The Bank of England's new Governor airs his views
Perhaps the clearest take away from Mark Carney’s TSC appearance is that he is keen to provide guidance on the future path for interest rates, which should help reduce uncertainty for households and businesses. On bigger changes to the monetary policy, Dr Carney was more cautious. He didn’t rule out future changes to the policy framework (e.g. to nominal GDP targeting), but said “the bar for alteration is very high”. Meanwhile, there was no change from his future colleagues on the Monetary Policy Committee, as expected. Interest rates were on hold at 0.5% and quantitative easing was steady at £375bn.
Fiscal austerity in the UK still has a long way to run
You could be forgiven for thinking that we must surely be coming to the end of fiscal austerity in the UK. Sadly not. Analysis from the Institute for Fiscal Studies (IFS) shows that we are only about a third of the way there. By the end of the 2012/13 financial year, 37% of all planned austerity measures will have been implemented. Tax increases and investment cuts are well advanced, but just 32% of the planned cuts to benefit spending and 21% of the cuts to day-to-day spending on public services will have been delivered by the end of March.
Trade deficit rises, but UK shows encouraging signs of diversification
The UK’s trade deficit rose by 60% in 2012 to stand at £38bn – the worst on record. But it wasn’t all bad news. The UK continued to make inroads into non-EU markets, with goods exports now almost split 50:50 in terms of EU and non-EU destinations. This compares to a 62:38 split in favour of EU countries a decade ago. This is encouraging for the UK’s rebalancing prospects.
Good end to a bad year for UK manufacturing and construction
Manufacturers had a decent end to the year, with December showing the fastest growth in output since July. But it wasn’t enough to prevent a 1.8% fall in 2012 overall. It was a similar story in construction, where a 0.9% increase in output in the final three months of the year halted a run of five successive quarterly declines. But output fell 8% in 2012, and is still 17% below its Q1 2008 peak.
UK service sector rebounds in January
The Purchasing Managers’ Index (PMI) for the service sector rose from 48.9 to 51.5 in January. This bucked a four-month trend of declines and gives hope of a positive GDP reading for Q1. But let’s not get carried away. The squeeze on margins has dragged profitability to within a whisker of a 3½ year low, and output growth is well below its long-run average. Read our monthly take on the global PMIs.
ECB holds rates at 0.75% in February
They say that actions speak louder than words. Not if you’re Mario Draghi, it seems. The President of the European Central Bank’s pledge to do “whatever it takes” was enough to becalm bond markets last summer. And last week, the words “we will closely monitor money market developments” was enough to bring the euro down by a cent against the pound, even though it was prefaced with the comment that the ECB does not have an exchange rate policy. Even so, the single currency remains a lot stronger than it was just a few weeks ago.
Good news from the Emerald Isle
The Irish Government announced details of a plan that will strengthen its public finances last week, by swapping the “Promissory Note” for longer-term sovereign bonds. The Promissory Note was basically a €31bn IOU provided by the Irish Government to the former Anglo Irish bank, which then pledged this as collateral to the Central Bank of Ireland in return for funding.
The switch is helpful in two ways. First, lower interest costs will lead to a reduction in the budget deficit, or create scope for a reduced pace of fiscal consolidation. Second, it will help the Government in its attempt regain full-time access to sovereign bond markets, as it improves Ireland’s fiscal position.
Slump in EZ retail sales continues
Turnover fell in December, dragging the y/y growth rate to a 3½ year low of -3% (adjusted for inflation). These are extremely challenging times for the sector. Sales have essentially been in decline for five years, albeit with a brief respite in 2009-10, and are more than 7% below their 2008 peak. Conditions are worst in the periphery but the core has not escaped either, with sales down 4% y/y in Germany.