Economic growth (GDP)


Powered by article titled “Bank of England cuts growth forecasts and leaves rates on hold – as it happened” was written by Graeme Wearden, for on Thursday 4th February 2016 18.51 UTC

One last thing…The London stock market outperformed its French and German rivals today, to finish 61 points higher, or 1%, at 5898.

Mining shares led the way, with Anglo American surging by 19%, Glencore gaining 15% and Antofagasta jumping by 14%.

That followed the sudden weakening in the US dollar, as Wall Street and the City anticipated that US interest rates would not rise much this year, given recent weak data.

A cheaper dollar pushes up commodity prices, while looser monetary policy should be good for growth. Welcome news for miners, who had a torrid 2015.

Mining stocks have also been heavily shorted by hedge funds, so those bears will have been squeezed by the rising share prices.

Good night. GW


A late PS…

Larry Elliott, our economics editor, has summed up the message from the Bank of England today. Here’s his conclusion:

There are three conclusions to be drawn from the inflation report, the minutes and the governor’s letter.

The first is that it would now be a major surprise if interest rates rose this year.

The second is that the Bank’s credibility has been dented by its failure to call the economy right and the confused messages it has been sending out to the public.

Finally, the prospect of 0.5% interest rates extending into an eighth and perhaps a ninth year risks stoking up a housing boom. The Bank has so-called macroprudential tools that can be deployed to cool down the property market without damaging the rest of the economy. It is going to need them.

And finally, a couple of photos from today’s press conference just landed:

Mark Carney, the Governor of the Bank of England, speaks during the quarterly Inflation Report press conference, in London, Thursday, Feb. 4, 2016. The Bank of England policymakers have voted to keep interest rates at their record low of 0.5 percent as Governor Mark Carney unveils economic forecasts for Britain. (Niklas Halle’n, Pool Photo via AP)
Bank of England Inflation Report Press Conferenceepa05142914 Bank of England Governor Mark Carney speaks during a press conference at the Bank of England in London, Britain, 04 February 2016. The Bank of England has cut its prediction for growth for 2016 from 2.5 per cent to 2.2 per cent and has decided to keep interest rates at 0.5 per cent. EPA/WILL OLIVER

Ouch. The latest economic data from America is a reminder of why the Bank of England is worried about the global economy.

US factory orders shrank by 2.9% in December, according to new data – the biggest drop since the end of 2014.

Being criticised by journalists is an occupational hazard in central banking, but Mark Carney doesn’t appear to enjoy it.

So he may not particularly like this analysis of today’s inflation report, from Sky News’s Ed Conway.

Mr Carney’s problem is that every time he makes a big forecast he seems to get it wrong.

When he came into office, the Governor brought with him a whizzy new framework for setting UK interest rates. Under “forward guidance”, he would provide clarity about borrowing costs.

He promised, based on the Bank’s forecasts, that he and the Monetary Policy Committee would start to consider lifting them only when unemployment dropped beneath 7%.

Suddenly, within a few months, the jobless rate, hitherto stuck stubbornly above that level, started to come down. Within a year, forward guidance had to be dropped, replaced with a far more vague set of promises some nicknamed “fuzzy guidance”.

Not to be deterred, Mr Carney started to drop hints about when the first rise in rates would come. In a speech at the Mansion House in 2014 he signalled that rates would go up sooner than markets expected (which meant within a year). That was wrong.

Last summer he predicted the decision to raise rates would come into sharper relief “at the turn of the year”. That was wrong. Well, unless you’re being very literal indeed and think it could also entail not raising rates.

The one prediction he has stuck to that had, up until now, looked pretty uncontroversial was that the next move in rates would be up rather than down. But, in the past few weeks even that has now come into question….

More here:

The Independent’s Ben Chu flags up one curious moment in today’s press conference:

That’s a bit odd, as you might expect inflation to take off sharpish once spare capacity in the labour market has been sucked up.

As, indeed, a former Bank deputy governor pointed out:


Today was dubbed “Super Thursday”, but it was more like “Party pooper Thursday” as the Bank of England cut its growth forecasts.

Savers, who might wonder when they might get a higher interest rate, won’t be feeling particularly super, either.

Rohan Sivajoti, advisory services director at financial advisor eVestor, says:

“With a unanimous vote to keep interest rates unchanged, a mediocre global economic outlook and growing deflation fears, ‘Super Thursday’ has proved to be anything but.

“Beleaguered savers, who yet again will be inwardly groaning at the news, may also be resigned to the fact that they have limited options at present. However, now more than ever, savers need to make their investments work harder for them. Those looking to secure their financial future, should review deposits and options for investments and look at reducing debt while it is still relatively cheap to do so.”

There was quite a contrast between Mark Carney’s performance at the press conference, and the minutes of this week’s Monetary Policy Committee meeting released at noon.

Kallum Pickering, senior UK economist at Berenberg Bank, says the MPC are clearly worried.

The MPC cautioned on risk from financial market volatility, slowing global growth and now the EU referendum.

The committee noted that since the previous report other central banks including the European Central Bank had eased further, oil prices had fallen and financial market volatility had risen. This was linked to developments in China and other emerging markets and had ‘coloured’ the outlook for the global economy

Stephanie Flanders, JP Morgan’s chief market strategist for Europe (and former BBC economics editor), says weak wage growth could scupper a rate hike this year.

She writes:

The bottom line of today’s report is that the UK cannot ignore the weakening of global growth prospects – particularly the weakness of global trade – and neither can the Bank of England. But domestic consumption is driving the recovery in the UK and the US and the Bank of England can see little reason to expect domestic consumption to grind to a halt.

On balance, we still expect the US Federal Reserve to raise rates again over the course of 2016 as recession worries recede and sentiment in emerging market economics starts to stabilise. In that environment, we would expect the Bank of England also to raise rates by the end of 2016. However, much will depend on domestic wage pressures, which look somewhat weaker now than they did 6 months ago.

Whatever happens, the high level of UK household debt – much of it borrowed on adjustable or semi-adjustable mortgages – underscores that the rate increases that do happen will be gradual and modest relative to past cycles.“

Snap summary: Carney rails against the doubters

Back in 2014, Mark Carney was labelled the “unreliable boyfriend” for giving mixed messages about possible rate rise timings.

Today, it felt like the governor was playing a defensive husband, denying that he ever misled the public while insisting that he’ll still raise rates at the right time.

Anyway, a quick recap:

The prospects of an early UK interest rate rise have receded, after the Bank of England left borrowing costs at a record low of just 0.5%. The Monetary Policy Committee voted 9-0 to leave rates at 0.5%, with noted hawk Ian McCafferty abandoning his calls for a rise.

The BoE has slashed its growth forecasts. It now expects GDP to rise by just 2.2% this year, not 2.5%, as Britain is hit by the weakening global economy.

Mark Carney has insisted that interest rates are still more likely to rise, than fall. The governor faced down a sceptical press pack in London, who reminded the governor that his previous forward guidance on the path of interest rises has proved somewhat unreliable.

Asked if he sticks to his previous prediction that the next move will be upwards, he declared

“Absolutely. The whole MPC stands by that.”

Carney also rejected criticism for telling households recently that interest rates were “more likely than not” to rise in 2016. He said his original forward guidance, that rates would stay on hold until the economy improved, had given businesses and households confidence.

We are not going to tie our hands ever to raise interest rates or adjust policy in any way, shape or form to a certain date.”

Governor Carney warned that problems in the global economy could hurt Britain, saying:

The outlook for trade is particularly challenging, with net exports expected to drag on UK growth over the forecast period.

But he tried to play down the idea that Britain could follow Japan and the Eurozone into imposing negative interest rates.

Carney said a rate cut hasn’t even been discussed at this week’s MPC meeting, but the committee does keep its tools under review.

And asked about the EU referendum, Carney said the Brexit risk has had some impact on the pound.

“There is not yet a big risk premium built into business and household confidence around the referendum. We do see in th eexchange rate market, and it’s observed in the report, that there has been some buying of protection if you will, around the referendum.”

That’s the end of the press conference. The press pack are scrambling back to their newsrooms, and Mark Carney has headed back to his office to keep the monetary wheels in motion.

I’ll pull together a summary shortly.

Carney: We haven’t discussed negative rates

Q: Negative interest rates are now in place in Japan, the eurozone, and Switzerland, so are they within the Bank’s toolkit?

Carney replies that the bank thinks interest rates are “not at the lower bound” – in other words, they could be cut further.

We will review our toolkit, he continues. But we have not discussed negative rates, as monetary policy is pointing in a different direction.

He reminds the reporters that they saw the minutes of this month’s MPC meeting, while they were locked in a room “being treated pretty badly and forced to read a bunch of documents”*.

Those minutes show that negative interest rates weren’t discussed. You’ll know when they are…

[* - don’t worry, they probably get drinks and biscuits too]

Another questions about Brexit — what contingency plans have the BoE taken?

Carney declines to reveal any details, but suggests that – like with the 2014 Scottish referendum – the Bank will reveal its homework after the event.

Q: Are you worried, governor, that you might go through your entire tenure at the Bank without raising interest rates?

Carney insist he’s relaxed about this prospect.

He points out that former policymaker David Miles did two terms without raising interest rates, but did plenty of other things such as quantitative easing.

The important thing is that we set policy to maximise the changes that we meet our objectives. That’s how we’re going to be judged.

Carney sees downside risks from global economy

Q: How worried is the Bank of England about the global economy?

We do see some downside risks, Carney replies. Britain is a particularly open economy, so it’s very vulnerable to global problems.

That’s why the Bank of England usually has lower growth forecast than other bodies, such as the IMF.

He cites market fears over China, and its knock-on impact on other emerging markets.

And monetary policy could tighten more quickly, if those upside risks develop.


Q: When does low inflation start to become a worry for the Bank?

Carney bats this question over to Ben Broadbent.

Broadbent says there’s “no simple level when it becomes an over-riding concern”, but the bank is watching wages closely for signs that inflation is weakening.

Now deputy governor Ben Broadbent takes the microphone, insisting that there’s no ‘mechanical link’ between the UK output gap and any interest rate move.

You might remember that the output gap was one measure cited by Mark Carney in 2014, when he took his second stab at setting forward guidance on interest rates.

So, it’s still a factor, but don’t expect it to trigger an interest rate hike.

We won’t be “bound by past comments” when we decide it’s time to raise interest rates, says Carney.

He also denies that his forward guidance, various speeches, and wotnot have caused volatility. Short-term UK interest rates are half as volatile as before he was parachuted into the BoE

City experts aren’t very impressed with Mark Carney’s performance, as he tries to talk down the Brexit risk and talk up the chances of an interest rate hike:

Our economics editor Larry Elliott asks Carney when the decision about rate rises will come into “sharper focus” again.

Carney denies that the MPC are looking at monetary policy through bleary eyes. We take a decision at every meeting. This week’s decision was “easy”, though.

Carney gets a question about the European Union referendum.

He says the Bank of England isn’t modelling for ‘parallel universes”, so today’s report doesn’t estimate the impact of Brexit.

He argues that there isn’t yet a “big risk premium” due to the possibility of Britain leaving the EU.

However, there has been some impact on the pound as investors seek protection ahead of the referendum.

Mark Carney is trying to argue that the financial markets are underpricing the chances of a UK interest rate rise.

Paul Diggle, economist at Aberdeen Asset Management, isn’t sure Carney’s message will get through:

The Bank did send a signal that they think the market is wrong about when it thinks rates will rise. Investors think the first rate rise won’t come until February 2018 and the Bank has tried to say they should bet on it coming sooner.

But the way they send this signal is so opaque – a couple of graphs buried in chapter 5 of the Inflation Report – it’s not really clear whether anyone will pay attention. Carney’s forward guidance certainly hasn’t paid dividends for investors up until now.”

Carney is now warning that there could be more slack in the labour market than first thought.

That would mean wage growth might be disappointing (as firms wouldn’t have to fight for workers as much), meaning inflation remains weak.

But he also points to the introduction of the national living wage, which should raise inflation a bit.

(from April, workers in the UK aged over 25 earning the minimum rate of £6.70 per hour will get a 50p per hour increase).


Q: Do you think the public gives your advice as much credibility as it used to, given previous guidance on rates?

Carney gives a long answer, defending his original forward guidance (he originally set a 7% jobless rate as a key target before considering a rate rise, only to backtrack when it was achieved sooner than planned).

The worst thing we can say about that guidance is that more people went to work earlier – and we’re not going to apologise for that, Carney smiles.

And he’s also happy that UK households believe rates may rise this year, as it means they are less likely to risk a credit splurge. Although households have made “great progress”, they are still pretty indebted.

Carney insists, though, that the MPC will never “tie its hands” to changing monetary policy at a certain time, or at certain events.

And in short, we have nothing to explain, he concludes — a classic central banker’s answer to criticism.

Carney insists rates more likely to rise than fall

Onto questions:

Q: Does Mark Carney still believe interest rate are more likely to rise, rather than fall?

Absolutely, the governor replies, and so does the monetary policy committee.

He reiterates that the market path of rates implies that inflation will overshoot the 2% target in the medium term unless borrowing costs are hiked.


Interest rates are more likely than not to rise during the forecast horizon, says Carney.

He points to the current “market path” for interest rates (where investors expect borrowing costs to be). On that path, inflation will hit its 2% target in the medium term, and then rise higher, meaning higher borrowing costs will be needed.

And Carney insists:

We’ll do the right thing at the right time, on rates.

Katie is tweeting the key points from Carney’s press conference:

Carney says the Bank of England expects real incomes in the UK to grow solidly this year, after several lean years.

And business investment should also continue to grow strongly.

Carney then warns that global financial conditions have deteriorated notably recently, with a “particularly challenging” outlook for trade.

That means Britain’s net exports will continue to drag on growth (ie, we’ll import more than we sell to the rest of the world)

Mark Carney’s press conference begins

The governor of the Bank of England is giving a press conference now, to discuss the quarterly inflation report.

Mark Carney begins by saying that the UK economy is in much better shape than in March 2009 when rates were first cut to 0.5%.

Seven years ago, the economy was in serious trouble at the height of the financial crisis, and heading into recession.

Today, we have sluggish global growth, turbulent financial markets, and a resilient UK economy.

And that’s why the Bank still expects the UK economy to keep growing.

The prospect of UK interest rates being cut to a new record low is looming over the City:

It’s staggering to think that UK interest rates have now been pegged at 0.5% for almost seven years (it started in the dark days of March 2009)

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, says we could see a decade of ultra-low rates:

‘An interest rate rise is like the pot of gold at the end of the rainbow, the nearer you get to it, the further away it moves. A rise in rates now looks firmly in the long grass, with growth forecasts cut and cheaper oil putting downward pressure on inflation, which is already way below the Bank of England’s target.

Markets are currently pricing in a rate rise in the middle of 2017, though they have been consistently premature in their forecasts, and reaching the dubious milestone of a decade of ultra-low interest rates is now a distinct possibility.

The prospect of an early UK interest rate rise has receded into the distance, writes Katie Allen from the Bank of England.

She reports:

The Bank flagged the recent sharp sell-off in global stock markets and investors’ jitters about a slowdown in China as it revealed that policymaker Ian McCafferty dropped his recent call for a rate rise.

He had voted against the eight other members of the Monetary Policy Committee (MPC) since last August but this month agreed with his colleagues that it was too soon to raise interest rates from 0.5%, where they have been for almost seven years.

Wage growth has been weaker than the MPC had been expecting and minutes to its latest policy meeting suggested it was cautious about predicting any significant pick-up in pay over coming months.

“Against that backdrop, all members of the committee thought that maintaining the current stance of policy was appropriate at this meeting,” the minutes said.

Here’s Katie’s full story:

The pound has fallen almost half a cent against the US dollar, to $1.456.

Markets are concluding that interest rates won’t move for some time, given today’s gloomy inflation report and the news that Ian McCafferty has given up calling for a rate hike.

The Inflation report is online here, and full of interesting charts if you like that kind of thing.

This one shows how the oil price has fallen much further than the Bank expected:


And this shows how the markets are already expecting interest rates to stay lower, for longer.


This chart shows how the Bank of England has cut its growth forecasts for the next three years (the old forecasts are in brackets after the new ones)

BoE grwoth o

And the message from the BoE is that economic conditions have deteriorated over the last quarter:

Since the November Report, global output and trade growth have slowed further and the latest data suggest a softer picture for UK activity in 2015 than previously assumed, with four-quarter growth slowing to 2¼% by Q4 on the MPC’s backcast.


The Bank of England also points to the turmoil in the financial markets:

Developments in financial markets seem in part to reflect greater weight being placed on the risks to the global outlook stemming from China and other emerging economies.

BoE cuts growth forecasts

The Bank of England has also taken a knife to its growth forecasts, admitting that the UK economy is not expanding as fast as expected.

It now expects GDP to rise by just 2.2% this year, down from 2.5% three months ago.

And for 2017, it has cut its growth forecast to 2.3%, down from 2.6%.

The Bank of England says that economic conditions have deteriorated in the last three since its November quarterly inflation report:

Global growth has fallen back further over the past three months, as emerging economies have generally continued to slow and as the US economy has grown by less than expected.

There have also been considerable falls in the prices of risky assets and another significant fall in oil prices.

The 9-0 vote means that Ian McCafferty has abandoned his calls for interest rates to rise.

He had been the lone hawk on the MPC, arguing that borrowing costs should go up now before inflation took hold. But with oil so cheap, and growth weakening around the globe, he’s had a rethink.

Bank of England interest rate decision

Breaking: The Bank of England has voted to leave UK interest rates at their current record low of 0.5%.

And the decision was unanimous, with the Bank’s monetary policy committee voting 9-0 not to alter borrowing costs.


Super Thursday, a preamble

We have less than 30 minutes to go until Bank of England announces its interest rate decision, at noon in London.

It will also release its latest quarterly inflation report, with new forecasts for growth and inflation.

And half an hour after that, Mark Carney will hold a press conference to discuss the report.

This is the third “Super Thursday” — but frankly, the first two haven’t lived up to this billing, thanks to the lack of pressure to raise interest rates and the mediocre global economic outlook.

Alastair McCaig of IG reckons it needs rebanding:

How the department overseeing the trade descriptions act have not intervened in the use of the term ‘Super Thursday’ when the Bank of England posts its inflation report and interest rate decision, is somewhat baffling.

Anyway, the smart money is on another ‘no change’ in interest rates, followed by plenty of questions about the darkening global outlook, deflation fears, and whether Britain could follow Japan and the eurozone into imposing negative interest rates.

