The Saturday Economist 9th February : Trade, manufacturing and construction.

The Saturday Economist 9th February -so this is rebalancing?

Economics news – trade, manufacturing and construction plus notes for an incoming governor.

Markets, profit taking evident this week as the Dow closed at 13,979 just below the testing 14,000 level. The FTSE closed at 6,295 after last week’s heady 6,347 but the FTSE 250, already in high ground moved up 100 ticks to 13,375. The great rotation is in play, last week was a “consolidation after extension”. We are calling 6,500 on the FTSE in our Easter rally.

UK ten year gilt yields closed up at 2.12, US gilts were down to 1.95 but the best play this week was Sterling Euro. In our Duff & Phelps, economics presentations this week, we suggested the Euro move was a technical over extension which could be short lived. It was. By the end of the week, the close at 1.18 from 1.15, represented the biggest gain for the pound in almost two years.

Economic News this week, the trade figures were released for December. No surprise, the trade in goods deficit closed at £106.6 billion for the year. The Services surplus of almost £70 billion financed the shortfall. The overall (goods and services) deficit was £37 billion. This is consistent with our forecasts at the start of the year and two years ago for that matter! The overall deficit, around 2% of GDP, is not a threat to Sterling nor will it lead to a run on the pound, as some of our younger, more excitable economists might suggest. What are the lessons from this?

The weakness of sterling does nothing to alleviate the deficit, trade in goods! Empirically, historically, analytically, using technical econometric analysis, the evidence confirms the demand and price co-efficients do not support the depreciation dogma. Weaker sterling is not good for the British economy, it does not lead to a surge in exports nor a drop in imports. There is no substitution effect. Mark Carney please take note.

Also, Britain needs a strong services sector particularly in Banking and Financial Services. It is time to stop kicking the golden goose and realise one way to rebalance the economy and finance the structural trade deficit, is with a strong, viable and growing banking and financial sector.

The Manufacturing figures were also released this week. For the year as a whole manufacturing output fell by just under 2%. In December, output was down by 1.5% compared to a year earlier. The march of the makers rebuilding the workshop of the world is not rebalancing the economy, it was never going to, Mark Carney please take note.

The Construction output figures were also released this week, output was down in the year by 8.5%. We expect a further modest fall this year, without some stimulus to infrastructure spending from central government.

Service Sector growth. The latest PMI Markit service sector data suggests further growth in the service sector in January and for the year ahead. We expect modest growth in the economy of around 1% this year generated by private and public service sector growth of around 1.5%.

The Bank of England – kept rates on hold this week, with no extension of QE, other than a £6.6 billion rollover, of some redemption. No surprise in that. Unusually, the statement from the Bank of England was more expansive this month. Growth will remain muted and inflation will remain above target for at least two years. No surprise in that either come to think of it. The Bank is still fretting about lost output and capacity hindering growth in the years to come. It really is time for a shake up in thinking. Mark Carney please take note. The output gap is over 10%, there is no “lost capacity” challenge in a predominantly service sector economy and the consumer is real income constrained not debt constrained. Time to abandon QE, nudge base rates (and sterling) higher and return gilt yields to a real (inflation adjusted) return.

Oil Price Brent Crude closed at $118.9 from $116.76. Oil averaged $119 through February last year. We had expected oil to trade between $110 – $115 for the first half of the year but five weeks into the year this looks optimistic.

Other Currencies – Sterling closed up against the dollar at 1.53 from 1.51 and the dollar closed up against the Euro at 1.34 from 1.36. Sterling bounced back against the Euro closing at 1.18 from 1.15, the technical extension a move too far for markets.

This week we released our Economics forecasts for 2013. This will form part of the “Economics and Fiscal Outlook” to be published in the “Budget for Greater Manchester” statement on the 14th March. Don’t miss that! The charts for the 2013 forecasts are available on line here.

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. 
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