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Tuesday
Jun072016

UK economic update - June 2016

I spent this morning populating the monetary dashboard, and thought I'd write up why my current view of the UK economy is "meh".

Monetary growth is reasonably strong and consistent. M3 has fallen from 2.7% to 2.3% and M4ex has fallen from 4.8% to 4.2% but narrower measures have grown - MAex is 7.8% (from 7.3%) and household Divisia 8.9% (up from 7.4%). Inflation measures remain subdued - CPI has fallen from 0.5% to 0.3%, RPI is down from 1.6% to 1.3%, input prices are -0.7% and output prices -6.5%. From a monetarist perspective there's no sign of impending return to the inflation target - indeed inflation expectations over the coming year have fallen from 2% to 1.8% and the Fed 5 yr be rate is 1.45%. We are still a long way from "normal" inflation.

It's important to take a broader look at inflationary pressure, but the picture doesn't change. Although the House Price Index jumped from 7.6% to 9% last month the Nationwide measure fell to 4.7% and Halifax remains elevated at 9.2%. IMF's measure of commodity prices is 4.7%. Stock market indicators are up over the last 3 months but the FTSE 100 is down 7.6% since last year. NGDP grows at a modest 2.5% and altough the PMI index has risen (slightly) above 50, Industrial Production is down 0.3% and business investment fell by 0.5%

The unemployment rate is 5.1% and the ratio between vacancies and unemployment for Jan-Mar at 0.45. Average Weekly Earnings have risen slightly, but are under 2%. The HM Treasury survey of forecasts shows that growth of 2.1% is expected next year, and inflation of 1.9%. Interest rates have fallen slightly, sterling is down, yields are down. With so much uncertainty due to the possibility of Brexit it would be wise to be cautious. And with inflation so low, policymakers hands are pretty tied.

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