Is this a Goldilocks scenario or a classic pre-election boom for the UK economy?

9th April 2014 by The Harried House Hunter

The latest news on the UK economy has been very positive. The strong industrial and manufacturing production figures that I analysed yesterday were followed by more good news in the afternoon. From the NIESR (National Institute of Economic and Social Research) came this.

Our monthly estimates of GDP suggest that output grew by 0.9 per cent in the three months ending in March after growth of 0.9 per cent in the three months ending in February 2014. This robust growth was relatively broad based.

I had suggested that this might show signs of economic growth accelerating even further and indeed it did. Added to this was the statement that the growth was broad based. Indeed there was further welcome news although the NIESR did present it with a less optimistic rider.

Even though the level of economic output has almost regained its pre-recession peak (January 2008), a sizeable negative output gap remains.

The concept of an output gap is something of a moveable feast and you could argue that if you project the growth of the pre-credit crunch era forwards then we will never catch up! But personally I felt it was nice to see that we were about to regain the levels of 2008 as it has been a long wait these last six years.

Hope on inflation

Last night came the news that shoppers are, according to the British Retail Consortium, seeing falling prices. Apologies for the capitals they use.

BRC-NIELSEN SHOP PRICE INDEX MARCH 2014: FOOD PRICE INFLATION AT RECORD LOW AS OVERALL SHOP PRICES CONTINUE TO FALL.

After many years of above target inflation in the UK this sort of data is very welcome for issues such as real wages and the cost of living. If we look at the detail we see this.

Overall shop prices reported deflation for the eleventh consecutive month in March, accelerating to 1.7% from 1.4% in February……

Food inflation slowed to 0.8% from 1.1% in February – the lowest ever recorded.

Non-food reported annual deflation of 3.2% in March from 3.0% in February

So whilst food prices continue to rise (albeit slowly) other prices are now falling and at a record rate, although some care is needed with the concept of a record rate as the series only began in December 2006.

This measure of consumer inflation does tend to have an optimistic bias but even so the news here is good especially as the UK economy is accelerating. So far there are few signs of an immediate inflationary response from the UK retail sector.

A wages pick-up?

It would seem that slower inflation and maybe a touch of disinflation in some areas is being combined with a pick-up in wages. From the  Recruitment and Employment Confederation (REC) and KPMG Report on Jobs.

Permanent salary growth accelerates Starting salaries for people placed in permanent jobs increased strongly in March, with growth picking up to the sharpest since July 2007.

Indeed their view of the labour market has become quite optimistic.

The trend of growth in people finding jobs across all industrial sectors and regions continues. Starting salaries and hourly pay rates are up as employers battle to entice the talent they need.

At this point the UK economy looks as though there is a Goldilocks scenario in play. What is there not to like about rising output and wages combined with hints of falling inflation? No wonder the pound’s value rose again and it pushed above US $1.67 and Euro 1.21. At such a level its rise since the lows of March 2013 has been equivalent to a rise in official base rates of 2% according to the rule of thumb that the Bank of England used to use but has apparently forgotten. So again policy has also adjusted albeit that it has nothing much at all to do with the official “Forward Guidance” mantra!

The problem which is trade

A situation which moves us away from hopes of an outright Goldilocks scenario is the UK balance of payments. Here the imports porridge has been too hot for years and indeed decades and in comparison the exports porridge has been rather lukewarm. The latter issue has been reinforced by this morning’s data release.

In the three months ending February 2014, exports of goods decreased by 2.5% to £72.7 billion, reflecting falls across a range of commodities.

So whilst yesterday’s manufacturing figures gave us a hint of the so far mythical “rebalancing” today’s export figures pour a dash of cold water on it. However if we consider that pretty much every measure has the UK going at full steam ahead we saw some odd import data.

Imports of goods decreased by 4.7% to £99.0 in the three months to February 2014, reflecting falls in semi-manufactures and oil.

So exports falling but imports falling even faster led to this.

