The Bank of England’s problem
The Bank of England is charged with keeping inflation 1% either side of 2%. Obviously, we’d all like as much growth as we can have, and as little unemployment as is consistent with that, but it’s still that single target.
If we look at the usual and base measures, growth, unemployment, inflation, they’re sending slightly mixed messages.
Inflation is below target but not massively so. Growth is pretty slow but given that on the continent is actually looking pretty good. Unemployment is at generational lows, real wages are rising. This isn’t perfect but it’s pretty good.
This is the big concern in the UK economy. Leaving the warm embrace of the Single Market and Customs Union is clearly going to cause some dislocation in the British economy. The question is, well, how much?
I’ve long been saying here that the big concern has been the uncertainty of whether we would go or not. That, in itself, lowers growth because it cripples business investment. That is of course now resolved and the uncertainty lifted.
As a result of that we’re seeing at least some signs of a return to economic optimism. UK house prices have been rising since the election that resolved the issue for example. We’ve had a survey of finance directors (nothing formal so no link to it) which says they’re now much more confident than they were.
We’ll get our first real reading of confidence when we get the PMIs in about a week.
The thing is this could, conceivably of course, go the other way. Now that we’re definitely going people lose confidence and entirely stop investing.
Or, equally, the BoE might decide that a cut in interest rates is useful to cover any disruption. They did do this once before after all.
So, in theory at least we could have a cut in rates. Or we could even find that confidence is rising so strongly that we’ll have a rise in them – the BoE would dearly love to raise rates after all. Just to get themselves back to a position where they have some room for monetary policy to work.
We need to decide which way are we going to go? Myself, I’m running with the idea that it will be objective conditions that determine the BoE’s response. So, I’m sticking with inflation and unemployment as my guides. In which case for the moment at least there’s going to be no change in policy.
We have the latest unemployment numbers:
The single-month estimate for the employment rate in the UK, for November 2019, shows a decrease of 0.5 percentage points compared with the previous month.
The single-month estimate for the unemployment rate in the UK, for November 2019, shows an increase of 0.4 percentage points compared with the previous month.
That doesn’t look so good but it’s worth noting that these numbers are always jumpy:
The overall effect is positive:
U.K. joblessness held steady at 3.8% in the November quarter, better than our expectations for a small increase. The details were extremely upbeat, showing that the number of employed people rose by 208,000, its strongest in four years. This helped to push the employment rate to its highest on record. Adding to the good news, unemployment fell while inactivity plunged.
Given the manner in which those numbers leap around month by month using the quarter gives us a better picture.
We’re also seeing steady wage growth:
Median monthly pay grew by 3.1% in November 2019, compared with the same period of the previous year.
We need to knock inflation off that but real wage growth is still real wage growth. And it’s not at a level which is likely to set off some inflationary spiral either.
Well, so, we’ve real wage growth, our basic aim in having an economy. We’ve the lowest unemployment rate for a generation and more, the highest employment rate we’ve ever recorded. There’s not much there to trigger a cut in interest rates or any other loosening of monetary policy.
Equally, we’re not seeing any break out in inflation so there’s no real case for a rise either.
This leaves just whatever worries people might have about Brexit as a cause for interest rate changes. The BoE has, once before, cut rates simply because of worries about disruption caused by it. The question is, will they do so again?
That depends on how much disruption there is of course. And my reading of this is that it’s running the other way. The new clarity, the removal of uncertainty, is leading to a bounce in economic activity. Sure, currently my view is fed by a mixture of innate prejudice and some very sketchy survey evidence. We’ll see more in the next week to 10 days as we start getting the PMIs.
I think they’ll show a considerable upturn in confidence. Therefore the BoE will do nothing.
The investor view
We’re going to get much more clarity in the near future as our first statistics collected after the election start to come through. I seriously doubt whether there will be any policy change before we gain that further clarity. Further, I think that when we do get those numbers they will be significantly positive.
Thus we’re not going to see a change in macroeconomic policy.
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