Russell Lynch: No rate cuts for now, but beware the baying of stagflation

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What do you really need to know from Thursday’s big growth figures? Boiling it down, three things. First, a 0.5% advance between July and September shows the economy was far from falling off a cliff in the post-referendum period. So far, so good.

Second, don’t expect an early Christmas present from the Bank of England next week in the form of an interest rate cut.

Policymakers were split in August over the need for more money printing, and the brighter news since then has hardened the hawks’ case. 

The UK has slowed, but certainly not flatlined as the Bank predicted in August; on the other side of the coin, its inflation headaches have become a little more painful thanks to a sharper fall in the pound than it reckoned on. Financial markets now believe there’s virtually no chance of a cut next Thursday.

Finally; if the UK is an engine, it is firing, as ever, on the single cylinder of its services industry, up 0.8% in the quarter. Construction and manufacturing are sinking, leaving the UK’s dominant services sector shouldering the burden, Atlas-like, until exports revive.

But frankly the first official estimate of GDP is always more handy as a political baseball bat than an economic event, particularly when it’s put together with half the necessary data. Brexiteers will make merry, using the number to beat their vanquished Remoaner foes, and jeer again at the doom-mongers in Threadneedle Street.

But more relevant is what this number doesn’t tell you, which is where we’re heading. Declaring any kind of victory based on these numbers is as pointless (and dangerous) as steering a car using the rear-view mirror. That’s why the Bank of England places more emphasis on up-to-date surveys to set policy.  

For example, Thursday’s figures tell you nothing about the most immediate threat facing the post-Brexit UK economy, which is falling business investment.

We’ll have to wait another month for the first indications of that in official data. Warning signs are already there. The CBI’s industrial trends survey got a lot less attention than the GDP figures but it’s one of the oldest, dating back almost 40 years. Firms are marginally more bullish on spending intentions, but far below the extent seen before the Brexit vote. 

October’s survey shows as many manufacturers are planning to cut spending on heavy equipment as those planning to increase it.

As for the boom in exports coming to the rescue, don’t forget that many rely on imported raw materials to make stuff. The CBI’s supplementary question for exporting manufacturers on the net impact of sterling’s fall was intriguing; of more than 200 firms who replied, 47% said it was negative and just 32% a positive. 

This isn’t great news for growth, even if consumer spending appears to be holding up.

For my money, the statistic the man in the street will take more notice of than Thursday’s GDP is the one in foot-high letters outside every petrol station. Government average petrol prices figures this week show more than 4p extra a litre on petrol since the beginning of September and rising oil prices and the weak pound deliver a double-whammy. Fuel is the canary in the coalmine of an inflation mini-revival likely to reach its peak a year ahead. Rising petrol prices, an essential cost, are a tax on consumption. 

And elsewhere the recent sell-off in government debt has pushed up the cost of the two-year swaps, off which fixed mortgages are priced. That’s another unavoidable cost creeping up.

It’s adding up to a mild case of “stagflation”; slowing growth and rising inflation, which promises a tricky spell for the first half of next year.

It won’t be as bad as 2008, which saw inflation above 5% and a sharp recession, but still a cold shower for the consumers our economy relies so much on. All the more reason, then, for the Bank to leave one final shot in its locker on rates until the new year.

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October 28, 2016 |
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