The total trade deficit has almost halved in the three months to February 2014 compared with the previous three months, from £8.7 billion to £4.8 billion, mainly due to a narrowing of the trade in goods deficit.

A hopeful move? Well yes except for the fact that falling imports are inconsistent with the rest of the UK’s current economic data. We also have the problem that the best sector for us (services exports) is not far off a number pulled from thin air.

In the three months ending February 2014, the estimated surplus on trade in services was £21.4 billion.

The underlying position has been grim for many years and this is reinforced one more time by the details below.

In 2013, the deficit on trade in goods narrowed by £0.9 billion to £107.8 billion (annually). The level of exports increased to a record £304.7 billion in 2013, up 1.4% from £300.5 billion in 2012.However, the rise in exports was accompanied by an increase in imports to a record £412.5 billion in 2013, up 0.8% from £409.2 billion in 2012.

If we switch to the overall picture we see this.

In 2013, the current account deficit equated to 4.4% of GDP at current market prices, compared with 3.8% in 2012.

Which follows on from this.

The UK has run a combined current and capital account deficit in every year since 1983 and every quarter since Quarter 1 2008.

The numbers above created quite a stir when they were released at the end of March but as I suggested the media storm soon died down and found other avenues to explore.

Comment

We see that the UK economy has started 2014 in a strong manner combined with weakening inflation and signs of a pick-up in wage levels. So three points of the Christmas wishlist look well on their way! Even the pound is for once helping by rising into this move and contributing a dash of disinflationary monetary tightening. What is there not to like about the spring-like data we are getting from these areas?

Where matters are more difficult are if we look at the housing market or the subject of new data today our trade position. These look like victims of a deja vu like scenario as how many times have they been flashing yellow if not amber alert into a General Election season? In a way this is reinforced by this picture being shown by the Financial Times Alphaville section discussing the number of cranes in view from their London office.

22 thoughts on “Is this a Goldilocks scenario or a classic pre-election boom for the UK economy?”

  1. dutch says:

    ‘We also have the problem that the best sector for us (services exports) is not far off a number pulled from thin air.’

    Can you explain that any further please Shaun?

    Also,one does wonder whether they should issue private debt figures alongside.New car sales are at decade record highs and I’d suspect the majority of people aren’t paying cash.

    http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CDMQqQIwAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fa148e296-bbd3-11e3-84f1-00144feabdc0.html&ei=gWRFU5K-FeW00QXt0oHICQ&usg=AFQjCNFEprjAw69W-5jcn8o2wY_7ChIc8A&bvm=bv.64507335,d.d2k

    1. Anonymous says:

      Hi Dutch

      There are two ways of analysing the services balance of payments figures. One is simply to look how often they arrive at the same number or to note that they get one page on the monthly report as to the 23 devoted to trade detail.

      The other is too note that the information is based on a quarterly service so technically there are no monthly numbers.

      As to the new car sales the SMMT released this with the strong March numbers.

      ““There has never been a better time to buy a new car thanks to attractive finance deals and advanced technologies that often make new cars cheaper to run. We expect the market to continue to perform positively for the rest of the year, albeit at a more modest rate.”

      1. Anonymous says:

        The new common rail diesel cars are cheaper on fuel, and faster. There is a catch, in that the motor industry is charging very high prices for injectors, EGRs and diesel pumps. Ergo once these cars go out of warranty, there is a chance of a £500+ repair bill which would wipe out most people’s fuel savings.

        But for the car industry. it’s great – repair it we win. Scrap it and replace it we win.

        1. dutch says:

          Thanks for the insights as ever Expat and Shaun.I learn a great deal on here.

  2. Anonymous says:

    Hi Shaun
    My fear is that this will turn out to be another pre election boom. Does this mean that we will face an economic hangover once the General Election is done and dusted next year? Still fingers crossed for better times.

    1. Anonymous says:

      Hi KimJosephine

      For now things look strong for the UK economy and that momentum will take us through the summer and into the autumn of 2014. Beyond then in these uncertain times it gets very hard to say.

