Wishful thinking from the MPC’s Michael Saunders

Tony Ward

September 6, 2017

Tony Ward is chief executive of Clayton Euro Risk

I was amused and intrigued by comments made by member of the Bank of England’s Monetary Policy Committee Michael Saunders last week.

In a speech in Cardiff, he suggested that the slowdown in Britain’s economy since last year’s EU referendum could turn out to be illusory.

In danger of losing credibility

Mr Saunders said that the economic weakness is likely to disappear as official data gets revised. “It seems quite likely to me that recent GDP data will be revised up at some stage given the more solid trends in business surveys of activity and hiring intentions as well as the jobs data,” he said. “Such revisions are a regular occurrence.”

Mr Saunders also argued that the bank should raise interest soon to combat rising inflation. The former Citigroup economist voted for an increase last month along with Ian McCafferty, while the rest of the MPC opted for no change.

Hmmm. I beg to differ on both points. David Page, economist at AXA investment Managers, makes sense to me, saying, “It’s a leap of faith to look at the jobs market and say it’s indicative of stronger underlying activity than the ONS numbers suggest”.

Perhaps Mr Saunders needs to refer to more recent economic data and commentary before he suggests that we are headed back to strong economic growth.

Just this week, figures show that the construction industry has slumped to a one-year low as commercial work declines and future projects dry up.

The Markit purchasing managers’ index (PMI), which gives an insight into the health of the sector at a grassroots level, recorded 51.1 in August, down from 51.9 the previous month. Robust growth in the residential construction sector could not offset the decline in the commercial world, according to Markit.

The data also hinted at what was described as a ‘sustained soft patch ahead’ as new business volumes fell for the second month in succession. Job creation in the sector also fell, reflecting the negative sentiment, with a slowdown in the number of new roles being created taking the reading to its weakest since July 2016.

Commenting on ‘lacklustre growth conditions’, Tim Moore, Markit, said: “Respondents noted the subdued business investment and concerns about the UK economic performance had led to a lack of new work to replace completed projects, especially in the commercial sector.”

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, said: “The sector hit a roadblock this month as purchasing activity slowed for the third month and new business wins were hard to come by. Reduced government spending, economic uncertainty and Brexit-delayed decision-making were largely to blame.”

More data to raise concern. The number of companies being taken over by management teams has fallen in the past year amid worries about Brexit and the future of the economy, research has found.

There were 80 management buyouts in the year to end-June, a 7% drop on the 86 that took place the previous year, according to Moore Stephens. Moore Stephens warned that the slowdown risked damaging Britain’s growth prospects, arguing that buyouts often prompted a strategic rethink at companies. Jamie Johnson, Moore Stephens, said: “A growing number of potential buyers and vendors are deciding to wait out this period of uncertainty.”

But wait for how long?

All this is damaging. As I have argued many times before, it seems to me the government’s muddled Brexit strategy is a major cause of the current faltering economic growth and delayed investment plans.

A deliverable plan still seems some way away and until there is a clear, concise way forward, I fear that there will be little evidence of sustained GDP growth in the UK. An interest rate rise looks some way off.

Howard Archer, EY Item Club, said: “With the economy struggling and inflation looking close to peaking, we very much doubt that there will be any interest rate hike before late 2018 – and it could well be delayed until 2019.”

Indeed!

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