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Economy in Brief

U.K. CBI Service Sector Survey Stays Mixed But Is Reversed for Q1
by Robert Brusca  February 26, 2018

The changes in the assessments of consumers and business & professionals' optimism have moved together over recent periods as the chart shows. But over the long haul, the assessments of business prospects have a correlation of only 0.36. In fact, over the last four quarters, businesses and consumers have continued to flip-flop quarter-to-quarter and to show opposite net positive and negative assessments of prospects. In Q1 2018, their movements have diverged sharply as consumers' mood improved to a 14 reading from -21 in Q4 2017 while the business & professional reading dropped to -9 from 16. At those levels, the consumer reading has an 88th percentile standing which is quite strong while the business & professional reading stands at 27.1, a reading nearly as weak as the consumer reading is strong.

Welcome to the bifurcated U.K. services sector. As we go down the line from overall optimism, to volume assessment, to demand, to authorized capital expenditures, to full time employment, we find the consumer sector responses readily exceed those of business & professionals. The lone exception is the volume assessment over the next three months where both consumer and business & professional segments assessments are at the 69.5 percentile; moderately positive.

It is also important to note that even though the consumer assessments in all the other cases exceed the business & professional assessments, the consumer assessment for authorized capital expenditures has a percentile standing slightly below its 50th percentile, putting it below its historic median. That means that despite consumer sector optimism monies are not being allocated for expansion to even a normal degree. In other words, there is still a drag on corporate spending from Brexit even in the more upbeat consumer sector. This is an important point to bear in mind since the overall assessment has an 88th percentile standing and demand has a 76th percentile standing and full-time employment has an 88th percentile standing for the consumer sector. Despite all that, monies for expansion are still below normal. Optimism per se has only a 61st percentile standing for the consumer sector against a business & professional reading at its 37.3 percentile, well below its historic median.

With that in mind, Brexit politics got a bit thicker. Opposition leader Jeremy Corbyn said on Monday Britain should stay in a customs union with the European Union even after it leaves the bloc. Theresa May is planning a 'clean break.' Of course, the U.K. is still engaged in its negotiations with the EU. However, without a single focus from the U.K. side, it will be pretty hard to strike any deal, let alone to have orderly negotiations.

To make matters just a little bit more dicey, BOE Deputy Governor Dave Ramsden said in an interview with the Sunday Times that the acceleration in wage growth indicates faster rate hikes are needed. He said that rate hikes are more likely to come 'sooner rather than later.' The BOE is playing with fire on this score as inflation was ignited by its own sharp easing policy that was meant as a stimulant to act as a palliative to the coming Brexit shock. And while the consumer sector has held up, business investment is being held back and the professional sector seems all but shell shocked. Still, stubborn inflation has been in train for a while. Add rising wages to the mix and suddenly we must ask, can the BOE wait it out since hiking rates ahead of the Brexit shift, which in and of itself will be a clear negative shock to the economy, is hardly desirable. The BOE must seriously ask itself, if it's too dangerous to hike rates ahead of the Brexit transition even though inflation has crept up or, on the other hand, if the up-creep is severe enough that it must be countered with force now, before it gets worse or becomes entrenched. This is the decision that the BOE must make and has been struggling with for some time.

Whatever the BOE decides to do, the message from 'The Universe' and from this episode is clear and it is that monetary policy really does not have much of a separate role to play. Exchange rate depreciation is no way out since the stimulus gained is countered by inflation control lost. U.K. macro-management tools are going to be solely in the domain of fiscal policy. The BOE has discovered 'the hard way' that the costs of trying to engage in monetary fine tuning are simply too dear.

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