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QE UK Style - Global Economics Weekly

Global Economics Weekly Brief

QE the UK way...

There’s been a hardening of attitudes towards the effectiveness of Quantitative Easing (QE) by the Bank of England’s Monetary Policy Committee (MPC). If not quite as dramatic as St Paul’s Damascene conversion, it is noteworthy. Indeed, evidence from within the high and hallowed walls of Threadneedle Street suggests that the UK recovery is very shaky at best, while the eurozone economy is going to get worse before it gets better.

At its core, the shift in position seems to be the QE bang for the sterling buck is diminishing. Like every good cliff-hanger, what happens next is vital. Could the Bank of England be preparing the ground for new monetary stimulus `toys`?

Rising scepticism over QE. The Bank of England is doing more QE, but by the back door. The Bank is giving the Treasury the coupon payments from the bonds held through its QE programme, lowering the Government’s cost of servicing debt. Even so, the minutes of the last MPC meeting reveal doubts on the ability of QE to boost the economy. And mortgage holders will be disappointed to hear that a base rate cut is unlikely in the “foreseeable future.” At least the MPC is not unduly concerned about the recent rise in inflation, which it puts down to temporary factors. Déjà-vu anyone?

Bank of England business survey underlines sluggish growth outlook. The Bank of England’s agents compile a monthly report following discussions with around 700 businesses. One positive for business services was that activity levels that had dipped during the Olympic Games have now recovered. But overall there was little by way of positive news. The prospects for growth in business investment remain very modest and employment intentions suggested that little net job creation is in prospect in the months ahead. 2013 is already looking like another difficult year for the UK economy. There will be another 10 years of `tough` times before we see an improvement!

Weak receipts a headache for the Chancellor. UK public sector borrowing came in at £8.6bn in October, £2.7bn higher than the same month last year. The main reason was corporation tax receipts, which fell almost 10%y/y. This is a familiar story. While the Government has been successful in hitting spending targets, receipts have repeatedly undershot. Borrowing in the current fiscal year is £5bn higher compared to last year, putting the Chancellor in a difficult position ahead of his Autumn Statement. His fiscal rules may have to be broken. The decline in corporation tax collection will be even tougher in 2013 due to profit warning from many companies!

The recession in the eurozone may (is) be deepening. The preliminary composite Purchasing Managers Index (PMI) for the eurozone, covering manufacturing and services, rose marginally from 45.7 to 45.8 in November. But it has now been in contraction territory (signalled by a reading below 50) for 10 straight months. While the rate of contraction in the manufacturing sector eased slightly, the larger services sector reading declined to the lowest level in over three years. The survey readings suggest the eurozone’s recession may get worse before it gets better. The next ten years will be very tough!

Bernanke urges swift resolution to US public finances. The Federal Reserve Chairman Ben Bernanke called on Congress to solve three pressing problems for the US economy - the fiscal cliff, the budget deficit and the fast approaching debt ceiling. Getting an early resolution to all three would help the US economic recovery next year. But he also highlighted the headwinds to that recovery, including a drop in the potential growth rate of the economy since the crisis. Reasons for this included weak investment and the unemployed not having the skills required by employers. A note of caution was also sounded on housing, despite the recent good news, with 20% of mortgage holders still in negative equity. More unemployment next year, plus, house repossessions!

US housing continues to deliver encouraging figures. Despite Bernanke’s warning, housing market indicators continue to point to an ongoing recovery, albeit from a low base. Housing starts in October reached an annual rate of almost 890,000 – a four-year high. Unsurprisingly, the construction sector is feeling a bit more upbeat with an index of house builder confidence reaching the highest level since May 2006. An improving housing sector should help consumers feel more confident and in turn provide some support to consumer spending. More house repossessions than new ones being sold!

Better news for global trade. China’s manufacturing PMI broke above the 50-mark for the first time in 13 months as new export orders turned sharply from a depressed 46.7 to a fairly strong 52.4. There was other good news from Asia’s manufacturers. Taiwanese export orders, an important bellwether for global trade, rose over 3%y/y in October, the highest reading in eight months. Meanwhile, global trade as a whole rose 0.8%m/m in September on the back of an improving Asia and US. Global manufacturing may be on the mend but it will likely be a slow process. The goods manufactured are being sold at a lower price than 12 months ago to keep produced but at what return?

QE UK Style! - Global Economics Weekly

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