Bull and bear: Sterling’s decline: will it continue?
Category: Bull & Bear, News
Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Sterling’s decline: will it continue? ITEM Club says cloud of uncertainty has lifted but little consolation is revealed. ITEM Club calls for changes in monetary policy. High Street suffers from cold turkey Christmas
Sterling’s decline: will it continue?
It was the summer time last year when the headlines here related to sterling hitting a four year high against the euro. By August there were 1.27 euros to the pound. It was good news for British holiday makers and importers, but bad news for exporters. It should also have been good news for inflation, although there are quite lengthy time lags in these things.
At the time of writing there are 1.19 euros to the pound; that’s an eleven month low.
Lots of reasons are being given, although one explanation seems a little odd.
Firstly there is the poor performance of the UK. The chances of the UK falling back into another recession are high, so that doesn’t help. Secondly, no matter how much George Osborne talks the talk of austerity, the fiscal deficit seems to be as bad as ever. Thirdly, there is the prospect of the UK losing its triple A credit rating. Fourthly, fears about more QE are spooking the markets. And fifthly, all that talk about the UK eventually leaving the EU has not helped.
The oddest reason is the one that is cited the most. The argument goes: as the euro recovers, the UK may lose its safe haven status as investors ditch UK bonds and buy bonds in the euro area.
It’s odd because given the huge levels of unemployment across the euro area and given the very real dangers of social unrest becoming very serious; the argument that says the euro is recovering seems to be built on naivety. Those who say the euro area is past its worst, and the euro area is recovering, are so out of touch with reality that it is a wonder they don’t just float away in a cloud of delirium.
So is the fall in sterling a negative or a positive thing?
The Bank of England MPC recently said it was worried about the strength of sterling and said that UK exporters needed a weaker pound. This led many to speculate that more QE will follow soon. Right now it is looks as if the Bank of England has talked the pound down without doing very much.
But a falling pound is bad for inflation. And remember these things have a habit of getting out of hand. As far as inflation is concerned, modest falls in sterling may not matter too much. But modest falls can become big falls, and that will matter.
But while the UK needs a cheaper pound to give exporters a boost, it needs lower inflation in order to help create an environment in which average wages rise faster than consumer prices. It seems economists are trying to have it both ways. On the one hand they say the UK needs a weaker pound to give exporters a lift. On the other they say the UK needs lower inflation so that households can see their disposable real income increase, fuelling more demand.
So which one is it? Do we need more exporters or for real wages to increase? Quite frankly, it is looking as if we can’t have both.
ITEM Club says cloud of uncertainty has lifted but little consolation is revealed
Until recently we didn’t know, now we do know, but the news is bad. That’s the gist of the latest report from the Ernst and Young ITEM Club. But it does see hope lurking somewhere near the horizon, and the hope comes in the shape of a country bedecked in a flag of stars and stripes
“The clouds of uncertainty are clearing,” stated the ITEM Club in its latest report, “but only to reveal a low-growth landscape.”
It has forecast growth of 0.9 per cent this year, 1.9 per cent next, and then, of course in 2015 and 2016 it has growth running at 2.5 per cent. True to the best traditions of economic forecasting since the crisis of 2008, it reckons things will be returning to normal in the year after next.
It also forecast that this year average wages will rise by 2.2 per cent and inflation by 2.4 per cent. So this time last year economists were predicting recovery in 2012, as inflation fell below the rise in average wages. Now the ITEM Club is saying this flip in the relationship between wages and inflation won’t occur this year.
But the ITEM Club does see average wages rising by 2.9 per cent next year, and inflation falling to 2.2 per cent. In 2015 it is forecasting average wages rising by 4 per cent while inflation is at 2 per cent.
So there you have it, recovery is just around the corner.
In fairness, the ITEM Club did say: “We cannot expect consumers to drive the recovery. The prospect of a durable recovery remains elusive, dependent upon confidence in financial and business communities, which is likely to take time to rebuild.”
But then it went bullish again, saying: “However, if the buoyant mood of the financial markets is sustained and is reflected in business confidence, company spending could move ahead much faster than the ITEM Club forecasts.”
But its forecasts about the US and how this will affect the UK are the most interesting.
The ITEM Club said: “Last year, the modest revival in UK household consumption and business investment was neutralised by the crisis in the Eurozone…This year, the UK recovery is threatened by the impasse on US fiscal policy.”
But it added: “Uncertainty in the US should not have a serious effect on UK exports as less than 15 per cent of UK goods exports go to the US, compared with 50 per cent going to the EU.”
It then went distinctly bullish on the US saying it: “believes that the uncertainty surrounding US fiscal policy will be resolved over the next few months and that the US economy is strong enough to withstand a fiscal contraction.”
It said that: “The recovery in the US has certainly been a lot stronger than in the UK, partly because the US had the luxury of waiting for the economy to recover fully before retrenching. This allowed US households to deleverage without the added pressure of an austerity programme, which has made this adjustment so much harder for UK households.”
It also said: “US productivity and profitability hardly fell at all during the recession and have been very strong since, putting US producers in a strong competitive position.”
ITEM Club calls for changes in monetary policy
It’s not really a surprise. It was predicted here last year that 2012 would see calls for the Bank of England’s inflationary targets to be changed. Well, The ITEM Club has done that.
So why has the US done better than the UK? The ITEM Club thinks part of the reason lies with the Fed being more proactive than the Bank of England. It said: “The Fed was quick off the mark when the money markets froze in August 2007, immediately recognising the threat to the banking system and the wider economy and flooding the money markets with liquidity. The Bank of England, however, was transfixed by the bogey of moral hazard and did not accept that the game had changed until Northern Rock collapsed six weeks later. The Bank’s programme of Quantitative Easing has focused narrowly upon the gilt market, avoiding the purchases of residential mortgages and other securities that the Fed has made.”
It said that “part of the problem lies in the very specific inflation remit set for the MPC by the Treasury. In contrast, the Fed has a dual mandate, involving both inflation and unemployment.” And suggested that: “now, with a new Governor designate, the Bank and the Treasury are in a position to reassess the remit.”
In short, the ITEM club is calling for the Bank of England to start targeting nominal GDP.
High Street suffers from cold turkey Christmas
December 2011 was a bad one for the UK High Street. So was it better in 2012?
Well yes, sort of.
Retail sales were 0.3 per cent up on a year ago, says data from the ONS. But footfall, according to the British Retail Consortium (BRC), was 1.2 per cent down on December 2011.
Looking at the ONS data in more detail, month on month retail sales fell 0.1 per cent in the three months to December and sales were down 0.6 per cent on the previous 3 month period.
Food sales saw a 0.3 per cent month on month fall, and total non-food sales fell 0.7 per cent. But clothing sales were up 0.7 per cent.
Non-store sales – that’s mostly Internet – rose 1.6 per cent.
Vicky Redwood, Chief UK Economist at Capital Economics, said: “It is hard to see consumer demand improving soon. With households’ real pay still falling, spending is likely to continue to stagnate in real terms.”
But if online sales were up, but total sales were down, what does that mean for the High Street?
The BRC’s finding that footfall was down is pretty consistent with this overall picture painted by the ONS data.
Helen Dickinson, Director General of the BRC, said: “Weak spending power is keeping people away and compounding long-standing difficulties in many of our town centres.”
The best hope for the UK High Street may lie with online companies using the High Street as a kind of shop window, to present their products.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees