The Bank of England runs the UK economy – here’s what that means for you

Bank of England: doing all the heavy lifting

Even more than usual, yesterday’s Autumn Statement by George Osborne was all about the politics.

The chancellor gave a tweak there, and a fiddle there. But it was mostly about him being able to stand up and rub his opponents’ faces in the fact that the UK economy seems to be rebounding.

Of course, the men who are mostly responsible for the British recovery weren’t in the room to watch a positively puce Ed Balls growl ineffectually at a trying-very-hard-not-to-be-smug Osborne.

Sir Mervyn King left his post earlier this year. And his replacement as Bank of England governor, Mark Carney, was busy doing his job. Which is a good thing, because Osborne has once again left all the heavy lifting on the economy to him.

And that has two big implications for investors…

Osborne’s lazy day

The biggest surprise about yesterday’s Autumn Statement is that Osborne didn’t even announce half of the things that had been leaked to the press before he stood up.

There was barely a whisper about Individual Savings Accounts (Isas), for example.

We were all ready to scream excitedly about peer-to-peer lending being allowed in Isas, or to boo and hiss at the idea of a lifetime limit. But there was nothing, bar a promise to look at reducing the five-year maturity limit on holding individual retail bonds in an Isa.

There was a line about removing stamp duty on exchange-traded funds, which was nice, but really means more for the City than for investors, as my colleague Ed Bowsher discussed yesterday. And there were a few little throwaway headline grabbers, which my colleague Matthew Partridge has taken a look at – making it cheaper to employ the under-21s; some relief on business rates; and the obligatory fuel duty freeze.

But overall, as Matthew Engels put it in the FT: “The chancellor gave away nothing worth mentioning and he took nothing away, except an hour of precious time.”

There’s a good reason for that. The most politically sensible thing for the chancellor to do was to sit on his hands. The economy is showing signs of recovery, however artificially induced. So he doesn’t need to be seen to be desperately ‘doing something’.

Meanwhile, the election is distant enough – still another 18 months away roughly – that any bribes will have been forgotten by voters by the time they have to go to the ballot box. Why launch any big giveaways now, when there’s everything to play for next year?

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Business as usual doesn’t mean what you think

So it’s business as usual. But business as usual might not be what you think it is.

The coalition – or the Tory part of the coalition anyway – likes to talk tough on austerity, and cracking down on spending. But as anyone who reads the figures knows, government spending is continuing to increase. The Office for Budget Responsibility (OBR) reckons that the over-spending won’t stop until the 2018/19 financial year.

The government has also discovered a handy new bottomless pit of imaginary money. These days, it’s tax avoidance. If the government needs to find a lot of money in a hurry, it says it’s going to crack down on tax evasion. Somehow, the latest measures are expected to raise billions in the coming years.

However, the main thing underpinning the government’s hopes and dreams is the idea of growth. Growth means a stronger economy, and thus a bigger tax take.

But what’s responsible for Britain’s rebound? It’s not the government as such. It’s the country’s record-low interest rates, and the channelling of that money into the property market via the Help-to-Buy scheme.

So what it really boils down to is that a lot of the heavy lifting in this recovery is still being turned over to the Bank of England. And while Bank of England governor Mark Carney might have indulged in a bit of political point-scoring by scrapping Funding for Lending for mortgage loans the other day, a cynic would argue that this was the perfect low-cost way to rebuff criticisms that he’s the chancellor’s poodle. Scrapping it made Carney look like a tough guy, but in the end there’s still plenty of support for the property market, so no harm done.

The problem is, this recovery – as with the boom before it – is based on debt. Not just government debt, but household debt. In fact, the OBR’s own projections for growth show that its economic predictions are based on consumers saving less, and becoming more indebted.

If households had hardly any debt right now, that needn’t be a problem. But most are still bloated with the last batch they took out. As Gavin Kelly of the Resolution Foundation think tank noted in the FT the other day: “Nearly a third of mortgage debt is held by households that have borrowed more than four times their income; and a sixth of it is held by those who have less than £200 a month left after spending on essentials.”

