The Bank of England faces an awkward meeting today and tomorrow. What to do now?

Today opened with the news that a staple of UK conversation is being blamed for a period of weakness in the UK economy. Yes the rain which is yet again falling as I type this has taken the rap for a slowdown in UK retail sales according to the British Retail Consortium. Apparently this  rain is rather special as it can reduce retail sales but has no affect on a drought even if it falls at record levels. You know the sort of thing, wrong type of rain,wrong time of year etc.

The Weather takes the blame quite a lot these days

One may forget that overall the UK climate is rather mild compared to many as we review the supposed impact on its economy. First we had the cold snap and snow of two winters ago which got the blame for the 0.5% fall in Gross Domestic Product of the fourth quater of 2010. When we had warmer and more temperate weather in the last quarter of 2011 but also had economic shrinkage (GDP -0.2%) we blamed the warmer weather!

Manufacturing contributed the most to the decline, followed by electricity, gas, steam and air conditioning supply

Yes electricity and gas output fell because it was not so cold meaning the weather may well be becoming a fan of the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
Damned if I don’t

The British Retail Consortium Report

Care is needed with these numbers as the headline figure of a 3.3% year on year fall on a like for like basis is not what it may seem. After all wouldn’t you expect a new shop to take some business and on the other side of the ledger shops which close automatically fall out of the numbers? Accordingly we see that there was a lower fall of 1% when all the numbers are compared. So weaker but not calamitous as March did show some growth.

It is also true that retail sales numbers are erratic so we will need much more than one months data to establish a trend. However I have noticed that in my area of South-West London I have noticed quite a few shops closing down recently and wondered if readers elsewhere have seen evidence of the same thing. Added to this theme is the failure of Clinton Cards this morning which has suspended its shares on its way into liquidation.

Of course if the rain dampens retail sales then surely the drought which preceded it must have boosted them!? Er apparently not as we see this reported.

the health of the retail sector continues on a downward trajectory

What about employment?

Here we saw some better news this morning as the KPMG jobs report told us this. 

Permanent staff placements increased in April, continuing the trend seen since the start of 2012. That said, the rate of growth was modest and the slowest since January.

So reassuring for now although the slowing of the employment growth is a worry if hardly a surprise with current circumstances. Although somewhat confusing the picture for temporary staff is weaker. 

Agencies’ billings from the employment of temporary/contract staff fell again in April.

It is confusing to see permanent work growing with temporary work weak at such a time. But the report does point out that legislation has affected temporary work which if it has at such a time deserves the hash-tag omnishambles for our government.

One ray of sunlight if I may continue the weather related theme is engineering and construction in the Midlands where employment has grown for six months. Let us hope that continues as we need growth in engineering, and it would be nice to confound the doom-sayers who claim we do not manufacture anything these days.

The Housing Market

The figures for April give us a hint of what may happen to the UK house market as we move forwards after the period where first-time buyers paid lower rates of stamp duty on purchases. From the Royal Institute of Chartered Surveyors.

the (seasonally adjusted) headline price net balance in April slipped from -11 to -19

Turning to activity, newly agreed sales weakened with the net balance turning negative once again (from +10 to -6).

So we see that both prices and volumes fell which sends a clear message which the RICS report attempts to spin by using words such as “broadly”. And if we look through the upwards-bias to future expectations we see signs of further price falls to come.

the three month price outlook (seasonally adjusted) declined in April, reflecting the still fragile level of confidence in the market. Indeed, the net balance dropped from -3 to -17.

If we recall that standard variable mortgage rates have begun to rise and that there are further rises to in the pipeline this outlook is hardly a surprise.

UK Output

If we look at our most recent purchasing mangers reports-which are the most timely signals we get- we see this.

Manufacturing 50.5; Construction 55.8 and Services 53.3

So whilst we are seeing a slowdown in growth we do according to these reports still have some which compares very favourably with places like Spain and Italy who have slammed into reverse.

The problems of the Euro will not help

As we see more and more countries get dragged into the morass of the Euro zone crisis we face the grim realisation that many of these are our trading partners and friends. There will be two effects of this. Firstly it will be harder to export to weaker economies and indirectly the pound is likely to be stronger against the Euro. Perhaps much of the latter effect has already happened as we have pushed above 1.24 Euros and no doubt short-term traders are looking for a retracement.