Ed Conway, writing for Sky News today, points out that borrowing costs could be cut this year.

Households should prepare themselves for a possible UK interest rate cut this year, with investors betting that there is now a greater chance that the next move in borrowing costs is down not up.

Money markets are now putting a one-in-four probability on the Bank of England reducing its official rates below the 0.5% level they have been sitting at since 2009.

It follows a dramatic shift in their expectations for interest rates.

For the majority of the post-crisis recovery, markets were betting that 0.5% would be the floor for borrowing costs, which would rise in the coming years. Now they are not pricing in a full increase in Bank rate until August 2018 – two months after Mark Carney’s five year term as Bank Governor is due to end…

Back in Brussels, Pierre Moscovici has explained that his latest forecasts don’t factor in the prospect of Britain’s leaving the EU.

Why not? Because everyone’s committed to avoiding such an outcome.

Moscovici has also defended the EC’s more rosy forecasts for Greece (well, less gloomy, anyway):

Shares in London have been lurching around like a well-refreshed journalist leaving The Inkwell after last orders (I imagine).

After jumping almost 90 points at the open, the FTSE 100 index slowly subsided until it was only up 20 points, before getting a second wind and romping ahead again.

Mining companies are still leading the way, with Anglo American leaping by 11%, BHP Billiton gaining 8% and Antofagasta up 7.5%.

The FTSE 100 this morning
The FTSE 100 this morning Photograph: Thomson Reuters

It makes for a tricky morning for traders:

So why the wild lurches? Investors are trying to decide how much optimism to take from the rally in the oil price, and the sudden weakness in the US dollar.

This could mean that the turmoil in the commodity market is reaching a bottom, especially if the US Federal Reserve is backing away from raising American interest rates several times this year.

The City is also waiting for the Bank of England to deliver its quarterly inflation report, in an hour’s time.

Ilya Spivak, currency strategist, at DailyFX, says markets expect a “dovish outcome”.

Traders are currently pricing in a 64% chance that rates remain unchanged over the next year, and a 36% probability that rates are cut to 0.25%, he adds.

Commissioner Pierre Moscovici is briefing the media now, about the EC’s new economic forecasts.

My colleague Jennifer Rankin is tweeting the key points:

I can’t believe *anyone* is euphoric, given the last few years. But do carry on, Pierre…

The FT’s Peter Spiegel is also ferreting out some important facts:

Despite those headwinds from China and refugees, the European economy is now entering its fourth year of recovery, says the EC.

Today’s report states:

Growth continues at a moderate rate, driven mainly by consumption. At the same time, much of the world economy is grappling with major challenges and risks to European growth are therefore increasing.

EC forecasts

EC slashes inflation forecast as headwinds grow

A flurry of news is flying our way from Brussels, as the European Commission releases its new economic forecasts.

The headline event is that the EC has slashed its forecast for inflation this year to just 0.5%, from 1% three months ago.

That’s partly because of the oil price, and also because “wage growth remains subdued”.

It has also trimmed its growth forecast for 2016 to 1.7%, down from an earlier forecast of 1.8%.

The EC still expects eurozone GDP to rise by 1.9% in 2017, as the slow recovery picks up pace (a little).

The Commission blames problems in emerging markets, and also points to the refugee crisis.

Commission Vice President Valdis Dombrovskis warns:

Europe’s moderate growth is facing increasing headwinds, from slower growth in emerging markets such as China, to weak global trade and geopolitical tensions in Europe’s neighbourhood.”

The EC has also revised up its Greek forecasts, saying the economy didn’t actually contract in 2015. It also expects a smaller recession this year.


Anti-austerity general strike brings Athens to a standstill

Greece is in the grips of a general strike today as demonstrators renew their protests against the country’s latest bailout deal.

Transport links are shut down, shops are closed, and thousands of people are marching through the Greek capital right now.

Members of the PAME Communist-affiliated shout slogans during a 24-hour nationwide general strike in Athens, Thursday, Feb. 4, 2016. Unions called the strike to protest pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes. (AP Photo/Petros Giannakouris)
Members of the PAME Communist-affiliated shout slogans during a 24-hour nationwide general strike in Athens today. Photograph: Petros Giannakouris/AP

Our Athens correspondent, Helena Smith, reports that the effects are withering.

She writes:

This is the fifth general strike since the leftist Syriza first came to power but none has been so fully endorsed. In a reflection of the growing anger at all embracing tax and pension reforms, the entire country appears to be paralysed by industrial action supported by every walk of life.

In Athens, where almost nothing is open, streets and central boulevards resembled a ghost town this morning with the shutters down on shops, offices and ministerial buildings. Small businesses, which usually turn a blind eye to the pleas of unionists to stay closed, have today heeded their call. “We have no choice,” said Lakis Antonakis who owns the popular Piazza Duomo café opposite the capital’s cathedral.

“If they pass these laws more than 50 percent of our earnings will be taxed and I am one of the lucky ones because I can depend on tourists. Other businesses are really struggling. It’s become unsustainable to keep them open. Everyone is very pessimistic.”

Unionists, who planned mass protest rallies, attributed the high turn out to the determination of Greeks to ram home the message that they will not accept pension and tax reforms as they now stand.

Members of the communist-affiliated PAME union march during a 24-hour general strike against planned pension reforms in Athens, Greece, February 4, 2016. REUTERS/Alkis Konstantinidis
Members of the PAME Communist-affiliated hold a banner reads in Greek ‘’Social Security’’ during a 24-hour nationwide general strike in Athens, Thursday, Feb. 4, 2016. Unions called the strike to protest pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes. (AP Photo/Petros Giannakouris)
Members of the PAME Communist-affiliated hold a banner reading ‘’Social Security’’. Photograph: Petros Giannakouris/AP

International creditors, led by the IMF, are pushing prime minister Alexis Tsipras for further cuts in pensions to make up for a fiscal shortfall of up to €4.5bn over the next three years.

Grigoris Kalomoiris, of the civil servants union, Adedy, said he also thought Greeks had been encouraged by protesting farmers who have set up roadblocks nationwide. “Their action over the past two weeks has had a ripple effect. Everything is close even the state audit office,” he told me.

“Farmers are leading the way. People are very determined to stop this pillaging because pillaging is what it is. Greece and Greeks cannot go on being pushed like this in the name of debt.”

The strike, ironically, has the full support of Syriza – although government officials, who will soon be called to vote on the reforms, are keeping mum.

National wide strike in Athensepa05142365 Women stand in front of a closed suburban station at the Athens Eleftherios Venizelos airport during a 24-hour national strike, in Athens Greece, 04 February 2016. Greece’s largest private and public sector unions GSEE and ADEDY held a strike on 04 February to protest against the government’s planned pension reforms. Public transport was grinding to a halt, while trains were cancelled and ferries stayed put in harbours, also cutting off the Greek islands from the mainland. EPA/YANNIS KOLESIDIS
A closed suburban station at the Athens Eleftherios Venizelos airport. Photograph: Yannis Kolesidis/EPA

Apparently the solution to monetary policy paralysis is taller central bank governors:


You might have expected the euro to fall this morning, after Mario Draghi guilefully declared that central banks shouldn’t stop taking action to fight deflation.

But the single currency didn’t take the hint. Instead, the euro has hit a three-month high against the US dollar, at $1.116.

And that’s starting to weigh on European markets, pushing shares down from their earlier highs….

VW car sales fall 14% in Britain

FILE - In this Feb. 14, 2013, file photo, a Volkswagen logo is seen on the grill of a Volkswagen on display in Pittsburgh. New Mexico is suing Volkswagen and other German automakers over an emissions cheating scandal that involves millions of cars worldwide, the first state to do so but almost certainly not the last. (AP Photo/Gene J. Puskar, File)

Sales of Volkswagen cars slumped by almost 14% in the UK last month, suggesting that the company is still suffering from the emissions scandal.

Just 12,055 VW-branded cars were registered in January, down from 13,993 in January 2015, according to new figures from the Society of Motor Manufacturers and Traders.

That cuts VW’s market share to 7.1%, from 8.5%.

Other Volkswagen brands also had a bad month. Sales of Seat cars slumped by 25%, from 4,137 to 3,119.

This is the fourth month in a row that VW car sales have dropped, following last year’s revelations that it used cheat software to get around emissions tests.

Overall, the UK’s new car market got off to a positive start in January, according to the SMMT.

Registrations rose by 2.9% compared with the same month in 2015 to reach an 11-year high of 169,678 units.

SMMT car sales


Goldman Sachs has weighed into the Brexit debate, predicting that the pound would slump by around 15% if Britain vote to leave the EU.

In a new research note, it argues that investors would be put off from putting capital into the UK if the public reject David Cameron’s new deal.

And if the domestic economy also suffered, sterling would come under sustained pressure – due to the country’s current account deficit.

Goldman predicts:

In our framework, a decline of 2% in domestic demand would still see close to a 15% drop in the British pound to close the current account deficit.

Worth remembering that Goldman isn’t completely impartial in this fight. The Bank has apparently given a six-figure donation to the Britain Stronger in Europe campaign, which is fighting against Brexit.

Mario Draghi: No excuse for inaction

Mario Draghi Presents ECB Report At EU ParliamentSTRASBOURG, FRANCE - FEBRUARY 1: The governor of the European central Bank, or ECB Mario Draghi speaks to the plenary room in the European Parliament ahead of the debate on the ECB report for 2014 on February 1, 2016 in Strasbourg, France. During the last press conference in Frankfurt, Draghi indicated that the bank may review its course of action in March. (Photo by Michele Tantussi/Getty Images)

European Central Bank chief Mario Draghi has dropped a clear hint that the ECB embark on fresh stimulus measures next month.

Speaking in Frankfurt a few minute ago, Draghi insisted that central bankers can’t just stop trying to hit their inflation goals because “global disinflation” is dragging prices down.

He declared:

There are forces in the global economy today that are conspiring to hold inflation down. Those forces might cause inflation to return more slowly to our objective. But there is no reason why they should lead to a permanently lower inflation rate.

What matters is that central banks act within their mandates to fulfill their mandates. In the euro area, that might create different challenges than it does in other jurisdictions. But those challenges can be mitigated. They do not justify inaction.

The speech is online here.

Double ouch:

Ouch. Shares in Credit Suisse have tumbled by around 10% in early trading.

The Swiss bank is missing out on today’s rally, after hitting shareholders with a loss of 5.83 billion Swiss francs ($5.8 billion) in the last quarter. That drove the bank into its first annual loss since 2008.

Credit Suisse took a bigger-than-expected charge to cover restructuring its investment bank,. as new CEO Tidjane Thaim tries to turn the firm around.

Thaim was also quite gloomy about the situation today, warning that:

Market conditions in January 2016 have remained challenging and we expect markets to remain volatile throughout the remainder of the first quarter of 2016 as macroeconomic issues persist .

Oil is continuing to gain ground this morning, adding to last night’s 8% surge.

Brent crude has risen to $35.36, up another 1%.

European stock markets are a sea of green, as traders welcome the higher oil price and the weaker US dollar.

European markets jump in trading

Up we go!

European markets are rallying at the start of trading, breaking three days of declines during this volatile week.

The FTSE 100 index of blue-chip shares opened 80 points higher, at 5917. That’s a gain of 1.2%, clawing back Wednesday’’s losses.

The German, French, Italian and Spanish markets are also up at least 1%.

Mining companies are leading the recovery. The weaker US dollar should spur demand for natural resources, as it will take some pressure off emerging markets.

Top risers on the FTSE 100 today
Top risers on the FTSE 100 today Photograph: Thomson Reuters

And Shell’s shares are rising, despite the company posting an 87% drop in profits this morning. Investors may have feared an even worse performance, given the slump in the oil price.

The key to today’s market moves is that the US dollar took an almighty tumble overnight.

After strengthening for months, the greenback suffered its biggest one-day drop since 2011.

That followed Wednesday’s disappointing US services sector data, which made investors conclude that US interest rates are unlikely to be hiked anytime soon. Perhaps not until 2017?

Mike van Dulken of Accendo Markets says the dollar fell on hopes that the Federal Reserve will “reign in its over-egged hawkishness”.

This delivered a welcome overshadowing of global growth concerns for markets hooked on cheap money.

And this chart puts the dollar’s weakness into some contect:

Asian markets rallied as oil recovers

It’s been another day of wild market action in Asia.

Most stock markets have surged overnight, on relief that the oil price has climbed back to over $35 per barrel.

Australia’s S&P/ASX 200 index led the way, jumping by 2%, with investors hoping that the commodity crunch may be bottoming out.

Only Japan missed out, because the yen gained against the US dollar (bad news for Japanese exporters)

Asian markets today
Asian markets today Photograph: Thomson Reuters

From Melbourne, Chris Weston of IG calls it “an incredible night of moves in markets”. And the trigger was the oil price, which has gained almost 10% since yesterday afternoon.

What we have seen is one of the most amazing one day moves in oil one will ever see, with US and Brent oil rallying 9% and 8% from yesterday’s ASX 200 close.

Oil is benefitting from a weaker dollar, rumours that OPEC might pull an emergency meeting to cut production, and suggestions that the selloff has simply gone too far.


Introduction: Bank of England Super(?) Thursday

Bank of England Governor Mark Carney listens during an inflation report news conference at the Bank of England in London, Britain November 5, 2015. The Bank of England gave no sign that it was in any more of a hurry to raise interest rates on Thursday, predicting near-zero inflation would pick up only slowly even if borrowing costs stay on hold all of next year. REUTERS/Jonathan Brady/pool

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

It’s Bank of England Super Thursday — that time of the quarter when the UK central bank sets interest rates, and also releases its latest inflation report.

“Super” could be pushing it, though. We’re expecting rates to remain unchanged at 0.5% (of course). The BoE will probably also lower its forecasts for growth and inflation, reflecting recent turmoil and rising pessimism about the world economy.

Governor Mark Carney will then face the cream of the economic press pack, who will presumably try to get him to admit that interest rates are highly unlikely to rise this year (despite Carney’s recent pronouncements). Might they even be cut to fresh record lows, governor?…

Also coming up today…

It’s going to be another lively day in the markets. European shares are expected to rally strongly, after three days of falls, and oil is looking perkier too (more on that shortly)

European Central Bank chief Mario Draghi is giving a speech in Frankfurt this morning; could that include fresh hints about ECB stimulus in March?

In the corporate world, we’re getting results from oil group Shell and mobile network operator Vodafone, among others.

We’ll be tracking all the main events through the day…

Updated © Guardian News & Media Limited 2010

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A £500m rise in cars shipped abroad fails to ease prospects of huge UK trade deficit in third quarter fueled by strong pound plus eurozone woes and declining oil industry. The significant improvement seen in Q2 now considered as “only temporary”…


Powered by article titled “Car exports cut monthly UK trade deficit but quarterly gap is growing” was written by Phillip Inman Economics correspondent, for on Friday 9th October 2015 11.47 UTC

A rise in car exports helped improve Britain’s trade deficit in August, according to official figures.

The monthly shortfall in the trade balance for goods narrowed to £3.3bn from £4.4bn in July. However, the UK was still heading for a huge deficit in the third quarter of the year after an upward revision to July’s shortfall.

Paul Hollingsworth, UK economist at Capital Economics, said: “Even if the trade deficit held steady in September, this would still leave the deficit in the third quarter as a whole at around £11bn, far higher than the £3.5bn deficit recorded in the second quarter.”

He said this suggests that net trade is probably making “a significant negative contribution to GDP” at the moment.

Hollingsworth warned that the strong pound and weakness in demand overseas as the US economy stuttered and the eurozone remained in the doldrums meant the government’s hopes of a significant rebalancing towards manufacturing exports would be dashed in the near term.

Alongside the £500m rise in car exports in August, the chemicals industry sent more of its production to the US, the ONS said. Total goods exports increased by 3.5% to £23.6bn in August 2015 from £22.8bn in July 2015.

But this positive news was offset by the continued decline in Britain’s oil industry, which has been a major factor holding back progress this year.

Lower production and the lower oil price have dented exports, and though oil imports are likewise cheaper, they continue to rise in volume.

The mothballing and subsequent closure of the Redcar steel plant could also have had an impact as the export of basic materials dived in August by more than 10%.

The services sector recorded an improvement in its trade balance, but the ONS pointed out that the UK continued to rely heavily on the financial services industry to pay its way in the world.

Figures for the second quarter showed that the surplus on trade in services was £22.8bn, of which almost half – £10.1bn – was contributed by banks, insurers and the fund management industry.

David Kern, chief economist at the British Chambers of Commerce, said the narrowing of the deficit in August was welcome, but taking the July and August figures together pointed towards a deterioration.

“This confirms our earlier assessment that the significant improvement seen in the second quarter was only temporary.

“The large trade deficit remains a major national problem. This is particularly true when we consider that other areas of our current account, notably the income balance, remain statistically insignificant.”

Kern urged the government to adopt measures that will “secure a long-term improvement in our trading position”. © Guardian News & Media Limited 2010

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Financial markets focused on the more downbeat indicators of construction and industrial production that some say might be a sign that the UK economy may be losing steam along with its largest trading partner the eurozone…

– >

Powered by article titled “Official data points to loss of momentum in UK economy” was written by Katie Allen, for The Guardian on Friday 9th January 2015 16.30 UTC

Further evidence of a slowing British economy came on Friday as official figures showed a surprise drop in construction in November and falling industrial output as oil and gas output declined sharply.

But the data showed a bounceback in factory output that buoyed hopes for the manufacturing sector and good news on exports suggested UK companies could weather troubles in their biggest trading partner, the eurozone.

Financial markets focused on the more downbeat indicators, taking them as the latest evidence the economy lost steam in the final months of 2014. The pound lost ground against the dollar as traders bet the Bank of England would be in no hurry to raise interest rates from their record low, given the mixed signals on the economy.

“Disappointing official data are adding to survey evidence which indicate that the rate of UK economic growth slowed towards the end of last year,” said Chris Williamson, chief economist at data analysts Markit.

“Looking at all of the official statistics and survey evidence currently available, the data collectively point to the economy growing 0.5% in the fourth quarter, down from 0.7% in the third quarter,” he added.

While economists said it was too soon to say whether the slowdown at the end of the year continued into 2015, the latest figures will be unwelcome to the Conservatives as they seek to convince voters that the recovery remains on track.

“On balance, there is further evidence that UK growth is slowing as we head towards the general election,” said Simon Wells, chief UK economist at HSBC.