And we’re in that state “despite 57 consecutive months of the lowest interest rates in 300 years. It is clear that some people are going to be in trouble when rates rise.”

This leaves the Bank with a tricky problem. It has said that it’ll revisit the case for raising interest rates if unemployment falls to 7%. But as Chris Giles notes in the FT, the OBR now reckons that’s pretty much likely to happen this coming spring. That’s “much earlier than the BoE expects.”

If interest rates go up, you can kiss goodbye to the recovery. What does that mean? Well, logically it means that rates won’t go up. And certainly not this side of the election.

That suggests two things, in terms of investment. For one, the pound is an accident waiting to happen. It’s being pushed higher in the expectation that Carney will be pushed into raising rates sooner than he wants to. But at some point, it will become clear to the market that he has no intention of being forced in to any such thing. And that will be messy for the pound. That’s one reason why we still think it’s a good idea to get overseas exposure in your portfolio.

Secondly, it suggests that there’s likely to be some room left in this cyclical recovery in the UK. In last week’s issue of MoneyWeek magazine, my colleague Phil Oakley tipped one stock that could do well out of any continuing reflation of the housing market. If you’re not already a subscriber, get your first three issues free here.

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21 Responses

  1. 06/12/2013, Mikeyman wrote

    I think it was one of the Rothschilds who, in a previous century, said “Give me control of a country’s money and I care not who makes their laws”. Surely the Bank of England and the U.S.A.’s Federal Reserve are perfect examples of that. No-one cares too much what George Osborne says but the markets hang upon every utterance of Mark Carney and Helicopter Ben.

  2. 06/12/2013, mikeT wrote

    For the pound to go into freefall, some other large block would have to raise rates. Who? The US? Eurozone (more easing, in some form)? Japan? I don’t think so.

  3. 06/12/2013, Chester wrote

    That politicians are impotent is not news, but we finally understand that central banks have no direct control over underlying interest rates either – the market does. That is why US 10 yr yields have doubled in the past 12 months, despite unprecedented QE3, and Bernanke’s goal to depress rates further

    As equity markets and asset prices finally resume their correction, Central Bank efforts to stop it will probably be overwhelmed by the speed and extent of debt destruction. If that unfolds, as few think it will, significantly higher interest rates will be the unintended consequence of QE stupidity, irrespective of what Carney et al do next

  4. 06/12/2013, robin wrote

    I don’t think we can blame MW too much for getting their predictions for the housing market and gold wrong.

    Of rather that they haven’t been right… yet.

    And as long as the politicians are directly and specifically interfering with these markets MW won’t be right.

    The reason we have high house prices is so that people can spend debt though MEW. If they didn’t MEW, the politicians and capitalists might actually have to pay a decent wage to allow the common man to engage in the economy so that businesses can profit. We have these profits because of debt, and at some point reality will set in. There will be defaults of some kind; either directly or through inflation.

    The real question is whether we head towards a fairer society, or whether those who own society decide to get their profits regardless. If the latter, we will have some hard times ahead and it will be entirely of our own making.

    • 06/12/2013, tuesday wrote

      “they haven’t been right… yet.”
      True but it has been an awful long time in the predicting – I have a copy of Monyweek from 2009 predicting an imminent crash. That is over four year of bad advice! And they have called several crashes – of pretty much everything – since.

      They will be right one day – of course, just like the boy who cried wolf, but that is not much use to investors in the meantime. I don’t really mind – but just object to their high minded critique of politicians and bankers whilst exhibiting remarkable amnesia about their own wrong calls (which must have cost any reader who followed them dear!)

      Oh yes and the ruthless marketing of ‘The End of Britain’ aimed at exploiting the anxiety of vulnerable subscribers to sell more magazines. That’s pretty despicable no?

