Intelligentguess

Situation

The Bank of England kept interest rates steady at 5.25 percent on Thursday - April 5th 2007.

Note

This site has continuously been studying this issue and concluding that the Bank would retain a steady posture.

The main reasons were discussed in Feb-Mar 2007 in the below links. 

1. Q4 2006 GDP issues 
2. Jan’07 Production issues  
3. Feb’07 Producer prices issues 

In the past week the revised Q4 GDP 2006 information and sluggish Feb’07 production continued to suggest that the Bank of England would retain a steady posture.

The issues discussed along with the reasoning is specifically discussed in the below two links.

Read : 1 ( Feb 19th 2007 )

         2 ( Mar 21 2007 )

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Note : These are revised  estimates for Q4 2006 ( read : previous estimate)

Situation

Quarter on Quarter - GDP grew by 0.67 % in the Q4 2006, ( 0.68% in Q3 2006).

On an annual basis GDP grew by  2.96 % p.a in Q4 2005.

For the year 2006 as a whole GDP rose by 2.8 % p.a.

Quarter on Quarter

• Production industry output fell by 0.2 % in the Q4 2006 compared to a rise of 0.2 % in Q3 2006. Within production manufacturing output was flat, the output of utilities fell by 1.6 %, and mining and quarrying output fell by 0.6 %.
• Growth in the service sector accelerated slightly from 0.8 % in Q3 2006 to 0.9 % in Q4 2006. Output of the business and finance sector grew by 1.0 % . Strength in wholesaling and retailing led to a growth of 1.2 % in distribution sector outputs.
• Construction output rose by 0.8 % in Q4 2006.
• Household expenditure rose 1.0 % in Q4 2006, with strongest growth in durable and semi-durable goods.
• Gross fixed capital formation rose by 2.6 % in Q4 2006, driven by strong business investment.
• Government final consumption expenditure rose by 0.7 % in Q4 2006. It is now 2.4 % above the level seen in Q4 2005.
• Compensation of employees, measured at current prices, rose by 0.9 %  and is now 4.1 % above the level seen in Q4 2005.

Background

The latest data on the Index for Industrial Production shows a sluggish beginning to 2007. 

Conclusion ( click/double click on chart for the larger picture)

1. The current interest rates at 5.25% will act as a drag on GDP growth in the coming Quarters.
2. UK GDP growth for Q1 and Q2 2007 can be expected to slowdown due to the slow growth / possible negative growths in Production 
3. While a 3.5% growth still looks possible in early 2007 - GDP growth rate looks like dropping towards the 2.00% area from end 2007 towards mid 2008.
4. Again - it does not look like the Bank of England will consider raising interest rates in the near future.

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Situation

On a monthly basis production ( IIP) decreased by - 0.2% in Feb’07 ( - 0.10% in Dec’06 and flat in Jan’07) . Manufacturing was the prime cause since its production dropped by -0.58% in Feb’07.

On an annual basis production growth was at 0.30% p.a ( 0.20% in Jan’07).

Background

Production growth peaked in Oct’06 ( 1.44% p.a) and has been slipping since Oct’06.( Caused by interest rates hikes ? )

New orders growth has been in negative territory recently. ( -5.6% in Dec’06 and - 4.3% in Jan’07) ,

 Note : The raising of the Bank Rate may have had to do something with this drop in IIP. The Bank rate was at 4.50 % - 4.75 % from September 2004 to July 2006. Post July 2006 the Bank of England - in order to contain inflation re-initiated rate increases (to achieve its inflation target).The Bank rate now stands at  5.25%

Conclusion ( click on image for a larger visual)

1. The behaviour of the New Orders leads to the conclusion that Production will not show any increase in the coming months of Mar’07 - Apr’07.
2. Production growth looks like heading towards the 0% growth mark ( to a  negative decrease of - 0.30%) for the first half of 2007 ,  and could start decreasing to a negative growth rate of towards mid 2008.
3. UK GDP growth for Q1 and Q2 2007 can be expected to slowdown due to the slow growth / possible negative growths in Production.
4. In these circumstances it is unlikely that the Bank of England will raise rates in the near future. 

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