Entries from August 28, 2011 - September 3, 2011

Phantom construction slump to cut UK GDP

Posted on Friday, September 2, 2011 at 10:43AM by Registered CommenterSimon Ward | CommentsPost a Comment

UK GDP figures are likely to receive another hit from a plunge in construction activity, at least as recorded by the Office for National Statistics.

Construction orders slumped by 16% in the second quarter, breaking below the recession trough of the first quarter of 2009 to reach the lowest level since 1980. This suggests that construction output, which lags orders, will fall at least to the low reached in the second quarter of 2009, implying a decline of 7% from the second quarter of 2011 – see chart.

Construction output accounts for 6% of the economy so a fall of 7% would cut GDP by 0.4%, probably spread over the third and fourth quarters of 2011.

The suggestion that construction activity is even weaker than at the trough of the recession is not supported by PMI and EU Commission construction surveys. The PMI, indeed, is consistent with gradual expansion, with the headline index above the breakeven 50 level every month so far this year (52.6 in August).

The slump in official orders should contribute to the MPC reducing its near-term GDP projection, further increasing the probability of an expansion of QE at next week's meeting.

Peripheral money trends diverge, Ireland looking better

Posted on Thursday, September 1, 2011 at 12:22PM by Registered CommenterSimon Ward | CommentsPost a Comment

Real M1 deposits continue to contract in the Eurozone periphery, as noted in a post last week. There are some interesting country differences, however.

Italian real M1 deposits, having declined sharply in late 2010 and early 2011, returned to six-month growth in July – see first chart. Spanish deposits, by contrast, have recently started to fall again, having perked up in the spring. This suggests greater scope for economic and fiscal disappointment in Spain than Italy, in turn casting doubt on the sustainability of the collapse in the Spanish / Italian 10-year government bond yield spread from 90 basis points in June to -5 currently.

Among the bail-out countries, Ireland may be decoupling from Portugal and Greece, with real M1 deposits flat in the six months to July versus falls of 7% and 10% respectively.

Other hopeful Irish developments include a large fall in relative unit labour costs since 2008 – second chart – and a recent reduction in banks’ need to borrow from the ECB / Central Bank of Ireland – third chart.

"MPC-ometer" leaning towards QE2

Posted on Wednesday, August 31, 2011 at 12:26PM by Registered CommenterSimon Ward | CommentsPost a Comment

The MPC may announce a further £50 billion of asset purchases next week, according to the “MPC-ometer” model described in previous posts – despite there being no compelling monetary case for such action, as argued yesterday.

The “MPC-ometer” forecasts the monthly policy decision based on economic data and financial developments since the prior vote. It correctly predicted that the Committee would shift to an easing bias in August, with Weale and Dale retracting their rate-hike call.

With 10 of the 12 inputs available, the model suggests a 5-4 vote in favour of easing action, which would probably take the form of a further £50 billion of gilt purchases, as recommended by Posen since October last year.

The final reading will depend on the manufacturing and services PMI results to be released on 1 and 5 September respectively.

The further dovish shift this month reflects the financial components – in particular, lower share prices and wider credit spreads – although there was a small contribution from a drop in consumer confidence. (Confidence, however, remains well above its April low.)

High current inflation may be less of a constraint on the MPC than widely assumed, with the doves, including the Governor in his latest exculpatory letter, claiming that the headline CPI rate would be below 2% but for “temporary factors” – a dubious assertion that confuses accounting arithmetic with economic causality.

The MPC could defend an expansion of gilt purchases by pointing out that a further £50 billion of buying would return the Bank’s share of the stock of market-held gilts to about the level it reached (26%) at the end of “QE1” in January 2010.

UK money numbers: QE2 unwarranted, foreign gilt-buying slows

Posted on Tuesday, August 30, 2011 at 02:44PM by Registered CommenterSimon Ward | CommentsPost a Comment

There is no compelling monetary case for launching QE2, based on July money supply statistics released today.

The Bank of England’s favoured broad money measure, M4 excluding “intermediate other financial corporations”, or M4ex, rose by 0.6% last month, pushing annual growth up to 2.2% – the fastest since December and up from 0.9% a year before.

The annual increase of 2.2% remains low by historical standards – M4ex grew by 6.3% annualised over 1998-2003, before the credit bubble developed. The velocity of circulation, however, has been rising recently, in contrast to a fall over 1998-2003, so slow monetary expansion has not prevented solid growth in nominal GDP – by 8.9% between the second quarter of 2009 and the first quarter of 2011, or 5.0% annualised.

Put differently, 2.2% M4ex growth may be consistent with or even too high for achievement of the 2% inflation target, at least until the Bank raises interest rates, thereby making bank deposits more attractive and slowing the rise in velocity.

M4ex, in any case, may understate liquidity expansion. A broader measure also including Treasury bills, National Savings instruments, DMO repos and foreign currency bank deposits (again excluding intermediate OFCs) grew by an annual 4.5% in July – see chart.

Elsewhere in today’s statistics, foreign purchases of gilts slumped to £440 million in July, the weakest result since March. This suggests that the UK is no longer being viewed as a “safe haven” by investors moving money out of the Eurozone – foreign gilt purchases surged ahead of last year’s first Greek rescue and again ahead of the Irish bailout.