No change for Bank of England as markets await Autumn Statement
It’s hard to imagine that just over nine months ago the UK was looking at the prospect of a triple dip recession, having come off a Q4 GDP number of -0.4%, yet here we are now looking at the prospect of four positive quarters of growth in a calendar year for the first time since 2006.
It is certainly a welcome change to look back on a year that has seen stock market gains and an improving economy, as in previous years the two haven’t been particularly been well correlated.
The improvement in economic sentiment has no doubt been helped by a number of government sponsored schemes like “funding for lending” which lowered the cost of borrowing and the highly controversial “help to buy” scheme that was announced in the March budget.
There has also been a less welcome side effect in that 10 year yields have gone from just under 2% to be trading to 2.9%, and while the improvement in GDP probably accelerated just after March it didn’t really start to become apparent until after the new Bank of England governor Mark Carney took up his post in July.
It’s been most apparent that the major driver of the recovery has been the services sector which this week posted its fifth successive monthly PMI reading of 60 or more, the best run of figures since they started to be recorded. New business and employment has been steadily increasing with work backlogs increasing for the eight month in a row.
The only concern was a slight increase in pricing pressures which could feed through into inflationary pressures in the coming months. This sector has now recovered all of its lost output after the crash in 2008/09.
The current rebound hasn’t just been confined to the services sector and this is the most encouraging part of the recovery this year with manufacturing and construction also starting to fire on all cylinders.
This week we saw November manufacturing PMI come in at 58.4, its seventh successive month of expansion. The improvement in output saw new jobs rise at their fastest level since 2011 and rising levels of new export orders expanded at their fastest level in 19 years.
Even the beleaguered construction sector which has been weighed down by problems in the North Sea over the last few years saw expansion across all of its categories and also expanded for the seventh month in a row. The biggest expansion not surprisingly came from house building, with a sharp rise in business activity, at a rate not seen in a decade.
How quickly economic fortunes can change, and it is against this backdrop that the Chancellor will give his Autumn Statement today. No doubt the Office for Budget Responsibility (OBR) will update their growth forecasts for 2013 and 2014 and no doubt the Chancellor will benefit from increased tax revenues due to the surprising economic rebound.
The one problem he has is that this recovery doesn’t feel like a recovery to a lot of people given that average incomes remain stuck well below the rate of inflation and will continue to do so for some time to come. This suggests that the recovery remains fragile, particularly where the services sector is concerned, and the high levels of indebtedness of the UK consumer.
This is likely to be one area the Chancellor is particularly keen to be seen to be tackling, given how the economic debate has shifted, so expect measures to rein in energy bills, either at the pump or at source, via energy bills as flagged up earlier this week.
The Chancellor could also look at personal allowances given how they have been raised pretty much every year of this parliament.
We could also see measures on business rates, given recent calls from small businesses about how much they are costing them.
Whatever comes out from today’s statement it is unlikely to have much effect on gilt yields and today’s Bank of England rate decision, which is expected to be a non-event. In fact the biggest problem the Bank and Mark Carney have right now is sticking to their forward guidance, and stopping gilt yields from rising further, given the improvements in the economy and the labour market.
If this week’s economic data is any guide we could well hit the Banks unemployment threshold of 7% by the middle of next year.
The pound is less of a problem, particularly if the Fed starts to taper as that could provoke some US dollar strength and keep the pound well below its August 2011 highs at 1.6620.
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