The Saturday Economist : recovery in sight, the pound is just right?

The Saturday Economist 16th March 2013

Recovery in sight, the pound is just right and we might have seen growth without falls in construction and oil last year. This was the gist of the Governor’s interview with ITN news this week. Sterling rallied on the back of surprising comments by the Bank of England Governor in support of the pound. Last week we posed the question – who speaks for sterling? This week, the governor has stepped forward, calling the floor and taking the fun out of the euro sterling trade for now.

“There is momentum behind the recovery, and during the course of 2013 we will see the recovery come into sight. When – I can’t possibly tell you and it would be silly of me to pretend that I could.” Oh dear.

Well at least the governor can’t see black clouds on the horizon, we should be thankful for small mercies. Not so promising – the governor still believes the march of the makers rebuilding the workshop of the world will drive recovery, with low interest rates stimulating investment and weak currency producing a surge in net trade growth. “The balance (away from consumption) has to change – policies are in place to achieve it”, he said.

Pity no one has explained this to the ONS, producing contradictory evidence this week on trade and manufacturing.

Manufacturing Output January
Manufacturing output fell by 3% in January following a fall of 1.5% last year. Investment goods increased by 2% but consumer goods output fell by 4%. Output is still 11% below the peak in January 2008. Growth, to which the governor alludes, was damaged by construction, oil AND manufacturing. As for the trade figures …

January trade in goods
There was a deficit of £8.2 billion on goods in January, partly offset by an estimated surplus of £5.8 billion on services. the UK’s deficit on trade in goods and services was estimated to have been £2.4 billion in January, compared with a deficit of £2.8 billion in December.

Does the month matter? Not really, last year the goods deficit was £106 billion compared to £100 billion in the previous year. This year the goods deficit will be between £100 and £110 billion dependent on the strength of recovery in the UK. Trade in services will moderate the structural goods deficit.

Growth this year, will be dependent on household spending and service sector growth, not manufacturing and net trade. The UK economy has been dependent on household spending since 1830. (That’s as far back as our records go!) As we explain in the Budget for Greater Manchester – released this week, – there will be no manufacturing recovery and no gain from net trade in 2013.

What’s happened to Sterling?
Rallied by the governor’s views, sterling closed up 1.1550 from 1.1474 against the euro and up against the dollar 1.5111 from 1.4917. The dollar closed up against the euro at 1.3075 from 1.295.

Oil Price Brent Crude closed down $109.82 from $110.85. No threat to inflation at present levels.

Markets, were up again this week on US optimism. The Dow closed at 14,514 from 14,397 and the FTSE closed at 6,489 up 6 points! We still think the FTSE will clear 6500 marker before Easter, then may take a May break perhaps.

UK Ten year gilt yields fell to 1.95 from 2.06 and US gilts closed at 1.99 from 2.05. The governor hinted at more QE to support recovery.

The “Budget for Greater Manchester” statement was released on Thursday, great coverage in The Times, the FT, the Guardian and the Daily Mirror.

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