“The glass is half-full” – so says Governor Mark Carney of the Bank of England. Following on from the Q3 GDP growth figures at the end of October (0.8% rise) and the revised BoE predictions for the UK in 2013, a full year rise of 1.6% up from 1.4%, there is a growing consensus that the UK is emerging from the downturn which started in 2008.
As mentioned last month the biggest issue for the ordinary man on the street has been the outpacing of wages by inflation. With recently announced increases in energy pricing this discrepancy will remain despite the headline that predicted inflation will begin to decline. It should be pointed out that the BoE’s “primary” aim is to maintain inflation below 2%, something that hasn’t occurred since 2009!
On the subject of the BoE’s “forward guidance”, in the context of a growing rate of growth and declining inflation, its worth looking at the unemployment figures as these have a direct knock-on impact on interest rate levels, which are still pegged at 0.5%. Analysis by the BoE shows that the probability of the UK hitting 7% unemployment before 2016 has risen to the level where it’s now predicted that 2015 Q2 sees a positive likelihood of this happening with the BoE stating that they are likely to increase interest rates at that point in time. With no change in interest rates since early 2009 this shift is likely to cause a an immediate contraction in consumer spending, not something a fragile economy needs (even if its two years away). At this point in time with the boom being primarily driven by consumer expenditure and credit this is a very concerning vision of the future.
Economics rarely deals in absolutes, we are dealing with the future after all, but following on from the above assertion that this is currently a consumer spending led recovery rather than a structural recovery as envisioned by the current government a viewpoint on the PMI (purchasing manager indices) for the various sectors is a prudent action.
All the PMIs collected and calculated by MARKIT show positive trends suggesting business is beginning to move, produce and build and the subsequent increases in the employment figures. All this suggests good news for the economy and jobs in general however are consumers “jumping the gun”? Last month it was discussed whether the UK consumer was creating a rod for their own backs by believing the hype about a growing economy, consumer credit growth certainly shows this to be true with credit hitting a 3 year high at 4% yearly growth..
Whilst the PMIs suggest that business is growing it really is too early to conclude that this is all sustainable (despite Governor Carneys beliefs) a couple more months of consistency are required. What is interesting is that there has also been a fillip in saving too, consumers are spending (what they don’t have) but there is also a suggestion that they may also be saving more (although still at low levels).
This contradicting pattern is reflected by the following three sources that show disposable income has actually decreased at the same time as consumer confidence about family has plateaued (likely driven by energy charges) whilst the time is evidently right to buy major purchases!
Another mixed bag with consumers showing definite signs of cognitive dissonance in their behaviour, knowing one thing and continuing to do something else driven by the positive macroeconomic signs in the media that suggest it’s all getting better. There are legitimate concerns about what is driving this recovery with arguments around excess employment capacity, booming debt and a housing bubble all clamouring for attention whilst the BoE’s reforecasting suggest that the big interest rate bump is closer than we all think. It all suggests, at face value, that we as a country have learnt nothing from the 2008 crash, time will tell!
Sources: ONS, BBC, ASDA, GFK NOP, BoE,
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