In the latest from Andrew Smithers, our eye was drawn to a line in his gloomy state of the world summary, that the UK economy is driven by an unsustainable fall in household savings.
What it turns out we had not been paying attention to lately is the fact that the UK household saving rate is the worst among the developed economies apart from Japan, where a dip into negative territory has some investors nervously (gleefully?) eyeing the sovereign debt load. Read more
Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy.
Will the Bank of England raise interest rates in 2014?
Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.
In contrast I am an optimist. I believe in free markets.
–George Osborne, Conservative party conference 2013
Details TBC, of course. But UK banks will be lending mortgages with a five per cent deposit in the very near future, under the rushed-forward Help to Buy 2 scheme.
And that means the UK government will be guaranteeing them — not the borrower — the next 15 per cent of mortgage value. Hence the fee paid by lenders for the guarantee (90bps for a 95 per cent loan to value, less for lower LTVs, apparently). Read more
The UK economy definitely expanded in the second quarter, by 0.7 per cent, the Office for National Statistics has confirmed.
Phew, recovery on track, although as the FT notes, household consumption was slightly weaker than previously thought, a 0.3 per cent gain rather than 0.4 per cent. Read more
First — GDP or unemployment as the slack indicator in forward guidance about low rates?
More on why the Bank of England chose unemployment (the 7 per cent threshold, not seen being reached until 2016), from the July/August minutes of the MPC: Read more
To the untrained eye, this might look like the usual buzzword-soup from the European Commission (home of “growth-friendly fiscal consolidation”): Read more
There’s loads of serious-minded UK Budget news & analysis on FT.com already, so…
Another update by NIESR of its monthly UK GDP projections… another prediction of flatlining growth, now extending into the first two months of 2013.
Breaking: deputy prime minister Nick Clegg has hit soundbite pay dirt.
In Tuesday’s FT he is quoted as saying that the Funding for Lending Scheme, whereby financial institutions get cheap loans from the Bank of England to boost credit to the wider economy, should be “put on steroids”.
(This is getting to be a genre.)
Robert Chote, head of the Office for Budget Responsibility – the UK’s independent fiscal watchdog – writes to David Cameron about this speech… Read more
Getting a favourable leader in the Economist is pretty Establishment, surely.
At the very least, it’s interesting that the red-top weekly has managed to endorse and explain a fairly specific nominal GDP target for the Bank of England. Read more
Some might say it’s labour hoarding; some might say it’s “flexibility”; some might say it’s the gutting of the City. Many would think the UK productivity puzzle goes on, and some would just ponder the strong showing of full-time jobs in the latest figures.
Here’s the view from Nomura’s Philip Rush, with some charts (click to enlarge)… Read more
The verdict is still out as to how much the Bank of England’s latest attempt to boost the economy is actually working. There are indications that Funding for Lending is helping ease credit flows, but we won’t know how attractive the low-cost financing actually is to banks until the FLS usage data for Q3 is released on December 3. It’s hoped that it will get up to £80bn of extra credit into the economy.
The scheme was launched this summer, and on Tuesday the BoE published a full list of participating banks along with their total lending to UK households and ‘private non-financial corporations’ (as of end of June). A total of 17 new institutions have got onboard since the launch, mostly building societies, but the Co-Op, Clydesdale and Tesco were also new joiners. HSBC is not on the list. Read more
Credit Suisse’s answer last week to the (rather odd) idea of the British government “cancelling” (restructuring) the gilts held by its central bank under quantitative easing…
From the bank’s credit analyst William Porter, it’s worth a read:
Any financial problem can be solved at a stroke if double-entry book-keeping can be ignored as a constraint. The problem is, it cannot. So debate in the private-sector financial community about “solutions” to the UK’s financial challenges based on ignoring it worry us. In the UK, Mervyn King has been quick to debunk the fallacies. But if they can exist even for a while in the very simple UK, then the infinitely more complex euro area (which we do not address in detail here) is fertile ground for solutions based on fallacious reasoning…
From Citi’s Michael Saunders and Ann O’Kelly: Read more
Andrew Dilnot CBE, chair of the UK statistics authority, writes to David Cameron…
We noted our growing love for one John Mann MP before and it looks like his proposals are gaining some traction. From earlier in August:
Mann is suggesting that incentivising measures should include a suspension of all town centre car park fees up to Christmas, a reduction of Vat on DIY product, a crash programme of building pensioner bungalows and a re-introduction of green technology incentives such as solar panels. Read more
This the Bank of England’s report into the distributional effects of its asset purchases. Click through the image for the full doc:
The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level. Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.
The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis. Read more
Aire Valley is in what’s called Brontë Country in the UK’s Pennine hills, home to the towns of Bradford and Bingley.
This cheery note is from the Office for National Statistics (our emphasis):
GDP contracted by 0.2 per cent in the first quarter of 2012, the second successive period of negative economic growth. The fall in real GDP was driven primarily by weakness in the construction sector, where output is estimated to have fallen by 3 per cent between the two latestquarters. But the dominant services sector of the economy grew only slowly while industrial production fell slightly. Read more
Posen, of course, is the Bank of England’s perennially frustrated dove and proponent of looser fiscal and monetary policy.
His case is that although the recoveries in both countries have been inadequate, UK growth has lagged and inflation has been higher for three sets of reasons: Read more
Chart via Citigroup, bouncing off the latest UK GDP revisions downward (hat-tip Bond Vigilantes):
Tesco is set to announce that it will create 20,000 jobs in the UK in the next two years, equal to seven per cent of its current British workforce, the WSJ reports. Plans to open new stores and upgrade existing ones in Britain account for the hiring increase. Tesco’s renovation bid comes as its share of the market dipped to its lowest since 2005 last month, and following an unexpected UK profit warning in January, Reuters reports. Tesco will take on more unemployed young people and also expand its apprenticeship programme to provide 10,000 places, says the Guardian. Tesco’s plans to offer more fresh food will however be met by a store expansion strategy by Wm Morrison this week, and a possible shift by J Sainsbury towards fresh produce, the FT says.
Linda Yueh of Bloomberg TV just asked a very sharp question of Bank of England governor Mervyn King at Wednesday’s Inflation Report press conference, at pixel time. If the UK’s money supply is contracting, shouldn’t there be more QE, and are you buying the right assets (gilts) anyway?
Mervyn dodged the last part. (Update — see below) Read more
The Bank of England’s Monetary Policy Committee voted to keep interest rates at their current record lows on Thursday and authorised further gilts purchases totalling £50bn, in line with economists’ expectations, reports the FT. The move brings the size of the total gilts purchasing programme, known as Quantitative Easing, to £325bn and suggests that, despite recent signs that the UK economy is picking up after a trough in the middle of last autumn, the Bank’s policymakers do not feel confident there is enough momentum for demand to build on its own.
In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review….
Three years of 0.5 per cent, now. Read more
George Osborne, the chancellor, warned on Tuesday night that enterprise could be stifled and jobs could be put at risk if an “anti-business culture” were allowed to take hold in Britain, reports the FT. Mr Osborne presented himself as a staunch defender of enterprise, vowing he would oppose the unidentified forces that were creating a hostile political climate for business. “We have to stop them,” the chancellor said. Against a background of disquiet in boardrooms and on the Conservative benches, Mr Osborne, speaking to the Federation of Small Businesses, said the government was reforming the banking sector, but he knows the government still has much pain to endure before the annual bank bonus round is over.