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After all the debate about whether the UK is going for a hard or soft Brexit, it came as a relief to find the Governor of the Bank of England, Mark Carney, presenting the Bank’s latest economic forecasts on the basis that Theresa May achieves a ‘smooth’ Brexit. It is probably a natural description coming from a man who appears to be Teflon-coated in managing to avoid too much criticism of his performance, despite his manifestly awful performance on forward guidance and the Bank’s reputation for dire economic forecasting. However, if he manages to keep the Prime Minister - and, it would appear, almost the whole country - from having a neurosis about the necessity to be ‘tough’ in negotiating the exit terms, and substitutes it with attempting to achieve a smooth process, we are likely to end up much better off.
On the subject of economic forecasts, in its latest Quarterly Report the Bank of England has revised its growth forecast for 2017 down to 1.9% following a disappointing first quarter. This, however, is only a 0.1% notch down on their February forecast. In the spirit, and dependent on an adjustment to a smooth negotiation in the exit process, the Bank has actually increased its forecasts for economic growth in 2018 and 2019 to 1.7% and 1.8% respectively. It is probably fair to say that the Bank’s new forecasts were met with a reasonable degree of scepticism. This may partly be down to it having considerable doubts over whether the government is capable of meeting the Bank’s ‘smooth’ requirement even if it should wish to do so. More likely, it was down to there being few signs of the economy picking itself up, particularly with the outlook for the consumer being unappealing as inflation rises to levels that are considerably higher than the increase in average earnings.
If the markets reflected a well-justified doubt over the accuracy of the Bank’s forecasting, they were probably even more surprised to see it come up with the comment that interest rates might have to rise sooner than was currently projected. This is hardly anything to get too excited about. For a start, the MPC meeting saw a 7-1 split for leaving rates on hold, with only Kristin Forbes voting for a rate hike. She has maintained a dignified presence in trying to explain to her colleagues that they are there, first and foremost, to guard against inflationary pressures and will leave the MPC shorn of its only true hawk when she departs after next month’s meeting.
The rationale behind the Bank’s suggestion revolves around a number of questionable expectations. Firstly, it anticipates a ‘significant’ increase in average earnings over the second half of the year. It also believes that the depreciation of the currency will lead to a much-improved trade balance, and that this will serve to offset any diminution in consumer spending. It has to be said that the markets were less than impressed with the Bank’s logic, and immediately sold the pound on the back of it as well as seeing a small fall in medium term rates.
The UK market is in for a busy time this week with the release of a range of economic data. First up, tomorrow, will be the latest inflation and consumer price figures. The CPI measure is expected to have experienced a major increase, rising from 2.3% to 2.8%. Core inflation is expected to have shown a similar increase. Some of the items causing this major increase are down to the timing of Easter. However, these had the effect of holding the March figures down rather than pushing April’s up. This is likely to have the effect of forecasters pushing up their peak rate for this year to around 3.3%. There will not be much relief coming from the producer price data either. Input prices are still running in excess of 17% annually, although output pricing is likely to show some moderating of pressure.
Wednesday sees the release of the latest labour market statistics. The unemployment rate is expected to be unchanged at 4.7%. However, this is calculated after new jobs increased by about 45,000 during the last three months despite the poor economic growth figures. Meanwhile, average earnings are expected to have increased by 2.4%, a slight bonus-influenced improvement on the previous month’s figures.
Thursday sees the release of the latest retail sales figures. They have been under considerable pressure over the last few months with the figures for March showing a 1.6% monthly fall. Something of a rebound is expected from April’s figures, with the median forecast noting a rise of 1%, although there are a number of economists who are projecting a much better result. In any event, last month’s annual figure, which had come all the way down to 1.7%, should prove to be the nadir and these figures should now start to move back onto an upward trend.
Away from the UK, the ECB meets for its monthly meeting on Thursday and the markets will be looking for any signs that it may soon start to move away from its ultra-loose monetary policy when it meets next month.
All views expressed here are the author’s own and are based on information and data available at the time of writing.
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