  5. 06/12/2013, Alec wrote

    There is no recovery just more debt which got us into the financial mess in the first place. When interest rates are 4% above inflation i.e. 7% you will know there is a recovery, in the meantime it’s all smoke and mirrors and the market continues to be rigged.

  6. 06/12/2013, Critic Al Rick wrote

    The salient question is – who truly runs the Bank of England?

    • 07/12/2013, Boris MacDonut wrote

      Rick. Now come on. You know the answer.
      It is the CoLC.

      • 08/12/2013, Critic Al Rick wrote

        Boris – whatever.

        The CoL is a Parasite (one of a few groups) leeching off the Truly Private Sector and the proceeds of the disposal of Public Assets.

        • 13/12/2013, Boris MacDonut wrote

          Rick. No it is worse than that.

          • 14/12/2013, Critic Al Rick wrote

            I’m intrigued. Please explain.

            • 15/12/2013, Boris MacDonut wrote

              The Remembrancer of the CoLC is the only non-parliamentary person allowed in the House of Commons and the oldest political lobbyist in the World.
              Dai Xianglong. The Mayor of Tianjin, China calls the CoLC the “Holy Place of Finance”. Nuff said. Read Nick Shaxsons book Treasure Islands.

              • 16/12/2013, Critic Al Rick wrote

                Thanks Boris; I will.

                Your reply may, I wonder, inadvertently hint towards the nationalities of the major shareholders of the BoE.

                Such may be the reality to which you embrace!

  7. 06/12/2013, Boris MacDonut wrote

    tuesday. I think MW are letting the End of Britain Report softly and suddenly vanish away. They never seek to defend it…..I assume because it is impossible so to do.
    I like John’s twist here…”seems to be rebounding”. It is the non-commital of the out of touch.

  8. 07/12/2013, NVP wrote

    sure the UK consumers are carrying debt…..and sure the GBP is under pressure …..but its all about relativity ……. no one operates in a vacuum… dont worry about us ….watch the opposition…thats what I teach people when trading Forex


  9. 07/12/2013, mikeT wrote

    I’ve got some sympathy with disgust at “the ruthless marketing of ‘The End of Britain’ ” and agree entirely that crying wolf eventually works. Why doesn’t the author of The End of Britain come out and explain where he went wrong?

    • 07/12/2013, Boris MacDonut wrote

      Where the author went wrong was to assume assume bad always leads to worse. In reality combined Government and Consumer debt in the UK rose from 108% of GDP in 1997 to 135% by 2007 and to 169% today.
      See something in these figures? I do.
      The rise in the “good times” was 24% and in the “bad times” was 25%. It sort of makes me wonder why nobody was screaming bad news during 1997 to 2007 and why so few can’t see that things are not so bad recently.

  10. 09/12/2013, tuesday wrote

    Sure but the real reason, the ‘author’ won’t explain (or any MW contributors respond to the many critical comments about it) is that it has proved a successful marketing strategy – regardless of its cynicism and gross inaccuracies. That is why they are still running it.

    How successful it is medium to long term is debatable – that will be down to how many of the anxious investors that that have been reeled in stick around to be marketed at again.

    • 14/12/2013, Critic Al Rick wrote

      I believe we have been witnessing the earlier stages of the degeneration towards ‘The End of Britain’ for decades; probably since we entered the so-called Common Market.

      IMO it’s not so much a case of is MW correct but more a case of when will MW be proven right.

      IMO Britain (ex ‘The City’), for one country, is slowly but surely being leeched towards a globalisation equivalent of ‘Third World’ status.

      • 15/12/2013, Boris MacDonut wrote

        Well you’d be wrong Rick. Since 1973 the World has improved vastly. The number of democracies has increased. Infant mortality has fallen away massively. Violence has abatted more quickly than ever and the UK has trebled it’s wealth.
        You are looking down the wrong end of the telscope using Mr Magoo’s specs

        • 16/12/2013, Critic Al Rick wrote

          Well Boris, if you see an acceleration towards mankind’s self-annihilation to be a vast improvement then it is you who is optically challenged.

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