brush and illustrative. There can be no certainty as to the impact of the special events and there may be other factors at play," the ONS said.

The ONS is beginning to sound like a beleaguered sales team under pressure to hit targets. Too hot, too cold, too wet, too dry, Christmas too early, Easter too late. Missed sales targets that’s our fate, the old mantra.

According to the ONS in Q4 there was too much snow, in January not enough snow, April was too warm and the bank holidays and the Royal Wedding hit the growth figures in the second quarter. Heaven knows what would have happened to GDP if it had snowed on the day of the Royal Wedding.

The march of the makers, rebuilding the workshop of the world, is beginning to slow with manufacturing growth up by 2.3% compared to a high of nearly 5% last year. Service sector growth was just 1.2%. We are no longer a nation of shopkeepers, we will become a nation of online traders. This recovery is not on track, it is slowing badly. The economy is not rebalancing, it’s slowing down.

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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.

pro.manchester economics review Q2 - what colour are the eyes of a Yeti?

The pro.manchester economics review for the second quarter of 2011 is available on line. Rates are expected to remain on hold until the Autumn. The economy is expected to grow by 2% in 2011 but any base rate rise will be postponed into early Autumn. Growth will be a tough grind in 2011.

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.

Since then, inflation has been well above target, commodity prices have been rising but the growth of the economy has been below trend. 

The preliminary estimate for growth in the first quarter of the year was 0.5% quarter on quarter and 1.8% year on year. This was just enough for Ed Balls to claim the economy is flat lining and and for George Osborne to hail growth of sorts. For the year as a whole, the economy is expected to grow by 1.7% according to consensus and our own forecast is revised down to 2.1% in this review. As for rates, the GDP figure will do little to convince the doves on the MPC to fly the Governors coop and vote for a rate rise. The earliest estimate is for a modest rate rise in the early Autumn.

The risks to the GDP figure are to the down side but the second quarter GDP growth will be of key concern. Capital Economics, NIESR and The Chamber of Commerce are flagging growth of just 1.4%.

A full copy of the pro.manchester economics review “Grinding Out Growth” is available as a free download. JKA

Check out : "What colour are the eyes of the Yeti? Trogs and the Yeti" page 20.

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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.

Puzzles at the Bank of England as the economy doesn't fit the models

Writing in today’s Daily Telegraph Roger Bootle makes the point that economics is too important to be left in the care of academics. The emphasis on mathematics and econometrics at the expense of economic history and pragmatic interpretation of events is evident. 

“Pick up the leading journals today and even many economists cannot understand the titles, never mind the articles. Open the pages, littered with algebra, and you could be forgiven for thinking that you were looking at a musical score. The mathematicians have taken over.”

“Students of economics today are force-fed theoretical models of startling banality and irrelevance, leavened only by doses of econometric techniques of dubious validity and near-zero intellectual interest. Typically, they complete their course knowing nothing about the British economy and untrained in how to think.” 

I do like Roger Bootle. I once went on a course to understand GARCH modelling. This is a modelling technique involving Gaussian or general autoregressive conditional heteroskedasticity. I didn’t understand a word as the lecturer began to chalk obscure hieroglyphics onto a blackboard from 9:00 am in the morning. There were only six of us in the room and was feeling more than a little overwhelmed. As time moved on 11:30 in fact, the lecturer realised he had made a mistake in the chain process at around ten minutes passed ten and a full hour and ten minutes were wiped off the board. We broke for coffee and I didn’t go back. 

If you read the minutes of the Bank of England Monetary Policy committee for last month you begin to think that RB has a good point. The Bank of England is puzzled that theory isn’t working. A depreciation of sterling according should lead to an improvement in the Balance of Payments. Exports are cheaper and imports are more expensive. There should be a reduction in import volumes but the bank noted :

“It was puzzling that import growth had remained so robust, despite the substantial depreciation of sterling. It was possible that domestic substitutes for some imported goods and services were not available. It was also possible that UK firms in some industries lacked the plant or capacity to expand production rapidly in response to the past depreciation of sterling and it would take time for them to install it."