Among the bright spots for the economy in a clutch of reports from the Office for National Statistics was the news that manufacturing output rose by 0.7% in November, reversing October’s fall and beating economists’ expectations for growth of just 0.3%. On the year, output was up 2.7%.

But the wider industrial sector which also includes utilities, mining and oil and gas production, fell 0.1%. That drop was driven largely by a 5.5% fall in oil and gas output. The ONS said the weakness was partly down to maintenance work at two North Sea oil fields.

Respected thinktank the National Institute of Economic and Social Research said following the latest industrial production numbers it estimated growth slowed to 0.6% in the final three months of last year, after 0.7% in the three months to November 2014.

Separate official figures from the construction sector showed output fell by 2.0% on the month in November, defying economists’ forecasts for growth and contrasting with surveys of the sector.

The news on trade was more encouraging, however, as the ONS reported the narrowest trade deficit since June 2013.

The manufacturing sector is still not back to its pre-crisis strength and exports have not grown as fast as the government would have hoped. Progress has been slow in the government’s push to rebalance the economy away from overdependence on domestic demand, but some economists are predicting a strong 2015 for manufacturing.

A drop in oil prices to their lowest level in more than five years has buoyed hopes for the sector. Maeve Johnston at the thinktank Capital Economics cautioned it was far from certain oil prices will remain so low, but the fall should help “reinvigorate the recovery”.

“Indeed, if low oil prices are sustained, it should greatly reduce costs for the manufacturing sector, providing some welcome support over 2015. And sustained low oil prices would also ensure that the improvement in the trade deficit proves to be more than a flash in the pan,” she said.

The trade numbers beat expectations as the ONS reported the goods trade gap narrowed by £1bn to £8.8bn in November, as exports edged down but imports fell faster. Economists had forecast a £9.4bn gap. The less erratic figures for the three months to November showed exports grew by £2bn and imports shrank by £0.5bn.

The details showed exporters continued to benefit from targeting markets beyond the deflation-hit eurozone. Exports to countries outside the European Union increased by £2.1bn, or 6.0%, in the three months to November from the previous three months. Exports to the EU decreased by £0.1bn, or 0.3%. At the same time, the UK recorded its largest ever deficit with Germany, reflecting a decrease in exports and a slight increase in imports.

The trade gap for goods and services taken together fell to its lowest since June 2013, at £1.4bn in November. © Guardian News & Media Limited 2010

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Live coverage of the latest GDP data, showing that the UK economy is, at long last, larger than in 2008 as it grew by 0.8% in April-June quarter. But on a per capita basis, GDP is still below the peak. Service sector surged, while construction shrank…


Powered by article titled “UK economy finally above pre-crisis peak, as GDP rises by 0.8% in Q2 – business live” was written by Graeme Wearden, for on Friday 25th July 2014 12.05 UTC

The first quarter of 2008 was also the time in which Northern Rock, stricken by the credit crunch, was formally nationalised by the Labour government.

Northern Rock was later sold to Virgin Money. And today, they’ve announced they are creating 200 new jobs this year, including 120 in the North East.

The announcement coincides with George Osborne’s trip to Newcastle today.


Here’s a video clip of George Osborne explaining how Britain hasn’t completed the task of recovering from the Great Recession.

Read the news story here

Rather than trudging back to 9.30am, new readers might prefer to read our news story on today’s growth figures:

GDP surpasses pre-recession high as economic growth hits 0.8%

Larry Elliott: Chancellor is right not to be smug

Our economics editor, Larry Elliott, says the chancellor is wise to resist crowing today (as I flagged up earlier, George Osborne tweeted that there’s still “a long way to go” to complete the recovery).

Larry writes:

For one thing, this has been the mother and father of a recession and it has taken far longer than Osborne expected for the economy to respond to the Bank of England’s cheap money medicine.

There have been four deep downturns since the second world war; two presided over by Labour governments, two by Conservative. After the first oil shock in the mid-1970s, it took 12 quarters for the economy to return finally to its pre-recession level of output; after the recession in Margaret Thatcher’s first term it took 16 quarters; after the recession following the Lawson boom of the late 1980s its took 10 quarters. This time it has taken 25 quarters.

The second reason it makes sense for Osborne not to crow too much is that in terms of output per head of population, the downturn is still not over. The population has risen since the economy went into recession in early 2008 and at the current rate it will be 2017 or 2018 before the losses in per capita GDP are made up.

More here: George Osborne is right not to be smug over GDP numbers


Unions are flagging up up that most people are not feeling the recovery in their pocket:

Wage growth, or rather the lack of it, is one of the clearest signs that Britain’s recovery isn’t feeding through to the workers.

Pay rises have been lagging behind inflation since the crisis began, and hit their lowest level since 2001 in the three months to May (at just +0.7%).

Today’s GDP report is only the first stab at assessing the UK economy’s performance in the second quarter of 2014.

It doesn’t actually contain any data from June at all — the Office for National Statistics just estimates how the various sectors performed, based on history and the data from April and May.

John Bulford, economic advisor to the EY ITEM Club, reckons the 0.8% growth reading could be revised up next month:

The disparity between official figures, which show manufacturing output growing by just 0.2% and construction contracting by 0.5%, and business survey data, which show both sectors roaring ahead, is glaring. With that in mind, it would not be a surprise to see the Q2 figures revised up in the next release in mid-August.”

Guess who had another ‘helpful suggestion’….


Ben Chu has pulled together another great chart, showing how Britain’s GDP per capita (economic size divided by the total population) has also lagged most of the G7 group of advanced economies since 2008.


Chart: How Britain lagged the G7 since 2008

Italy is the only member of the G7 to have recorded slower growth than the UK since the first quarter of 2008

That was the time when the credit crunch was transforming into the biggest financial crisis to grip the world since the Great Depression.

Ben Chu of the Independent has helpfully tweeted this chart to show it:

At which point, the Conservative team at the Treasury suggested he might like to rescale it to 2010 (when the coalition took power).

Better, but still not top of the class…

Guy Ellison at Investec Wealth & Investment, says Britain’s recovery has been “a long slog”:

The UK is the second to last member of the G7 group of economies to reach the milestone and took much longer to rebound than in past recessions.

Geraint Johnes, director at Lancaster University’s Work Foundation, has rubbished the notion that today’s growth figures are a triumph for George Osborne’s austerity programme.

After all, the chancellor did (sensibly) drop the idea of eliminating the deficit in this parliament after it became clear that he was spiralling off course.

Johnes says:

“What do the figures say about the effectiveness of austerity and the management of the economy? The Chancellor’s actions trump his rhetoric. Austerity was effectively abandoned a couple of years ago, and the economy has flourished – albeit in patches – since.

And next year’s growth is unlikely to match the “rather remarkable results” being achieved at present, Johnes adds.



Rob Wood, economist at Berenberg, agrees that growth was “not balanced this quarter”:

The service sector (+1.0%) was strong while manufacturing (+0.2%) and construction (-0.5%) were weak. The longer the recovery remains unbalanced the less sustainable it may seem to aim for growth continuing around these rates.

That being said, manufacturing and construction suffered from an usually weak May and could bounce back strongly in June and through Q3

Manufacturing data from other European countries was also weak in May, suggesting the global economy had a hiccup.

A lot of people are hammering home the fact that the UK’s recovery has been the slowest in living memory.

This tweet from RBS shows the tortoise-like nature of the rebound:

And the FT explains just how badly it compares it to previous recessions over the last 100 years:

Ed Balls: GDP per head won’t recover till 2017

Better late than never, George.

That broadly sums up Ed Balls’ response to the GDP data, who points out that America’s economy hit its pre-crisis peak back in 2011.

The shadow chancellor says:

“At long last our economy is back to the size it was before the global banking crisis – three years after the US reached the same point.

“But with GDP per head not set to recover for three more years and most people still seeing their living standards squeezed this is no time for complacent claims that the economy is fixed.”

Balls adds that Labour measures, such as more free childcare and a 10p starting rate of tax, will make the recovery fairer. More here.

Jeremy Cook, chief economist at currency company World First, says the recovery is “engendered, sustainable and flourishing”.

“Once again, it was services that drove the economy onwards, rising by 1%. Construction slipped back in Q2, falling by 0.5% following a strong Q1 helped by home building and repair efforts to flooded properties in the west country.

“Industrial production rose 0.4%. The recession prompted a renewal of the phrase “Keep Calm and Carry On” and all in the UK will be hoping that this expansion does just that.”


Simon Baptist, of the Economist Intelligence Unit, points out that the recovery has been “notable for its extremely slow pace”:

Austerity in this parliament has been a drag on growth.

Markets needed to see a long term plan to big ticket items like pensions, healthcare and welfare spending; the government has done some of this for which it deserves credit, but growth now is in spite of austerity not because of it.

GDP reaction starts here

Ben Brettell, senior economist at Hargreaves Lansdown, warns that the UK economy “isn’t as strong as it looks”.

He also points out that GDP per person is still lagging (check out this chart)

While it has surpassed its pre-crisis peak in absolute terms, a larger population means GDP per capita is around 6% lower. The economy has been growing by adding jobs, but there is an underlying issue with productivity, and this is why we are not seeing any meaningful increase in wages.

Despite another upgraded growth forecast from the IMF I believe significant challenges lie ahead.

Don’t forget, GDP per capita is still below 2008 peak

I flagged this up earlier, but it really can’t be repeated too many times:

Britain’s GDP per person is nowhere near the level it reached before the recession.

The ONS hasn’t issued a new estimate today but, based on earlier data, GDP per capita is probably at least 5% smaller than in 2008.


The Liberal Democrats want their share of the credit, declaring that they have “cleared up Labour’s economic mess”.

Lib Dem Treasury Minister Danny Alexander says Britain has passed a major milestone today.

“The main reason that we stepped forward to form the coalition was to sort out Labour’s economic mess and rebuild a stronger economy and a fairer society for the future.

“By forming the coalition we gave the country a long term economic recovery plan based on Liberal Democrat values and policies and the stability to see it through.”

George Osborne: we’ve got a long way to go

Chancellor George Osborne is touring the North of England today – designed to show that the government takes regional regeneration seriously.

He’s tweeting from Newcastle:

Britain’s manufacturing sector didn’t enjoy a blowout quarter — its activity expanded by just 0.2% in the April-June quarter, down from 1.5% in January-March.

The key chart: GDP finally over pre-crisis peak

And here’s confirmation that the 0.8% growth in the last quarter was almost totally due to the service sector (which makes up around three-quarters of the economy)

Britain’s agriculture sector also shrank during the quarter, by 0.2%.

On an annual basis, the UK economy is 3.1% bigger than a year ago.

The construction sector contracted during the quarter – with its output shrinking by 0.5%.

Britain’s industrial sector grew by just 0.4% in the quarter, a slowdown compared to the 0.7% in Q1.

Britain’s service sector continues to drive the recovery.

It expanded by 1.0% between April and June, which is the strongest growth since the third quarter of 2012.

The Office for National Statistics confirms that the UK economy is now 0.2% larger than at the previous peak, in the first three months of 2008.

UK economy grew by 0.8% in second quarter of 2014

Here we go! The UK economy grew by 0.8% in the second quarter of this year.

That’s means Britain’s GDP is finally above the previous peak set in 2008.

Lots more detail and reaction to follow…

Ed Balls has rather pre-empted today’s growth figures, in an article in today’s Guardian.

In it, the shadow chancellor argues that there’s no cause for complacent celebrations, just because GDP has reached its pre-crisis levels (assuming it does….)

Not only is it two years later than the chancellor’s original plan said, and three years after the US reached the same point, it’s also the case that GDP per head won’t recover to where it was for around another three years – in other words, a lost decade for living standards.

Conservative complacency won’t help working people

Just over 20 minutes to wait until we learn how fast the UK economy grew in the second quarter of 2014.

Paul Hollingsworth of Capital Economics says it will be “another milestone for the recovery”, if GDP comes in at +0.8% as expected, 0.2% above the 2008 previous peak.

GDP per capita still lagging behind

There’s a very important reason to be cautious about today’s growth numbers, which explains why many people don’t feel the benefits of the recovery.

GDP per capita (ie, the amount of economic output divided by the number of people in Britain) is still more than 5% below the pre-crisis peak.

As the ONS said this month, “GDP per head has recovered relatively slowly since 2009″, and was 5.6%. This chart confirms it:

Tax campaigner Richard Murphy comments:

And that means almost everyone in this country is still worse off than they were in 2008. That’s nothing for the government to celebrate.

Lloyds close to Libor deal

RBS isn’t the only bank tackling “conduct and litigation issues”, of course.

Its UK rival, Lloyds Banking Group, has confirmed this morning that it is close to reaching a settlement over its role in Libor-rigging.

This is the scandal in which traders allegedly conspired to fix benchmark interest rates that underpin many financial markets. Lloyds is expected to pay a fine of £200-£300m.


Today’s GDP figures should also show that the UK economy has grown for the last six quarters — the longest sustained run of rising output since 2008.

RBS shares surge 12% after rushing out better-than-expected results

Royal Bank of Scotland has surprised the City by rushing out its results a week early, in the latest sign that conditions are improving in the UK economy.

RBS, which was rescued by the taxpayer after the great recession struck, has reported an unexpected rise in pre-tax profits, thanks to a fall in bad loans and a general improvement in economic conditions.

Shares surged by over 12% when trading began in London, even though CEO Ross McEwan cautioned that it still faces a number of “conduct and litigation issues”.

Here’s our full story:

RBS reports largest profits since bailout as share price soars

To hit its pre-crisis peak, UK GDP must have risen by at least 0.6% in the last quarter, I reckon.

Most economic data from April, May and June has suggested that growth remained quite strong, which is why economists expect GDP to have risen by 0.8% or 0.9%.

The slowest recovery since at least 1920

It’s wise to be cautious when economists talk about X or Y being the best or worst ‘on record’.

Reliable statistics don’t go back terribly far — for example, the central bankers faced with the Great Depression were hampered by limited knowledge about how their economies were faring*.

But it’s clear that this UK recovery has been the slowest in at least 100 years.

This graph from the NEISR thinktank (which includes their estimate for today’s GDP data) compares the last six recessions, going back to 1920.

* – the excellent Lords of Finance explains this well.

UK growth figures to show state of the recovery

Good morning.

After the longest downturn in recent UK economic history, has Britain’s economy finally returned to the levels before the 2008 financial crisis?

Economists think so, and we’ll find out for sure at 9.30am this morning when the Office for National Statistics issues its first estimate of UK growth for the second quarter of 2014.

The ONS is expected to report that GDP expanded by 0.8% or 0.9% between April and June. That would match, or exceed, the growth seen in the first three months of this year, showing that the UK recovery continues to outpace other advanced economies.

And with an election just 10 months away, the figures are eagerly awaited in both Westminster and the City.

Just yesterday, the International Monetary Fund upgraded its forecast for UK growth again – it now expects GDP to rise by a punchy 3.2% this year. Good news for George Osborne.

IMF predicts Britain’s GDP growth rate will surge to 3.2% by year end

But critics of the chancellor argue that Britain is enjoying another of those consumer-driven recoveries that have caused such trouble in the past.

So we’ll be scrutinising today’s data for evidence of whether the economy is really rebalancing, or not. © Guardian News & Media Limited 2010

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Concerns over Portugal’s largest bank send shares down across Europe. Fears over Espirito Santo International as the shares of the troubled bank suspended after tumble. Portugal’s bond yields jump. Analyst says “it’s not a new eurocrisis”…


Powered by article titled “European stock markets hit by Portuguese bank fears — business live” was written by Graeme Wearden, for on Thursday 10th July 2014 15.23 UTC

As those of you who follow the stock markets will know, analysts and traders have been suggesting for weeks (if not months) that there could soon be a ‘correction’, after a long period of steady gains.

The problems in Portugal have acted like a catalyst.

As Chris Beauchamp, market analyst at IG put its:

With Portugal looking to be in trouble once again, prudent analysis has been thrown out of the window in preference to a knee-jerk reaction.

Portuguese bond yields aren’t soaring (yet), and the contagion hasn’t spread to Spain or Italy (yet), but the combination of the news from Lisbon and more data that confirms the weakness of the eurozone has provided the excuse to finally kick start the summer volatility trade into life.

Or, in fewer characters:

Golden Dawn spokesman imprisoned ahead of trial in Greece

Elsewhere in the eurozone…. Greek authorities have highlighted their determination to crack down on the neo-nazi Golden Dawn.

Magistrates demanded that the party’s spokesman Ilias Kasidiaris be imprisoned pending trial, as our correspondent Helena Smith reports:

Ilias Kasidiaris, for many the face of Golden Dawn, was led away to the special wing of Athens’ Korydallos prison after appearing before the two magistrates assigned to investigate the alleged illegal activities of the neo-nazi organization. His imprisonment, on charges of illegal weapons possession, brings to nine the number of Golden Dawn MPs now currently in prison pending trial on charges of running a criminal organization that masqueraded as a political group.

The step illuminates what many are describing as the renewed determination of the two female judges to close the Golden Dawn file before times runs out: the magistrates have 18 months to get the trial up, running and completed before they are forced to release the MPs again.

Kasidiaris, who ran for Athens mayor and garnered 16% of the vote in local elections in May, strongly denied that he had been in possession of illegal weapons, showing reporters the permits he had for two hunter shot guns he is accused of transforming into automatic weapons,

The MP’s lawyers, who said they would be appealing the decision, repeated that the politician’s incarceration was part of a political plot orchestrated by the government to eradicate a party that has shot from being a fringe group to the country’s third biggest political force.

But judicial authorities, who had privately regretted Kasidiarias being freed on bail when he was arrested for allegedly overseeing Golden Dawn’s paramilitary activities last year, appear in no mood to compromise this time round. The former commando, who is believed to have ambitions to lead the party, had spent the last nine months reorganizing and softening the group’s image – a move that has seen it go from strength to strength on the back of the country’s worst economic crisis in living memory. In May the newly revamped Golden Dawn succeeded in sending three MEPS to the European parliament.

Kasidiaris rose to fame slapping two leftwing female politicians on live TV back in 2012 – a shocking feat that at the peak of Greece’s economic crisis only saw the party’s popularity’s ratings rise.


Today’s selloff is a blow to anyone who took part in Banco Espirito Santo’s recent rights issue.

It raised funds by selling new shares at €0.65 each. Today’s 17% tumble sent them down to just €0.51 before trading was suspended.

Banco Espirito Santo’s problems come at a tricky time for the banking sector, points out Jasper Lawler of CMC Markets:

Banks in particular are under massive scrutiny with European banks being targeted by the US regulators while banks in the US and Europe face tougher capital requirements as part of bank stress tests.

