Forex News Blog
Back to The Headlines
Monday January 16, 2006 - 11:45:27 GMT
Share This Story
Lloyds TSB Financial Markets - www.lloydstsb.com/corporatemarkets
An uncertain UK economic outlook for 2006Economics Weekly: An uncertain UK economic outlook for 2006
Will the economy recover?
At the end of 2005, the UK economic outlook for the year ahead was increasingly talked about as looking exceedingly bleak. After growth of 3.2% in 2004, the expansion in 2005 is going to be 1.8% at best, and possibly as low as 1.6% depending on how growth in the final quarter of 2005 turns out. This would be the slowest annual rate of economic growth since the current expansion began in 1992. What is likely to happen in 2006? Will the economy recover or weaken further and interest rates therefore need to be cut as inflation falls below the 2% target?
Consumer spending has slowed sharply…<.b>
Latest figures show that unemployment has risen for the last 10 months, consumer confidence has fallen for the last three months in succession, consumer debt is at an all time high, retail sales growth has been weak and, to cap it all, the manufacturing sector is back in recession with exports faltering. On this view, it is easy to understand why there are such vociferous calls for interest rates to be cut, with one prominent forecaster expecting interest rates to reach a low of 3.5% in 2006, a level last seen in 2003. But this is not a view that we take; far from being about to contract, the economy is actually about to recover and consumer spending is likely to strengthen in 2006, helping business investment spending to pick up as well.
…but recovery may already be underway
A cut in interest rates now would be wrong for the economy and likely to be quickly reversed. In fact, there could be pressure for a modest rate rise by the end of 2006 (taking back the August 2005 cut which was insurance against a sharper slowdown), if some trends that we see developing actually emerge. We base this view on continued recovery in the housing market, particularly a sustained high level of mortgage approvals, sustained employment growth and service sector expansion and solid growth in the global economy. The latter should help UK exports and boost business investment, even though overall economic growth will remain tilted toward consumer rather than investment led spending.
Growth will continue to be led by services…
UK economic growth in the last five years has certainly been led by consumer and government spending, accompanied by increased debt in both sectors, with relatively weak expansion of business investment. But it seems somewhat simplistic to say that a rise in debt is always bad, because, in the case of consumers, it could have been outweighed by an even bigger increase in assets, such as the value of their homes and their holdings of equities.
...as housing and equity wealth underpins borrowing
This is exactly what has happened in the UK over the last few years. Chart A shows that UK household net total worth was £5.8trillion at the end of 2005, with borrowing at a record high of £1.2trillion, but rising at a slower pace than asset growth. The reason for the fall in net worth during 2000, as shown in the chart, was the share price collapse that year; the reason for the recovery is the continued rise in house prices (albeit at a slower pace) and, now, the recovery in equity prices as well. As for the view that the government is at the limit of its borrowing, this may indeed be true in the sense that the budget deficit, at 3.6% of the economy is large, but it is also the case the UK public sector net debt is only 36% of gdp, low by international standards. Moreover, government spending acted as a stabiliser, rising when the economy was weak, just as theory suggests it should. Equally, of course, it should now slow as the economy recovers so that debt is repaid.
What is fuelling the recovery in the UK housing market?
The short answer appears to be that consumer confidence is being underpinned by growing employment and reasonably healthy growth in incomes. Despite falling in the past few months, consumer confidence is still above its long run average and consistent with growth in retail sales of around 4% a year, see chart B, a rate that we expect to see in official sales data in the next few months. In addition to these positives, the fast growth of UK money supply, up by over 12% in the year to December 2005, is the highest in eight years and potentially inflationary. This shows that there is ample liquidity around in the UK to fund faster consumer and company spending. Our own monthly FMD survey of consumers shows that inflation expectations are higher than the consensus and hence that interest rates will rise in 2006. But overall consumer borrowing growth has fallen, as consumer spending on credit cards and other non secured borrowing has declined quite sharply, helping to create room for more modest expansion based closer to growth in income. We are looking for a modest recovery in consumer spending to 2.5% in 2006, up from 1.8% in 2005.
Investment spending to rise
But investment spending should also play a role. The latest Lloyds TSB Business in Britain survey shows that business confidence has risen sharply in the last six months, despite pressure on company profit margins. What appears to have held back investment is uncertainty about demand conditions, driven by the weakness of consumer spending. If that begins to improve, as we expect, investment spending should also accelerate. That would push economic growth up to the 2.5% range that we are looking for. In terms of output growth, a similar pattern of recovery is also discernible. Based on surveys of manufacturing purchasing managers, output growth is set to quicken modestly in coming months. With faster growth in the UK’s main export markets (US, EU), manufacturing growth should accelerate. Already, UK export volumes are rising - running at 11.6% in the year to November, with import volume growth at just 3.6%. The puzzle is that this trend is diverging from the domestic measure of UK output volume. One possible explanation is that UK firms are able to increase exports but cannot compete in the home market for goods that UK consumers are purchasing at increasingly lower prices.
What about inflation and interest rates?
Low UK wage inflation has been one of the main reasons why overall price inflation has stayed subdued in 2005. This has helped to offset the inflation effect of higher oil prices boosting energy costs. Also, inflation expectations remain low in the UK, shown by low long term bond yields. Indeed, the current negative slope of the UK yield curve is due, in our opinion, not to short term interest rates being too high but long term interest rates being so low. But we would look for confirmation of stronger growth to lead to a positively sloped curve in early 2006. Consumer price inflation has fallen from its September peak of 2.5% as the inflationary effect of higher oil prices eased back, but in recent month’s oil prices have moved higher again so inflation may also rise back. This means that price inflation may remain above its 2% target for most of 2006, limiting the downside for interest rates. If growth slows, a cut in interest rates is most likely. However, if economic growth accelerates, worries about wage inflation are likely to resurface, even though they are just 3.6% at present, and the pressure towards the year end will be for the modest increase in interest rates we expect. However, in the near term, it appears to us that UK interest rates are likely to stay at 4.5% well into 2006 as the MPC waits to see how the economy develops.
Trevor Williams, Chief Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."
Actionable trading levels delivered to YOUR charts in real-time.
Register To Test Your Amazing Trader
GVI Trading. Potential Price Risk Scale
Tue 17 July 2018
AA: Major, A: High, B: Medium
AA 08:30 GB- Employment
A 13:15 US- Industrial Production
AA 14:00 US-Powell Testimony
Wed 18 July 2018
AA 08:30 GB- CPI
A 12:30 US- Housing Starts/Permits
AA 14:00 US-Powell Testimony
Thu 19 July 2018
AA 1:30 AU- Employment
AA 08:30 GB- Retail Sales
A 14:30 US- EIA Crude
A 12:30 US- Weekly Jobless
Fri 20 Jun 2018
A 12:30 CA- CPI/Retail Sales
John M. Bland, MBA
co-founding Partner, Global-View.com
Global-View Affiliate Program
We are starting an affiliate program to market some of our products.
Send me an email if you would be interested or if you know someone who would like to be an affiliate. Generous commissions payout for those accepted.
Put the word "affiliate" in the email subject line.
Start trading with forex broker Markets Cube
Max McKegg's Daily Forex Trading Forecasts
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
Request a TRIAL of Max's Forex Service.