Record Lows for UK government bond yields

I am slightly exaggerating here as our ten-year yield has fallen to 1.923% this morning which does not quite equal the 1.917% of the 20th of January (thanks Ian) but I think you get the idea. I tweeted last night that the UK Debt Management Office should be issuing as much stock as it can at such levels and I hope it gets the message. This would be an excellent deal for the UK taxpayer in my view although it begs the question of who is buying!? But of course we recall that there is so much official interference in markets these days that prices and yields are not the guide they once were. Frankly we should be grateful for that as otherwise our bond yields imply a definite recession and probable depression.


Regular readers will be aware that I feel that Spain is in a severe downturn and is in danger of an economic depression. So her bond yield is lower than ours right? Er no as her ten-year bond yield has gone over 6% this morning. If you really look like you are moving into a depression investors stop chasing yields lower as they mull solvency or rather potential insolvency.

There are ever more rumours of further bank bailouts in Spain causing this with the latest one being that an extra 20-40 billion Euros will be required. I wouldn’t be worrying about the lower end of that range if history is any guide.


So we see that the UK economy seems to have some weak growth which we should be grateful for in these times. However the combination of troubles in Europe,rises in mortgage rates combined with an already weak housing market and a strengthening currency poses problems ahead. Against that finally the oil price has weakened as Brent crude has dipped below US $112 today so some relief may be gained there.

So the Bank of England will be considering more Quantitative Easing tomorrow and the vote could easily be tight. Ironically the main advocate Adam Posen shot himself in the foot when he declared this recently in the London Evening Standard.

the first thing rate-setter Adam Posen wants us to know is that he’s far happier about life than he was six months ago.

This economic reference  may put him  in a “class of one” as Brian Clough once so memorably put it although at the other end of the ability spectrum from Mr.Clough. Still never mind its all okay as he is.

 the man who has largely called the economy right over the last couple of years

Not going to be quite so easy to call for more QE at tomorrow’s meeting is it? Well not without yet another u-turn for both him and his interviewer. Largely called the economy right? Another entry for my new financial lexicon..




This entry was posted in Euro zone Crisis, General Economics, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
Subscribe Find an Adviser
  • Anonymous

    Hi Shaun
    The BoE should also look at the poor productivity statistics. Output per hour worked has been broadly flat for the whole economy for nearly four years. It is said by commentators that we are producing 4% below our capacity. I see often the term ‘zombie’ banks being used. I wonder if zombies can be found further afield in all advanced economies.

  • JW

    Hi Shaun
    Is the UK ‘bumping along the bottom’, or ‘hanging onto the cliff-edge by its teeth’? I think we can rule out, ‘slowly climbing the foothills’.
    If you take into account ;growth on population, creation of money, and actual inflation ( not CPI); the expediture measure of economic activity GDP is pretty appalling. The real state of affairs is better reflected in your oft quoted real wages growth ( sic), that is the only truely valid measure of the health of an economy. Perhaps the teeth are falling out!
    Interestingly the German government are finally considering raising wage levels, they need to a lot and quickly, ultimately when they run out of all the ‘jargon’, its the only thing that will save the EZ .

  • Anonymous

    Fine article, Shaun. Came across this interview

    Hawkish? Doveish? or merely “Posenish”…. 

  • Pavlo

    Another good article. I am not surprised by the news that Clinton cards is in trouble as supermarkets now supply quite a good selection of cards. What we are seeing on the high st is a stress test of business models and those found wanting are failing. Looking back on the likes of Woolworths you have to ask yourself what it was they were doing? Nothing very well and only their pick and mix sweets appeared to be a bit different. The advent of (very competitively priced) online retailing, supermarket category expansion etc is sounding the death-knell of many ‘traditional’  high st businesses. If I were Jessops I would be worried about what the future holds. If you can’t clearly state why customers should come to you or what it is you offer that is unique or what it is you do better than others then you’re in trouble. Nothing new in that but hard times expose weaknesses.

  • Ian_jones

    You do wonder when people will realise QE is simply redistributing wealth, it isnt a fix in itself. The gilts you suggest should be sold by the Govt would be bought by banks and pension funds. The banks will hit a crisis when rates rise and pensions will be insufficient to meet outgoings. Its nothing more than bringing forward consumption and pushing out the cost in the hope growth will replace the missing money. Shame its not going to since the cause of the crash is the rise of china.