With tougher capital requirements, it means banks need to keep more money in reserve and can’t lend it out and make returns. This problem is exacerbated in Europe where weak economies are not generating demand for banks loans in the first place.

It’s a vicious circle — the weak economic growth also makes it harder for companies to risk taking out more loans, especially if they don’t see strong demand.

We’re not free of World Cup analogies yet….

Here’s a good write-up of the Portuguese situation, from AP

Bank fears reignite Portugal market tensions

Worries over the health of one of Portugal’s largest financial groups hit the country’s stock market hard on Thursday and pushed up its borrowing rates.

The tensions are centered on the Espirito Santo group of companies, which includes Portugal’s largest bank Banco Espirito Santo.

Share trading in the bank was suspended after a precipitous fall of more than 16 percent, dragging the Lisbon stock exchange down more than 4% and pushing up the yield on Portugal’s benchmark 10-year bonds by 0.13 percentage points to 3.89 percent. Sentiment was knocked across Europe, and the Stoxx 50 index of leading European shares was down 1.4%.

The market moves provided an unwelcome reminder to investors of the tensions that gripped Europe for much of the past few years, when concerns over the state of the public finances in a number of countries that use the euro were at their most acute.
Portugal became the third eurozone country after Greece and Ireland to require a financial rescue when it got a €78bn ($106bn) bailout in 2011. In return, successive governments have had to enact tough austerity measures, such as cutting spending and reforming the economy.

Portugal’s efforts in recent years to get its public finances into shape have helped it regain the trust of investors. That was manifested in the fall in the interest rates the country pays on its borrowings. As a result, Portugal concluded its three-year international bailout program in May, with the government confident it can raise money in the markets.

The government insists Banco Espirito Santo is solid, but a parliamentary committee says it intends to call the finance minister and the governor of the Bank of Portugal to answer questions about the Espirito Santo group of companies.

Banco Espirito Santo is being engulfed by a cascade of bad news from other family group companies, and investors fear it is vulnerable. It is part of a banking dynasty dating back to the 19th century, and the Espirito Santo family is the bank’s largest shareholder with around 25 percent. The other shareholders include France’s Credit Agricole, Brazil’s Banco Bradesco and Portugal Telecom.

An audit requested by Portugal’s central bank in May found “serious” accounting irregularities at Luxembourg-based Espirito Santo International, an unlisted holding company whose board of directors included Ricardo Salgado, chief executive of Banco Espirito Santo.

Investors fear the holding company’s financial problems could contaminate other parts of the Espirito Santo group, including Rioforte, the group’s non-financial holding company which manages assets in tourism and private health care among other interests, as well as the bank.

Portuguese banks recorded heavy losses during Portugal’s bailout but passed the so-called “stress tests” demanded by the European Central Bank to assess whether they were sound.


Europe’s stock markets remain deep in the red too, led by Portugal’s PSI index

Many banking shares are down by 3% or 4%:

Dow Jones falls 1% at start of trading as Portuguese bank fears hit Wall Street

Wall Street has just opened, and the main share indices have promptly dropped as US investors react to the selloff in Europe.

The Dow Jones industrial average has dropped by almost 1%, losing 159 points to 16826.

And the tech-heavy Nasdaq index shed 1.5%, as Espirito Santo International’s problems hits markets on both side of the Atlantic.

There’s no suggestion that Banco Espirito Santo customers are panicking, by the way, despite concerns over the health of its parent company. This photo of a branch in Lisbon shows a definite absence of queues….

The Wall Street Journal has pulled together more analyst reaction to the situation at Espírito Santo International (ESI) after it suspended some bond repayments on certain short-term bonds yesterday, and the knock-on impact on Portuguese lender Banco Espirito Santo (BES).

Analysts at the Royal Bank of Canada highlighted that the problems relating to ESI could have a much wider impact on the country’s economy if they persist.

“While the aforementioned case is likely to be an isolated one it clearly highlights the problems of early bailout exits whilst the economy, the banking system and the public finances are still in a shaky state,” they wrote in a note.

Alberto Gallo, a credit strategist at the Royal Bank of Scotland said that although BES is not directly responsible for the repayment of any ESI bonds, it “is subjected to reputational risks given its link to the group.”

More here: European Markets Tumble on Portuguese Bank Woes


Here’s a useful chart explaining how Banco Espirito Santo fits into the Espirito Santo Group structure.

Shares on Wall Street are also expected to fall when trading begins in around 30 minutes:

Another reason not to panic too much — as Aurelija Augulyte of Nordea Markets points out, Portuguese government bond yields are still near their lowest point in four years:

Here’s an interesting chart – it shows how the cost of insuring Portuguese bank debt, using a credit default swap, has risen in the last month.

A CDS of 344 means that it costs €344,000 to insure €10m of bank debt for a year.

Megan Greene: Portugal won’t create new eurozone crisis on its own

So, do the problems in Portugal mean the eurozone crisis has reared back into life?

I don’t think so. We’ve not suddenly been transported to the mad days of 2011 and 2012 again.

Espírito Santo International’s problems are a reminder that southern Europe’s economy is fragile, and that undeclared problems are still lurking in the banking sector

But as analyst Megan Greene points out, Portugal simply isn’t big enough to derail the eurozone.

Concerns over Espírito Santo have also been building for a while. Last December, the Wall Street Journal flagged up that the company raised funds during 2011 by selling debt to its own investment fund.

The money was repaid, but the deal shows the potential clashes of interest that can arise with a major conglomerate.

Portuguese government debt has also fallen in value today, driving up the yield on its 10-year bonds to around 4%, from 3.8% yesterday. That’s a three-month high.


Background on the Portuguese selloff

The Portuguese worries flared up yesterday afternoon, when it emerged that conglomerate Espírito Santo International was looking to restructure some of its debt.

That sparked fears over the health of its businesses, triggering the 17% tumble in Banco Espirito Santo’s shares today.

European markets slide as euro fears return

European stock markets are in retreat today, with losses across the board sparked by fears over Portugal’s largest bank.

The main Portuguese stock market, the PSI 20, has tumbled by 4.5% so far today, driven down by their biggest bank, Banco Espirito Santo (BES).

Disappointingly weak manufacturing data from France, Italy and the Netherlands this morning (details here) has helped drive shares down, as investors worry that Europe’s recovery is faltering.

The main European markets have all been hit, pushing shares across the region to their lowest level in two months.

Greece’s underwhelming bond sale this morning has added to the jitters (and also suffered from them), wiping out the optimism created by the Federal Reserve last night.

Concern is growing in Lisbon that BIS will be hit by financial problems at its parent company — Espirito Santo Financial Group, which suspended trading in its own shares this morning.

And in the last few minutes, trading in BES has also been suspended after tumbling 17%.

As Jamie McGeever of Reuters shows, European banking shares have been falling for a while:

More details and reaction to follow….


Allie Renison, head of Europe and Trade Policy at the Institute of Directors, reckons we shouldn’t panic about Britain’s widening trade gap.

“While first impressions are indeed worrying, it should be pointed out that that the widening gap is down to a rise in imports, which grew by 1.7% and are a sign of robust domestic demand”.

She also argues that exports are coping with the strong pound:

“Contrary to expectations that the appreciation in sterling would lead to a reduction in the export of goods, there has been an increase of 0.6%. Indeed, when compared with the previous three months, export prices decreased by 0.8% for the three months ending in May.

The Bank of England was right to leave interest rate unchanged today, reckons Dr Gerard Lyons, economic advisor to London mayor Boris Johnson.


Greek borrowing costs rise after lacklustre auction

Investors are a little edgier about Greece today, after a much-anticipated bond sale drew modest demand.

The interest rate, or yield, on Greek 10-year bonds has jumped to 6.3%, from 6.1% last night. That’s quite a hefty move, but it still leaves yields away from the ‘danger zone’ of 7%.

The selloff was triggered by a Greek bond sale, which hasn’t proved as popular as its blockbuster auction three months ago.

And lacklustre demand means buyers were able to secure a more lucrative rate of return on the bonds.

Reuters and RANsquawk have more details:

Order books for the bond have topped 3 billion euros, according to IFR, a Thomson Reuters service. When Greece sold a five-year bond back in April orders reached over 20 billion euros.

Bailed-out Greece is aiming to raise up to 3 billion euros from the new bond, its second bond sale after it defaulted in 2012.

The Bank of England has also made no change to its quantitative easing programme, and there’s no accompanying statement.

Bank of England leaves interest rates unchanged

To no-one’s surprise, the Bank of England has left UK interest rates unchanged at 0.5%.

M&S finance officer quits to join Tesco

It’s official. M&S’s finance chief is off to Tesco.

Here’s the statement:


Marks and Spencer Group plc today announces the departure of Alan Stewart, Chief Finance Officer.

Alan has stepped down from Board and will leave M&S on a date and on terms to be agreed. The search for his successor is already underway.

And Tesco has announced that Stewart will receive a basic annual salary of £750,000 per year, plus replacement share awards worth £1.737m.

Those shares are being granted “in lieu of his deferred share awards from Marks & Spencer plc that will be forfeit when he joins Tesco”.

Those share awards are meant to tie senior executives to a company, by linking pay to long-term performance — that link is broken if you can simply get your new employer to offer the same terms….



Marks & Spencer’s troubles continue…. the word in the City is that Tesco has just poached M&S’s finance director, Alan Stewart.


At least he waited until after M&S’s AGM (on Tuesday)…


Britain’s widening trade deficit is a concern, says the British Chambers of Commerce (BCC).

Chief economist David Kern is worried that the progress made narrowing the deficit earlier this year has halted:

Today’s figures confirm that the pace of the UK’s rebalancing towards net exports is far too slow, and if this continues we risk missing out on the Prime Minister’s target of increasing exports to £1tn by 2020.

Therefore narrowing the trade deficit by providing additional support to UK exporters must remain a national priority for both the government and the MPC. On its part, the MPC must restore clarity to its forward guidance and resist calls for premature interest rate rises.

UK exports to the EU have fallen by 0.9% in the last three months (if you strip out erratic items), but are up by 4.6% to the rest of the world.

That’s via Christian Schulz, economist at Berenberg, who explains:

Trade growth has been more buoyant vis-à-vis the rest of the world than with Britain’s EU partners.

And is the strong pound hitting exporters? Schulz reckons not….

British exports are relatively price insensitive, sterling is still below pre-crisis levels vis-à-vis major trading partners’ currencies and global demand growth matters more than the exchange rate.

UK recovery remains a ‘domestic affair’

Britain’s widening trade gap illustrates how the UK’s recovery has been driven by the domestic economy, rather than strong global demand.

And with Europe’s economy still weak, it’s hard to see that changing quickly.

As Martin Beck, senior economic advisor to the EY ITEM Club, flags up:

“The shortfall of exports relative to imports is the largest since January. Exports picked up slightly in the month, while imports rose at their fastest pace for almost a year.

“Looking forward, we doubt that the export picture will brighten significantly, at least in the near-term. The recovery in the Eurozone economy, the UK’s largest single export market, is running at only a very modest pace.

And here’s another chart showing how Britain’s trade gap with Germany, the Netherlands and China widened in May:

The full data is online here.

Weaker European exports pushes UK trade gap wider, to £2.41bn in May

Britain’s trade gap with the rest of the world has swelled in May, as the UK was hit by weak demand from Europe.

Exports of goods to the European Union fell by 0.2% during the month, while exports of goods to countries outside the EU increased by 1.5%.

Exports to Germany and the Netherlands both fell during the month, as this chart shows:

The goods balance (physical exports minus imports) widened to -£9.2bn in May, from -£8.8bn in April. That’s a worse result than expected.

Total imports jumped 2% during the month, while exports rose by 1.1%.

The Office for National Statistics said this was partly due to an increase in imports of aircraft.

Britain’s traditional surplus in services was little changed at £6.78bn.

The total trade balance thus widened, to -£2.418bn, from -£2.05bn in April.

Despite the strong recovery, Britain has struggled to improve its trading position with the rest of the world, as this chart shows:

Imports have also outstripped exports over the last three months. The ONS reports:

In the three months ending May 2014, exports of goods increased by 0.1% to £72.6 billion and imports of goods increased by 0.5% to £98.9 billion….The export of goods excluding oil and erratics increased by 0.9% to £60.6 billion; reflecting a £0.4 billion increase in exports of cars.

Imports of goods excluding oil and erratics increased by 0.2% to £83.8 billion for the same period.

Italy and the Netherlands also suffer manufacturing declines in May

Wham! Two more European countries have reported that their industrial output fell in May, adding to worries about the European economy sparked by France this morning.

Italian industrial output slid by 1.2% during the month, the steepest monthly fall since November 2012. That’s much worse than expected — economists had predicted a rise of 0.2%.

That means that Italian industrial production is down by -0.4% over the last quarter, compared to the previous three months.

And over the last 12 months, Italian industrial production has decreased by 1.8% compared with May 2013.

A spokeswoman for national statistics institute ISTAT described the data as “very negative” (via Reuters).

The Dutch manufacturing sector also struggled in May, with output slumping by 1.9% during the month. It’s up just 0.5% over the last year, and the recent trend is downwards….

It’s a worrying echo of France’s troubles — as covered earlier this morning, French manufacturing output tumbled by 2.3% in May.

But everyone seems to have suffered – yesterday, we learned UK manufacturing output fell by 1.3%, while the German powerhouse suffered its biggest fall in two years, down 1.8%.

What went wrong in May? Can it really just be the May bank holidays?

More worrying signs for France — its annual inflation rate has dropped to just 0.6% (on a harmonised basis)

INSEE reported that food prices were down 1.4% year-on-year, and manufactured products down 1.2%, underlining the weakness of parts of the French economy. Inflation in the service sector, though, was up 1.8%.


In other corporate news, Mothercare’s interim CEO has been given the job fulltime.

Mark Newton-Jones, who was parachuted into the company in March, is quite a retail veteran — at just 25, he was a regional manager at Next covering 100+ stores, and he ran Shop Direct (including, for nearly 10 years.

Newton-Jones will get a basic salary of £600,000 per year for running Mothercare, which has rejected a takeover approach from US rival Destination Maternity. That’s around £100k more than his predecessor.

Barratt boosted by housing demand

The upturn in Britain’s property sector has boosted housebuilder Barratt Developments. It posted a 8.6% jump in sales this morning, and have shareholders the welcome news that profits will hit the top end of expectations.

Burberry isn’t the only company fretting about the strong pound.

Associated British Foods (owner of Primark), has warned that sterling’s strength will have “a negative impact” on its sales and profits from overseas businesses, particularly in Grocery and Ingredients.

And that is on track to knock £50m of ABF’s profits, it suggests.

Burberry sales jump, but strong pound is a worry

Shares in UK fashion chain Burberry jumped 4% in early trading, despite warning that the strong pound is still eating into its profits.

Burberry is topping the FTSE 100 after reporting a 12% surge in comparable sales in the last three months.

That helped calm investors’ worries over the “increasing currency headwinds” which the company is suffering, due to the strong pound.

Burberry is on track to lose £10m in licensing revenue in Japan, and the impact on overall profits this year “will be material”, if rates remain at present levels.

Company boss Christopher Bailey (chief creative and chief executive officer), reckoned the sales jump:

…demonstrates our teams’ success in unlocking the benefits of these investments, as we continue to concentrate on the things we can control in an uncertain external environment.


French manufacturing output tumbled 2.3% in May

France’s economy has taken another blow – with manufacturing output slumping by an alarming 2.3% in May.

Statistics body INSEE said manufacturing output fell “dramatically” during the month.

The wider measure of industrial output also fell, by 1.7%, which will fuel concerns over the eurozone’s second largest economy.

The survey suggests France’s industrial sector struggled badly in May, with almost all industries reporting a drop in output.

Electrical and electronic equipment production fell by 4.9%, and transport manufacturing fell 3.5%.

And output in the manufacture of coke and refined petroleum products “plummeted” by 8.4%, INSEE reported.

So what happened?

French public holidays may have exacerbated the downturn. INSEE says three holidays fell on Thursdays, meaning firms may have shut down on the Friday too.

But as this graph shows, French manufacturing output has fallen by 0.9% over the last three months, as its economy struggles.

France isn’t alone, though. Recent data has shown that German and UK industrial output also fell in May, making some analysts wonder if the European economy hit trouble during the month….


Dovish Fed minutes supports markets

Good morning, and welcome to our rolling coverage of the financial markets, the economy, eurozone and business.

After a few shaky days, European stock markets are set for a calm open after the Federal Reserve showed last night that it’s in no rush to raise interest rates.

The minutes of the Fed’s last monetary policy meeting did show that its quantitative-easing programme is on track to end in October. So, less new money flowing into the markets.

Federal Reserve likely to end QE stimulus program in October

But that is tempered by signs that the Fed is too worried about America’s labour markets to start raising interest rates soon.

The minutes showed that many Fed policymakers are worried about the amount of spare capacity, or “slack”, in the economy.

Here’s the key line:

“A number of them thought [the spare capacity] was greater than measured by the official unemployment rate….citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labour force participation rate.”

Several Fed committee members also welcomed the prospect of US real wages rising, rather than fretting about the impact on inflation.

And that’s being taken as a sigh that the Fed’s still pretty dovish about economic prospects.

As Stan Shamu of IG explains:

The market seems to have been positioned for a hawkish shift in sentiment. In fact, the minutes showed the Fed continues to show concern about growth rather than inflation.

Which may be enough to stop the FTSE 100 falling for the fourth day running…

Here’s IG’s opening calls:

  • FTSE: 6720 +2
  • German DAX: 9816 +8
  • French CAC: 4362 +2
  • Spanish IBEX: 10765 +18
  • Italian MIB: 20900 +15

What else is afoot?

The Bank of England’s monetary policy committee ends its monthly meeting. It’s not expected to make any changes to interest rates or its asset purchase scheme (QE) though.

On the economic front, there’s the latest UK trade data (9.30am BST) and US weekly jobless numbers (1.30pm BST).

Plenty of corporate news around too — including another warning from Burberry that it’s suffering from the strong pound, and strong-looking numbers from housebuilder Barratt (of which more shortly….) © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Shares push higher after Putin press conference eases some of the tension in Ukraine. Relief rally seen on trading floors around the world. Interfax reports that some Russian troops have returned to base. Flooding hits UK housebuilding…


Powered by article titled “Stock markets rally as Ukraine crisis eases a little – business live” was written by Graeme Wearden, for on Tuesday 4th March 2014 14.26 UTC

On income inequality….

