Bank of England policy meeting features in UK economic week commencing 7 January
The Bank of England’s Monetary Policy Committee is expected to hold off from providing more economic stimulus. Much attention will be focused on the British Retail Consortium’s survey for December to see if a late pickup in sales saved Christmas for retailers and helped the economy to avoid a renewed dip in GDP in the fourth quarter of 2012. Fears of GDP sinking again in that quarter have been fuelled by the purchasing managers indicating services activity contracted in December, and fears could heighten if industrial production and the trade deficit failed to improve appreciably in November.
Bank of England set to start 2013 in “wait-and-see” mode
It looks highly likely the Bank of England’s Monetary Policy Committee (MPC) will kick off 2013 as it ended 2012, in wait-and-see mode.
Any change in interest rates is clearly off the radar, while most MPC members seemingly believe there is currently not a compelling case for more quantitative easing (QE), given recent, increased inflation risks and signs the Funding for Lending scheme may be starting to have an influence. Also arguing against further Bank of England action at the January MPC meeting, the major downside risks to the economy have been diluted, for now at least, by the United States side-stepping the fiscal cliff and by the recent easing of Eurozone sovereign debt tensions.
The weak December purchasing managers’ survey for the dominant services sector (indicating the first contraction in activity for two years) highlights that the UK economy is still struggling markedly to develop even modest sustained growth. This reinforces our belief that the Bank of England is likely to eventually give the economy a further helping hand with a final GBP50 billion of QE during the first half of 2013.
The Bank of England’s failure to extend QE in both November and December means the program has been brought to at least a temporary halt, given that July’s GBP50-billion extension (which took the stock up to GBP375 billion) was fully utilized by early November. Meanwhile, interest rates are firmly on course to complete a fourth year at 0.50%, having originally been taken down to this level in March 2009.
The minutes of the December MPC meeting point to the committee being firmly in wait-and-see mode going into 2013. The indications are they may well remain in this mode for some time to come, barring a marked downturn in economic activity.
Significantly, the dovish David Miles was again the only one of the nine MPC members who favored more QE in December. There is little indication from the minutes that any other MPC member is leaning toward more QE in the near term at least.
Meanwhile, there was no reported discussion of the case for taking interest rates lower than 0.50% in the December minutes, which maintains belief this remains off the radar for the time being, at least. The MPC had revisited the case for lower interest rates at its November meeting but concluded there was a danger that a cut in the Bank Rate could prove counterproductive for overall aggregate demand, and it notably concluded that “it was unlikely to wish to reduce Bank Rate in the foreseeable future”.
The MPC believes the economy is likely essentially flat at the moment, while they perceive the risks from the Eurozone have eased recently. In addition, the United States avoiding the fiscal cliff had removed a near-term threat to economic activity.
Meanwhile, there is concern within the MPC over the inflation situation. Consumer price inflation (up to 2.7% in October and November from a 34-month low of 2.2% in September) could well reach 3.0% within the next few months because of increased utility charges and higher food prices, and inflation is seen likely staying above its 2.0% target level through 2013. There is some concern within the MPC that inflation could prove sticky over the longer term because of weak productivity, while extended high food prices due to poor harvests are also seen as a threat to the inflation outlook.
Also arguing against any further stimulus in the near term at least, the MPC hopes the Funding for Lending scheme (FLS) will increasingly feed through to boost lending, and it is encouraged by some of the early signs. The MPC’s hopes that the FLS will help matters will likely have been boosted by the Bank of England’s latest credit conditions Survey. This reported that lenders increased the capital available for secured lending to households and to corporate entities in the fourth quarter of 2012, and plan to make further increases in the first quarter of 2013. While there are some signs mortgage lending has picked up to a limited extent recently, there is yet to be clear evidence that corporate borrowing is on the up.
Even so, the MPC’s central view is consumer price inflation will fall to its target level of 2.0% over the medium term, which does keep the door open to more stimulus.
With the economy clearly still struggling to develop even modest, sustainable growth, we believe there is still a very real possibility the Bank of England will ultimately decide to give the economy a final GBP50 billion of QE during the first half of 2013. However, this seems unlikely to happen before the second quarter, if it does at all.
