The heady days of 1% growth in a quarter look long gone already for the UK. More QE on Thursday?

It was just over a week ago that we learnt that the preliminary estimate for the UK economy in the third quarter of 2012 was for 1% economic growth. However along the lines of the famous quote from Star Trek “It’s growth (life) Jim but not as we know it” we were left with the question of how much underlying growth there was as half of the growth was likely to be a rebound from the previous quarter mostly due to the extra bank holiday. Also even with that quarterly performance we had flatlined over the previous year as over that period we had seen no economic growth at all. Even worse according to the National Institute for Economic and Social Research we remain in this position.

Over the past two years GDP has been broadly flat, and the economy is still around 3.3 per cent below its pre-recession peak in January 2008

So we should be growing in the fourth quarter to make up that gap and because we hopefully have some momentum. Let us examine the evidence that we have so far.

Purchasing Manager’s Indices

These give us the earliest and most timely estimate that we receive  about the state of the UK economy. We receive them in the order of manufacturing,construction and services and here is our most recent set.

The UK manufacturing sector saw overall operating conditions deteriorate for the sixth successive month in October. Companies continued to face a combination of declining export sales, weaker domestic demand and rising cost pressures.

October data highlighted another difficult month for the UK construction sector, with the latest survey showing a subdued trend in output levels alongside moderate reductions in new work and employment.

Further growth of UK services activity was recorded during October, although the rate of expansion slowed to a marginal pace. Growth of new business also eased during the month, leading companies to deplete backlogs of work. Meanwhile, staffing levels were reduced for the second month running………Moreover, the rate of growth was the slowest in the current 22-month period of rising activity.

So if we start with our largest sector which is services we see that growth is now very marginal with the reading having fallen to 50.9 in October from September’s 52.2 and we see that this is the slowest rate of growth for nearly two years. That looks ominous to me when we consider that overall our economy has barely grown over that period so we are weak compared to a previously poor performance. Construction at least has managed some growth in what has been a dreadful run for it but 50.9 is very weak growth. Finally we see that manufacturing has dropped from 48.5 in September to 47.5 in October. If we stretch our minds back to then the 48.5 number was presented as a “shock”.

Europe is not helping much either

The UK’s ability to export to its nearest neighbours will not be helped much by the latest news from the Euro area.

The downturn in the Euro zone economy deepened at the start of Q4 2012, with the combined output of the manufacturing and service sectors falling at the fastest pace since June 2009. The Markit Euro zone PMI Composite Output Index fell to 45.7 in October, down from 46.1 in September and the earlier flash estimate of 45.8.

I guess we could look West to Ireland my subject of yesterday as she produced a stellar reading of 55.5.

The past may not have been as good as we thought either

This morning has seen the release of our industrial and manufacturing numbers for September and they were not good.

The seasonally adjusted Index of Production fell by 2.6 per cent in September 2012 compared with September 2011

The seasonally adjusted Index of Manufacturing fell by 1.0 per cent in September 2012 compared with September 2011

The dreadful industrial production numbers which were also down by 1.7% on a monthly basis were driven by this.

The biggest contributor to the decrease was from the extraction of oil & gas, which fell by 20.2 per cent

So many already are hoping it is a blip due to maintenance,although I have concerns that our oil production seems to be developing a trend which is not good. Also those pursuing the view that this is a blip need to address the fact below about UK industrial production.

This is the 18th consecutive monthly fall on the same month a year ago.

If we look at the underlying index we see that UK industrial production was at 113.1 in 2007 before the credit crunch hit on a scale where 2009=100 and in September it was 94.8. Manufacturing output is more hopeful as on the same basis it was 104.8 in September.

The UK housing market remains weak

Today we have seen this from the Halifax

House prices in the three months to October were 1.2% lower than in the preceding three months. This was the fifth
successive decline in this measure of the underlying trend and compared with a 0.5% fall in September……

Prices in the three months to October were 1.7% lower than in the same period a year earlier. This is very similar to the annual rate recorded a year ago: -1.8% in October 2011.

