The thorny question of when interest rate rises will begin came back into focus this week thanks to a curious turn of phrase in the minutes of the Bank of England’s monetary policy committee. Previously, two of the nine members were toying with the idea of voting for an increase; now it seems that “a number” of members find the decision on rates finely balanced.
I still think that Bank Governor Mark Carney is looking at next February, not this November as many commentators have decided for him. However, we have a reminder that only five members need to vote for a rate rise and that majority does not have to include Carney.
The committee has a great deal of information pulling in both directions. This week’s retail sales volumes, for June, showed sales unexpectedly down 0.2%, though they were still 0.4% higher than June last year. Higher wages are not yet flowing into higher spending, so the fear of wage inflation sparking price inflation has subsided a little. Spending on household goods, food and fuel was lower and gas and electricity prices have this month entered another round of reductions.
Economists think that the UK economy will see 0.7% growth in the second and third quarters. If that is true, then perhaps we are at last seeing some rebalancing of economic growth away from consumer spending and into more productive parts of the economy.
Echoing this sentiment, UK car manufacturers say production hit its highest level for seven years in the first half of 2015 even though British drivers bought fewer cars. The 5.4% increase in production was driven by exports. The industry continues to invest and expects to continue to expand.
All the signs are that the UK economy is continuing to grow and that the Budget deficit continues to shrink. That reality is not reflected in UK share prices after heavy falls recently.
UK Record Dividends Boosted by Banks
A timely reminder of the importance of dividends rather than share price movements comes from Capita Asset Services, whose record on forecasting total payments is excellent, though erring a little on the conservative side.
Capita calculates that dividend payments by companies quoted on the London Stock Exchange were up 13.2% in the second quarter at £29.2 billion compared with the same quarter last year. Strip out special dividends, which were in short supply in the latest three months, and the payment of £28.3 billion was the highest for any single quarter.
As a result, Capita has raised its forecast for the full year by £600 million to £87.2 billion, with regular dividends reaching a record £84.8 billion. Interestingly for those still obsessed with bank bashing, financial services is contributing one third of the total, thanks in part to the first dividend from Lloyds since 2008.
That works out at about £1,400 for every man, woman and child in the country. You just have to own shares to get your allocation.
A Tale of Two Retailers
Two retailers that issued trading updates this week, Kingfisher (KGF) and Mothercare (MTC), were greeted with contrasting reactions. DIY chain Kingfisher saw its shares rise while children’s stores group Mothercare fell back sharply.
Kingfisher sales have picked up further over the past 10 weeks, albeit against weaker comparative figures a year ago. I continue to worry about slow growth in the B&Q stores and the struggles of Brico Depot in France, while the recent fall in the euro will reduce future profits as translated into sterling.
Perhaps I am being a little unfair. Certainly Kingfisher is a far better prospect than it was a few years ago and at least it is going in the right direction.
Mothercare seems to have taken a turn for the worse. I would have thought that the rise in wages would be feeding through into spending on children by now yet UK sales are down marginally. The rise in online sales has not fully compensated for store closures. The international business is doing even worse.
Retailing remains a tough, competitive sector. Nothing in either statement makes me want to invest in it.
