Although politics and economics are clearly still at war with each other, it looks as though economics might have gained the upper hand, at least for a brief period.
Yesterday’s sharp upward revision of the Bank of England’s forecast for UK GDP for this year to 2% from 1.4%, its second significant upwards revision since the referendum, caught the markets off-guard although the maintenance of its monetary stance with no sign of early tightening, despite the growth prediction, led to sterling taking another spanking. Having been on a mission north and having just hit US$1.27 just ahead of the rate decision, it retreated back to the US$1.25 space.
To economists and strategists alike, not to mention investors, the UK is a real conundrum. That Brexit is going take its toll at some point is quite obvious as the economy recalibrates itself to the altered state. As we have no clue how that altered state might present itself, it leaves us with that old game of pinning the tail on the donkey. There has been much criticism of the bank and especially of its economists who in the past had a sterling reputation for the rigour of their work. During the financial crisis they were taken to task for having painted too rosy a picture of the state of the economy and for not having taken into account how much of the growth had been generated by feckless borrowing married to imported disinflation - who could forget Mervyn King’s “NICE” economy? - and now they’re in the firing line for being too gloomy. Damned if they do, damned if they don’t.
Economics is ultimately, despite all the higher mathematics and eye-wateringly complex statistics, much more of an art than it is a science. The planets may obey the laws of science but consumers, the bedrock of all economic activity, don’t. I was rather taken by a speech given by Jeremy Irons as the Cambridge mathematics professor GH Hardy in the film “The Man who knew Infinity”, a biopic of the brilliant Indian mathematician Srinivasa Ramunujan in which he observes that the laws of science have always existed and all we can do is to discover them. That cannot be applied to economics and therefore trying to treat economics as a pure science is self-deceptive and silly. That British consumers did not take fright after the referendum and withdraw their wallets and credit cards was not predictable so the chaps at the bank aren’t really to be blamed. That they erred on the side of caution or even over-caution should be applauded and not dismissed. False, rose-tinted optimism would be much worse.
Despite raising the growth forecast, Mark Carney and his merry men still see muted inflation risk on the basis of which tightening expectations were deflated and the pound went south. But don’t panic: as recently as January 16 cable was trading at very close to US$1.20 so even with yesterday’s dump, it is still far from its lows. Picking fair value for sterling is taking a shot in the dark and hence my suggestion that those who don’t need to punt around in either the currency or sterling-denominated assets would be well advised to leave it alone.
The predominance of economics will continue with US payrolls for January. Consensus forecast is for 180,000 on the headline number but once again the killer blow will come, if it comes, from the revision to the December release. But here too, as with the UK GDP figure, we are sailing into uncharted waters. Trumpanomics has put the wind up a significant part of America’s corporate world and the threats to the automotive giants might have done enough to encourage quiet expansion of domestic production capacity in other areas too. Thus many of the labour statisticians’ base cases may well need to be revised although nobody can sensibly suggest how and by how much.
In the absence of any usable forward-looking models, markets will have to take each release on its own merits, adjusted by a best guess.
Meanwhile, the political career of François Fillon looks to be in its death throes. The gloss has gone and, whether right or wrong, he is now a dead duck. Alain Juppé is girding his loins to take over as Republican champion but on the evidence so far, Emanuel Macron is in the driving seat and, despite all the talk about the risks of a Marine Le Pen presidency, he will be the next president of France. What needs to be appreciated is that everybody who will vote for Le Pen will vote for her in the first round but next to nobody who didn’t will do so in the second. Latest polls have a Macron/Le Pen run off pegged at 63% to 37%.
Alas, it is that time of the week again and, apart from wishing you and yours a happy and peaceful weekend, for me it is very nearly that time of the year when I shall be packing away the woolly hats and digging out the bathers as I head off on my annual February pilgrimage to Antigua. For three weeks I shall be writing no daily columns but will be working on my memoirs of life and love in the City under the working title of Fifty Shades of Pinstripes. I could not, however, fly until France and England have joined battle in the Six Nations at Twickenham on Saturday. England are highly rated but France are in resurgence mode. This will be a big one and the beach can wait. Back March 1.