A further round of asset purchases merely oils the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.
The MPC are beginning to look like a bunch of economists huddled in a storm shelter in Kansas hoping the tornado will pass by. It really is time to face the storm. In 2008, oil prices were driven higher by speculative trading and large derivative positions. The subsequent fall, reflected the closing of short positions pushing oil underground to $40 a barrel. The trend is for higher and higher prices as the high growth nations and China in particular places great demands on finite resources. Gapology is dead and monetary policy needs to reflect that. The increase in output prices to almost 6% with a trend output gap of the same dimension should be adequate evidence.
Manufacturing is experiencing above trend growth as it always does at this stage in the cycle. It’s like falling off a cliff and recovering from a coma, a recovery of sorts but still a long way off the top. An industry struggling to find its feet again is a rebalancing of sorts, but it is more like a prize fighter staggering to his feet after a near knock out punch. It is rebalancing George but not as you mean it. That’s verging on codswallop.
Mervyn King completes his second term of office in June 2013. Will inflation be on track by the end of the second term? It could be a close run thing?
The Bank of England Inflation Report (May) was released this week. The Bank down graded the forecast for growth in the current year to 1.8% with above trend growth likely in 2012. In the years ahead, inflation will return to target and growth will be above trend. It will all turn out OK. Sleeping Beauty will buy a Silentnight bed without a pension liability and Miss Haversham will finally get married. The End.
The manufacturing figures for March were released this week. After growth of 6.6% in January and 5.0% in February manufacturing growth was just 2.7% in March. In the month capital goods and engineering were up 7%, metal bashers were up by 4% but consumer durables were down by 3%. So is the manufacturing miracle over? What will happen to growth this year? Let’s face it, the growth in manufacturing is not evidence or a “rebalancing” of the economy, it is more like evidence of a hit and run victim regaining consciousness. It’s a recovery not a manufacturing miracle.
The Bank of England is puzzled that theory isn’t working. A depreciation of sterling according should lead to an improvement in the Balance of Payments. Exports are cheaper and imports are more expensive. There should be a reduction in import volumes but the bank noted : “It was puzzling that import growth had remained so robust, despite the substantial depreciation of sterling.In 1983 the UK went into deficit in manufactured goods following the Howe Thatcher pogrom. The trend decline is getting worse not better. Only in one manufacturing sector, chemicals does the UK trade at a surplus the rest is in serial deficit. Devaluation isn’t working but then it never did.
In 1931 the UK faced a balance of payments crisis and a run on the pound sterling which in the end led to a negation of the Gold peg and the dollar pricing of $4.86. By modern standards the deficit was no big deal. In 1929, the country had a credit balance (current account) of some £100 million falling to £30 million in 1930. In 1931 there was an estimated debit balance of £90 to £120 millions. It was this anticipated deficit on current account that led to a run on Sterling and a repatriation of assets particularly to France and the USA. In Q4 2010, the UK visible deficit was 7% of GDP and the pound traded at $1.56. The current account recorded a deficit of £10.5 billion in the fourth quarter of 2010, equating to 3 per cent of GDP. UK reserves amounted to £40 billion.
Plenty of good controversial material to draw on in my speech to Pro Manchester at the end of April. It will be looking back at the lessons for monetary policy from the past four to five years and I am looking forward to it.” This was my week-end message from Andrew Sentance, the first hawk on the monetary policy committee to call for an interest rate rise. Andrew will be with us on the 26th April for a members lunch at the Hilton Hotel. Join us from 12:00 until 14:30 for what promises to be a momentous event with significant repercussions for monetary policy. JKA
Is it possible to look at the world through rose coloured glasses with your head in the sand? If you are an economic analyst it appears you can. According to the Daily Telegraph, “January’s trade figures lift hopes of an export led recovery.” But, monthly data on trade can be erratic and subject to revision. Over the latest three month period, the deficit on goods was £25.4 billion compared to £22.5 billion over the same period last year. The deficit is getting worse not better.