Thursday, 20 March 2008

The UK economy is not in recession

Despite the all gloomy talk about a recession, the latest economic data shows that the UK economy is still in good shape. Earlier this week, inflation data showed a sharp pick up in prices, pushing the CPI inflation rate well above the 2 percent goverment target. Meanwhile RPI inflation remains stubbornly above 4 percent.

(Click on the chart for a sharper image)

Today, the ONS published retail sales data. Again, the data shows continued strong economic activity. Compared to last February, retail sales are up about 5.5 percent. UK shoppers did not get the memo about the slowdown.

(Click on the chart for a sharper images)

Unemployment continues to fall; again offering strong evidence of an economy operating close to full capacity.

(Click on the chart for a sharper image)

The printing press down at the Bank of England aren't slowing down either. The 12 month growth of the M4 measure of the money supply was over 12 percent. With that kind of monetary growth, high and persistent inflation is a certainty.

(Click on the chart for a sharper image)

There is no guarantee that the UK economy will continue to power ahead during the rest of the year. However, the current data suggests that it is inflation and not recession that should be the foremost concern for the Bank of England's monetary policy committee.

On the other hand, housing market is in trouble and the screams for an interest rate reduction are becoming louder. However, as things stand today, an interest rate cut would only serve to reignite the housing market and further increase inflationary pressures.

The MPC should resist the hysteria and focus on price stability.


Josh said...

1. High inflation
2. Strong retail sales
3. Low unemployment
4. Rapid monetary growth
5. A large current account deficit.

There is no case for an interest rate cut.


Pat said...

Interesting post, it seems a bit counterintuitive. From what I see here in Birmingham, we are definitely in a recession.

Pat said...

Interesting post, it seems a bit counterintuitive. From what I see here in Birmingham, we are definitely in a recession.

Anonymous said...

LONDON, March 20 (Reuters) - The Bank of England is nearly certain to cut rates by May and the chances of a cut next month have risen as the bank tries to head off economic and financial turmoil, a Reuters poll conducted on Thursday showed. The survey found 22 predicted the central bank would cut rates in April and 34 predicted a cut in May. Another economist said sometime in the second quarter.

Just three weeks ago only 13 of 62 were predicting an April move and 49 were going for May, timed with the BoE's next quarterly inflation forecasting round. But the trough for British rates remains 4.50 percent, to be reached at the end of this year, roughly where the market is also pricing the rate to be.

The findings highlight the difference between the British rate outlook, where base rates are falling gradually, and the U.S., where the Federal Reserve has already chopped them by 3.0 percentage point since September to try to avert recession.

Retail sales figures on Thursday showed a surprise 1.0 percent monthly rise in February, when most analysts had expected a small drop, confounding the outlook and making the timing of the next BoE move difficult to call.

``A week ago I would have said May, a few days ago I would probably have said April, and now after strong retail sales numbers I would probably say May again,'' said Andrew Smith, chief economist at KPMG.

Economists had a median 40 percent conviction that rates will fall in April and all of them expect at least one cut by June. Medians showed rates dropping again to 4.75 percent by September and to 4.5 percent by the end of the year.

The Monetary Policy Committee cut rates by 25 basis points in February after making the first cut in over two years in December and all analysts agree it's only a matter of time before rates fall again.


The minutes from the BoE's March rate setting meeting showed Deputy Governor John Gieve joined David Blanchflower in calling for a rate cut in March while the remaining seven members voted to keep them on hold.

Policymakers are juggling a slowing economy with rising inflation, which the MPC is mandated to target at 2.0 percent but which has risen to 2.5 percent and could rise much higher in the short-term thanks to rising utility bills.

The pound (-GBP) hit an 11-year low in trade-weighted terms this week, adding to the central bank's inflation worries but providing a welcome boost to exporters.

But British retailer John Lewis JLP.UL, whose sales are a bellwether of middle-class spending, reported on Thursday a second consecutive drop in department store sales, adding to signs that British consumers may be starting to rein in their spending.

Global stock markets have been in turmoil as the credit crunch bites. They were hit further this week after a fire sale of stricken U.S. bank Bear Stearns (BSC.N) and fears that the worldwide credit crisis will claim more casualties.

Britain's housing market, a bedrock of consumer wealth, is also slowing rapidly and mortgage lenders have tightened their lending criteria even as rates have come down.

ThinkorSwim said...

All the major incidences of severe economic deflation over the last 30 years;in Japan, the US and the UK, have been partly due to property over-valuation during a period of apparent prosperity. Current UK average property prices are at ridiculous multiples of average earnings. Hence, the crazy mortgage deals that have been done in recent years:- 110% loans and upto 5 times earnings. Madness. House prices are due for a major major correction. However, the blame lies on all sides - it takes two parties to sign a loan agreement. In many cases in recent years, both parties have assumed too high a value for the property. ALL asset values can go up and down - period. There are no exceptions. An asset is simply worth what someone will pay for it at any moment in time. What is in demand one year may not be in demand the next year. Supply and demand pricing rules, but it works both ways. There are foolish greedy bankers making risky loans and foolish greedy buyers taking out the massive loans. The situation in the UK is not yet as bad as in the US, but what will happen if UK property prices fall 5% this year and then 10% next year. Panic. People cannot sell due to negative equity. Repossessions loom. The UK has been there before. We appear to have learnt nothing. Once started a deflationary spiral is very very difficult to stop. Japan has been in one for 10 years. The correction in the UK is likely to take 3 - 7 years. The crunch in terms of loan write offs is only just beginning. The financial sector should not pay themselves any bonuses for 5 years, in penance. That should speed up the correction, particularly in London, and then we can get back to sanity.
STOP PRESS: - Nationwide House Price Index fell today for the 5th straight month in a row. HOORAY !!
Still a long way to go . . .