Hello! It’s a wake up call for the Bank of England. The Bank has over two hundred economists educated to Masters or PhD standard. They produce much research and analytical papers. Two of my favourites from last year are :

“How non Gaussian shocks affect risk premia in non-linear DSGE models”. (No. 417) and “An efficient method of computing higher order bond price perturbation approximations.” (No 416). Very helpful to policy makers everywhere, I am sure.

Someone should commission a paper and send it to the MPC, on why depreciation has never worked, be it 1931, 1947, 1967 or 1992. Peter Spencer of the ITEM club points out the manufacturing has been in decline since the 90’s. I presume he meant the 1890’s. In 2011 there is little manufacturing capacity in the UK and this is likely to remain the case. There will be no rebalancing of the economy towards net trade surplus.

In 1983 the UK went into deficit in manufactured goods following the Howe Thatcher pogrom. The trend decline is getting worse not better. Only in one manufacturing sector, chemicals does the UK trade at a surplus the rest is in serial deficit. 

The Bank seems to think that in pubs around the UK discussions are taking place about the merits of open hearth steel making versus Bessemer and the electric arc furnace. Resurrection of tube making facilities using the pilger process is also on the agenda presumably but where to buy the equipment? Back to the darts with a pint and a packet of pork scratchings the only option. Import substitution - buy real ale. Devaluation isn’t working but then it never did.

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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 deficit - this is no time to be bashing the banks!

In 1931, the deficit on balance of trade in goods and services amounted to -2% of GDP. The import bill for food, beverages and tobacco amounted to 8.6% of GDP. Add in the raw materials bill, and a manufacturing surplus of just £72 million could do little to offset the 12.3% GDP bill for essential imports in food and basic commodities. Invisible earnings, which would normally finance the import bills had been hit by a fall in revenues particularly shipping revenues as world trade collapsed.

The UK government faced a crisis which was to lead to Sterling leaving the Gold standard and a devaluation from the level of $4.86 to the dollar. Eat less and export more was the call to remedy the problem.

In 1948, A net trade deficit of just under 2% precipitated the devaluation of Sterling from $4.20 to $2.80. As always the mantra, eat less, export more was prevalent. A food bill of some £450 million amounted to just under 4% of GDP. Including raw materials, the total amounted to 7% of GDP. The UK was struggling to finance the deficit either in terms of manufacturing surplus or invisibles surplus.

By 1950, according to Coutts and Rawthorn, the UK was a great industrial power with more than a third of its labour force employed in the manufacturing sector. There was a trade surplus in manufactured goods equal to 10% of GDP and the country was a net exporter of energy. All appeared to be well, the overall deficit was less than one half of one per cent.

In 1967, seventeen years the Labour government was obliged to run cap in hand to the IMF as a result of a balance of payments crisis. This lead to a further devaluation of the currency. The actual balance of payments numbers were inconsequential, confidence was everything and the Wilson government offered little. The pound in your pocket was unaffected as the devaluation from $2.80 to $2.40 was to unfold. The run on the pound had been triggered by a balance of payments deficit less than 1% of GDP.

Forty three years later in 2010, the UK had a deficit on food of just 1.2% of GDP, add in the bill for raw materials and the deficit amounted to less than 1.5%. Yet the overall deficit on trade in goods amounted to 6.7% of GDP. Since 1983, the UK has been running a persistent deficit on manufactured goods which has compounded the trade deficit problem. In 2010, the trade deficit on manufactured goods amounted to -4.6% of GDP.

The surplus on invisible account could not cover the trade deficit. The overall deficit in goods and services was -3.3% of GDP. In Q4 alone the deficit was -4% of GDP.  The situation is worse than 1931, 1948 and 1967. How did the UK get into this situation?

The paper “Forty years of UK Trade” analyses the deterioration in the UK Balance of Payments position. It will be published sometime next week. For those expecting to see the rebalancing of the economy towards net export growth following the devaluation of the currency once again, it should be an interesting read. The UK needs a strong banking and financial services sector to offset the manufacturing deficit. This is no time to be bashing the banks.

Prospects for the UK balance of Payments : Coutts, K. and Rowthorn, R. 2010 Civitas 

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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.

Pickles, the run on the Pound and the Sterling crisis.