Unless the news on the economy is really dire early on in 2013, we suspect the MPC will prefer to hold fire, given that consumer price inflation could well hit 3% early in 2013 and then stay there for a while. The MPC will likely want to make sure there are no signs that underlying price pressures are picking up, given the move up in the headline consumer price inflation rate. The MPC may also wait longer to see just what impact the FLS is having, given its belief it will take an extended period for it to really feed through to lift lending to businesses.
The MPC may also be minded to eventually do some more QE to put some downward pressure on the pound, given that Sir Mervyn King has started the pound’s overall appreciation since mid-2011 has not been helpful for the UK economy.
Meanwhile, we expect interest rates to remain at 0.50% through 2013 (and very possibly through 2014 as well). The Bank of England certainly is not going to raise interest rates anytime soon, given the economy's extended weakness and limited recovery prospects in the face of a tight fiscal squeeze and still serious problems and uncertainties in the Eurozone. We very much doubt the Bank of England will take interest rates below 0.50% because of ongoing doubts within the MPC that such a move would have a net overall beneficial impact for the economy.
Of course, it remains to be seen whether the Bank of England under Mark Carney turns out to be a significantly different institution than it is under King. Carney is certainly floating some interesting ideas ahead of his arrival at the start of July 2013, although it always has to be remembered that he will only have one vote among nine on the MPC. It is also one thing to float ideas, another matter completely to adopt any of them.
Major economic releases
British Retail Consortium retail sales monitor for December
The British Retail Consortium (BRC) retail sales monitor (overnight Monday/Tuesday) will provide the first tangible evidence of whether there was a late pickup in retail sales in December that at least partly saved Christmas for retailers. How retail sales fared in December could also be a crucial factor in determining whether or not the economy avoided a renewed dip in GDP in the fourth quarter of 2012.
Certainly, the pressure was on retailers going into December, as hard data from the Office for National Statistics show retail sales volumes were only flat month-on-month (m/m) in November after falling 0.7% m/m in October. Furthermore, survey evidence from the Confederation of British Industry (CBI) pointed to lackluster sales in the first half of December. The last BRC figures show total retail sales values rose 1.8% year-on-year (y/y) in November. This was up from a gain of 1.1% y/y in October. This result pointed to essentially flat sales volumes y/y, given that the BRC put annual shop price inflation at 1.5% in November. Meanwhile, sales values on a like-for-like basis (which strips out the effect of additional floor space) rose 0.4% y/y in November after edging down 0.1% y/y in October.
There are indications (such as the weekly sales figures from John Lewis) there was a significant last-minute rush for Christmas presents, which may well have been the consequence of a substantial number of consumers delaying their purchases to try to take advantage of any increased discounting and promotions offered by worried retailers.
Even so, it appears unlikely the Christmas sales will have been any more than adequate overall for retailers, as so much ground had to be made up for the slow start. For those retailers that lifted their sales late on because of increased discounting and promotions, a key question is just how big a hit did their margins take?
December retail sales also appear to have been supported by a strong start to the clearance sales. This development likely reflected still-pressurized consumers looking to take advantage of the genuine major bargains to be had. Given still-low consumer confidence and significant pressures on many households, we doubt interest in the sales would be particularly high once the best bargains had gone.
The problem retailers face is that while consumers’ health benefited overall through the first three quarters of 2012 from a reduced squeeze on their purchasing power coming from slowing inflation, a modest pickup in earnings growth, and decent employment growth, developments in late 2012 were not so favorable, with consumer price inflation moving up and earnings growth retreating. In addition, there are hints the labor market could be losing momentum. It must also be remembered that many households have faced an extended squeeze on their finances, so they are still in a vulnerable position even if they saw some improvement over the first three quarters of 2012.
