WEEKLY COMMENT 5-11-2015
By Barry Edwards
BofE Inflation Report
The Bank of England (BofE) inflation report was published on Thursday this week as the Monetary Policy Committee (MPC) announced no change to interest rates as expected. The report confirms that prospects for the UK economy are slightly below those anticipated in the August report which is in line with most predictions from economists generally. You can read the report if you click on the link below, it has 50 pages and the summary is 2 pages;
Below are a couple of paragraphs from the summary;
“The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects. While growth in advanced economies has continued and broadened, the Committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August. There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.
Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust. As a result, domestic demand growth has been solid despite the fiscal consolidation. Although it has moderated, growth is projected to pick up a little towards the middle of next year, as a tighter labour market and stronger productivity support real incomes and consumption, and as accommodative credit conditions encourage strong investment and a pickup in the housing market. The Committee judges the risks to domestic demand to be broadly balanced.”
Those are positive comments to make with some reservations for the slower growth in emerging markets. Elsewhere in the report the MPC refers to an increase in borrowing which gives them some concern although the cost of servicing this debt has remained at a manageable level to allow the economy to grow at a sustainable rate. If it does start to overheat the Governor stated that he believes they have the powers to control it effectively. Business investment has returned to pre-crisis levels with access to credit improving all the time.
The concerns about China seem to have been dissipated for the time being as the slower growth that has been forecast by the government, around 7%, does look like it will be achieved. The reports from inside China are very positive and private consumption is booming according to the figures recently released. It is the manufacturing sector that is suffering from a reduction in demand as they adapt to supplying the local market rather than concentrating on exports. The manufacturers will take time to adjust as they learn to compete with high quality imports from around the world and acclimatise to the requirement for more sophisticated products.
Overall, the BofE seem content with the state of the UK economy and they believe that growth should start to recover next year after the small decline, which they did forecast correctly, that has occurred recently because of slower growth in some countries around the world.
Although most people in the UK are fully aware that the economy is improving all the time, many are still finding it very difficult to make ends meet. There is not much indication that it will change soon while the demand for highly skilled people is never satisfied. There is a fundamental flaw in the education system which fails to make manufacturing more appealing. Training is the key to changing this situation but it takes time and commitment for it to happen. Companies are beginning to make the effort to correct the skills shortage but there needs to be more determined cooperation with government to have a big impact.
Ultimately, manufacturing in the UK can only survive if this fundamental problem is resolved otherwise the sector will struggle to compete worldwide. What is made in the UK is considered high quality and in demand around the world, training has to become more important and supported properly by the schools, government and industry. The UK is a leader in the services sector which has a very efficient training system, industry needs to learn from this and improve the approach to young people to consider the sector since the salaries offered are competitive with the service industry. Making these changes is the only way to help those people who are still finding it hard to manage with low salaries.
That’s all for this week, more observations next week.