New Bank of England Governor Mark Carney seemed to be saying that interest rates will remain at their present level for another three years, which ought to be encouraging for UK equity markets and bad for sterling. Financial markets seemed to assume that he has signalled the next increase in interest rates, and the pound rose while shares fell.
The economy is entering a Goldilocks era where the porridge is not too hot and not too cold
Carney is trying to break the BoE tradition that as little guidance as possible should be given to markets and if guidance does have to be given it should be in nudges and winks that only the economists attending Bank briefings can interpret.
I do wonder if, in fact, economists and political commentators are trying to look for something that isn’t there. Perhaps Carney does mean that interest rates will not go up until unemployment comes down. There is no hidden meaning.
The only point to query is that there are nine people on the Bank’s monetary policy committee setting interest rates and he could be outvoted. It is unlikely that five members will summon up the courage to defy him in the next 12 months or so but it could happen at some point.
However, the current state of play is that the US Federal Reserve Bank has indicated that the American economy is recovering sufficiently for economic stimulus to be tapered off, which has gone down badly in the markets, while the UK economy is not doing well enough to allow us to start getting back to normal, which went down equally badly. Central bankers just can’t win at the moment.
What will make a difference, however, is if the UK economy continues to pick up and unemployment falls. Since many people have been put on shorter hours during the downturn, economic growth may not translate immediately into extra jobs, just full time ones instead of part time.
Even so, UK economic data continues to be mildly encouraging. We seem to be entering a new Goldilocks era where the porridge is not too hot and not too cold, though admittedly it is on the tepid side.
After early statistics showing a 0.6% improvement in GDP in the second quarter, making 0.9% growth so far this year, we have excellent indications for July. The Markit/CIPS Purchasing Managers' Index (PMI) for services, construction and manufacturing all show readings above 50.
PMI surveys are based on data from various private-sector firms, which supply information on factors such as output, new orders, stock levels, employment and prices. Above 50 is growth, below 50 is contraction.
It’s a rough and ready indicator but it is far and away the best leading economic indicator we have , with information coming from the sharp end of the economy. The big encouragement is that the services sector recorded 60.2 in July, up from an already impressive 56.9 in June. This is the best figure since December 2006, well before the crash.
The latest services figure contrasts with data from the Eurozone services sector, which showed a slight contraction at 49.8. London remains firmly at the heart of Europe’s financial services.
Despite all the senseless political hype about rebalancing the economy to get away from reliance on banking and finance, we should rejoice that services are doing best in the UK. It is the largest slice of the economy, so any growth in services far outweighs improvements elsewhere.
It would be great if manufacturing took off as well, but that is simply not happening as it is still cheaper to make things in low wage countries and ship the stuff in. No amount of devaluation will change that despite the wishful thinking of many commentators.
Fracking may just help manufacturers if it produces cheap energy as in the US but, understandably, it attracts strong local opposition and will not happen here on any scale for a long time.
While manufacturing will probably oscillate between growth and decline, never straying far from 50 on the PMI index, construction should continue to make solid progress.
All in all, it is difficult to see the UK economy failing to achieve 1% growth in 2013 and I am now prepared to stick my neck out and suggest the figure will hit 1.5%. It needs only 0.3% in each of the two final quarters.
As I have suggested previously, if you are a Labour supporter you should consider a wager on the Conservatives winning the next election. If you lose you won’t mind and if you win it will be some consolation. The prospect of the economy coming right in the run-up to the next general election grows stronger by the day.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
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