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Is the UK really better off than Brazil and China?
Napoleon Bonaparte famously said he’d rather have lucky generals than good ones – so with Mark Carney arriving to head up the Bank of England just as every indicator turns positive, which is he?
A funny thing has been going on in the last couple of weeks - all of a sudden, the UK, one of the weakest links in the global economy, is starting to look stronger than the emerging market powerhouses of China, India and Brazil.
So what is going on? The UK economy is well-known for the double-dip recession that never was, persistently high inflation, weak wage growth and overall economic misery to rival our dismal weather. But, just as the weather has started to turn summery, so has the economy.
The brightest bit of news came from a survey on the all-important services sector, which rose to a three-year high last month. The forward-looking parts included in the PMI services reading for June were even more impressive, with the new orders index rising to a 6-year high, well above its historical average.
The economic surprises also stretch to the manufacturing sector, construction, retail sales and the housing market, with annual prices increasing to their fastest pace of growth since 2010.
In sharp contrast, Brazil’s economy has disappointed to the downside, China is suffering from the duel effects of a slowdown in the manufacturing and service sectors alongside a potential credit crunch, while India has seen its currency plunge to a record low versus the US dollar.
Is it safe to come out from behind the sofa yet? Could it be that the worst of the economic storm has passed, and things will continue to improve in the coming months?
Well, it’s probably safer to peek from the back of the sofa rather than come bounding out like a bull in a China shop as the economic recovery is still fragile. The new Governor of the Bank of England certainly thinks so.
Mark Carney’s chief concern at his first monetary policy meeting as Governor was that higher government bond yields could destroy recent economic progress. 10-year yields reached a peak of just over 2.5% in recent weeks, well below the 5-year average.
If the UK economy can’t withstand rates at this historically low level then perhaps we should curb our enthusiasm on the prospect of a recovery.
But rising bond yields are problematic for a debt-laden county like the UK as it pushes up the interest we have to pay to our creditors. While rising yields are not a problem if the economy is strong, if rising yields choke off growth then things can easily go pear-shaped.
The UK’s enormous debt load is another reason to be wary of this uptick in economy data. The government is still borrowing £85 billion more than it takes in revenue, and public sector debt as a percentage of GDP is 90%, up from 50% in 2009. The government is behind schedule with its austerity plan, which means the fiscal screws will continue to be tightened for some time yet. This could cap any economic recovery in the medium-term.
As ever with the UK economy there is more cloud than silver lining. While recent data has been good, we have been here before and then experienced an economic swoon. So, we will need a few months’ more data before we can say that the UK economy is strengthening.
We may not be as ugly an economy as we once were, but that is mostly because our biggest rivals, especially in emerging markets, are seeing their bright facades start to fade. The UK is far form in a pretty state.
Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.
