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Saturday 30th September 2017
Hi Friend,
Growth Slows ... Governor Hints of Rate Rise ...
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| The Governor was on Radio 4 this week. Interest rates could rise in the "Relatively Near Term" Mark Carney explained. It was time for the Bank to "ease it's foot off the accelerator". Taking away the punch bowl to avoid a drink driving offence, presumably... could the rate rise be as early as November?
"If the economy continues on the track that it has been on, and all
indications are that it is, in the relatively near term we can expect
that interest rates will increase," he said.
Ironic, on the same day, the ONS revealed the latest estimates of growth in the economy. The U.K. economy grew by 1.6% last year, compared to the 1.8% last estimated. The downward revisions continued into 2017. Growth in the second quarter was revised down to 1.5% from 1.7% earlier. The economy appears to be slowing, the Bank is threatening to hike rates. Does that make sense? Perhaps.
The Governor is seeking to return rates to the "Status Quo Ante Referendum". A 25 basis points rise would reverse the mistake of August last year. For the moment, further rises will be small and gradual, despite the concerns about bank lending and household borrowing.
Here too, there was some good news for monetary policy. The household savings ratio bounced back in the second quarter. The ONS had previously estimated this had fallen to a record low of 1.7%. That always looked like an errant outlier. The fall supported the proposition households were financing consumption by saving less and borrowing more. The savings figure has now been revised up. The Q2 estimate is now over 5%.
Should the Bank relax? "What we are worried about, is a pocket of risk. A risk in consumer debt, credit card debt, debt for cars and debt for personal loans" Carney told BBC Radio 4's Today Programme. That is not the Bank of England's fault. "Banks had not been as disciplined as the should be in their underwriting standards and pricing of the debt." Oh dear.
So much for regulatory control. As for pricing, banks will take their lead from base rate plus. Life on Planet ZIRP can lead to a heady cocktail of mispricing of loans and asset prices after all. It really is time to plan for take off, despite the apparent sluggish growth in truly global Britain.
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So what of the economy ...?
The ONS revised the estimates of the current account deficit. In 2016, the deficit has been updated to a record 5.9% of GDP up from the previous estimate of 4.4%. In classic economic parlance, this is "not good."
In the first half of the year, the deficit is averaging 4.5% of GDP. It is vulnerable to downside revision. A deficit of 4.5% is incompatible with rates on the floor. The current account deficit has to be matched by capital flows. "The Kindness of Strangers" will not be mollified by gilt yields at 1.38%.
John McDonnell the shadow Chancellor may seek to war game a run on the pound in the wake of a Labour victory. He may get to witness this first hand in his current rôle. The fundamentals are pretty bad after all. A change in sentiment and loss of confidence in the Tory Government could lead to a reappraisal of rating and support. So what's to worry about?
"Tories are trapped in a zombie apocalyse" the verdict from Matthew Parris in the Times today. "The paralysed government is done for. It will take a bold challenger for the leadership to save the party". Jacob Rees-Mogg or Boris Johnson, the party is hardly spoiled for choice. Johnson has just announced another Brexit manifesto. So much for collective cabinet responsibility. More mayhem in Manchester expected.
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| West Wing WTF ... Devastation in Puerto Rico ...
Hit by hurricane Maria, Storm ravaged Puerto Rico struggled for food, water and electricity this week. Trump was at his golf club in New Jersey fixated on feuds with North Korea and the NFL.
"Trump's time at his golf club hurt the response to Maria" The Headline in the Washington Post today. Despite the positive tweets from the President about the rescue effort, three million people on the island are looking for more than 140 characters of comfort at this devastating time.
"The Trump administration has been slow off the mark". said Florida lawmaker Darren Soto, "We have invaded small countries faster then we've been helping American citizens in Puerto Rico". Good point but the U.S. has had more experience of invading countries of any size.
We understand the challenge claimed the President "Puerto Rico is an island surrounded by water". Excellent. There is a man with a clear grasp of geography. Puerto Rico is unlike the White House, fast becoming an island surrounded by WTF.
To be fair, Trump has had a lot on his mind. Health Secretary Tom Price quit after criticism of his use of charter flights at the expense of the American taxpayer. It was a race to quit before he was fired. The tax-payer funded trips had cost over $400,000. Approved travel on military planes around the world had cost over $500,000.
Perhaps he just wanted to stay out of the way. During the infamous speech to the gathering of Boy Scouts, Trump had warned Price would lose his job if the Health Care Bill didn't pass through the house. "He better get the votes" the President warned, "Otherwise I will say, Tom, you're fired". In a race for the paper work this week, the resignation letter got their first.
Others may be drafting. Veterans Affairs Secretary David Shulkin made a trip to Europe on July. A visit to Wimbledon and a cruise on the Thames featured. His wife offered support for crucial meetings with British officials.
Trump is working on his tax bill. Doomed to failure, the tax bill offers big cuts and growth to generate lost revenue. The rich will not benefit says the President! "Our framework ensures the benefits go to the middle class, not the highest earners". Tax experts beg to differ. Those earning over $730,000 will save around $129,000 on average, claims the Urban-Brookings Tax Policy Center. That's the problem with a billionaire President. Those earning around a million dollars a year, look pretty middle class to him.
That's all from the West Wing Whisky Tango Foxtrot this week ... much more to follow in the weeks ahead ...
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| | | | | Don't
Miss the Economics Conference on the 13th October. Our theme is the
Economics of Greater Manchester. We will be talking about the Inclusive
Growth Challenge, Balancing the Books and the Sectors Driving Growth in
the City Region! Another Great Conference in the pro-manchester series . We have a great line up of speakers announced. Book Now Don't Miss Out ... |
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John
That's all for this week. Have a great week-end ...
John
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