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The Bank of England Forward Guidance - Global Economics

Global Economics Weekly Brief

The Bank of England Forward Guidance

The Bank of England unveiled a new policy on forward guidance last week. In simple terms, it has set out its thinking on when, and under what conditions, interest rates might start to rise. Timing is one thing. But size and speed of hikes are also important.

While quantitative easing takes a back seat to forward guidance in the UK and the Eurozone, it remains Japan’s preferred policy to stimulate economic growth. With Japanese government debt hitting ¥1,000,000,000,000,000 - one quadrillion yen (210% of GDP) - a good hit of growth cannot come soon enough. The Japanese model is not one to follow!

Old Lady of Threadneedle Street gets forward with us. The Bank of England has unveiled a new policy on forward guidance. In a nutshell, it has pledged that the Bank Rate will not rise above 0.5% until unemployment falls below 7% (currently 7.8%). This is expected to take about three years. And even then, it will not necessarily trigger an automatic rate hike. Instead, the Monetary Policy Committee (MPC) will look at the lay of the land and decide the best course of action. And what about inflation? Governor Carney underlined the primacy of price stability in the MPC’s mandate. The Bank set out three 'knockouts' which would break the link between Bank Rate and the 7% unemployment threshold. Two of these relate to inflation, and the third to financial stability. Will it work? So far investors have been slow to react and are still pricing in the first hike for 2015. Time will tell if businesses and consumers are more willing to take the Bank at its word. Look at the BoE`s record - it does not read well!

Back to the good old days? The UK Purchasing Managers’ Index for the services sector surged to 60.2 in July, the strongest reading since 2006. Driving the upturn was a sharp rise in new business, which fed through to employment intentions. Industrial production hit a 10-month high in June, boosted by rising output across all 13 manufacturing sub-sectors. With July's manufacturing survey data suggesting further improvements in output, it seems it’s not just the service sector contributing to the recovery. While these data provide further evidence that the economy is healing, the world is pretty different from the pre-crisis good old days. Real earnings are declining and fiscal austerity is ongoing. While a recovery looks to be setting in, it’s likely to be a case of slow and steady rather than fireworks from the UK economy. UK keep up the excellent work!

Record month for UK goods exports. A combination of solid improvements in both goods and services exports helped reduce the UK's overall trade deficit to £1.5bn, from £2.6bn in May. Exports of goods hit a record high, driven by a 10%m/m rise in exports to non-EU markets. June's data gave rise to two consecutive quarters of export growth. The last time this occurred was two years ago. Has the UK finally re-found its export mojo?

US hits four-year high on trade stats. June saw the American economy's best international trading performance in almost four years. Rising exports and falling imports produced a sharp fall in the trade deficit to c3% of GDP. This doesn't mean that the US has become an export powerhouse, but it has seen a gradual and sustained improvement over the last two years. Booming domestic energy production has helped, but it's not just the energy industry doing well. The US ISM survey of non-manufacturing output leapt to 56 in July, up from 52.2 in June, on rising new orders, production and prices. This signals healthy demand conditions and is the sort of news that should make the Fed more confident in its intentions to gradually wean the country off its monetary stimulus.

China - one out of three. China's exports rose over 5%y/y in July with the US, Eurozone and emerging markets all pulling in more Chinese-made goods. Industrial production was also up. At 9.7%y/y, this was faster than June's 8.9%y/y. All-in-all, not bad. But now for the caveat. Despite better news out of the US and the Eurozone, new export orders remain depressed. And the upturn in industrial production is being driven by infrastructure spending - something China is supposed to be doing a little less of. Additionally, the services PMI remains weak and retail sales are subdued relative to recent years. Growth stabilisation? Yes. Foundations for a strong recovery? No. Rebalancing? No. For now, it’s only one out of three for China.

One quadrillion yen. Noting that the Japanese economy is starting to recover moderately, the Policy Board of the Bank of Japan (BoJ) voted to keep its current quantitative easing programme unchanged. BoJ Governor Kuroda also voiced his support for a proposed sales tax rise, from 5% to 8%, believing that it won’t send the economy back into recession and will help repair the public finances. According to the Ministry of Finance, Japanese Government debt has hit the one quadrillion yen mark, ¥1,000,000,000,000,000, equivalent to 210% of GDP. A good hit of growth cannot come soon enough.

A Global issue - Warfare Erupting in the Workplace in the UK and other countries Globally!

Resentment factors as over 65s continue clocking in while youngsters struggle to find a role! Please a stampede to enter the UK from people from other countries!

The workplace should be a place of inter-generational harmony with the experience of older skilled/experienced employees balancing youthful enthusiasm and innovation as it used to be in the UK and globally. With the number of recent developments suggest hostility bubbles `just` below the surface!

"In the UK, people aged over 50 now account for 35% of the total population and rising rapidly, 60% of consumer expenditure and 80% of the wealth. With the population continues to age, there are more of us every year." source: www.rhcadvantage.co.uk

More and more people are stampeding into the UK from Europe and other countries and taking up jobs that normally would be for the home grown population. Why do the UK government allow the future to be an hostile working environment due to many people entering the UK and `taking` jobs from new university graduates and others? The European business model for employment is not working in the UK and other European countries? Also, look at main land Europe and see who wins the jobs in each country!

Do younger people think older members of staff need to retire to give them a better chance of career progression? Bear in mind more than a million over 65s remain in the workplace following the abolition of the default retirement age (DRA). At present the unemployment rate for 16 to 24 year olds stands at 20.9% and rising rapidly. With a third of Neets (young, people, not in employment, education or training) think they will never get a job, says the University and College Union.

Each age group should have a skill set to harmonise with the other. The jobs being taken up I have no idea on statistics for labour migration to the UK but the graph on the BBC makes for rather interesting reading http://www.bbc.co.uk/news/business-21938085

Is an outbreak of age/foreign workers warfare on the cards? Or will there be a back lash to the millions of people entering the UK and taking up jobs?
Global Economic Outlook for 2013 revealed - United Nations ...

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Colin Thompson

The Bank of England Forward Guidance

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