  3. Just a thought says:

    Hi Shaun,
    Are we witnessing the Plato’s cave allegory???

    https://www.youtube.com/watch?v=RoOVFO4Qnqg

    1. Anonymous says:

      Hi Justathought

      Thanks for the link and I suspect that Plato’s analogy is indeed in play. Just one thing could you please find a version next time which avoids the profanity as I like to keep this blog clean of such things…

  4. Noo 2 Economics says:

    Hi Shaun,
    You may remember I have been banging on about expected higher wage increases this Spring since about last November.

    Unfortunately, I am worried now because this is arriving a bit earlier than I expected. The reason I expected it is because I reject the mythical output gap despite current unemployment levels, which explains “Starting salaries and hourly pay rates are up as employers battle to entice the talent they need”.

    This is inflationary when you consider productivity per capita has fallen 15% since 2007 and there has been no great increase in business investment (and exactly what has the Government been doing about training/re-training the unemployed??).

    Looking at M1 growth and increasing wages which I believe will pace inflation by year end, I am now predicting inflation to start edging up from April or May onwards and we should see about 2.5% CPI by year end assuming GBP doesn’t appreciate further (by the way I believe GBP is overvalued and needs to fall about 17 cents against the US dollar to achieve it’s “true” value) and the BOE doesn’t raise interest rates.

    Beyond that, 2015 election year doesn’t look too good to me – inflation moving to 3% and GDP growth maintaining about 2.5% or slowing a little preparing for a slowdown in the latter half of 2015 or if the Government are lucky, early 2016. So pre-election boom probably but it may yet turn into a pre-election downturn as I suspect they may have turned on the money taps a little too early.

    So my overall comment is disinflation! what disinflation? – We’ll see in the next 3 months…

    1. Anonymous says:

      Hi Noo2

      Under ordinary UK economic history we would now be seeing a pick-up in inflation. But the bulwark against that has been the rise in the value of the pound £. This evening it has touched US $1.68 and whilst this represents dollar weakness today the pound has been strong for a while now on its own. Whilst our economy looks strong this is likely to remain true. So your scenario could get more cataclysmic if a weakening rate of growth sees the pound fall which will feed into imported inflation.

      As to the employment issue the REC report I mentioned also said this.

      “We have a core group of long-term unemployed people whose skills don’t fit with current vacancies and are unable to access the jobs market.”

      We need to try harder to do something about this.

      1. Noo 2 Economics says:

        “So your scenario could get more cataclysmic if a weakening rate of
        growth sees the pound fall which will feed into imported inflation.”

        And that’s kind of what I expect to happen, excepyt it will be improving US growth which will cause the dollar to rise as money flows there and so the pound will fall bringing with it extra inflationary pressure on top of labor inflation and later, so will UK GDP as these inflationary forces gather strength. Expect this to start happening any time from Summer 2015 – Summer 2016. The BOE need to increase interest rates to circa 2.5 % over the next 3 months to ameliorate the effects of this development – it’s been done before (remember late 1987 – 1990?), but then I woke up! My song nomination for today blog is “Enjoy yourself” by the Specials for the next 15 months because then it will be time to brace ourselves…

  5. Eric says:

    Hi Shaun,
    It all sounds promising, but I wonder if we are sitting on a time bomb of rising asset prices supported primarily by a mountain of debt (yes, it’s the banks, again – still too big to fail).

    I’d certainly be a lot happier if the base rate was not still on the floor and economic growth was being supported more by rising exports, incomes and investment. The fact that the base rate can be held at 0.5% for 5 years and not cause inflationary havoc is very worrying.

    Or have things changed so much that my 1960s education is worthless!

    1. dutch says:

      ‘It all sounds promising, but I wonder if we are sitting on a time bomb
      of rising asset prices supported primarily by a mountain of debt’

      and falling real wages.

    2. Max says:

      I would suggest that, if you put housing into inflation, you would find that we are in VERY inflationary times.
      Inflation is whatever the statisticians/politicians want it to be.

