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Economy in Brief

New Record High in U.K. Orders
by Robert Brusca  September 21, 2021

U.K. industrial orders took another strong step higher in September, rising to a net reading of 22 from 18 in August. The previous high in this cycle was a reading of 19 in June of this year. The previous all-time high was a reading of 21 in 1988- net readings for this series extend back to 1977. The U.K. economy is still in a period of recovery as it marks time in digesting its Brexit deal with the EU and continues to normalize in a new economic environment and as it deals with the repeated problems thrown its way by the virus and by the steps taken to contain it.

I rank the CBI readings for September in the far right two columns of the table on two periods, one since 1991 and the other since 2015. Since 2015 the U.K. economy has been stronger accounting for the slightly weaker reading on that timeline. The longer timeline that extends back to 1991 shows orders have been this high or higher only 0.3% of the time which is the value of one observation on this timeline since the September reading is the all-time high.

The chart shows that while export orders are high (at an 83.8 percentile standing), they have been higher recently on a number of occasions 2017-2018. Still, the 83.8 percentile standing is a strong reading. Stocks on the other hand record a low reading, not a high one. Apparently, the nexus of supply and demand simply has not allowed inventories to be properly rebuilt.

Looking ahead, expected output volume has been ticking lower. Expected output volume peaked at 44 in July then fell sharply to 26 in August and ticked lower to 25 this month. While the withering aspect of that trend is a bit disconcerting, at a reading of 25 expected output still has a very strong 91.5 percentile standing. The reading of 44 was an all-time high. The previous all-time high had been at 38 (data extend back to 1977).

Looking ahead three-months for prices also gives an elevated reading. The prices reading is slightly weaker this month but still has an extremely high 98.9 percentile standing at a net diffusion level of 41. The cycle high was set at a value of 46 in June of this year; that compares to all time high at 68 (From 1980 back to 1977 when inflation was cooking globally, the U.K. recorded quite a number of expected price readings in the 50s and in the 60s decile. After 1980 no readings even as high as 50 have been recorded). Clearly the U.K. is still in a super-heated price environment. U.K. inflation is still running hot with its CPIH gaining 0.4% in August and up at a pace of 3% over 12 months as well as cooking at a 4.3% annualized pace over three months. Out of ten major CPI categories, inflation is still accelerating over three months compared to six months in half of the sectors. Over three months inflation is running at an annualized rate in excess of its 12-month pace in eight of ten categories. So, inflation in the U.K. remains hot and it is still expected to stay hot. But the Bank of England is holding its ground.

Because of the joint impact of Brexit and fighting the virus, the U.K. economy has been through a unique wringer. As of November of last year, total orders, export orders, expected output volume and expected prices all logged net negative diffusion values. Now each of these categories posts readings of extreme strength. The U.K. economy has flipped a switch unlike any other economy in the world.

The U.K. economy continues to grow solidly. Home prices have been at the highest levels ever according to Nationwide. And the BOE, like other central banks, continues to be on the alter for inflation. Inflation is running hot but is assumed to be temporary. All central banks say this. But in the U.S., the Fed seems ready to either start or to set a date to start tapering. That same discussion is advancing at the ECB where more board members seem to have some anxiety about inflation risks. In the EMU, core inflation is not running hot; only headline inflation is hot. But the ECB is still holding rates extremely low and that is a separate source of anxiety there. The Federal Reserve and the BOE have base rates essentially at zero while the ECB still is running with a negative base rate. The BOE is already a step ahead of the Fed in the tapering game. But so far, it’s a game of rhetoric and planning rather than action. So being ahead does not count for much.

This survey of industrial strength and strong price expectations continues to keep the BOE in the spotlight and the hot inflation rate in the news. At some point, central banks will have to admit that inflation is as it is being reported. It is far from clear how long central bankers are going to be willing to call current inflation temporary to permit themselves to continue to run stimulative policies. At some point, the various economies must be left to stand on their own. We are edging tentatively toward that goal and the U.K. may or may not be a step ahead of the Fed in that process.

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