Monetary Policy in the UK Spotlight
Global Economics Weekly Brief
Mark Carney made his UK debut last week, with a four-hour grilling from the Treasury Select Committee (TSC).
His testimony suggests that, with regards to monetary policy, we should expect evolution not revolution when he takes over at the Bank of England. But all that could change once he gets his feet under the desk. This guy is only in the UK for a five year fixed term for mega bucks!
The Bank of England's new Governor airs his views. Perhaps the clearest take away from Mark Carney’s TSC appearance is that he is keen to provide guidance on the future path for interest rates, which should help reduce uncertainty for households and businesses. On bigger changes to the monetary policy, Dr Carney was more cautious. He didn’t rule out future changes to the policy framework (e.g. to nominal GDP targeting), but said “the bar for alteration is very high”. Meanwhile, there was no change from his future colleagues on the Monetary Policy Committee, as expected. Interest rates were on hold at 0.5% and quantitative easing was steady at £375bn. What will the future bring?
Fiscal austerity in the UK still has a long way to run. You could be forgiven for thinking that we must surely be coming to the end of fiscal austerity in the UK. Sadly not. Analysis from the Institute for Fiscal Studies (IFS) shows that we are only about a third of the way there. By the end of the 2012/13 financial year, 37% of all planned austerity measures will have been implemented. Tax increases and investment cuts are well advanced, but just 32% of the planned cuts to benefit spending and 21% of the cuts to day-to-day spending on public services will have been delivered by the end of March. These cuts are taking far too long with civil servants hanging on and spending far more money at the same time!
Trade deficit rises, but UK shows encouraging signs of diversification. The UK’s trade deficit rose by 60% in 2012 to stand at £38bn – the worst on record. But it wasn’t all bad news. The UK continued to make inroads into non-EU markets, with goods exports now almost split 50:50 in terms of EU and non-EU destinations. This compares to a 62:38 split in favour of EU countries a decade ago. This is encouraging for the UK’s rebalancing prospects. More exports are required with non-EU countries for long term benefits!
Good end to a bad year for UK manufacturing and construction. Manufacturers had a decent end to the year, with December showing the fastest growth in output since July. But it wasn’t enough to prevent a 1.8% fall in 2012 overall. It was a similar story in construction, where a 0.9% increase in output in the final three months of the year halted a run of five successive quarterly declines. But output fell 8% in 2012, and is still 17% below its Q1 2008 peak. Construction/traditional printing/media advertisements in more decline year-on-year!
UK service sector rebounds in January. The Purchasing Managers’ Index (PMI) for the service sector rose from 48.9 to 51.5 in January. This bucked a four-month trend of declines and gives hope of a positive GDP reading for Q1. But let’s not get carried away. The squeeze on margins has dragged profitability to within a whisker of a 3½ year low, and output growth is well below its long-run average.
ECB holds rates at 0.75% in February. They say that actions speak louder than words. Not if you’re Mario Draghi, it seems. The President of the European Central Bank’s pledge to do “whatever it takes” was enough to becalm bond markets last summer. And last week, the words “we will closely monitor money market developments” was enough to bring the euro down by a cent against the pound, even though it was prefaced with the comment that the ECB does not have an exchange rate policy. Even so, the single currency remains a lot stronger than it was just a few weeks ago. What will the future bring for the Eurozone?
Good news from the Emerald Isle. The Irish Government announced details of a plan that will strengthen its public finances last week, by swapping the “Promissory Note” for longer-term sovereign bonds. The Promissory Note was basically a €31bn IOU provided by the Irish Government to the former Anglo Irish bank, which then pledged this as collateral to the Central Bank of Ireland in return for funding. The switch is helpful in two ways. First, lower interest costs will lead to a reduction in the budget deficit, or create scope for a reduced pace of fiscal consolidation. Second, it will help the Government in its attempt regain full-time access to sovereign bond markets, as it improves Ireland’s fiscal position.
Slump in EZ retail sales continues. Turnover fell in December, dragging the y/y growth rate to a 3½ year low of -3% (adjusted for inflation). These are extremely challenging times for the sector. Sales have essentially been in decline for five years, albeit with a brief respite in 2009-10, and are more than 7% below their 2008 peak. Conditions are worst in the periphery but the core has not escaped either, with sales down 4% y/y in Germany.
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Global business barometer
A survey of executives' expectations for 2013
· Pessimism may still rule the corporate world in 2013 but results from the latest Economist/FT Global Business Barometer suggest that businesses may be finding their way out of the gloom. Although only 22% of those polled in October expect business conditions to improve, this figure is up from a bleak 14% a year earlier.
Overall confidence, measured as the balance of executives who think the global economy will improve against those who expect it to worsen, rose from the subterranean minus 39 of 2012 to reach minus 11 for 2013.
Executives in the Middle East and Africa are particularly optimistic. One in three believe the next six months will bring improvement.
The main driver of gloom remains economic and market risk. Although these fears have dropped 12% over the last year it is still a key concern for 63% of those polled. Meanwhile a shortage of skilled labour concerns nearly a third of all executives.
Worries over the euro zone persist, with Europeans far more confident in its stability than the rest of the world. Overall 29% of executives expect Greece to leave in the coming year and 8% expect Spain’s exit.
The ray of sunshine peeking through the cloud is the impending demise of the necktie in the workplace.
The World in 2013
Why do politicians/bankers/lenders ignore history? and yet history repeats itself several times because these people do not read! People need to read `The Rise and Fall of the Roman Empire` and then perhaps they will learn how to avoid repeating history.
* The Credit Crunch of AD 33 Repeats itself time and time again!
What with the Bank of England pushing £375+ billion and the USA Federal Reserve $1+ trillion into their countries respective banking systems, readers may be interested to learn of the following from `Banking & Business in the Roman World`.
In AD 33 the lack of cash continued to become increasingly serious (where have we read this before many times?). To remedy the situation, through the intermediary of `ad hoc` financial offices directed by Senators, the Emperor himself offered interest-free loans amounting to an overall sum of 100,000,000* sesterces from his personal fortune for the duration of three years. The borrowers were required to offer security in the form of real estate or buildings. In this way they were not forced to divest themselves of their patrimony in order to pay off their debts. Fides, that is to say confidence, returned, and the situation was retrieved for a short time.
We live in a global trading environment of which there are so many players chasing very few opportunities that it is driving down prices globally and still people do not wish to buy!
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Note: About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.
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