Posts Tagged ‘July’

file4741270417603

The Bank of England says a rate hike is not likely until 2016; the markets are pricing in a 2015 hike. But might they rise even sooner than that?

These days it’s about unemployment. The Bank of England now says that for as long unemployment is above 7.0 per cent it won’t be upping rates. It says this is not likely to happen until 2016, that the markets are too optimistic, and that there is just a one in three chance of a rate hike sooner than that.

One of the lessons of the last few years is that when the economy is entering a downturn, economists and markets alike tend to underestimate the speed of contraction. Yet it seems equally clear that when things are improving, markets and economists tend to underestimate the speed of recovery.

The OECD has joined a long list of economic forecasters to revise its projections for UK growth upwards. The latest Purchasing Managers’ Indices (PMIs) from Markit/CIPS point to quarter on quarter growth of between 1 and 1.34 per cent in Q3. In fact, the latest composite PMI tracking construction, services and manufacturing has hit its highest level ever since records began in the late 1990s.

So if the UK economy is expanding so much faster than the wildest optimists forecast just a few months ago, is it not possible that UK unemployment will be back to 7 per cent faster than both the Bank of England and markets are predicting?

Yet more evidence to support this case comes from recent data from the ONS. It has recently begun experiments with month on month data on UK unemployment and recorded a fall from 7.8 to 7.4 per cent in July. A recent survey from the CIPD has its headline index tracking employers’ intentions to hire more staff hitting its highest level since 2008. The PMIs for July pointed to the fastest rate of job creation since 2007. And if we really do see the boom in residential construction that many are predicting, the effect on employment will surely be significant.

There are problems with these rosy forecasts, however.

For one thing, data on month on month changes in the jobs markets are highly volatile – the August data may see July improvement cancelled out. The PMI for August may have pointed to faster growth, but as far as job creation is concerned, it was nowhere near as positive as the July reading.

The big doubt related to what they call the productivity puzzle.

Until recently a characteristic of the UK economy has been disappointing growth in GDP, but surprisingly robust jobs figures given the state of the economy. Of course the mathematics of poor growth but reasonable job creation has meant poor productivity. Lots of theories abound for the poor growth in productivity, with one of the most popular being that employers have been choosing labour which has low upfront costs, over investment into capital equipment. In other words, they prefer staff, who they can always fire, to labour efficient machinery which requires a bit of upfront outlay, and cannot not be easily sold. Is it not possible that as the economy improves, so will productivity, and just as unemployment was relatively low in the recession, it will be relatively high in the recovery? If that is right, then interest rates may stay at half a per cent for some time yet – regardless of whether the recovery exceeds expectations.

© Investment & Business News 2013

file0001944464323

When surveys start concluding that certain vital sectors of the UK economy are enjoying the best growth rate since 2006, you know you need to start taking things more seriously. Until recently the UK recovery looked – how can one put it? – well, it looked quite nice. Surveys and hard data pointed to growth; they suggested that the UK was comfortably clear of recession territory, but there was always that reminder that the recovery was really quite lacklustre compared to what it was like before 2008. But then yesterday and this morning it changed. Not one, but two surveys have seen the light of day in the last 24 hours, which suggest that certain vital sectors are now seeing their best performance since 2006.

Just to remind you, the UK economy may not be in recession, but it is still in a downturn. GDP is still in excess of 3 per cent below the 2008 peak, and that is a record. Data goes back to the early years of the 20th Century and in that time no downturn has lasted as long. In fact so severe is the downturn that some are going further and calling it an economic depression. It is a funny sort of depression though. It is undeniably the case that unemployment is too high, but then neither is it at the kind of level that one would normally associate with economic depression. What is different this time around is that while employment has been higher than one might expect given what is happening in GDP, average wage increases have been lower. It is now more than three years since average wage increases were higher than inflation.

The latest data says the UK economy expanded by 0.5 per cent in Q2, compared to 0.3 per cent in Q1. So that’s an improvement, but the fact is that 0.5 per cent growth is not that good. At this stage in the economic cycle, with the economic output so far behind potential, the economy should be booming. Hold that thought. Four surveys have seen the light of day since last Thursday, and between them they suggest that the UK economy is finally growing the way it should be – it may even be close to booming.

First off, there was the latest Purchasing Managers’ Index produced by Markit/CIPS for manufacturing. The index rose to a 28 month high in July, with a score of 54.6 – with any score over 50 supposedly denoting growth. This was the best bit from the report: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Second off, we got the latest Purchasing Managers’ Index, again from Markit/CIPS, this time for construction. The index pointed to the fastest rate of residential construction since June 2010 and the steepest improvement in new order levels since April 2012.

So far the story is okay. Surveys point to an economy improving, but at best they only suggest the performance is comparable to what we saw in 2011, maybe late 2010. But the UK economy was not in good shape back then, so big deal. The UK economy is not as terrible as was in 2012, but it is as bad as it was in 2011.

But then yesterday the story became altogether more promising. The latest Purchasing Managers’ Index for services rose to its highest level since 2006. In fact with the headline seasonally adjusted Business Activity Index standing at 60.2, it was the highest reading since December 2006.

But even that is not the best bit. July also saw the sharpest rise in backlogs of work since February 2000. Now when backlogs rise, you can normally expect output to rise in the following months to try to catch-up. In other words, if anything, the next few months should be even better. Collectively, the three PMIs point to quarter on quarter growth of 1.5 per cent. If that proves right, the UK will have enjoyed its fastest growth rate in 14 years.

Finally, this morning saw a survey from the British Retail Consortium indicating that retail sales rose by 3.9 per cent in July, which is the best year on year rise since 2006.

Okay, there are snags. For one thing much of the expansion appears to be fed by UK households saving less, and borrowing more. Not everyone welcomes this development. For another thing one-offs partly explained July’s retail growth: with the good weather and sporting success being cited for reason for higher sales.

But lurking in the data are signs of something that may be more permanent. The rather unfortunate timing of the economic depression in the UK’s largest export market – the Eurozone –has really not helped things. It is encouraging that there are signs that the UK is exporting more outside the euro area. So, let’s enjoy the moment.

Some are now patting themselves on the back. They say that the economic recovery proves they were right. Austerity works, QE works. But is that really right? Read the next piece for an answer.

Does the recovery prove that QE works?

© Investment & Business News 2013