House prices decreased by 0.7% in October

So house prices are drifting lower according to them and we may be seeing signs of a little bit of an acceleration. The Halifax tries to give the numbers a little bit of spin by pointing out that mortgage approvals are rising but as you can see from the quote below that is not as good as it may seem.

Approvals increased by 4% to 50,000 in September, but were still 2% lower than in September 2011

So there is no clear signal of a recovery for our housing market from those numbers. Indeed there are worries for the fourth quarter from them although in the longer-term I have to confess I do not see that as being all bad as I still feel that overall UK house prices need to fall to enable a proper recovery rather than a zombie one.

Also one has to acknowledge that as ever seems to be the case the picture is confused as the Nationwide agrees that prices have edged lower over the past year but tells us this for October.

UK house prices increased by 0.6% in October, more than offsetting the 0.4% decline recorded the previous month

UK Retail Sales

Overnight the British Retail Consortium has informed us of this.

UK retail sales values were down 0.1% on a like-for-like basis from October 2011, when they were down 0.6% on the preceding year. On a total basis, sales were up 1.1%, against a 1.5% rise in October 2011.

Excluding Easter, this was the lowest growth in total sales since November 2011. The slowdown from
last month was felt across all categories, including online sales.

So not inspiring and their economist added this to it.

Year-to-date average growth hasn’t outpaced inflation meaning overall sales volumes going backwards

Mind you they could not resist a little bit of spin.

This underwhelming showing means there’s all to play for as Christmas approaches

I would like to see a football manager try that one!

The other side of the coin

Not everything is downbeat as the UK’s car sales numbers do look more optimistic. From the SMMT.

The new car market has increased 5.0% over the year-to-date, growing in all but one month, totalling 1,771,861 units. This represents an increase of 83,823 units on a year ago.


Unfortunately unlike my review of the Irish economy of yesterday the news here is mostly disappointing. We still have much of the fourth quarter to go but it looks as though the first month of it (October) showed little if any economic growth. The heady days of 1% economic growth in a quarter -a number which may be under challenge now- look likely to be an actual blip rather than any new surge. It looks as though our economy continues to grind forwards slowly with some growth but not very much. This far into a contraction this is both unusual and a disappointment.

This Thursdays vote at the Bank of England about more Quantitative Easing could be much tighter than many have assumed.

Travelling in a land down under

Whilst I refrain from entering the political debate I do from time to time comment on our political class. I am curious as to the terms of the contract of our Members of Parliament as one has time to go to Australia and enter I’m a Celebrity Get Me Out of Here whilst Parliament is sitting. What about representing your constituents?

Anyway let me give you my views by quoting Men at Work for a second time.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake


21 thoughts on “The heady days of 1% growth in a quarter look long gone already for the UK. More QE on Thursday?

  1. Look East to Ireland? Good grief, Shaun, where are you based? Rockall? 😉

    BTW, North Sea gas and oil are in ‘secular decline’, I believe the phrase is. So, whilst there will be ups and downs, the contribution of both to UK GDP will continue to decline.

    • Good grief I agree… Corrected now and apologies particularly to any past geography teachers who may have been reading.

      I agree about the “secular decline” of the UK’s oil sector but the recent data indicates a worsening of that trend so we will have to see if it improves or if that is the new normal.

      • “secular decline” is that a new lexicon speak for geological contraints ? ie peak north sea oil ? – even Norway is having some issues here ….

        Think about the 80’s and that oil bonaza

        think about the near future when we have to import all our oil

        now think about north sea gas ……

        not looking good is it?

        esp as manufacturing appears to be still on the decline

        then the energy crunch predicted for 2015…..

