The Bank of England is charting the middle course between the ECB that cut rates last week and the Federal Reserve, which is expected to raise rates on Wednesday. This will be the most significant monetary policy divergence since the Eurozone’s ill-fated rate rises in 2011. Does it matter? Yes and no. Yes, because capital flows have responded to the prospect of US rate rises and could accelerate if those expectations are met. Flows out of the UK don’t seem to be particularly strong, but emerging markets have felt the drain for most of this year. The Bank of England’s Financial Policy Committee is on alert for more turmoil. No, because there can rarely have been such a well-trailed rate hike.
King Knut didn’t try and halt the tide. He was showing his powerlessness to stop it. It seems policies designed to rebalance the UK economy are similarly ineffective in stemming the tide from manufacturing and towards services. The UK's trade deficit in goods and services widened to £4.1bn in October. Excluding oil and other erratic items, October's deficit was the largest on record. As usual, we enjoy a decent surplus in our trade in services. We simply import a lot of goods, which in October meant a lot of finished goods. It might well be shops stocking up for Christmas. Even so, if the rest of the world likes our services, is that such a bad thing?
UK manufacturing output fell by 0.4% in October. Although this follows a decent 0.9% rise in September, over the longer term British manufacturing output is, at best, static. The wider measure of production fared better, up 0.1% in October. But again, strong-ish performances from mining and oil somewhat disguise longer-term decline. This is hardly the stuff of hardy festive cheer. So, more warming is the unexpected 0.2% rise in construction output in October, including a 2.3% rise in private sector housing. Great news. But as the adverts don't say, new housing is not just for Christmas.
The price of Brent crude slipped below $40 per barrel last week for the first time since February 2009. It’s down 40%y/y and 20% since late summer. In part, this is a story of weakening world demand growth, notably in emerging markets. It also highlights two structural changes on the supply side of the market. First is the demise of OPEC, the oil producers’ club, as an effective cartel. Second is the resilience and creativity of American frackers, who have risen to the challenge of boosting productivity with gusto. By keeping inflation depressed, the falling oil price is another force that will keep UK interest rates where they are for a while yet.
Ups and downs.
House prices are 9% higher than last year according to the Halifax. At £204,000, the average house price is now 5.5 times the average income, something that we last saw back in mid-2008. Part of the reason for this is simple supply and demand. According to the latest figures from the RICS, even though new buyer enquiries are slowing, the pace at which new houses are coming onto the market is slowing faster. This has been particularly pronounced in London, where the impact of the stamp duty changes from earlier this year has led to less business coming through estate agents' books.
At first blush, growth in US retail sales of 1.4%y/y is hardly stellar. In normal times it’s a pace that would have a cautious central banker thinking twice about raising interest rates. But reported growth continues to be depressed by the impact of the lower oil price on gasoline sales. They were down 20%y/y. Contrast that with the 6.5% rise in eating out and 5.4% growth in sales of home furnishings and the US shopper looks to be in fine fettle. The windfall from the falling oil price is being spent elsewhere. It was another green light for the Fed.
Among those waving a red flag at the prospect of a Fed rate rise is the Bank for International Settlements. Its concern is that higher US rates could have adverse consequences for the global economy and financial system. Higher US rates raises the prospect of negative financial spillovers in emerging markets as corporates there buckle under the weight of the debt loads they have accumulated in recent years. That's because lending rates in emerging markets are closely tied to US rates. So higher US rates means servicing debt burdens will become more onerous. It's also a further risk to growth in emerging markets, many of which are slowing sharply.