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Saturday 23rd July 2016
Hi Friend,
Waiting for Godot ... or business as usual ...
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An early start to the week on Monday, BBC Breakfast at 6:50am talking down the excitement from the EY ITEM club latest forecast. The far too gloomy outlook for the economy has growth plummeting next year and employment on the rise. Why so gloomy?
Now at the end the week we take a hard look at the PMI Markit Flash forecast for the UK economy. “Britain’s economy shrinking at fastest rate since 2009”, the headline in the Guardian today. “Flash survey points to post Brexit recession” the headline in the Times. The PMI Markit “Flash” survey has an index plummeting below the magic 50 level, a clear signal of setback, or is it?
According to Chris Williamson, Chief Economist at Markit, the downturn whether as a result of order cancellations, a lack of new orders, or the postponement or halting of projects was attributed in one way or another to Brexit.
Interesting isn’t it? Nothing has actually happened yet re Brexit. Nor is it likely to, for the next five years. OK there has been a vote and a surprise result. We are not leaving the EU just yet, nor are we “leaving Europe”. Article 50 will be triggered early in 2017, then will follow a tortuous series of trade negotiations which may be completed by 2022 at the earliest.
The PMI Flash survey has no pedigree and is a one off survey, taken at the moment between the referendum result and the government interregnum. Later data will include the first moves by the May administration which may have improved business sentiment significantly.
The latest data on retail sales, jobs and borrowing may also improve the reaction from business. Time also to factor in the possible relaxation of fiscal and spending policy as announced by the new May-Hammond axis.
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Waiting for Godot ...
The forecast models assume uncertainty will impact on investment, recruitment, housing and household spending. Waiting for something but what? Economic “Agents” are expected to behave like Vladimir and Estragon in Samuel Beckett’s allegory. Waiting in a dark place by a dead tree, for the elusive Godot, to appear always tomorrow, with something better to offer. By the end of the play, even the tree returns to life, but for the luckless pair, inactivity and inertia remain the norm. Trapped in a prolonged moment of eternal despair.
Business cannot wait for Godot. Consumers remain impatient to spend the leisure pound on Pokemon Go and other pleasures. Business opportunities must be taken as presented. No chance to wait for five years. The good deals will continue at best prices. The bad deals will flounder along with the overpriced.
The Bank of England “Agents’ summary of business conditions” July suggests it is very much business as usual in the wider community. Uncertainty has risen but the majority of firms did not expect a near-term impact on investment or hiring plans. There was no clear evidence of a slow down in activity.
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Monetary and Fiscal Reaction …
The Governor of the Bank of England has made it clear the Bank will act to ease monetary conditions if necessary to support growth. Martin Weale and Kristin Forbes have argued against a rate cut this week. The likelihood of an August move to cut rates appears as unlikely as it is undesirable. Action should be taken to support Sterling from current over sold levels, not weaken the currency as we drift into the NIRP crevasse.
The Chancellor has hinted there may be fiscal or spending moves to compensate for any reduction in domestic demand. More spending on infrastructure and housing the obvious move to compensate for investment and household spending weakness. The Audit Office issued a warning this week on over commitment to Heathrow, Hinckley, Trident, HS2 and the Northern Powerhouse!
The borrowing figures released this week, offered a modest reduction of £1.6 billion over the first three months of the year. Treasury will struggle to near the ambitious target reduction headlined by the OBR for the year ahead despite the rise in employment and retail spending.
Retail sales June …
Retail sales data for June did not suggest any spending weakness. Retail sales volumes increased by over 4% in the month. The problems for the “High Street” exacerbated as values increased by just 1.5%. Online sales increased by 14.1%, accounting for 14.2% of all retail sales activity. The squeeze on bricks over clicks continues.
Job Figures …
The unemployment rate fell to 4.9% in May. The number of vacancies matched the number of people looking for work according to the claimant count in June. The number of people unemployed was 1.65 million down by 200,000 in the year. The number of people in work increased by almost 600,000 over the twelve months.
Inflation …
Inflation CPI basis increased to 0.5% in June from 0.3% prior month. A rise in airfares and motor fuels pushed the overall index higher. Service sector inflation increased to 2.8%. Goods inflation fell by -1.6%.
The trend is turning for inflation. Clear signs of reversal are evident in producer prices both input and output. The weakness of Sterling, if sustained will exacerbate the swing. If oil prices hold at current levels, Brent Crude £ basis will increase by 25% in the final quarter of the year and by 50% in the first quarter of 2017. No time for the MPC to make the rate cut! The Fed look set to hike rates in September.
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So what happened to Markets?
Sterling slipped against the Dollar to $1.309 from $1.316 but moved up against the Euro at €1.194 from €1.198. The Euro moved down against the Dollar to 1.096 from 1.106.
Oil Price Brent Crude closed at $45.27 from $47.58. The average price in July last year was $56.56. In August it was $46.52.
Markets, were up - The Dow closed up at 18,583 from 18,479. The FTSE closed at 6,730 from 6,590.
Gilts - yields moved down. UK Ten year gilt yields closed at 0.82 from 0.84. US Treasury yields moved to 1.58 from 1.59. Gold closed at $1,320 from $1,327.
John
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