        I’ve checked my candle stock – looking good

        my kids don’t believe me when I tell them about the power cuts of the 70’s – ok that was union made ( mad ? )

        these will be because we didn’t plan and could not afford the international price of energy …..

        they think I’m mad and it will never happen – well I understand -all their lives the electric has always been there along with the the internet and i-phones……


        PS: did you see Minitru’s article on Prof Black advocating the Irish jail their bankers ?

        if only we could prosecute over here – if our MPs had the guts too…

  2. Shaun,
    Very interesting on the economy and I still don’t understand why employment isn’t higher.
    Anyway, on the question of nadine Dorries going to Australia, may I point out that, if you read the contract carefully for MPs, you will find the following clauses:
    1. You are to treat your constituents with utmost contempt at all times (see appendix on expense claims, pension entitlements etc)
    2. You are to make every attempt to degrade the reputation of parliament and its members (see appendix on expenses, TV appearances etc)
    3. You are to remember for a period not exceeding three weeks in every five years to tell your constituents that you do care about them and will champion their views. This will result in a new five year contract on the previous terms (see points one and two above).

  3. Oil/Gas production is volatile quarter to quarter but the North Sea is in long term decline of about 10% a year as to be expected. It might reach a cliff where its uneconomical to operate the offshore infrastructure with low levels of production (unlike the nodding donkey stripper wells in onshore US fields) but the cliff keeps moving into future with the increasing oil price.

    So it will be very hard for manufacturing (also in long term decline) to offset the losses – I think unlikely. The pound will drop at some point and theory says that will boost exports (hasn’t so far) . But it will also boost inflation and cost of raw material/energy imports so we need major reductions in labour costs (aka living standards) or massive increases in productivity e.g robotics (but then so will our competitors and they have more capital and probably more technology now).

    We might be about to revisit the 70’s but this time without the IMF to save us from inflation. Also the 80’s revival was based on North sea and financial services and then boosted by one off dividends of globalisation i.e. cheap goods and cheap debt. Difficult to see what would save us this time but then perhaps I would have said the same thing in 1975 whilst wearing flared trousers.

    • Hi Dave S

      It is usually easy to see what will decline in the future but much harder to figure out what will be new and thriving so I wholeheartedly agree with your last sentence. Mind you younger readers are probably wondering what are flared trousers! We will need a few new ideas if we are to keep ourselves in the style to which we have become accustomed.

  4. Hello Shaun,

    More QE – again ? well as we’re not sure it worked last time !

    If they are going to do it I wish they’d go for the really big bang this time !

    And I expect more capital spending as well , we’ll need more roads for all those super rich to drive their BMWs on , won’t we ?

    I would hope our Gov would spend on energy projects but there’s always a NIMBY for tidal, nuclear and even wind power ( not that it helped much when we have cold windless days – like we have had!! )

    Why not sub PV on every roof ?

    passivhaus insulation would help as well

    full electification of Rail

    and trams to return to London

    lets actually SEE something for our QE buck!


    • More roads and most of all more houses – houses=wealth, we love houses.

      Forget energy – our politicians can’t win votes with sensible energy solutions – instead they squabble about unfair tariffs – wasn’t the free market meant to solve that ?

    • Hi Forbin

      As you know I am not a #QE fan as I fear that the downside has offset the good parts such that it may even have made things worse. However if we move onto what the Monetary Policy Committee thinks an insider (Sir John Gieve) suggested last week that he thought Thursdays vote would be 5-4 against. With this week’s data being poor it could move one or more over to the “dark side”.

      We could do with a bit more sun for PV… least where I have been! But more seriously we have let our energy policy wither and it goes back years to when the Thatcher government let some of our coal mines flood and thereby be unusable without a lot of effort. We will probably need them and maybe sooner rather than later.

  5. Good commentary.

    There is no mention of the positive impact on Q3 GDP caused by the London 2012 Olympic Games.

    The state of UK’s balance of payments causes concern, especially since the government made this a priority some time ago.