Just stumbled on an interesting blogpost on income inequality, on Columbia Management’s site.

It explains how the failure of lower-paid workers’ pay packets to keep pace with the 5% top earners was an important cause of the 2008 financial crisis, as it drove demand for (then-easy) credit.

You may have known that already. But this post also flags up another important point – the trend began earlier than many might think,with the wealthiest starting to claim an increasingly large slice of the pie from the mid-1980s onwards.

Marie Schofield, chief economist at Columbia, and Toby Nangle, head of multi asset allocation, write:

The roots of the great financial crisis and the slow post-recovery period can be traced to many factors, but a predominant one is the rise in income inequality.

What is not generally known is that this is not a new or recent development—income inequality for both wages and earnings in the U.S. (and other advanced economies) began to rise starting in the 1980s.

The income share of the top 5% in the U.S. income distribution was a fairly constant 20% from 1960 to 1980, with income gains for the top 5% and for the bottom 95% fairly close at near four percent annually. After 1980 the income share of the top 5% rose steadily in the U.S. lifting their income share to 35% by 2012.

Here’s their key points:

  • The rise in income inequality was a root cause of the U.S. financial crisis and the slow post-recovery period.
  • Mediocre income gains for middle income households have contributed to the slow recovery of U.S. consumption and economic growth.
  • As pressure continues to build to address income inequality, we expect the government to lead on this issue and private sector to lag.

More here: The role of income inequality


The US stock market is also tipped to rally around 1% when it opens, in around 20 minutes

Lunchtime round-up: Markets bounce back

World stock markets have bounced back after Russia took some steps to calm the crisis sparked by its military action in Ukraine.

Shares rallied in Moscow, and on European stock markets across the region — although the situation remains tense and fluid.

Scott Meech, co-head of European equities at Union Bancaire Privee (UBP), says:

“It’s still a very worrying situation but seems to have calmed down a bit. That’s why we’re seeing a bit of a recovery.”

The FTSE 100 gained over 100 points at one stage, clawing back all Monday’s losses. And the MICEX index jumped 5%, having tumbled 10% yesterday.

Short-term relief gushed through trading floors after the news broke this morning that the Kremlin had told troops on military exercises in Western Russia, near the Ukraine border, to return to their bases. This calmed fears that they could soon be sent into eastern Ukraine.

At a press conference, President Putin told reporters that his decision to send troops into Crimea would not provoke war.

Putin also said that former Ukranian president Yanukovych had no political future, and claimed that events in Kiev are unconstitutional. Highlights here.

The ruble has risen around 0.8% against the US dollar, to 36.1 ruble to the $1, having hit an alltime low of 36.5 yesterday night.

The recovery came after it emerged that Russian and Ukranian billionaires had lost almost $13bn in Monday’s selloff.

In other news…

Cyprus’s parliament has approved a privatisation plan, as part of its bailout.

Activity in Greece’s manufacturing sector has risen, but workers are still being laid off

Britain’s construction sector was hit by February’s floods, with house-building growth slowing last month.

EC commissioner Michel Barnier has criticised banks who are doing everything possible to avoid Brussels’ clampdown on bonuses.

REMINDER: Our liveblog on Ukraine is here.


Cyprus approves asset sale plan in second vote

Just in, the Cyprus parliament has approved plans to privatise its electricity operator, telecoms provider and port authority as demanded by its lenders, a week after failing to approve the package.

30 MPs voted in favour of the plan, with 26 voting against. It paves the way for future tranches of Cyprus’s bailout to be paid.

Last Thusday, MPs narrowly failed to approve the plan – as striking workers protested in Nicosia.

Reuters has more details:

Cyprus’s parliament approved a roadmap for privatisations on Tuesday, averting a showdown with international lenders insisting on state selloffs as part of a €10 euro ($13.77 billion) bailout.

In a show of hands, 30 lawmakers in the 56-member parliament endorsed a guideline for asset sales just before a deadline for approval expired on March 5.

Parliament’s rejection of an earlier privatisation motion on Feb. 27 risked derailing the bailout accord brokered with the European Union and International Monetary Fund in March 2013.

Democratic Party MPs, who had opposed the plan last week, changed sides and backed it today.

PhD student George Iordanou isn’t impressed:


Barnier: Some banks doing their utmost to dodge bonus rules

Over in Brussels, the EC Commission has issued a rebuke to banks who are trying to dodge its controls on bank bonuses.

Michel Barnier, the EU commissioner for the single market, said he was determined to enforce transparency over bankers pay. He made the comments as the Commission formally adopted curbs on bankers pay, limiting bonuses to 100% of basic salary or 200% if shareholders give their approval.

Last month, HSBC was criticised for giving senior staff new ‘allowances’, worth £32,000 a week to its CEO.

Barnier didn’t name names, but declared that Brussels remains committed to the new rules. He said:

Some banks are doing their utmost to circumvent remuneration rules.

The adoption of these technical standards is an important step towards ensuring that the capital requirement rules on remuneration are applied consistently across the EU. These standards will provide clarity on who new EU rules on bonuses actually apply to, which is key to preventing circumvention.

In addition, the European Banking Authority has a mandate to ensure consistent supervisory practices on remuneration rules among competent authorities. The Commission will remain vigilant to ensure that new rules are applied in full.”

Key event

Here’s our Russia correspondent Shaun Walker on the Putin press conference, which came a few hours after the Kremlin calmed the situation by saying some troops on active duty in Western Russia will return home.

Vladimir Putin is confident Russia‘s take over of the Crimean peninsula – where 16,000 pro-Russian troops are in control of the region’s security and administrative infrastructure – will not descend into war.

During a live address on Russian television, the president insisted that the armed forces of Russia and Ukraine were “brothers in arms”.

“We will not go to war with the Ukrainian people. If we do take military action, it will only be for the protection of the Ukrainian people,”said Putin, adding that there was no scenario in which Russian troops would fire “on women and children”.

The Russian president continued: “Ukraine is not only our closest neighbour it is our fraternal neighbour. Our armed forces are brothers in arms, friends. They know each other personally. I’m sure Ukrainian and Russian military will not be on different sides of the barricades but on the same side. Unity is happening now in the Ukraine, where not a single shot has been fired, except in occasional scuffles.”

Putin denied that the Russian-speaking soldiers occupying key Crimean military sites were Russian special forces, saying they pro-Russian local self-defence forces.

“There are many military uniforms. Go into any local shop and you can find one,” he said.

More here: Russian takeover of Crimea will not descend into war, says Vladimir Putin


The ruble is also gaining more strength, up 1.4% against the US dollar — to 36.08 rubles to the $1.


Putin also had an impact on the Moscow stock market. It has now recovered almost half of Monday’s losses — with the MICEX up over 5%.

So roughly speaking , close to 50% of the $58bn wiped off the value of Russia’s biggest companies has been added so far back today. Or around half a Sochi Olympics….

London stock market recovers all Monday’s losses

The FTSE 100 just hit its highest level of the day, up 105 points or 1.7% at 6813.

That means it has clawed back all Monday’s 101-point losses, and then a bit — as Vladimir Putin made his first press conference since the Crimea crisis began.

These news flashes appeared to be the catalyst for the triple-digit gains – calming concerns over Moscow’s plans.




Reminder – our Ukraine liveblog has full coverage of Putin’s press conference.

Shares are rallying higher as a relaxed-looking Vladimir Putin continues to defend his actions in Crimea (full coverage here).

The FTSE 100 now up 96 points — much higher and it will have recovered all yesterday’s losses (when it fell 101 points).

Putin: Market reaction is ‘temporary and tactical’ state of affairs

Vladimir Putin has described the turmoil in the financial markets as a tactical and temporary state of affairs, during his ongoing press conference on Ukraine (live on Sky News now, and streamed here).

The Russian president also tried to pin some of the blame for the volatility on America, saying that there was already a degree of nervousness in the markets due to certain US policies (ie, the slowing of the Federal Reserve’s huge stimulus programme).

As Haroon Siddique is covering in his liveblog (here), Putin also told reporters that the overthrow of former Ukrainian president Yanukovych is unconstitutional. He said:

The interim president is not legitimate. From the legal perspective it is Mr Yanukovych who is president.

He also planning to host the G8 summit in June – but Western leaders “don’t need to” come if they don’t want to.


Ukraine’s stock market is also surging today, up more than 7% with every share gaining ground.

The UAX had yesterday matched Moscow with an 11% tumble.

Russian market continues to rise

The Russian stock market has continued to romp ahead, with the MICEX up almost 4.5% now.

Airline group Aeroflot is up 6.4% on optimism that Russia will escape economic sanctions, and also reflecting the falling oil price (down around 1% this morning).

European markets are also buoyant.

  • FTSE 100: up 72 points at 6780, +1%
  • German DAX: up 84 points at 9443, +0.9%
  • French CAC: up 59 points at 4350, +1.4%

David Madden of IG reckons confidence has returned to the equity markets has been restored, as the stand off between Ukraine and Russia is no longer on red alert.

The prospect of war is dwindling as Russian troops have been recalled to their bases – but we are not out of the woods yet.

The drop in equity markets yesterday, and correction back today, highlights how volatile an issue this is. We may have pulled back most of yesterday’s losses but the rally is fragile.

Heads-up, Russian president Vladimir Putin is due to appear on TV shortly – it should be streamed here. (and covered in our Ukraine liveblog)

Back on the Ukraine crisis. Jamie McGeever of Reuters has tweeted a handy chart showing which countries are most dependent on Russia’s Gazprom.

10 countries, from Finland to Bulgaria, get at least 80% of their gas supplies from the company, it appears:

This may help explain by European leaders have been more cautious than Washington about hitting Moscow with tough sanctions (see today’s Guardian front page story)

Activity among Britain’s civil engineering firms jumped at the fastest pace since at least April 1997 last month, making it the best performing area of construction, Markit reported.

That suggests that while flooding was bad news for housebuilders (see here), it meant more work for builders who could handle large infrastructure projects.

Some UK building firms are also expecting a boost from the recent flooding, with pressure to avoid a repeat of the disruption suffered by thousands of families.

Markt reports:

Construction firms noted greater spending among local authorities on capital projects and maintenance, in some cases in response to recent flooding and adverse weather conditions.

UK construction sector hit by bad weather

Britain’s builders were hit by the heavy rain and flooding last month, but still recorded decent growth.

Markit’s UK construction PMI, which measures activity across the sector, fell back to 62.6 in February from from 64.6 in January (which was the highest since August 2007).

Any reading over 50 shows the sector expanded.

Building firms reported that the flooding which struck parts of the UK hit efforts to build new homes. House-building growth fell to a four-month low.

But in brighter news, job creation hit a three-month high.

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said:

“Bad weather took a bite out of progress in house building, but UK construction remains on a strong growth trajectory in February.

The sector was fuelled by the strongest rise in civil engineering activity in the survey’s history, as an increase in spending was recorded on investment and infrastructure projects in response to recent flooding.

Even though both housing and commercial activity suffered a slide in pace of growth in February, the overall performance was one of continued expansion.


Greek factories still laying people off

Over to Greece, where the battered factory sector continues to shed staff despite a rise in business activity, according to Markit’s monthly healthcheck.

The Greek manufacturing PMI (based on interviews with purchasing managers) rose to a 66-month high of 51.3, up from 51.2 in January. That indicates another rise in activity.

But while new orders and output rose, employment continued to drop.

Markit warned:

The pace of job shedding was in fact slightly faster than one month before.

The survey found “anecdotal evidence” of increased demand for Greek manufactured goods from both the domestic market and foreign clients.

But it also reported that output prices fell at the fastest rate in four months, as deflation continues to grip Greece.

Follow our Ukraine liveblog here

My colleague Haroon Siddique is anchoring the Guardian’s Ukraine crisis liveblog again today – here:

Ukraine crisis: Shots fired at Crimea airbase – live updates

This graph shows how the Micex index (+3.4%) has only recovered a third of yesterday’s losses – meaning those Russian billionaires who lost $13bn on Monday have still shed a hefty chunk of wealth:


Today’s rally stock market rally underlines just short-term and reactive the financial markets can be, with news flashes and tweets swiftly pored over by investors and ‘black box’ trading machines.

As Kit Juckes, Societe Generale’s foreign exchange expert, puts:

Tensions in the Ukraine and Crimea have (temporarily) been eased. Russian troops have finished their ‘military exercise’ and financial market tension is melting away. And no, of course it’s not ‘all over’.

The economic fallout, notably in Russia, will be significant and building political stability in the Ukraine remains a huge challenge. But financial markets are short-sighted animals and everything is calmer.


Bloomberg has calculated that Russia and Ukraine’s billionaires saw $12.8bn wiped off their collective fortunes yesterday, as global stock market slid. (details here).

Stock markets bounce back in relief rally

European stock markets are bouncing back, following the Russian stock market higher on hopes that the Ukraine crisis may be easing a little.

News that Russian troops close to the Ukraine border will return to their camps by Friday sent the main indices bouncing back.

Investors are calculating that the risk of military conflict between the two countries had fallen.

The FTSE 100 index has leapt 80 points, or 1.2%, recovering most of yesterday’s 101-point slide.

Germany’s DAX, which is heavy with companies with large exposure to the Russian economy is up almost 1%. It tumbled 3.4% yesterday, in its biggest one-day slide since November 2011.

Spain, Italy and France are all up over 1%.

And in Moscow, the MICEX is almost 4% higher as traders rush to buy stocks, a day after battling to dump their portfolios.

The ruble is still also up 0.8% against the US dollar at 36.3 to the $.

Ishaq Siddiqi of ETX Capital says share are rallying because “global markets have been anxious that the mobilisation of Russian troops could mean something more serious.”

He added:

Market sentiment remains fragile and anxious at best with traders transfixed with developments in the Ukraine.

Russian troops began the military exercises almost a week ago, close to the country’s border with Ukraine. Their presence had stoked fears that that could be mobilised into pro-Russian areas of eastern Ukraine.

Bloomberg flags up that the exercises are ending ‘on schedule’, with the troops now expected back at their bases by this Friday, March 7.

Here’s Associated Press take on the latest developments in Ukraine:

Vladimir Putin ordered tens of thousands of Russian troops participating in military exercises near Ukraine’s border to return to their bases as U.S. Secretary of State John Kerry was on his way to Kiev.

Tensions remained high in the strategic Ukrainian peninsula of Crimea with troops loyal to Moscow fired warning shots at protesting Ukrainian soldiers.

It was not clear if Putin’s move was an attempt to heed the West’s call to de-escalate the crisis that has put Ukraine’s future on the line.

It came as Kerry was on his way to Kiev to meet with the new Ukrainian leadership that deposed a pro-Russian president, and has accused Moscow of a military invasion. The Kremlin, which does not recognize the new Ukrainian leadership, insists it made the move in order to protest millions of Russians living there.

AP’s full story is online here.


UPDATED: Oil is also falling, with Brent crude dropping almost 1.5% to $109.60 per barrel.


The gold price has dropped almost 1% this morning, down $11 per ounce at $1,338, having soared to a four-month high yesterday on the back of the Crimea crisis.

Russian MICEX claws back some losses

Good morning.

The Russian stock market is rallying this morning after yesterday’s torrid selloff, on reports that Vladimir Putin has instructed troops on military exercises in Western Russia, close to Ukraine, back to base.

Interfax reported early this morning that Putin had ordered “Russian military units and divisions involved with surprise drills to return to their permanent bases”.

There’s no specific reference to Crimea, though, after days of growing pressure on Moscow over the occupation of the peninsula over the weekend.

Stocks leapt in Moscow as the news broke. After spiking 5%, the MICEX index settled up around 3% — clawing back around a quarter of Monday’s heavy losses in which around $55bn was wiped off the market.

The ruble is also strengthening having hit record lows yesterday. It’s up around 0.8% at 36.2 rubles to the US dollar.

Oil and gold have also dropped in early trading, reflecting relief that the threat to the global economy could be easing.

The news comes as John Kerry, US secretary of state, heads to the Ukranian capital, Kiev, later today, as Western government’s debate how best to respond to Putin.

Here’s our latest Ukraine news story from last night: Ukraine crisis: US-Europe rifts on Russia surface

I’ll be tracking the latest development in the financial markets, the world economy, the eurozone and business through the day. © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Bank of England governor says recovery is gathering pace, but output gap means it’s too early to raise borrowing costs. New forward guidance based on spare capacity. Here are the details of the new plan and the market’s reaction to it…


Powered by article titled “Bank of England rewrites forward guidance, signalling no rate rise until 2015 — inflation report live” was written by Graeme Wearden, for on Wednesday 12th February 2014 15.07 UTC

The latest news story

Our full, updated, news story on forward guidance is online here:

Bank of England to keep rates at 0.5% for at least another year

So we’ll take a break here in the blog, but will be back with any major developments….

Forward Guidance 2: What the readers say

Thanks, as ever, for the ace comments below the line – here’s a selection:

So, only 1-1.5% spare capacity.

But growth of 3.4%, 2.7% and 2.8% over three years.

With rates only going up slightly in, say, 18 months.

That makes no coherent sense, surely?

‘But the number of part-time workers looking for full time work is near a record high. And he cautions that “the recovery as yet is neither balanced nor sustainable.”’

It astonishes me that, apparently, part-time working has never been regarded with the significance it should: this, and the fact that “hours worked” is also to be given more consideration in the Bank’s assessment of economic progress, underlines his caution that “as yet the recovery is neither balanced nor sustainable.”

House of cards?

It is almost as if the Bank of England is trapped. Right now it should raise rates, but maybe it knows why the system cant take it if it does.

smoke and mirrors – we cant put up rates unless Europe and US also put up rates, its a macro economic war,

Italian PM to announce new plan tonight

Important developments in Italy, as coalition prime minister Enrico Letta tries to maintain his position as government leader in the face of a possible challenge from centre-left reformer Matteo Renzi (see 8.49am for details).

After holding talks with Renzi today, Letta has decided to announce his new plan for the coalition at 6pm local time, or 5pm GMT.

Here’s the statement:

“Enrico Letta will present “Commitment Italy”, a proposal for a coalition pact between the parties that support the government.”

Democratic Party (PD), the coalition partner (and Letta’s own party) will then decide on Thursday whether to support the current PM. If not, then PD leader Renzi could take over.

