UK recession may not be as deep as feared – as better than expected construction data raised hopes the GDP figures for Q2 would be revised. Don’t hope for much, the latest construction stats suggest the fall in construction was 9.5% compared to 9.7% year on year in the second quarter.
So too the latest data on manufacturing and production suggest the drop in output was just 2.7% and not the 3.2% first feared. It looks as if the second quarter fall in GDP should be 0.6% compared to the 0.7% first estimated. Put out the bunting, you did not have it so bad, to paraphrase Macmillan. Download The Saturday Economist 11th August for details.
Of the slump, two thirds or 0.4% is attributed to the jubilee effect, rain bank holidays and too much alcohol, to blame for the economic malaise. The Governor of the Bank of England suggested the economy has not yet reached full fitness unlike the Team GB. All this in his opening remarks to the Inflation Report Press Conference on Wednesday.
Yes economic news this week, Tuesday the manufacturing data suggested manufacturing slumped by over 4% year on year in June, the trade figures released on Thursday recorded a deficit of over £10 billion as exports fell by 9% and manufacturing price inflation continued to fall in July to 1.7% output based and input costs fell by -2.4%.
So what to make of it all? The governor summed this up in his inflation report. The fantail charts were swimming again in rough waters with storm clouds rolling over head and the economy facing headwinds. Never sure if the governor’s presentation is the economics update or a met office review of weather prospects for the year ahead.
The inflation report did not reveal much we did not cover last week in the NIESR review. Little or no growth this year, inflation falling to target, no prospects for a change in base rates up or down and slowly but surely the economy will return to growth. How do we know? Because that is the way the models are set.
Good news according to the Black Cloud Index, the economy must be looking up. The Governor mentioned Black Clouds just once in his short introduction on Wednesday, compared to six times in his presentation at the Mansion House in June. It must be getting better. But how would we really know, Mervyn King confessed “We are in no position to make any accurate forecasts about what will happen in the UK”. This having spent some £3.5 million updating the Bank of England Economic Model less than two years ago.
Some hope but not much apparently is placed on the Eighty Billion Pound funding for lending programme. The scheme is designed to provide incentives to banks and building societies to lend more to households and businesses with discounted rates and pressured incentives.
But if the central bank is in no position to make any accurate forecasts about the economy, the clearing banks are in no position to make any accurate forecasts about repayment prospects. Lending will remain subdued as a result. Confidence, clarity and domestic demand growth the key to real lending progress.
Check out The Saturday Economist for a detailed review of the economics news this week. Much of the data for June and Q2 is skewed by two bank holidays and the jubilee party. The impact on exports and manufacturing exacerbated. Nevertheless, the economy is flatlining, domestic demand is subdued, the hopes for investment, manufacturing growth and net trade were never going to materialise.
Inflation is falling towards target but trends in commodity and energy prices may yet derail the plan. Geo political risks to oil and energy and weather risks to crops and drought may thwart expectations of positive household income growth in the second half of the year.
Ed Conway, from Sky News asked the Governor if the Bank of England had fallen off the medal table when it comes to forecasting. “Not at all” said the Governor, “This is not a spot the ball contest. We have seen exactly why growth did not pick up in the way our central path would have suggested.” Reassuring.
Don’t miss the Sunday Times and Croissants, out tomorrow. Have a great week-end.
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