  • Spacemanc

    Clinton Cards deserves to die with the terrible business model which they’ve clung to. I’m sure they’ve lost sales to the internet and supermarkets, but in my town at least, it seems to be ‘The Card Factory’  which is really taking their business – it’s constantly packed due to their cards costing a small fraction of what Clinton’s tries to charge.
    Surely there must be a slight upside to all these High Street companies going under? They’re being undercut by cheaper rivals and the internet, which must in some way be making the economy more efficient and saving people money?

  • Spacemanc

    Considering the government cuts are now in full swing and our biggest markets in Europe are in a worsening mess, the fact that there is still growth in our output and falling unemployment is pretty impressive.

  • Rob

    Hi JW

    If Germany do raise wage levels do you think demand will increase imports from her major European trading partners, France, Netherlands, UK and Italy or could this lead to protectionism?

    I see CMD is calling for a ‘buy British’. 
    Barry O in the past 18 months has tried to stimulate his economy  by cancelling sub contracts in the Far East and Asia bringing the work back to the US to create extra employment… other conspiracy theories regarding the auto industry.

    “If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.”George Bernard Shaw.

    I always enjoy reading your comments.

  • Spacemanc

    “The real state of affairs is better reflected in your oft quoted real wages growth ( sic), that is the only truely valid measure of the health of an economy. ”
    We’re very nearly the most highly paid workers on this planet.

    Considering the state of our economy and the need to increase our exports and competitiveness, our high wages are probably a sign of an unhealthy economy right now, so wage growth is probably a bit too much to expect.

  • Anonymous

    I agree with you. Yesterday, Grant Thornton issued their business sentiment analysis for Q2 – it is surprisingly upbeat!

  • Anonymous

    Hi Shire

    Do you mean perhaps zombie minds? Such zombie minds miss inflation and low productivity growth but can see rebalancing of the economy everywhere when in fact it is thin on the ground…

    They are unlikely to be worried much by weak bank lending to SMEs either.

  • Anonymous

    Hi JW

    Yes the debate in Germany has moved onto inflation and wage growth.Not exactly what you would expect in a slump but then (so far) they do not have one! I can see the Bundesbank and the ECB clashing here…

  • Anonymous

    Hi Ray
    Thanks for the link. I was just reading it and thinking that the author has a weak grasp of monetary economics when I read the bits which Adam Posen had joined in on.
    “but the worst is probably over for now in the rest of Europe” “but the worst is probably over for now in the rest of Europe” .”After years of dilly-dallying, policymakers have successfully contained the Greek problem” Typical Posen and completely wrong as we stand tonight.Even better the interviewer sadly lacks the nous to enquire as to why Posen’s mum is upset because her government bonds have surged in price…. An odd complaint!
    “After years of dilly-dallying, policymakers have successfully contained the Greek problem”
    Typical Posen and completely wrong as we stand tonight.

    Even better the interviewer sadly lacks the nous to enquire as to why Posen’s mum is upset because her government bonds have surged in price…. An odd complaint!

  • Anonymous

    Hi Spacemanc

    I agree that the other side of the ledger is usually ignored. Someone must have the business unless card buying has dropped.

    And if people wish to send cards online or via text why shouldnt they?

  • Anonymous

    Hi Ian

    We do sell some gilts abroad and if the Debt Management Office’s numbers are accurate we sold some £79.5 billion to overseas holders last year. We could do with selling some more to them…At the moment with rising gilt prices and just if not more importantly to them rising £ it is worth a go.

  • JW

     Spacemanc ( is that somewhere in Manchester?)
    I wasn’t implying we had a healthy economy. However to have one you need real wage growth so people can buy and save. The problem for western economies is since the 80s real wage growth hasn’t happened. Wages have taken a declining share of wealth in real terms. Its been replaced by growth in debt.

  • JW

     Thanks Rob. It appears that about 3/4 of the last quarter’s growth in the US came via zero interest loans for new cars. Not a lasting stimulus I fear.
    The only real hope for EZ equilibrium is for the German people to buy more ‘stuff’ from the south. And start buying all those empty cheap houses on the Costas. No, I doubt it will happen either.

  • Anonymous

     Quite right to point to inflation as the zombie’s friend. Zombieism ( lexicon addition) leads to : earnings retained for working capital, not investment ; credit provision to non-risk activity and export of capital or public debt support ; high rates of interest for risk investment and disincentives ; anti-competitive structures…..zombeism