Specifically consumers benefited from consumer price inflation falling from 5.2% in September 2011 to a low of 2.2% in September 2012 and an edging up in earnings growth through to August from the lows seen earlier in 2012. In addition, employment growth was particularly robust through the summer, helped by the Olympics. This was highlighted by latest data showing households’ real disposable income rose a further 0.4% quarter-on-quarter (q/q) in the third quarter of 2012, after jumping 2.3% in the second quarter. This meant it was up 2.8% y/y in the third quarter. In contrast, households’ real disposable income fell 1.0% overall in 2011.
Latest developments point to an appreciable, recent reversal of the improvement in consumers’ purchasing power seen over much of 2012, which could well have reduced their ability and willingness to spend over Christmas. Furthermore, consumer confidence fell sharply in December after spiking to an 18-month high in November, as concerns over the economic situation and outlook mounted again.
Consumers’ purchasing power will have been hurt by consumer price inflation rising to 2.7% in October and November, while earnings growth fell in both September and October. Specifically, y/y growth in overall earnings growth (including bonuses) retreated to 1.3% in October from 1.8% in September and 2.3% in August. It had previously trended up to 2.3% in August from under 1.0% in the first quarter of 2012. Meanwhile, employment growth has slowed appreciably over the last couple of months, although employment is currently at a record high.
Trade deficit in November
The total trade deficit (Wednesday) is expected to have narrowed to GBP2.9 billion in November, after widening to GBP3.6 billion in October from GBP2.5 billion in September. The trade data have been particularly volatile recently, which may well have been influenced by special factors (such as the Olympics lifting imports in August). A significant point to note, though, is that the total trade deficit of GBP3.6 billion in October was well above the average monthly shortfall of GBP2.9 billion over the first 10 months of 2012 and substantially above the average monthly deficit of GBP2.0 billion in 2011.
Within this, the visible trade deficit is forecast to have narrowed to GBP8.8 billion in November after widening to GBP9.5 billion in October from GBP8.4 billion in September. This would be in line with the average monthly deficit of GBP8.9 billion over the first 10 months of 2012 but markedly above the GBP8.3-billion monthly average in 2011.
The traded goods deficit rose appreciably in October as exports fell 1.0% m/m and imports rose 3.9%. There was actually a pickup in exports to Eurozone countries in October but this followed falls in the previous two months, and they were still down 1.1% on a three-month/three-month basis. Furthermore, exports to the Eurozone were down 8.0% y/y in October. Worryingly, there was a marked drop in exports to non-EU countries in October, indicating the tough conditions facing UK exporters are not limited to Europe. Meanwhile, imports were relatively robust despite muted UK domestic demand
The renewed marked widening in the trade deficit in October has stoked concern that net trade was negative in the fourth quarter of 2012, thereby increasing the risk that a renewed dip in GDP occurred. Net trade made a recently rare, significant positive contribution to GDP in the third quarter following markedly negative contributions in both the second and first quarters.
Certainly, it is hard to be optimistic that net trade can help the UK economy much in the near term at least, given the pressure on exports coming from ongoing very weak domestic demand in the Eurozone and generally soft global growth. Nevertheless, the United States avoiding the fiscal cliff and a recent easing of Eurozone sovereign debt tensions do offer some hope for UK exports going forward.
Industrial production in November
We expect manufacturing output (Friday) to have seen a limited rebound of 0.5% m/m in November, after plunging 1.3% m/m in October. This improvement would still leave manufacturing output down 1.3% y/y in November.
Overall industrial production is seen expanding 0.8% m/m in November, following sharp drops of 0.8% m/m in October and 2.1% m/m in September. This expansion would result in industrial production being down 1.9% y/y in November. In addition to the sharp drop in manufacturing output in October, industrial production was hit for a second successive month by a sharp decline in oil and gas extraction; it fell 4.4% m/m after a record drop of 23.7% m/m in September and was down 26.9% y/y. This drop was primarily due to repair work continuing on a major oilfield in the North Sea. Hopefully, there will have been some rebound in oil and gas extraction in November. The only decent news in October was a 4.5% m/m increase in utilities output.
Much industrial production and manufacturing output rebounded in November and, hopefully, December, yet it is highly unlikely that it will have prevented appreciable contraction in production in the fourth quarter, which will have weighed down on GDP. Nevertheless, if industrial production did see some recovery in the final two months of 2012, it will limit the overall contraction in the fourth quarter and increase the chances that a renewed dip in GDP was avoided.