Renzi himself has tweeted that he will make his own position clear tomorrow “in the open” at the PD meeting:

A calm start to trading in New York. Here’s the opening prices:

  • S&P 500 UP 1.06 POINTS, OR 0.06 PERCENT, AT 1,820.81 AFTER MARKET OPEN


This may be a little awkward for the Bank — today’s quarterly inflation report (page 12) shows that forward guidance made households slightly less confident about future economic prospects.

Just 1% said they felt much more confident, while 14% were slightly more confidence. But 12% were slightly less confident, and 4% much less confident.

Here’s the chart (which also shows that, as Carney said earlier, the pledge did make firms more upbeat about their future prospects)


Economist Shaun Richards is unimpressed by Mark Carney’s defence of forward guidance:

Apparently the first version has been so successful it is to be immediately abandoned! It is being replaced by something so vacuous that it cannot go wrong. If you add eighteen new metrics to a system there is bound to be something you can hang your hat on.

Rather ironically this seems to involve the original inflation target as Mark Carney does what Elvis Presley described as this.

“Bright in early next morning /

it came right back to me.”

Here’s his analysis: Mark Carney’s honeymoon period is over as Forward Guidance is rebooted – let’s hope his luck isn’t

Two arrests in Rolls-Royce inquiry

In other news, two men were arrested in London this morning as part of the Serious Fraud Office’s investigation into British aerospace and defence group Rolls Royce, and its activities in Asia.

The SFO told Reuters that:

”In connection with a Serious Fraud Office investigation, we can confirm a number of search warrants have been executed at various properties in London today. Two men were also arrested.”

The SFO opened its criminal inquiry into Rolls-Royce just before Christmas, around a year after allegations of allegations of malpractice involving the aeroplane engine maker in Indonesia and China came to light.


Larry Elliott, our economics editor, has returned from the Bank of England to put his finger firmly on the problem with the rejigged forward guidance on monetary policy — can the Bank really judge the output gap correctly?

Here’s a flavour:

Put simply, the output gap is the difference between the actual level of activity in the economy and its potential level. Policy makers assume that the economy has a long-term trend rate of growth, which in the UK’s case is between 2-2.5%. In recessions, activity falls below this level and so there is scope for the economy to grow faster than trend during recovery periods without inflation picking up. But it is also assumed that some of the damage caused by recessions is permanent, because investment is scrapped and unemployed workers lose their skills.

As a result calculation of the output gap is highly subjective. The Treasury publishes a range of estimates from forecasters and these vary from 0.8% to 6%. The Bank’s estimate is 1-1.5%, but that figure depends on a) the economy’s trend rate of growth; b) the permanent damage caused by the recession and c) likely productivity growth in the future.

All of which means forward guidance is now extremely fuzzy….

More here: Forward guidance version 2: will the public believe it?

Forward Guidance 2 could threaten financial stability

Here’s the case against Forward Guidance 2, from Eimear Daly, head of market analysis at Monex Europe.

She warns that the Bank could easily threaten financial stability if it doesn’t end its exceptionally stimulative monetary policy in time.

Mark Carney has evolved forward guidance to its next phase. This is a nice euphemism for saying outright that forward guidance has been abandoned.

The Bank of England admitted that unemployment will reach the all-important 7% threshold in January, but the economy is by no means ready to stomach higher interest rates.

The next economic indicator that future rate rises will be linked to is labour market spare capacity – an economic idea so vague and hard to track that it provides the scope to keep policy ultra easy, despite a gathering recovery.

About that u-turn…..

The Independent’s economics editor, Ben Chu, has been rifling through the August 2013 quarterly inflation report, and reminds us that the Bank was more sceptical about using the output gap as a target six months ago:

While the FT’s Chris Giles flags up that the Bank argued against ‘fuzzy guidance’ initially:

The new forward guidance may sound like “we won’t raise rates until we decide it’s the right time to raise rates”.

It’s rather more complicated than that, of course (don’t forget those 18 different economic indicators that the bank will be tracking!). Ian Stewart, chief economist at Deloitte, sums it up thus:

Forward guidance has morphed into something fuzzier, but what is clear is that the Bank is in no hurry to raise rates and, when it does, it intends to go slowly. Mr Carney believes that the recovery is gaining momentum. The last thing he wants to do is to snuff it out with aggressive interest rate hikes.

CBI likes the look of Forward Guidance 2

Over to the CBI for the business reaction — its chief policy director, Katja Hall, agrees that there’s still a significant output gap in the UK economy:

“Forward guidance has clearly been effective in influencing companies’ expectations of when interest rates will rise and in cementing their confidence in the recovery.

“The Bank’s new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates. And the Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.”

People may be less willing to invest or spend on the high street because the new forward guidance provides more uncertainty, suggests Howard Archer of IHS Global Insight:

Son of Forward Guidance – necessitated by unemployment falling much faster than the Bank of England had forecast when it set up the policy last August – may well prove to be a more difficult entity for businesses and consumers to understand given that it is based on the overall state of the economy and is not linked to one variable….

Consequently, consumers and businesses may well find it more difficult to confidently gauge what is likely to happen with interest rates going forward, which could lead to greater caution in their spending decisions. While some degree of greater consumer caution may be no bad thing given concern over debt levels, the Bank of England does want to see businesses invest.

Dr Gerard Lyons, economics advisor to Boris Johnson, also reckons the Bank has done the right thing:

Rob Wood of Berenberg Bank has applauded Mark Carney’s willingness to tear up his first attempt at forward guidance, in the face of an improving economy.

Showing no problems at all with an abrupt U-turn, Mark Carney and the Bank of England binned their threshold based forward guidance and returned to inflation targeting, with a few bells and whistles attached. Rather than expecting the first rate hike in late 2016, as they did back in August, their forecasts are now consistent with a hike in Q2 2015. Given that past BoE forecasts have been so spectacularly wrong, we remain comfortable forecasting the first hike for Q1 2015.

Wood also argues that the new forward guidance is effectively a return to the old days of targeting inflation:

Guidance 2.0 is returning to inflation targeting with some added bells and whistles. Getting down to brass tacks, the BoE said clearly that it is planning to adjust interest rates as slack in the economy is eroded in order to deliver inflation around the target. That is inflation targeting. The inflation forecasts give now, as they always have, a steer on what the BoE think about interest rates.

The added bells and whistles are a continued break with the Mervyn King era; additional talk about where the BoE thinks interest rates are heading and a list of indicators that it will use to judge whether the economy is evolving as expected.

That was a missed opportunity to quiz Mark Carney on important issues, agues Simon Nixon of the Wall Street Journal:

Manos Schizas, Senior Economic Analyst at Association of Chartered Certified Accountants, says Carney is right to warn that the UK recovery is still fragile.

Schizas adds, though, that the new forward guidance (based on unemployment, involuntary part-time work, hours worked, participation, labour productivity, wages, and a range of other indicators) is hardly straightforward:

On the one hand, this will reassure those who say the recovery is not yet robust enough for the Bank to ease up on its stimulus – and this is the Governor’s view as well. On the other hand, making a call against all of these multiple variables is more art than science, which will create more uncertainty.

Stewart Cowley, portfolio manager at Old Mutual Strategic Bond Fund, puts his finger on the problem with the original forward guidance – the unemployment rate isn’t easy to predict:

“Setting strict economic targets for interest policy is like playing soccer with a rugby ball – it’s too imprecise and no matter your intentions it will bounce off course.

Unemployment numbers don’t take into account the breadth of human experience and is too coarse a measure to be useful for policy setting. In that case it isn’t surprising that the BOE abandons strict numerical targeting. What a capitalist economy like we have in the UK needs is a new and vigorous credit cycle built on a stable banking system and a working population that has the confidence and self-assurance to borrow. The BOE would do well to concentrate on that.”

Forward Guidance – all the best reaction

There’s masses of reaction to the quarterly inflation report – I’ll round up the best.

Jeremy Cook, chief economist at the foreign exchange company World First, dubbed the new policy “forward suggestion”, with an American flavour.

“With the Bank of England unable to meaningfully target unemployment for interest rate increases, it seems that Carney’s ‘forward guidance’ strategy is now better described as a plan for ‘forward suggestion’.

“The plan is to keep rates low after the threshold has been hit, much like the Federal Reserve’s forward guidance has changed in the past few months as it has become clear that job increases have come on quicker than had been expected.


A reminder from the Bank of England about how it handles the levers of monetary policy:

Inflation Report – the key charts

Here are the key fan charts from the Quarterly inflation report — the darker coloured areas show where the Bank reckons inflation and growth are most likely to proceed:

A quick summary

To recap — the Bank of England has revised its forward guidance on interest rates, pledging not to raise interest rates until the UK economy has mopped up most of the output lost in the financial crisis.

It is now suggesting that the first interest rate rise could come in just over a year’s time, in the second quarter of 2015.

The new policy was unveiled as the Bank conceded that its original guidance, released just six months ago, needed to ‘evolve’ as the UK unemployment rate has fallen more sharply than expected.

The new forward guidance is based on the remaining slack in the UK economy – measured by a range of indicatorsin an attempt to measure productivity as well as joblessness. There’s no single trigger for a rate rise — putting the BoE closer to other central banks.

In sometimes sharp exchanges with journalists in London, governor Mark Carney denied that forward guidance was a flop, saying that the policy had given businesses the confidence to invest.

He also insisted that future rate rises would be gradual, and did not see a return to historic averages (say 5%) for some time.

The Bank also hiked its growth forecasts, seeing GDP rising by 3.4% this year. And its chief economist, Spencer Dale, predicted that wages will probably finally rise faster than inflation by the end of this year.

The pound jumped on the news, up almost a cent at $1.6535.


Carney: We don’t want to have forward guidance forever

Final question — is this the governor’s final word on interest rate policy, or should we expect Forward Guidance 3?

After a pause, Carney insists that the Bank does not want to keep forward guidance forever. And turning to his colleagues alongside him, he asks whether they’ve enjoyed the last five years.

Not particularly, they grunt back.

Our aim, Carney reiterates, is to move from the recovery phase to the expansion phase — and to make sure that this expansion phase is durable.

That’s the end of the press conference. Details and reaction to follow!

A question about the eurozone.

Is the Bank of England worried that the German constitutional court has just asked the European Court of Justice to examine the European Central Bank’s OMT programme (a pledge to do ‘whatever it takes’ to protect the single currency by buying government bonds)?

Carney says that the Bank isn’t an expert on legal issues (especially German law) — and bats the question over to Paul Fisher, Executive Director of the Bank of England’s Markets division.

Fisher says there is now market confidence in the future of the euro – pointing to charts in today’s report showing how the borrowing costs of peripheral countries fell closer to Germany’s once Mario Draghi announced the OMT programme.

Are we getting carried away with talk of a UK recovery, with growth in 2014 now seen at 3.4% (now 2.8%)?

Carney says that the Bank is “not complacent at all” about the recovery.

Carney also sways away from a question on potential risks to the UK economy if an independent Scotland were to keep the pound (a hot topic today)

He says that the Bank’s job under all circumstances is to implement the mandate set by the democratic elected athorities.

We will execute whatever we’re given.

Carney points out that consumers have been proving much of the stimulus of the recovery — it’s “very important” that there is a transition to business investment to drive growth.

Why didn’t the Bank copy the Federal Reserve and publish a chart showing its predictions for future interest rate rises, asks Szu Ping Chan of the Telegraph.

Carney explains he’s not a fan of these charts, as they are inevitably based on the accuracy, or otherwise, of the Central Bank’s own forecasts. So they’re not a pure reaction function — they show “the path of rates if your forecasts turn out to be true”

Governor, you don’t want to provide time-contingent forward guidance, but can you rule out a rate rise in 2014?

No, that would be time-contingent forward guidance, responds Carney, driving the question to the boundary.

Bank sees real wages rising later this year

When might real wages finally turn positive (ie, grow faster than inflation)?

Chief economist Spencer Dale says the Bank hopes it could finally happen in the second half of this year – but only if productivity recovers.


Key event

City AM asks whether the Bank can see interest rates returning to historically normal levels.

Carney says he’s not a pessimist on the ability of the economy to return to interest rates which were once consistent with stable inflation and growth.

But, that is well beyond the Bank’s forecast horizon.

The financial markets are pricing in the first rate rise in spring 2015, and returning gradually to 2% from there – are they right, asks Hugo Duncan of the Daily Mail.

Carney doesn’t endorse, or otherwise — he says the Bank isn’t publishing its own forecast path for rates.

What’s your message to business today?

The message is that we will set an appropriate path of monetary policy so that jobs and businesses grow, says Carney.

Businesses are good listeners and seem to understand messages pretty well, he adds, pointedly.

Unlike pesky journalists?

Carney again denies that he blundered by picking the unemployment rate to underpin forward guidance.

It’s a good measure, he insists – it doesn’t get revised (unlike, say, GDP) and it shows slack in the economy being used up. It was the right metric, not the wrong one.

Carney reiterates that the Bank wants to eliminate spare capacity in the economy over the forecast horizon.

Deputy governor Charlie Bean also weighed in on this point, suggesting that the MPC would probably want to start tightening policy before all the space capacity is absorbed/closed.

Update: These reuters snaps explain Bean’s point:





Chris Giles of the FT puts an elegant boot in — the governor’s first stab at forward guidance was billed as for the medium term and lasted six months, so how long until this effort needs to evolve?

Carney doesn’t offer a hostage to fortune, but concludes that forward guidance will be with us for a while.

Pound rises

The pound has jumped by almost a cent since the inflation report hit the wires — up to $1.654 against the US dollar.

Asked about this by Emma Charlton of Bloomberg, Carney points to the Bank’s new, raised, growth forecasts — saying that it is more optimistic about the eurozone for the first time in a while.


Our own Larry Elliott reminds Mark Carney that the Bank failed to spot the financial crisis, misread the recession, often misreads inflation, so how can the public believe a word it says?

Carney defends the Bank’s record – claiming it got the big decisions right (when to cut rate, when to see through short-term inflationary pressures, when to buy government gilts).


Ed Conway asks Mark Carney whether, with hindsight, he would have done things differently back in August if he’d known how poor the Bank’s forecasts would prove to be.

Carney indicates that he might perhaps have set the threshold differently if he’d known then what he knows now — before (as Conway slips a second question in) staunchly defending his flagship policy:

If I’d known then when I know now, than absolutely I’d have given a clean message to businesses – a message they understood, which many have responded to, says Carney.

That message has “absolutely” helped the recovery, he concludes.

So no admission that forward guidance was a mistake.


What is the public meant to make of forward guidance based on the output gap, asks Phil Aldrick of The Times.

Carney says that the recovery since August has been stronger than expected – that’s a goood thing

We’ll update our definitions of the state of the economy regularly, to give a medium-term perspective to households and business on where rates are likely to go.

And the key point is that productivity has not recovered — the Bank doesn’t see it hitting pre-crisis level for a while.


Onto questions — Hugh Pym of the BBC says the Bank has torn up the guidance it announced six months ago, what are borrowers to make of it?

Carney defends himself — saying the August policy worked. We’re in a different place now, we’ve taken stock, and revised the new guidance.

This is the take-away quote from Carney, explaining that as forward guidance evolves:

The MPC will not take risks with this recovery.

Here’s some other top lines:

“Forward guidance is working” – “uncertainty about interest rates has fallen” and “most importantly, businesses have understood the guidance” – with three quarters saying it has boosted their confidence according to a Bank survey.


The New Forward Guidance

Carney has now outlined his new forward guidance – and it’s a much more complex policy than before. Here’s the key points:

1) For the first time, the Bank will not raise rates until the spare capacity in the UK economy has been fully absorbed (which, as explained at 10.30am, won’t happen until 2015).

2) It will consider a broad range of indicators — including the unemployment rate, business surveys, the number of hours worked

3) When rates rise, they will do so gradually. Exceptional stimulus will remain appropriate for some time

4) The Bank is publishing a clutch of new forecasts (I think he said 18) – they won’t all be right, Carney said, but they’ll show the Bank’s view.

5) The Bank will hold its stock of £375bn bonds bought under quantitative easing at least until the first rate rise.

Carney: The recovery is neither balanced not sustainable, yet

Carney then concedes that the unemployment rate has fallen much faster than we expected, and will hit the initial 7% threshold “in the spring”.

He argues that some of the sharp fall is because the long-term unemployed total has fallen — that means that a lower rate of unemployment is consistent with stable inflation.

But the number of part-time workers looking for full time work is near a record high.

And he cautions that “the recovery as yet is neither balanced nor sustainable.”

Productivity is still below its pre-crisis level, wage growth is weak, and the household savings rate will probably fall further, he points out.


The inflation outlook has been “more benign” than the Bank expected, Carney says – (ie, there’s not much pressure to raise rates to control the cost of living).

Mark Carney begins by pointing to the encouraging signs in the UK economy — saying the recovery has gained momentum recently. Jobs are being created at a record pace.

And he defends his forward guidance – saying that it helped calm concerns that rates would rise too soon. Businesses got the message, he says – it encouraged them to invest and hire.

Inflation Report released

BREAKING: the Bank of England has signalled it will keep interest rates on hold at the historic low of 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014.

It had concluded that there is still too much spare capacity in the UK economy to stomach a rate rise yet, despite unemployment likely to fall to 7% in January.

From the Bank, Larry Elliott and Angela Monaghan report.

Threadneedle Street said in its February Inflation Report that a lack of inflationary pressure, spare capacity, and “headwinds” at home and abroad, meant that“bank rate may need to remain at low levels for some time to come”.

Seeking to reassure businesses and households, the Bank’s Monetary Policy Committee said that when rates did eventually go up, they would do so only gradually, settling around 2-3% – below the pre-crisis norm of around 5%.

“Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending.”

Last summer the Bank’s governor Mark Carney announced a “forward guidance” strategy, under which the Bank would consider a rate rise only when the unemployment rate – then 7.8% – fell to 7%. At that time it was not expecting the jobless to fall to the threshold until early 2016.

The MPC now expects the next set of official figures to show that the jobless rate fell to 7% in January, forcing it to assess whether the time is right to raise rates for the first time in five years from the all-time low of 0.5%.

It concluded that there is still spare capacity amounting to between 1-1.5% of national output, that can be absorbed by a growing economy before rates need to rise.

The Bank sharply upgraded its growth forecasts for 2014 to 3.4% from its November forecast of 2.8% – much higher than other predictions from the Office for Budget Responsibility and the International Monetary Fund.

The Bank is pencilling in a big surge in both business and housing investment of 11.5% and 23% respectively this year. Consumers are expected to run down their savings to compensate for another year of weak earnings growth.

The Bank is expecting the economy to grow by 2.7% in 2015 and by 2.8% in 2016.