In 1931 the UK faced a balance of payments crisis and a run on the pound sterling which in the end led to a negation of the Gold peg and the dollar pricing of $4.86. By modern standards the deficit was no big deal. In 1929, the country had a credit balance (current account) of some £100 million falling to £30 million in 1930. In 1931 there was an estimated debit balance of £90 to £120 millions. It was this anticipated deficit on current account that led to a run on Sterling and a repatriation of assets particularly to France and the USA.

The problem for the balance of payments was a deterioration in the net receipts from invisible exports largely as a result of the fall in international trade and collapse of shipping revenues. Furthermore, the government was unwilling to raise interest rates to defend the currency given the overwhelming concern re unemployment.

The visible account had long been in substantial deficit, despite a surplus on manufactures and semi manufactures. Imports of raw materials and food, particularly food, meant that exports of manufactures and a surplus in invisible earnings had to finance the food bill of the UK population.

In 1931, food exports totaled £39 billion but the import bill was £377 billion producing a deficit of £338 million. The proposition to remedy the balance of payments problem was to eat less, import fewer manufactures and export more. Food drink and tobacco imports should be reduced by 7%, manufactured goods imports should be reduced by 25% and exports of manufactures increased by 25%.  A combination of import tariffs and duties would assist in the process.

Certain items were considered to be non-essential including shell fish, game, pickles and pickled vegetables, precious stones, feathers, flowers, plants and bulbs. The category of non essentials, totaled £13 million. The “pickled imports” alone cost the UK £6,000 such was the level of detail in the analysis. In some small way Pickles contributed to the run on the Pound.

In 1930 and 1931, the deficit on merchandise trade was £386m in both years and this was offset by invisible receipts of £400m - £420m in 1931 but falling to £285m to £315m in 1931 largely as a result of the fall in income from overseas investments. In 1930, the visible deficit was equal to almost 9% of GDP but thanks to the surplus on invisible account the current account was in balance.

It was argued there is no problem of the balance of trade so long as the “£ is free to move” as, if the balance is adverse, sterling will automatically fall to the point necessary to maintain equilibrium. “The real problem is to secure such a balance of payments as is consistent with a reasonable exchange values of the £.” 

(Committee on the Balance of Trade - report January 19th 1932). 

In September 1931 the British Government suspended obligations due under the Gold Standard Act of 1925 which required the bank to sell gold at a fixed price. As the statement from the Prime Minister Ramsay MacDonald explained. 

“In the last few days the international financial markets have been “demoralised” and seem intent on liquidating their foreign assets in a sense of panic. Since the middle of July, funds amounting to more than £200 million have been withdrawn from the London market. The withdrawals have been met partly from gold and foreign currency held by the Bank of England, and short term credits of £130 million from the USA and France.” 

By September 1931, reserves were exhausted. In a chilling note from the Bank of England to the Prime Minister, the Deputy Governor E M Harvey reported : 

Gentlemen,

I am directed to state that the credits for $125,000,000 (£25.7m)  and FFs. 3,100,000,000,  (£25m) arranged by the Bank of England in New York and Paris respectively, are exhausted, and that the credit for $200,000,000 arranged in New York by His Majesty's Government, together with credits for a total of FFs. 5 millions negotiated in Paris, are practically exhausted also. The heavy demands for exchange on New York and Paris still continue. 

Under these circumstances, the Bank consider that, having regard to the above commitments and to contingencies that may arise, it would be impossible for them to meet the demands for gold with which they would be faced on withdrawal of support from the New York and Paris exchanges. The Bank therefore feel it their duty to represent that, in their opinion, it is expedient in the national interest that they should be relieved of their obligation to sell gold under the provisions of Section 1 subjection 2 of the Gold Standard Act, 1925. I am, Gentlemen, Your obedient Servant.

And so it was, the UK abandoned the Gold Standard, the Pound was left to float, to a level which will automatically produce equilibrium. The rest “as they say” is history. 

In Q4 2010, the UK visible deficit was 7% of GDP and the pound traded at $1.56. The current account recorded a deficit of £10.5 billion in the fourth quarter of 2010, equating to 3 per cent of GDP. UK reserves amounted to £40 billion. 

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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.

Prime Minister’s update : The Pound in your pocket - lessons from history

Since 2008, Sterling has devalued by 20% but there has been no discernible impact on the trade deficit as policy makers have hoped (and as we have consistently predicted). According to policy makers, what does devaluation mean to the British Economy. Here is a quote from the Prime Minister.