On an encouraging note, December manufacturing surveys from the CBI and, particularly, the purchasing managers showed significant improvement overall, importantly including a pickup in new orders. The purchasing managers indicated new orders rose at the fastest rate since March 2011. Improved domestic demand clearly drove the pickup in orders as export orders fell for a 12th successive month, albeit at a reduced rate.
While the latest surveys offer some encouragement to manufacturers as they head into 2013, it is evident the sector still faces tough domestic and global conditions. Domestic demand for manufactured goods is handicapped by current muted investment intentions and tightening public spending. Furthermore, consumers’ purchasing power is coming under renewed pressure from a move up in inflation and muted earnings growth. On top of this, a still-uncertain and difficult economic environment risks some orders being delayed or even cancelled.
Meanwhile, muted global economic growth, and Eurozone economic weakness in particular, is currently still a constraint for foreign demand for UK-manufactured goods. The United States side-stepping its fiscal cliff and easing Eurozone sovereign debt tensions do offer some hope for UK manufacturing exports.
House prices in December
We expect house price data to be released during the week by the Halifax lender to show that prices were flat m/m in December. This would cause them to be down 0.6% y/y in the three months to December. Latest data from the Halifax showed house prices rose 1.0% m/m in November after falling in each of the previous four months. The Nationwide lender has already released its house price index for December, which showed prices edging down 0.1% m/m, resulting in a drop of 1.0% y/y. The Nationwide had previously reported flat house prices in November after a rise of 0.6% m/m in October.
While significant downside risks remain to house prices, particularly in the near term, recent signs of modestly improving housing market activity and the likely increasing beneficial impact of the FLS on mortgage lending lead us to believe house prices will be broadly flat over 2013. There could well be significant monthly fluctuations in house prices, with bouts of weakness.
We suspect that any significant, sustainable turnaround in house prices is still some way off.
On the negative side, house prices are likely to be held down by still relatively limited market activity (despite the recent modest pickup), low and fragile consumer confidence, and muted earnings growth. We also doubt the economy will grow fast enough for some time to come to provide any significant support to the housing market. Furthermore, the housing supply/demand balance currently seems to be in favor of sellers overall. For example, the latest evidence from Hometrack indicates movements in houses coming on to the market exceeded new buyers registering for a ninth successive month in December.
Nevertheless, some support for house prices should come from recent, decent employment growth and likely extended low interest rates, while mortgages appear to be becoming increasingly available helped by the FLS launched at the start of August by the Bank of England. The latest Bank of England credit conditions survey indicated there was a significant increase in the amount of credit made available by lenders for mortgage lending in the fourth quarter of 2012, and that a further appreciable increase is anticipated in the first quarter of 2013. A number of lenders have also recently cut some of their fixed mortgage rates, although mortgage conditions remain challenging for many people who are unable to raise large deposits. The Halifax, the Council of Mortgage Lenders, and the Royal Institution of Chartered Surveyors all believe the FLS has made an early, positive impact on the mortgage market.
By Howard Archer
8 Jan - British Retail Consortium Monitor Total Sales, December (Year-on-Year): not forecast
8 Jan - British Retail Consortium Monitor Like-for-Like Sales, December (Year-on-Year): not forecast
9 Jan - Non-EU Visible Trade Balance, November (GBP/Month): -4.2
9 Jan - Visible Trade Balance, November (GBP/Month): -8.8
9 Jan - Total Trade Balance, November (GBP/Month): -2.9
11 Jan - Industrial Production, November (Month-on-Month): +0.8%
11 Jan - Industrial Production, November (Year-on-Year): -1.9%
11 Jan - Manufacturing Output, November (Month-on-Month): +0.5%
11 Jan - Manufacturing Output, November (Year-on-Year): -1.3%
During Week - Halifax House Prices, December (Month-on-Month): 0.0%
During Week - Halifax House Prices, December (Year-on-Year): -0.6%
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