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If Andy Haldane, the Bank of England Chief Economist, is feeling rather sheepish this morning, it would come as no surprise. Haldane, it will be remembered, was the architect behind the MPC’s package of an interest cut, another large chunk of QE, the purchase of a small amount of corporate bonds and the revival of direct, low-cost lending to the banks as long as it is passed on to borrowers. The rationale for this bazooka was clearly predicated on the Markit/CIPS surveys that had been released in July and was considerably more comprehensive than expected.
These have been, without exception, truly dreadful but not altogether surprising given that the survey was undertaken only a month after the Brexit vote. This morning came the news that the Markit/CIPS survey for the services sector in August had come out at 52.9, up from 47.4 in July. The median expectation had been for a recovery to 50.0 as, unlike manufacturing, the service sector is not a large beneficiary from a low exchange rate. However, a 52.9 reading would have been regarded as perfectly respectable even in pre-Brexit days.
The problem for the Bank of England is that the CIPS survey of the service sector just continues trends shown in all the other CIPS surveys. On Thursday last week, the Markit/CIPS survey for the manufacturing industry showed a rise in August to 53.3 from July’s 48.3 (its highest level since June 2014) and on the following day the Markit/CIPS survey covering the construction industry also showed a notable rebound from July’s 45.9 to 49.2 in August.
Had the Bank of England known in advance that the survey evidence that they wholly relied on when they eased monetary policy last month would be completely reversed, they would have held off taking any action until a greater degree of knowledge had been gained on the economic consequences of Brexit. This bulletin pointed out a couple of weeks ago the great divergence between survey evidence and actual figures compiled by the Office for National Statistics. However, the Bank of England would have been very brave to take no action. Many economists were baying for blood after the MPC did just that in July, and to have held off the following month would have been taking an enormous risk considering almost every economist was calling for action.
Theoretically, having taken immediate action on the back of the CIPS surveys last month, they should do so again this month and reverse last month’s easing measures. They won’t of course, but one would hope for a bit of contrition after their meeting on 15 September. One area where a much more erudite and logical explanation is due, was the inclusion of a large amount of QE. It will be remembered that three of the MPC members actually voted against this part of the package, and it is difficult to see why a measure to further reduce medium- and longer-term rates was justified. It would seem that much of the evidence of its impact is entirely counter-productive.
The impact on the deficits of pension schemes is not a subject that you will find economists talking much about, and the Bank of England is totally silent. PwC has recently produced some research that estimates the deficit outstanding at £600bn, and this was before the latest downward lurch in longer-term rates which is estimated to have added another £100bn. The result is that the trustees of these pension funds have little alternative other than to siphon off largish proportions of their profitability to offset the projected additional deficit that reductions in medium- and longer-term interest rate levels cause. This in turn, is increasingly causing companies to reduce or stop paying dividends and, more importantly, diverting funds away from investment. A notable example is BT, which is currently being castigated for not spending sufficiently on internet-related infrastructure, while at the same time having to subsidise the very large deficit on its pension scheme. To date, the Bank of England’s money-printing machine has generated £375bn of QE. It is estimated that of that amount only £50bn has found its way into the real economy. The rest has been exchanged for safe income-producing assets like commercial property or has leaked overseas. In a recent interview in the Sunday Times, Andy Haldane noted that he had much more faith in investing in property than in contributing to a pension. Hardly a surprise! However, much more pressure should be put on the MPC, or at least those who voted for this latest money-printing binge, to explain how it produces greater value to the UK economy than what it destroys.
One disappointing economic statistic to emerge last week was the latest US non-farm payroll figures. These came out at a rather meagre 151,000, which falls to 126,000 excluding civil servants. This was considerably less than the median forecast, and probably removes the hopes of those predicting a September rate hike. However, there were still some clinging on to this prospect, citing that taken on a three month average, the jobs figures were still very strong and that traditionally August job figures are always averaged upwards. Interestingly, US rates moved very little on the announcement, but we suspect that a no-change result after the Fed’s meeting on 21 September is already priced into the market.
After the result of the Markit/CIPS survey on the service sector, most of the other economic data being announced this week looks pretty dull. The latest industrial and manufacturing production figures are released on Wednesday and are expected to show a small deficit. Thursday sees the release of the latest trade figures, which are expected to show a slight exchange rate-driven improvement, but we finish the week with what are likely to be some pretty dire construction numbers reflecting the slowdown in the house-building market.
All views expressed in this bulletin are the author’s own and are based on information available at the time of writing
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