    3. Noo 2 Economics says:

      It’s all about velocity of money and it’s very very sluggish at the moment, but with the monetary base the BOE, BOJ and Fed have built if things start picking up properly then they’re going to have to move very very fast to sterilise all their asset purchases to stem inflation, otherwise we’ll have a massive inflationary event. Unfortunately, Central Banks take a long time to recognise changes and an age to react to them…….

  6. AnneD says:

    If I am correct in my understanding of the current situation, the downward spiral of deflation will accelerate. Expenditure of capital to expand businesses will decelerate. Automation of labour intensive activities will accelerate displacing lower skilled workers. Opportunities for workers with advanced skills will increase; however, our educational system cannot keep up pace with that demand. Rising currency value will decrease exports (deflation) creating more pressure on employment and wages. Government will keep increasing the money supply in the hope of reversing the economic trend. That hope will not materialize. A Sovereign Debt Crisis will be the end of the road. “Osborne’s austerity message is set to be dented by the government’s own statistics body, as it prepares to adopt new calculations that mean the UK’s public sector debt will be £100 billion greater than estimated. The Office for National Statistics will bring in the new calculation this autumn.”

  7. therrawbuzzin says:

    So we won’t need the “boost” to the economy of HS2?
    HS2 is an interesting project, primarily because of the inherent contradictions between its planning, and its aim.
    “Boosting the economy,” would be best achieved by starting the project where the economy is struggling most, namely by starting with phase 2, and building from north to south, yet the opposite is happening.
    This gives the clue to HS2’s real purpose: start in the north, and HS2 doesn’t serve London until its completion.
    HS2 is being built to serve the parasite-that-is-London’s growing voracity.
    The workers it will need, will have no prospect of being able to afford to live there, and HS2 will widen the realistic commuter range.
    Why separate it into two phases?
    Simple, Manchester and Leeds will still not be realistic distances for large numbers of London commuters, and there has never been any intention of building it. It’s a temporary sop to those whose taxes will help fund it.
    Why not distribute the investment over the network as a whole, as has been suggested?
    London will only be able to drain the rest of the UK of even more talent than it does now with the help of HS2.

    1. dutch says:

      ‘HS2 is being built to serve the parasite-that-is-London’s growing voracity.’

      ‘Why not distribute the investment over the network as a whole, as has been suggested?’

      There’s a lot of common sense in that post RWB.

      1. therrawbuzzin says:

        One further point has since re-arisen in my far-from-perfect memory: when the costs of the HS2 were being calculated, no value was put on the executive work which WOULDN’T get done on the train because of the shorter journey time.
        Accident or design?
        If HS2 was being built for equitable travel between London and Birmingham then it would be a huge cost, however, if, on the other hand, HS2’s primary purpose is to shuttle back and forward London’s wage slaves, then it is of little consequence, and would probably not enter the consciousness of planners.
        Lies tend to be found out in omissions.

        1. Noo 2 Economics says:

          I don’t understand why many many more managers don’t work from home. You can have online meetings via webcams and web microphones. This blog is effectively a meeting place, if anything we need to live more local lives communicating via telephone/internet and cut the business journeys down.

          Of course this doesn’t apply to manual workers or telephone answering staff etc but if these technologies were efficiently ultilised it could make a significant contribution to reducing rail, road and air traffic thereby negating the need for any more new rail track or roads to be built.

  8. Max says:

    Yes. London is full of cranes. I have never seen so many. it is incredible. And most of the workers are Eastern European.
    The housing market is ‘recovering’ to astronomically unaffordable levels.
    Interest rates are 0.5% and will never go up ever again.

    What could possibly go wrong? I can’t imagine.

    Followed by politicians murmuring about “we need to learn lessons…blah blah blah”

  9. Max says:

    The whole point of the BoE is to calm down this bubble and stop wild lending. Instead the banks will have massive exposure to housing debt and will be even more too big to fail.

    Nothing has been learnt from the past. We are governed by selfish morons.

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