Ever wanted to put some questions to the head of a UK bank? Now’s your chance.

Ross McEwan, RBS chief executive, will be holding a Q&A session with Guardian readers this morning — with our City editor Jill Treanor.

It starts at 11am – but you can suggest your question from 10.30am:

Q&A: Ross McEwan, RBS chief executive, answers your questions

Quarterly inflation report – how it works

Economics reporters are corralled at the Bank of England now, looking at an embargoed copy of the new Quarterly Inflation Report. There will be a flurry of newswire flashes at 10.30am GMT exactly when the report is released.

Mark Carney and senior colleagues will then hold a press conference at the Bank — starting with a prepared statement. The press conference will be streamed live here, and should also be carried on the main news channels.

The Bank will probably tweet details itself (they’re terribly up to date at Threadneedle Street)

The City is fairly calm this morning. The pound is unchanged against the dollar at $1.645 as investors wait to hear from Mark Carney in just under 30 minutes time.

The FTSE 100 has risen 23 points to 6696, led by supermarket Wm Morrison (and those rumours of a possible buyout). Mining stocks are also up, after China reported a surprisingly strong rise in imports and exports in January. That’s bolstered optimism for the global economy.

Here’s Nick Fletcher’s opening market report: FTSE moves higher after Yellen speech and ahead of Carney update

Jane Foley of Dutch bank Rabobank points out that UK inflation has finally fallen back to 2% (the BoE’s target), taking pressure of the central bank to raise borrowing costs.

She reckons Carney would be unwise to cut the jobless target to 6.5% — that could damage its credibility.

Instead, the governor could copy the Federal Reserve and argue that the recovery in the labour market hasn’t reached the sustainable point where justify higher borrowing costs.

She told clients :

Fed chair Janet Yellen spent some time in her appearance in Congress yesterday talking about underemployment in the US economy.

Carney could follow a similar tack and in effect water down the significance of the unemployment rate as a measure of the broad health of the labour market.

These charts, from the ONS, show how the UK unemployment rate has tumbled from 7.8% to 7.1% in the six months since forward guidance was announced (depicted by that black splodge).

But on a historic base, the jobless rate is still high:

And by simply targeting the jobless rate (as a measure of spare capacity in the UK economy), the Bank isn’t considering other factors — such as the failure of wages to keep pace with inflation since the financial crisis began.


One of the founding members of the Bank of England’s Monetary Policy Committee, Dame DeAnne Julius, has predicted that forward guidance will be broadened today.

Speaking on the Today programme this morning, she said Mark Carney will adjust the plan to include wider analysis of the UK labour market.

She also offered Carney some support, saying forward guidance was the right idea at the time – but now needs a rethink.

New power struggle in Italy

Over in the eurozone there is fresh political upheaval in Italy — where the country’s prime minister, Enrico Letta, faces the threat of being ejected from office.

An internal row in Letta’s party, the Democratic Party, means he could be succeeded by Mattio Renzi — the charismatic leader of PD who is dubbed, by some, Italy’s Tony Blair or Gerhard Schröder.

Renzi, the logic goes, is the best man to drive through structural economic reforms in Italy and get its economy growing again.

PD will hold an internal meeting tomorrow night — where they could decide to no longer back Letta, a move that would push Renzi into power.

The FT has a good take on the situation:

Mr Letta, who came to office last April after elections a year ago resulted in a hung parliament, has dismissed reports that he intended to resign. On Tuesday he stated that he would soon announce a new pact with his existing centre-right coalition partners with an ambitious programme to lift Italy out of recession. This plan would also involve a cabinet reshuffle.

The Democratic party leadership is due to discuss Mr Letta’s proposals and the fate of the government on Thursday, but expectations were rising that Mr Letta would fail to win his party’s support and be forced to resign.

Should that happen, then Giorgio Napolitano, the 88-year-old head of state with constitutional powers to dissolve parliament and nominate a prime minister, could ask Mr Renzi to form a new government – possibly as early as this weekend – rather than call snap elections

The financial markets are taking the news calmly. Italy’s government debt is trading pretty flat this morning, as bond trader Gustavo Baratta reports from Milan.

Our economics editor, Larry Elliott, laid out the five options for Mark Carney over interest rate forward guidance in his column on Monday.

They boil down to:

  • cut the threshold where the Bank might start considering raising borrowing costs to a 6.5% jobless rate, rather than today’s 7%.
  • Broaden the target, to include measures such as average earnings growth or the increase in nominal GDP (growth unadjusted for inflation)
  • Promise that the Bank won’t raise rates for at least two years
  • Copy the US Federal Reserve and release a chart showing the Bank’s view of where borrowing costs are heading
  • Copy the European Central Bank and embrace unconditional forward guidance — saying that rates will stay at their record low levels for an “extended period”.

That last option is quite risks, given the Bank’s patchy forecasting record. As Larry puts it:

Carney would say that the MPC is looking at a whole bunch of indicators and will start to talk about tighter policy when they are flashing amber.

On past form they will be flashing amber for some time before the Bank notices – so that moment is some way off.

More here: Bank of England’s method of setting interest rates needs reviewing

Reckitt Benckiser cautious on emerging markets

Reckitt Benckiser, the consumer products giant, has joined the ranks of companies warning that emerging economies are a trickier place to do business.

The firm (maker of Cillit Bang, Air Wick and Strepsils) told shareholders:

Market conditions are more challenging now than at the beginning of last year, particularly in some emerging markets.

It reported a 6% drop in sales across Russia, the Middle East and Africa (or RUMEA in Reckitt speak), blaming “a further slowdown in Russia and continued socio-political challenges in certain markets impacted growth in the quarter”.

Wm Morrison ‘looking for a buyer’

A flurry of excitement in the City this morning — the family behind supermarket chain Wm Morrison is reportedly inquiring whether a private equity firm might care to take them over.

Shares in Morrisons jumped 5% at the start of trading — although it’s not clear that a bid is imminent.

As Bloomberg put it:

The founding family of U.K. grocer Wm Morrison Supermarkets Plc has contacted private-equity funds such as CVC Capital Partners Ltd. and Carlyle Group LP to weigh their interest in taking the retailer private, people with knowledge of the matter said.

The family has so far been unable to find a buyout partner due to concerns about Morrison’s slow sales growth and the size of the deal, said two of the people, who asked not to be named because the talks are private. The Morrisons hold about 9 percent to 10 percent of the grocery-market chain, two of the people said.

The family also has approached other private-equity funds including Apax Partners LLP, the people said. However, Apax has decided not to pursue a deal, one of the people said.

More here: Wm Morrison Founding Family Said to Gauge Buyout Firms’ Interest

Quarterly Inflation Report: What the economists predict

Capital Economics’s Jonathan Loynes says Mark Carney would be wise to widen the scope of interest rate forward guidance, when he presents the Bank’s quarterly inflation report today:

There have been several hints from Governor Mark Carney and his colleagues to suggest that today’s Inflation Report will see the MPC’s existing single variable, state-contingent forward guidance dropped in favour of a rather broader form of guidance. In place of the unemployment forecast chart, or at least alongside it with greater prominence, there seems likely to be a discussion, and perhaps charts, of a number of other measures of labour market slack.

The broad message will be that borrowing costs are staying at their record low for some time, Loynes added….

While this change would help to tackle the problems associated with making monetary policy excessively dependent on one single indicator, it might also make it harder to extract a clear and straightforward message from the Inflation Report. Perhaps, then, the best course of action will be to concentrate most closely on the one thing we know will be included in the Report, the MPC’s inflation forecast. With inflation itself having fallen more sharply than the Committee expected back in November, while Q4 GDP growth was weaker and the pound is stronger, the message from that at least should be relatively clear. Interest rates are going nowhere for some time yet.

Chris Weston of IG reckons the Bank could learn from the Federal Reserve:

A view I feel seems realistic would be to change guidance in-line with the Fed; whereby rates will stay low even if the unemployment rate drops through the threshold or rates are staying low for a long period.

Clearly there is still slack in the UK economy and similar to Japan, earnings are still far too low, relative to the level of inflation, and certainly too low to deal with a central bank hiking interest rates.

Mark Carney could even factor in the UK’s cost of living crisis by saying the Bank won’t hike rates until real wages are rising, suggests Michael Hewson of CMC Markets:

The key question today will be whether or not Mr Carney either quietly drops the unemployment threshold, revises it, or pushes the market in the direction of average wage growth relative to price inflation, or whether he toughs it out by insisting that the unemployment rate was one indicator, and only a threshold, along with the inflation rate, and that because both are falling the need for a rate hike remains some way away.

It seems highly unlikely that he would tweak the guidance lower to 6.5% because he would run the risk of the Bank losing credibility, at a time when its credibility is already stretched due to its inability to hit its inflation target over the last five years.

Bank of England’s quarterly inflation report released this morning

Good morning, and welcome to our rolling coverage of the latest events across the financial markets, the economy, the eurozone and business.

A week may be a long time in politics, but six months is all too short in the world of central banking. Especially when it comes to predicting when interest rates might rise from their current record low levels.

When Mark Carney presents the Bank of England’s new quarterly inflation report this morning, the governor will have to admit that the “forward guidance” unveiled so proudly six months ago needs serious remedial attention.

Having pledged in August not to consider raising borrowing costs until the UK unemployment rate has fallen to 7% (which the Bank envisioned sometime in 2016) Carney has watched the jobless rate slide more dramatically than a Sochi snowboarder, from 7.7% to just 7.1% at the last count.

Carney has stated many times recently that the UK economic recovery isn’t strong enough to support a tightening of monetary policy. So the governor will be under serious pressure to convince the judges in the City, and the media, that he’s still got a firm grip on monetary policy.

Economists predict that he’ll adjust forward guidance — adding a wider range of factors, rather than just the blunt 7% target that has put the Bank’s forecasting credibility on the skids. I’ll round up some predictions shortly.

Alongside the updated forward guidance, today’s Inflation Report will also contain the Bank’s new forecasts for UK inflation and growth. It’s released at 10.30am sharp, followed by a press conference with Fleet Street’s finest….

Updated © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

The British economy expanded by 1.9% in 2013– the fastest GDP growth since the first quarter of 2008, after 0.7% q/q growth in final three months of last year. But the UK economy still remains 1.3% smaller than the pre-crisis peak…


Powered by article titled “UK economy grows by fastest rate since financial crisis – live” was written by Graeme Wearden, for on Tuesday 28th January 2014 14.55 UTC

UK economy posts best annual growth since 2008

Time for a very brief catch-up.

Britain’s economy has posted its fastest annual growth since before the Great Recession, expanding by 1.9% during 2013.

The Office for National Statistics reported at 9.30am that GDP rose by 0.7% in the final three months of 2013.

Chief economist Joe Grice said that, after a long haul, there are signs that the recovery is more broad-based.

We have now seen four successive quarters of significant growth and the economy does seem to be improving more consistently.

The growth was, predictably, welcomed by Conservative ministers as a sign that the government’s economic plan is working.

George Osborne said:

“These numbers are a boost for the economic security of hardworking people.

Growth is broadly based, with manufacturing growing fastest of all.

It is more evidence that our long term economic plan is working. But the job is not done, and it is clear that the biggest risk now to the recovery would be abandoning the plan that’s delivering jobs and a brighter economic future.”

But shadow chancellor Ed Balls said Britain’s cost-of-living crisis wasn’t resolved, and backed business secretary Vince Cable’s warning last night that the shape of the recovery was wrong.

Deputy PM, the Liberal Democrat’s Nick Clegg, welcomed the GDP news but also cautioned that deficit-reduction plans need to “fairly” share the burden.

• City economists broadly welcomed the data — Berenberg Bank’s Rob Wood reckons we could see growth rise to 3% this year.

Britain’s Services sector grew by 0.8% in the last quarter. Industrial production was up 0.7% (with manufacturing output jumping by 0.9%), but construction output fell by 0.3%.


Some economists warned that this shows Britain has failed to rebalance its economy since the financial crisis began. The best-performing part of the services sector was the “Business services and finance” section.

The IPPR said that the recovery could stumble unless firms use their cash piles on business investment.

Productivity remains a concern, too, with Duncan Weldon of the TUC flagging up that the number of extra hours worked is rising faster than GDP.

An opinion poll from ITV News and ComRes found that many people fear inequality is rising. It also found that just 22% of people believe George Osborne should get the credit for the recovery.

And with that, Nick Fletcher is taking over for the rest of the day. Cheers all. GW

ITV News/ComRes poll on the economy

Three quarters of Britons believe that the gap in wealth between rich and poor is widening in the UK, and barely a fifth reckon George Osborne should get the credit for the recovery.

Just two findings from an opinion poll published by ITV News and ComRes this lunchtime, which showed that many people say they haven’t felt the benefits of the upturn..

It found that a majority saw inequality rising as the UK recovery picks up pace — with 61% agreeing that “economic growth has only really benefitted wealthy individuals” so far.

2,052 British adults were interviewed, online, between Friday 24th and Sunday 26th January 2014.


While 40% said the economy had got better over the last three months, 34% reported no change and 25% said it had got worse.

Here’s another highlight:

There is a degree of optimism moving forward, with three in ten (31%) British adults agreeing that they are confident that if the UK economy grows they will be personally better off, despite 38% disagreeing.

However, only one in ten (11%) agree that they have benefitted from the growth in the UK economy over the past six months and seven in ten (71%) disagree.

There are more details over on ITV News’s website.


Duncan Weldon: The productivity problem

Back to UK GDP, and I just chatted with TUC senior economist Duncan Weldon about growth and productivity.

He explained that while the 0.7% growth in Q4 2013 is clearly welcome, the balance of the UK economy still doesn’t look great.

Indeed, it appears to have become less balanced since the financial crisis – with the Service sector now above its pre-crisis peak but the Manufacturing and Construction sectors around 10% smaller.

Unless those parts of the economy grow faster than services, you’re not going to get a better balance.

But his main concern is about productivity — recent labour market stats show that the total hours worked rose by 1.1% in the three months to November. Today’s data shows 0.7% growth in the three months to December — so either there was a big drop in output in December (unlikely) or output per hour fell in Q4.

Britain’s falling productivity is one of the big economic mysteries of recent years — why is it taking more and more hours to produce the same amount of output since the crisis began?

Weldon reckons there are clues in the unemployment data. It shows a large rise in people employed in healthcare and human services (up over 4000,000 since the start of 2008) and real estate (+100k), but significant falls in construction (-200k) and manufacturing (->300k) over the same period.


The pattern, he concludes, is that Britain has created more lower-paid, lower-productivity jobs since the crisis began – which is very bad news in the long term for growth potential and living standards.

He’s just launched a longer blog post of his own about it. Worth a read:

The Changing Shape of the British Economy in Recession & Recovery


Switching to the US briefly, a slab of bad American economic news just hit the wires.

Orders for durable goods slumped by 4.3% in December — the biggest monthly fall since last July. Economists had expected that orders grew by 1.8% .

December was a grim month weather-wise in the US (ice storms gripped the country, and has already been blamed for recent poor employment data). So perhaps it’s all the snow’s fault…

GDP: more reaction

Our economics correspondent Phillip Inman writes that George Osborne cannot, and shouldn’t, crow too loudly about the UK growth:

Vince Cable and his supporters are well aware there are key components of the recovery that are still Awol. Business investment kept falling last year when it was supposed to take over from consumer spending as one of the main drivers of growth. Export growth has stuttered to a halt, leaving us with a persistent balance of payments problem before the country really starts to spend and suck in huge amounts of imports.

Then there is the London factor. Along with the south-east, the capital is bounding along while many regions are still propped up by the public sector.

But concerns about the nature and sustainability of the recovery are only one restraint on triumphalism.

The other is the need to continue selling austerity as a key election message. How can the government cheer while it tries to convince a weary electorate they must vote for more cuts?

Why George Osborne won’t be cheering too loudly about the latest GDP figures


Over on the Telegraph, Jeremy Warner recognises that the service sector growth, while welcome, shows how the recovery is still unbalanced:

In the end, the only route to sustainable, balanced growth is via gains in productivity and incomes, and regrettably, we are not yet there.

The economy has been juiced to give Coalition parties a boost ahead of the election, but with the deficit not yet tackled, glaring gaps in industrial competitiveness, severe supply side constraints, and a runaway housing market, we are still a million miles away from economic salvation.

Britain’s economic recovery: unbalanced and unsustainable

Looking through the reaction to the UK GDP, Ian Brinkley, chief economist at The Work Foundation, makes an important point — that Britain still has a productivity problem.

“The latest preliminary GDP figures confirm a firmly based, if not spectacular, recovery is underway. However, with employment growing faster than GDP the productivity figures for the final quarter of 2013 are likely to be very poor.

Preliminary GDP figures in recoveries are often revised upwards, so the underlying position may be a bit better than we think. Either way, however, we have a jobs rich and productivity poor recovery and that may not be sustainable over the medium term.”


Sticking with parliament, Ed Balls (amid much noise from the Conservative benches) is trying to ask about the economy. 

Speaker Bercow shushes them,  ’punning’ about how in tennis you get new balls after seven games (?)

Balls asks why Osborne won’t admit that living standards aren’t going up.

Osborne replies that Balls had claimed that a recovery couldn’t happen under the government’s plan, that the deficit would go up, that we’d never get growth without extra government spending.

On the other side of the house they need new crystal balls, Osborne concludes.

Very good, Chancellor, a joke about my name, responds the shadow chancellor.

They then clash about fiscal policy – Balls asks Osborne to rule out cutting the top rate of tax. The chancellor replies by attacking Balls’ plan to raise the rate to 50p, saying it’s anti-business and has been refuted by the IFS already.


Over in Parliament, MPs are holding Treasury questions — they’re discussing important issues like infrastructure spending (Danny Alexander is denying that the government is moving too slowly).

One opposition MP, Sammy Wilson, DUP member for East Antrim, just welcomed the news that the economy was growing, but asked what is happening to stimulate growth beyond London.

David Gauke, exchequer secretary, replies that employment has gone up in every region of the UK since the election.

The quarterly GDP data has become increasingly charged with political implications as the next election draws nearer (scheduled for May 2015).

Faisal Islam of Channel 4 comments:

Britain’s businesses need to stop sitting on their cash piles and crank up their investment, argues IPPR’s chief economist Tony Dolphin:

“The news that manufacturing is growing is welcome. But businesses have been sitting on a lot of cash, and the economy is still smaller than before the crisis. We need more business investment and a pick up in exports before we can truly see this economic growth as sustainable.

