Economic Update
CBI Economic Update: Last week’s “Super Thursday” releases from the Bank of England saw no change in the stance of monetary policy – with a unanimous vote to leave interest rates (at 0.25%) and quantitative easing unchanged. But the Bank upgraded its outlook for economic growth, particularly strongly so in 2017 –mostly taking account of announcements in November’s Autumn Statement and a firmer outlook for the global economy.
On the surface, a better growth outlook coupled with higher inflation may be interpreted as raising the likelihood of a rise in interest rates ahead. But the Bank’s language on monetary policy remained largely neutral, emphasising scope to respond in either direction to economic developments (albeit with some hawkish undertones).
Minutes of the MPC’s meeting suggests that movements in wage growth, household spending and sterling’s impact on inflation (all relative to the Bank’s current expectations) would be key in swaying the Committee either way.
Bank of England Update:
BoE upgrades its growth forecasts – The Bank upgraded its forecasts for GDP growth, particularly strongly so in 2017 2.0% from 1.4% in November. A stronger assessment of the outlook was driven by:
- Looser fiscal policy announced in November’s Autumn Statement (driving about half of the upgrade)
- Firmer outlook for the global economy (accounting for a quarter of the upgrade)
- Supportive financial and domestic credit conditions – in part reflecting previous policy action by the Bank
- Signs of resilience in household spending since the EU referendum
…but still expect a slowing ahead.
Governor Mark Carney stressed that even with the upgrade, the Bank’s forecasts have baked in a significant Brexit impact, with the level of GDP still 1½% lower in two years’ time compared to their pre-referendum forecasts in May 2016. Furthermore, the Bank still expect growth to slow over 2018, particularly as consumer spending growth eases due to a combination of slower pay growth and higher inflation.
“Limits” to a toleration of inflation overshoot – Despite a stronger growth outlook, the Bank’s inflation forecasts are little changed from November – they expect CPI inflation to peak at 2.8% in Q2 2018, and remain above target thereafter.
- Bank of England forecasts (%)
- GDP growth CPI inflation (Q1) Unemployment rate (Q1)
The overshoot in inflation above the Bank’s 2% target is entirely due to the 11% decline in sterling since the referendum. The absence of a large CPI forecast revision is because the Bank also now believe that there is more spare capacity in the economy, which offsets the impact of stronger growth on inflation. In particular, the “natural” rate of unemployment (the rate that the economy can sustain without driving up inflation) is now believed to be 4.5%, from 5.0% previously. This is also a big driver of the Bank’s lower forecast for unemployment (see table).
But echoing comments in an earlier speech by Mark Carney, the MPC judged there to be “limits to the degree to which above-target inflation could be tolerated”. Some members had “moved a little closer” to those limits, in terms of their assessment of the softer growth/higher inflation trade off.
BoE Agents’ Summary of Business Conditions – This covers intelligence gathered from business contacts between late November 2016 and mid-January 2017. It generally makes comparisons with activity and prices over the past three months on a year earlier.
- Consumer spending growth had remained resilient, but was expected to ease during the year as prices rose. Investment intentions had edged higher and pointed to small increases in spending during 2017. Export volumes growth had risen due to the fall in sterling and stronger world growth.
- Hiring plans had edged up, but pointed to little change in staffing overall in the next six months. A survey indicated a modest rise in total labour cost growth in the year ahead (see box on page 2). That was partly due to difficulties in hiring and holding on to staff and costs from the forthcoming apprenticeship levy.
- Price pressures had continued to build through supply chains following sterling’s fall. So far, the main effect on consumer prices had been higher food and fuel prices. But a wider range of goods prices were expected to be affected over the coming year, causing inflation to rise further.
- Links to the full report are given below:
http://www.bankofengland.co.uk/publications/Pages/agentssummary/default.aspx
http://www.bankofengland.co.uk/publications/Documents/agentssummary/2017/feb.pdf
Other News
AIBI 2017 Congress: The 2017 AIBI Congress takes place in Versailles from 25th to 28th May. It is the premier gathering of EU industrial bakers. At this Congress Joe Street from Fine Lady bakeries will be appointed President of AIBI for the next two years.
The AIBI Congress Website 2017 is online and the registration is open. http://jp.sitefeb.com/en/
For entering into the online – registration, please use the following passwords:
- e-mail: congres@aibi.eu
- password: AIBI2017
Grocery Code Adjudicator(GCA): Edition 11 of the GCA newsletter – ‘News from the Adjudicator’ is now available online. Please click the link to follow.
ALDI: Has overtaken the Co-oP to become Britain’s fifth largest supermarket. Sales rose 12.4% in the last year. The market share increased to 6.2%.
Food Waste: According to Philip Simpson, Commercial Director of Refood, food waste disposal and waste management service provider, the UK could save £3.7bn by using food waste sent to landfill for renewable bio fertiliser, after figures of jan’17 confirmed domestic food waste alone topped 7.3mt. He further added food manufacturers should recycle unavoidable food waste, the products that were spoiled in the manufacturing process as recycled food waste could be used to create renewable and sustainable bio fertiliser, which is an extremely valuable source.
He added that if zero food waste to landfill is achieved, UK could generate 1.1 terawatts (tfi) of energy by 2020, enough to power 102,000 homes for an hour. He also stated that about 27 million fewer tonnes of greenhouse gas emissions would be generated, and there would be a huge economic benefit for the public sector.
Wheat Milled: According to AHDB figures wheat used by the GB milling industry totalled 3.7M tonnes between July and December, up 10% year on year. The rise has been driven by an increase in bioethanol usage and the low specific weight of the current UK crop.
Please note that there will be no weekly blog published next week. Have a good week.
Gordon Polson
Director – Federation of Bakers