“What it [devaluation] does mean is that we shall now be able to sell more goods abroad on a competitive basis. This is a tremendous opportunity for all our exporters and for many who have not yet started to sell their goods overseas. But it will also mean the goods we buy from abroad will be dearer and so for many of these goods, it will be cheaper to buy British. Because one of the great problems we in Britain have had over the past [five or six  years] has been the great increase year by year in imports of goods manufactured abroad.

Saving imports, and still more the export drive, will mean that industrial production will go up. Many industries and firms which are now working below capacity, will have a chance to get into full production. This means more work, more jobs in the development areas, because we intend to be ruthless in diverting new enterprise to those areas."

Is this the "march of the makers" speech from Chancellor Osborne? If the quote sounds familiar, it should do. But it would be even more familiar if prefaced by the words, “from now on the Pound abroad is worth less but it does not mean the Pound in your pocket, or in your purse or in your bank has been devalued.” 

The quote is from Prime Minister Harold Wilson in 1967 speaking of the 14% devaluation of the currency, “creating a great opportunity for exporters and manufacturers and salesmen, what a great opportunity for them”.

So what really happened? In 1967, the pound was devalued by 14% but in the following year, the cost of imports went up by 12.5% and the price index of exports increased by 8%. The following year 1969, export prices rose slightly ahead of imports but by the third year any price gain had been eroded. Import costs and export costs had both risen by 20% compared to 1967. In volume terms by 1970 import and export volumes had risen by 28% compared to 1966. (Source Pink Book ONS).

There had been no relative gains to prices or to volumes relative to imports. Devaluation did little or nothing to solve the problems of the British Economy in 1931, 1945, 1967 and 1992. It  has done little and will do little to solve the problems of the British Economy from 2008 to 2011. 

“The pound in your pocket” is being devalued by higher inflation especially on dollar denominated prices paid for food, energy and commodity imports from abroad. The devaluation will not lead to a rebalancing of the economy. 

A rise in interest rates would increase the value of the pound abroad and the pound in your pocket as the inflation effect of international commodity price rises is moderated. Devaluation isn’t working, it never did.

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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 in Goods in January - no rebalancing - it's getting worse.

Is it possible to look at the world through rose coloured glasses with your head in the sand? If you are an economic analyst it appears you can. According to the Daily Telegraph, “January’s trade figures lift hopes of an export led recovery.” 

“Economists said the figures raised hopes that trade will make a positive contribution to GDP growth in the first quarter. The Government is pinning its hopes on exports to lead the economy back to health to offset the hit to consumer spending from the austerity measures.” 

According to the Financial Times, “Britain’s deficit in trade in goods narrowed by much more than expected in January, raising hopes that the economy can rebalance away from its dependence on domestic consumption of goods and services.”

The latest trade figures released by the ONS yesterday are the source of all the excitement. The UK’s seasonally adjusted deficit on trade in goods was £3.0 billion in January compared to a deficit of £5.5 billion in December.

The trade in goods deficit was £7.1 billion in the month compared to a deficit of £9.7 billion in December. 

For some analysts, the latest data is welcome confirmation of the “rebalancing of the economy towards export led manufacturing growth. David Cameron said the numbers were "exactly the sort of rebalancing our economy needs".

No doubt the Governor of the Bank of England will be pleased as he stated during the February presentation of the Inflation Report. “I think it would be very peculiar if a 20% fall in the real exchange rate did not lead to some rebalancing. There are very few examples where if you have a persistent fall in the real exchange rate you don't see a rebalancing. You clearly see it in the figures for exports. I think there is certainly evidence that some forms of import expenditure switching is occurring.”

But here is the problem, monthly data on trade can be erratic and subject to revision. Over the latest three month period, the deficit on goods was £25.4 billion compared to £22.5 billion over the same period last year. The deficit is getting worse not better. A quick look at the chart shows the ten year data and the trend line. The deficit was too high in December and too low in January.

In the pro.manchester Economics Review we forecast the trade in goods to continue to deteriorate through the year. The January data does nothing to change this view.

In our forthcoming paper on “Forty years of UK trade data” we will explain why.

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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.

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.