tony's blog

Monday, February 26, 2018

Things are better than expected. Time to put up rates!

So we have accelerating wage growth and productivity was up in the second half of last year. Luckily productivity is currently ahead of wage growth which is a good thing, but Bank of England forecasts are predicting wage growth to rise to 3% this year and to get ahead of productivity growth which is not so good. The path seems set for rates to hit 0.75% and the City is betting on this happening by May. So as the year moves closer to Brexit we start to crank up the risk factors.
We still don’t know what the Treasury model of the UK is making of all of the conflicting inputs including a forecast of QE withdrawal. Once this happens it should have its own impact on reducing inflation. But as Dame Minouche Shafik, previously Deputy Governor of the Bank of England reminded us on Desert island disks at the weekend, Economics isn’t a precise science given that we have to consider the behaviour of people. Wise words and a timely reminder that no matter how much the economic boffins tell us that they know how things work… the really don’t with any degree of accuracy. So when the Bank decides to increase rates let’s just hope that it considers the human factor.
Elsewhere in Europe we have the Italian elections next Sunday March 4th. The rise of the right and anti-immigration parties are moving the elections towards a flash point with an engaged and angry electorate. We also have the German SDP postal vote on their coalition with Merkel’s CDU … and that might prove to be more important. Markets seem to be of the view that the Merkel leadership is unassailable and that things will carry on much as before. But that seems at best wildly optimistic. Voters are becoming increasingly disillusioned with the increases in immigration: since 2015 Germany has received 1.38mn ‘initial asylum applications’ and in the short term there has been a significant increase in crime according to a controversial government-commissioned study published by the Zurich University of Applied Sciences. So, as we continue to focus on domestic issues and the latest state of play of Brexit negotiations, it would be easy to miss the significant issues in Europe right now which just could have some major impacts on us. Whether we are in the EU or not.

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