“Much of the recovery is based in London in the finance and business sectors but we need to see growth across the whole country. We need more sectors like the car industry taking up the baton of recovery, investing in plant and machinery to drive an increase in productivity. The jobs market held up better than expected but unless we see investment by companies in their capabilities we won’t see the growth in living standards that we want.

Dolphin is also concerned that few lessons have been learned since the crisis ripped through the financial markets and the global economy:

“Strong growth in the short-term does not mean that structural weaknesses in the UK economy that became more evident during the ‘Great Recession’ have been eliminated. Unless we move to adopt a new economic model, the recovery will prove unsustainable and bittersweet for those who do not benefit from it before it is extinguished.”


TUC: danger of unsustainable recovery

And here’s TUC general secretary Frances O’Grady’s take:

“Any return to growth is welcome, but this is the wrong kind of recovery and is two years late.

“The recovery is yet to reach whole swathes of the country or feed into people’s pay packets. This must change if the benefits of recovery are to be felt by both businesses and workers.

Unless the short-term boost provided by house prices and consumer debt is transformed into investment, rebalancing and higher living standards, the danger is that it will prove unsustainable.”

Nick Clegg: Recovery plan must be fair

Interesting comments from deputy prime minister Nick Clegg — he’s said that the task of repairing the country’s finances must be completed “fairly”.

I’ve taken the comments from PA:

“Our economy is moving in the right direction – unemployment is down and growth is up.

“The coalition Government has set Britain on the right course by repairing the country’s finances and helping to create over 1.6 million jobs in the private sector.

“But we must finish the job fairly, with further investment in jobs outside London and by cutting taxes for working people.”

The reference to fairness comes a day after the Liberal Democrats appeared to break away from the post-2015 deficit reduction plan laid out by George Osborne. Business secretary Vince Cable said further welfare cuts to save an additional £30bn in the next parliament were political and ideological commitment.

Service sector, the details…

The strongest performing part of Britain’s services sector was “Business services and finance”, which posted 1.2% growth in the last quarter.

That covers banks, insurers, technology companies, other financial firms, estate agents, and goods rental companies.

Sky’s Ed Conway just had an entertaining exchange of views with the Treasury after he argued that this showed the UK was NOT rebalancing:

Andrew Goodwin, senior economic adviser to the EY ITEM Club, reckons growth rates will slip back during 2014 because of the financial pressure on households:

The challenge now is to broaden out the recovery beyond the consumer and housing market. The enduring squeeze on real wages will limit the consumers’ ability to continue to drive the recovery forwards.

Investment and exports are likely to have improved in Q4, but not enough to drive growth forward at the pace we’ve become accustomed to. So the chances are that the pace of growth will slow a little through 2014.

Rob Wood of Berenberg Bank isn’t worried by the 0.3% drop in construction output in the last quarter, and

With all construction surveys red hot right now, construction should bounce back quickly and economy wide growth should accelerate further. There are absolutely no signs of growth slowing anytime soon. If anything, the risks are towards an acceleration.

He predicts strong growth both this year and next year, as the Bank of England’s exceptionally loose monetary policy reaps dividends:

The 2013 data show that low interest rates and a massive housing stimulus can be a very powerful tailwind indeed, offsetting headwinds to growth from factors like deleveraging. With every chance that some of the headwinds will fade this year, the monetary policy tailwind should drive UK growth higher over the next two years.

The recovery will snowball. We expect the economy to expand by 3.0% in 2014 and then 3.3% in 2015.

Stronger growth will put more pressure on the Bank to raise interest rates — although governor Mark Carney spent a lot of his time at Davos last week insisting that the UK economy isn’t strong enough yet.

Ed Balls: Vince Cable is right to express concerns

Shadow chancellor Ed Balls says he’s happy that the economy is “finally” growing. 

But, speaking on BBC News 24, he warned many people are suffering from a cost-of-living crisis with real wages still falling.

There is more to do to get a balanced strong economy, Balls says.

That’s exactly what George Osborne says, replies the BBC’s Simon McCoy. You’re in agreement with him?

No, Balls replies, He says he’s frustrated that George Osborne spent three years getting things wrong, and “choked off” the recovery.

He argues business don’t trust the chancellor, if they did they’d be investing more.

McCoy asks about Vince Cable’s comments last night about the shape of the UK economy.

Balls replies that Cable is right, and he’s reflecting the same concerns I’m expressing.

Have you spoke to each other about this?

No, he’s a grown-up politician who looks at these figures and sees a big difference between the government’s complacency and the reality, the shadow chancellor replies.

Balls adds that the risks in the global economy mean Britain needs a stronger recovery.

These are fragile times, and he’s [Cable] saying, as I’m saying, that this is not the strong sustained economy that we need.

Here’s our full news story about today’s GDP data:

UK economy grew 1.9% in 2013 – the fastest growth since 2007

The British economy grew at the strongest rate in six years in 2013, having ended the year on a strong note as the recovery became more entrenched.

The UK’s services and manufacturing sectors were the drivers of 0.7% growth in the fourth quarter, taking the annual growth rate to 1.9%, the strongest since 2007 before the financial crisis took hold.

The economy grew in every quarter last year according to the Office for National Statistics, providing a significant boost for the chancellor who has persistently argued that a burgeoning recovery is proof that his economic plan is working.


The CBI are also upbeat about prospects this year. CBI director-general John Cridland says:

The economy is growing and the recovery gathering momentum. This is good news, and we’re seeing improvement across many different sectors.

While I chew through the GDP data, our senior political correspondent Andrew Sparrow is liveblogging from parliament where top executives from Atos and G4S are being questioned by MPs over public sector reform.

Atos and G4S questioned by MPs: Politics live blog


Jeremy Cook, chief economist of World First, the currency exchange firm, reckons the UK ended the year in ‘fine fettle’, even though the service sector provided much of the growth, again….

“The 0.3% fall in construction output will be a concern, but I would hope that an increased level of investment throughout 2014 should reverse this.”

The government needs to do more to sustain the recovery, warns John Longworth, Director General of the British Chambers of Commerce.

Longworth said the rise in GDP confirms anecdotal evidence that UK firms are “ever more bullish”, but rising confidence isn’t enough:

 “It is of course heartening that Britain is now amongst the fastest-growing advanced economies. But more must be done to shore up the foundations of this recovery if it is to be a lasting one.

Unless we do much better on the three ‘T’s – training, transport infrastructure and trade support – our aspirations for investment at home and success around the globe cannot be achieved.



GDP: the key charts

This chart shows how Britain has, finally, posted four quarters of growth in a calendar year for the first time since 2007:

And this chart shows how Britain’s dominant services sector (in green) bounced back much more strongly from the crisis than industrial production (black), construction (yellow) or agriculture (blue):


ING: UK could achieve 3% growth in 2014

Reaction is flooding in:

ING’s James Knightley reckons that the UK could grow by up to 3% in 2014:

With business surveys, such as the purchasing managers’ indices and the British Chambers of Commerce reports indicating very strong activity across the economy it looks as though there is significant momentum at the beginning of 2014.

Employment continues to rise robustly, housing activity is very firm, confidence is on the rise, credit growth is improving and the UK’s key export market – the Eurozone – is showing some encouraging signs.

Here’s ONS chief economist Joe Grice’s official comment on today’s growth data:

“We have now seen four successive quarters of significant growth and the economy does seem to be improving more consistently.

“Today’s estimate suggests over four fifths of the fall in GDP during the recession has been recovered, although it still remains 1.3 per cent below the pre-recession peak.”

Osborne: Broadly-based growth

The manufacturing part of the UK economy grew by 0.9% in the last quarter, slightly faster than the wider industrial sector, which grew by 0.7%.

George Osborne has seized on that as a stick to smite critics (such as Vince Cable?)  who claim that he’s failing to rebalance the economy and should change his plans:

Don’t forget that construction output fell by 0.3% during the quarter – unlike in Q3 when all sections of the economy expanded.

David Cameron tweets that today’s growth figures shows that the government’s plans are working:

Today’s data  also means that the UK has grown for all four quarters in a calendar year — that’s not happened since 2008  (although the double dip was revised away, there have been occasional quarters of negative or flat growth)

Joe Grice repeated that that there is now a “rather better tone” to the UK economy, after four quarters of growth.

Grice declined to say when UK workers might finally see wages rising in real terms, but did point out that inflation has recently fallen.



Joe Grice explains that the 0.3% drop in construction output may be down to seasonal factors (worth remembering, though that the building sector had seen growing strongly early in the year).

Asked about the wider state of the UK economy, Grice says that “in the last year we have had more balanced growth than previously, but over the longer period we have had a divergence in the recovery.”

That’s shown by the fact that that the Service sector is now bigger than before the financial markets were convulsed by the collapse of Lehman Brothers, but construction and manufacturing are someway shy.


The recovery has been somewhat erratic, says Joe Grice, but it “feels like the economy now has a better tone”.

However the UK economy is still 1.3% smaller than before the financial crisis began.




The UK service sector grew by 0.8% in the fourth quarter, and Industrial output racked up 0.7% growth.

But Construction output fell by 0.3% in the October-December period.

That means the services sector is higher than in 2008.

But both industrial production and construction are around 11% smaller than before the crisis, Grice adds




On an annual basis, GDP for 2013 was 1.9% higher than in 2012, says the ONS’s Joe Grice.

That, I believe, means Britain has recorded its strongest growth for any year since 2007.



BREAKING: The UK economy grew by 0.7%  in the final three months of 2013, the ONS just announced.


Key event

Just a few minutes until the Office for National Statistics reveals the preliminary estimate of UK GDP for the final three months of 2013.

ONS chief economist Joe Grice will announce the data at 9.30am sharp, and then take questions from the press.

It should be broadcast live on the BBC and Sky News in the UK.

Fact for the morning, via Sky News’s Ed Conway – Poland is the fastest-growing member of the EU since the financial crisis began in 2008:

Key event

And here’s another graph reinforcing how the UK’s economy has lagged behind major rivals since the great recession - with particularly weak growth from mid-2010 to mid-2012:



What the analysts are predicting

Here’s a couple of analyst predictions about today’s GDP data (due in under 30 minutes):

Howard Archer of IHS Global Insight:

Our best bet is that GDP growth edged back to a still very decent 0.7% quarter-on-quarter in the fourth quarter of 2013 after accelerating to 0.8% quarter-on-quarter in both the third and second quarters from 0.5% quarter-on-quarter in the first quarter. This would still result in year-on-year GDP growth accelerating to 2.8% in the fourth quarter of 2013 from 1.9% in the third quarter, thereby giving the best annual growth rate since the first quarter of 2008. 

It would also result in overall GDP growth in 2013 coming in at 1.9%, which would be the best performance since 2007 and up from growth of just 0.3% in 2012. Even so, GDP in the fourth quarter of 2013 would still be 1.3% below the peak level seen in the first quarter of 2008.

Kit Juckes of Societe Generale [SG]:

The market looks for a 0.7% gain, SG for a 0.8% increase that takes the annual growth rate up to 2.9%, the fastest since Q4 2007. Sterling is a little stronger again today. Positive economic surprises have supported the currency and triggered a sharp re-pricing of the interest rate outlook, despite Mr Carney’s best efforts to keep that in check.

The pound has risen slightly this morning, touching $1.66 against the US dollar.

James Ramsbottom, chief executive of the North East Chamber of Commerce, just put his finger on the underlying issue with the British recovery – it doesn’t feel like a recovery for most of us, yet anyway.

Speaking on the BBC’s Today Programme, Ramsbottom said that manufacturing had “sustained” his region’s economy (Nissan have a big plant in Sunderland) while construction has only recently picked up.

“But for many people on the street, it doesn’t feel like it’s changed,” Ramsbottom added.

Rob Marshall, who runs a web design firm, also cautioned that he didn’t feel any better about business conditions than a year ago. But he has hired more staff since founding his firm in 2009, growing from four staff to 13.

Duncan Weldon, the TUC’s senior economist, makes four important points about today’s data (in this blog):

It’s provisional data, it won’t tell us much about  living standards, UK productivity may still be falling, and Britain has lost a lot of ground against most comparable countries since the crisis began:


Another point to watch will be which sectors of the UK economy did best – services, construction or manufacturing.

Weldon says:

Whilst the top line figure will tell us something about the overall pace of the recovery, the sector breakdown will tell us about its balance.


Back to UK GDP. It’s worth remembering that, despite the decent growth seen so far this year, Britain’s economy has still not reached its pre-crisis peak. Three months ago it was still 2.5% smaller than its peak in 2008.



The ONS reported last month that the UK grew by 0.5% in the first quarter of 2013, then 0.8% in the second and third quarters.


An important development in emerging economies this morning – India surprised the markets by announcing a surprise rise in interest rates, from 7.75% to 8%

The move is designed to underpin the rupee, and also to target India’s inflation rate. Central Bank chief Raghuram Rajam said he might be able to cut rates again in future once inflation has been pegged back. 

The unexpected move comes hours before the central bank of Turkey (also under pressure in the recent emerging market turmoil) meets to discuss monetary policy. Many analysts expect a rate hike, or other measures, to prevent the Turkish lira being further routed.

A reminder that while Britain’s recovery continues, there’s the potential for upheaval elsewhere….

CBI sees “real upsurge” in output

The CBI has fuelled confidence in Britain’s economy by declaring this morning that business output in the private sector is rising at the fastest pace since the collapse of Northern Rock.

Ahead of this morning’s GDP data, the employers body said the economic outlook looked bright. The proportion of firms reporting higher output over the last quarter has hit its highest level since Autumn 2007.

Katja Hall, the CBI’s chief policy director, said:

A picture is unfolding of a real upsurge in output across much of the UK economy.

Many firms in many sectors are feeling brighter about their prospects than they have for a long time, showing the recovery is gaining traction.

UK GDP data to show recovery continued

Good morning, and welcome to our rolling coverage of events across the economy, the financial markets, the eurozone and the business world.

Britain’s economic recovery is centre-stage today, with new data likely to show that the UK has recorded its strongest year since being rocked by the financial crisis six years ago.

Preliminary GDP data for the final three months of 2013 will be unveiled with a flourish by the Office for National Statistics at 9.30am GMT. Economists expect another decent quarterly growth, with the economy growing by around 0.7%-0.8% (estimates vary, as usual).

That would mean annual growth of around 1.9% — which would be the best performance since 2007. 

Caveats abound, of course. Many experts fear that Britain has failed to rebalance its economy over recent years, with the current recovery based on the rickety framework of consumer spending and the housing recovery. A very British recovery, in other words.

The business secretary Vince Cable even threw his weight behind this argument last night, warning that the “shape” of the recovery was less than ideal.

Cable said:

A real recovery is taking place

The big question now is whether and how recent growth and optimism can be translated into long-term sustainable, balanced recovery without repeating the mistakes of the past.  We cannot risk another property-linked boom-bust cycle which has done so much damage before, notably in the financial crash in 2008.

Cable also appeared to be moving the Liberal Democrats away from George Osborne’s plan of further cuts beyond the election to eliminate the deficit — more here:

Vince Cable undermines chancellor with ‘wrong sort of recovery’ message

But there are signs that the chancellor’s March of the Makers hasn’t come to an abrupt halt, such as rising orders in the manufacturing sector.

Britain is among the first countries to report GDP data for the last quarter, so today’s preliminary reading could give some clues to how the global economy fared at the end of 2014.

I’ll be tracking the UK GDP data, and economic reaction to it, along with other news through the  day.


Updated © Guardian News & Media Limited 2010

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Forecast for U.K. economic growth of 1.9% this year raised to 2.4% with IMF chief Christine Lagarde declaring ‘optimism is in the air’. IMF may also upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year…


Powered by article titled “IMF upgrades UK economic growth forecasts as global economy expands” was written by Katie Allen, for on Monday 20th January 2014 12.14 UTC

The International Monetary Fund is widely expected to raise its outlook for the UK this week, nudging up the country’s growth forecasts by more than for any other major economy.

The Washington-based fund is due to unveil an update on Tuesday to its World Economic Outlook from last October. Back then it forecast UK national output would rise 1.9% in 2014. Now it is expected to predict growth of 2.4%, according to a Sky News report.

The IMF is also expected to upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year’s speech from its managing director, Christine Lagarde, last week.

“This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years,” she said.

If confirmed, the substantial upgrade to the UK will be a welcome boost to Chancellor George Osborne and his much repeated assertion that the coalition’s “economic plan is working”.

But in the past the IMF has echoed other economists, including experts at the UK’s own Office for Budget Responsibility, that the UK remains over-dependent on consumer spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK’s outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, the British Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic advisor to the EY ITEM Club comments: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government’s Achilles heel and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The US-based IMF could not be immediately reached for comment. © Guardian News & Media Limited 2010

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With its linked trade and innovation deficits, the UK seems as unprepared for a currency war as it was for real war in 1939. Countries are trying to export deflation somewhere else, using currency manipulation to do so…


Powered by article titled “UK looks ill-prepared if a global currency war breaks out” was written by Larry Elliott economics editor, for The Guardian on Sunday 17th November 2013 19.41 UTC

Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany’s beggar-thy-neighbour approach to the rest of the eurozone. Last week the Czech government said it would defend its economy by driving down the value of  the koruna, following the aggressively interventionist example of  Japan and Switzerland.

It’s not hard to see why the atmosphere is becoming less cordial. This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure. A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so.

If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939. We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting. We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals. The UK has linked trade and innovation deficits.

Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK’s corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.

Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.

The consequences of decades of neglect of the country’s productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance. This recovery starts with a current account deficit of more than 3%  of national output.

This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports. In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade.

Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography. More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling’s depreciation has been blunted.

This view is not shared by the Bank of England. While admitting that the global recovery is patchy, the bank noted in its February inflation report that “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. It concluded that some other explanation was needed “to explain the disappointing performance of UK exports”, and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share. The decline in exports from the City since the crash highlights the risks for Britain of the “eggs in one basket” approach.

As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011. North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.

On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP). Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012.

The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen. This has affected the UK more than the other big global providers of financial services, the US and EU.

According to the Bank of England, “This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.” This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City’s “socially useless” products.

Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets.

The baseline projection is that the current account is 3% of GDP in 2022. Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: “A deficit of this magnitude would be a cause for serious alarm.”

It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever. The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.)

We have heard the “export or die” message many times in the past, to little effect it has to be said. It is not impossible to improve Britain’s export performance, though doing so with the current economic model is a pipe dream. It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.

Britain, Jones says, “needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity”. Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938. © Guardian News & Media Limited 2010

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