Disappointingly, new economic data published last week has cast serious doubts over the strength of the UK’s economic recovery. It has prompted warnings against an early rise in interest rates.

tearThe Office for National Statistics (ONS) said that manufacturing activity and broader industrial output were both flat in November, from October. Not only that, but the ONS also revised down the growth figures for manufacturing and wider production for October. Separate figures showed construction activity fell 4%, the sharpest monthly decline since June 2012.

On an annual basis, all three sectors showed growth, with manufacturing up 2.8% in November from a year earlier, the strongest performance since May 2011. Construction output, a stronger performer for much of 2013, was up 2.2% on the year.

Recent industry and consumer surveys have pointed to growing confidence about economic prospects, prompting debate about when, not if, the Bank of England will raise rates. But the cynic in me said, when good news was being bandied about: “don’t believe anything until it can be verified”, but then at one time I was a registered auditor after all.

BBC News reported that BNP Paribas economist David Tinsley called the data “unambiguously poor” but despite the data, he said that the UK’s economic fundamentals were “broadly encouraging” and the new figures should keep “the lid on over-exuberant (interest) rate hike expectations”. But David Kern, chief economist at the British Chambers of Commerce, warned against a rise any time soon.

“Although longer-term comparisons show solid annual growth, these monthly figures are disappointing. It’s a timely reminder that the recovery is not yet secure, and should also dampen the clamour for an early rise in interest rates. The government must continue to implement measures to boost growth, to ensure that the UK economy is on firmer ground before any such step is introduced.”

Samuel Tombs, UK economist at Capital Economics, cast some doubt on the Q4 figures: He said: “November’s weak industrial production figures signal that GDP growth in the fourth quarter is unlikely to be quite as strong as the business surveys have indicated.”

Also on Friday, the National Institute of Economic and Social Research (NIESR) released estimates suggesting that GDP grew by 0.7% in the final three months of 2013. The economic research group said that this suggested the economy had expanded by 1.9% last year, up from growth of just 0.3% in 2012. This would put the level of GDP at just 1.2% below its pre-recession peak in January 2008, NIESR said. But then good news: NIESR added that: “The economy is expected to expand at a reasonable pace in 2014.”

The economy is still 1.2 per cent smaller than it was before the recession struck, NIESR said.

The Mail Online reported that the UK economy has its best growth for six years despite slowdown in Q4 2013.  The money markets didn’t like it at all. Sterling tumbled against the euro and the dollar as weaker-than-expected manufacturing and construction figures added to the disappointment over the slowdown in the final quarter of 2013. ‘A triple whammy of weak economic data out of the UK has resulted in a pounding for sterling,’ said Kathleen Brooks, research director at Forex.com.

Azad Zangana, European economist at Schroders, said: ‘Despite the wave of optimism on the UK economy, the evidence suggests that the economy slowed in the fourth quarter of 2013. We forecast fourth quarter GDP growth to slow to 0.5 per cent.’

Over the weekend, the BBC reported that Britons are more optimistic on the economy, according to a survey by think tank British Future. The number of British people who are optimistic about the economy has trebled since 2012, the survey suggests. It found that 29% of people were optimistic about the economy in the year ahead, compared with only 9% in the same survey in 2012. And on the other side, the proportion of those feeling pessimistic dropped from 74% to 40%. The BBC story is here.

But my cynicism must be misplaced. According to Tim Wallace writing in City A.M. (here), bank lending is expected to rise in every area of the economy, analysts at EY forecast today, as the recovery finally gives banks the confidence to supply more credit. But it’s restricted to the UK as apparently no other European country’s bankers have so much confidence, and it’s all down to the strength of the recovery in Britain.

Looking on the positive side, firms of all sizes and sectors in the UK are expected to benefit, with healthcare, media and telecoms firms particularly likely to borrow more from willing lenders, 74% of whom expect the UK economy to improve, compared with 56% across the EU as a whole.

All this glowing (and growing) confidence means that British banks expect to cut their loan loss provisions compared with Eurozone banks who are still hiking their likely losses on bad loans.

You needn’t worry about other parts of the market which are propped up by government support, including the Treasury’s Help to Buy mortgage guarantee programme. However EY’s Global Banking Outlook, also out this week, warns these supports could make the current spurt of mortgage growth unsustainable. Sensibly it says: “Many are wary of encouraging too much growth in this sector at a time when interest rates are at an all-time low.”

Such concerns have led Bank of England governor Mark Carney to withdraw the Funding for Lending scheme from the mortgage market, a programme which offers banks cheap funds if they increase lending.

The study also warned that the varied new regulations from country to country may reverse some of the globalisation of recent decades, a so-called “Balkanisation” of the financial system.

I keep hearing warning bells in my head about our economy. Keeping an open mind but not going around empty headed is what I shall be doing. You might like to do the same.

Martin Pollins
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