    There are other further signs of business stress such as the Ford Transit factory closure and the Comet administration. Both are signs of further decline in UK manufacturing industry & the move from High St & out of town shopping to internet. Ford’s announcement seems counterintuitive with the UK SMMT’s latest monthly car sales data of today.

    The Chancellor’s budget annoucement of new subsidies for North Sea oil sound as if they may require scrutiny for deadweight based on the comments made above about the long term decline in the sector.

    We need credit easing not quantitative easing, but Sir Mervyn King seems opposed, or perhaps the Chancellor told him he would object. Rapid implementation of the business bank with a remit for equity involvement in companies would help – could be the vehicle for credit easing. We also need to free up the £ in consumers’ pockets. Fuel & utility price increases, and particularly mortgage & credit card rate inceases are the latest pressures eating into their vital didposable incomes; the latter also slowing vital debt repayment by consumers.

    • I’d suggest that credit is the LAST thing we need –

      What we need , but will not get , more wage rises but the global trade agreements we made to make our buying cheaper goods means that we are stuck competing with low wage economies

      thus we cannot raise wages

      massive debt means we cant cut taxes

      answers on a post card please 😉


      PS: “controlled ” inflation is what we’re getting with the top lot protected wages/salaries

      even if they’re shares – as priced at the peak of collapse not worth more due to – erm, QE ?

      • Forbin – I’ve suggested that rather than provide more loans, a change in culture in finance provision is required in the UK; particularly for the companies that will generate future growth and employment, through innovation and capital spending. Greater equity participation by the banks, not lending is the solution.

    • Hi Jonathan

      Thank you and welcome to my part of the blogosphere.

      I left out the “Olympics Effect” because one could also go back to the building of the stadia and infrastructure improvements of the period in the run-up to it. Also whilst the ticket sales represented some 0.3% of GDP there were offsetting effects on Oxford Street and London’s main shopping areas.

      I believe that the effect of #QE may even have been negative due to the way that it led to falling real wages via higher inflation.

      As to credit you might like to look back to my articles on why it was a mistake to accelerate the end of the Supplementary Liquidity Scheme which I mostly wrote on the Mindful Money website. Put another way I consider the Funding for Lending Scheme to be an admittal of the error. the trouble is that in the meantime things stagnated.

  6. Hi Shaun,

    Another good piece of analysis.

    As Government spending is up 1.5% through increased borrowing since April (on present spending they will miss this financial years deficit target by £22bn) then there has been no growth in the productive side of the economy at all. The boost has come from increased Government borrowing! So the real economy is still declining and I can’t see that changing anytime soon.

    The only way to kick start the UK economy is by cutting Government spending, followed by tax cuts to start improving the public to private sector balance, where high Government spending chokes growth along with excessive red tape.

    Under this Government decreasing Government spending is never going to happen. In fact the opposite where they are increasing it every year, including oversea aid, which they admit has virtually no effect on helping the UK economy or employment where it is spent overseas. Still it should help pay for India’s space and 5th generation fighter aircraft programs, not to mention Argentina’s blockade of the Falklands and Moroccan holiday resorts for middle-class French tourists!

    It looks like the French and the Dutch economies are going to fall off a cliff over the next few months due to Government policies there, which is not going to help our situation.

    I’m sure rising energy, food and taxes and a falling pound will keep UK inflation above 2% and real wages falling. From January there will be 3p on a litre of fuel and medium wage earners losing child benefit all helping to push the tax burden towards 45% to eliminate the deficit.

    To sum up the UK economy now and over the next few years in three words: Stagflation, Stagflation, Stagflation.

    My record of the day is Somewhat Damaged by Nine Inch Nails.

    I think it would be an excellent idea to send all of Europe’s politicians to a remote island for a year, so the people can sort the current mess out. They can’t make it any worse. On a more serious note, I expect she has booked it as an “austerity and the media fact finding tour” so she gets triple bubble, £40,000 from the TV series, her MP’s wages and a full set of expenses. And finally will she be missed as I had never heard of her until now, and maybe her constituents won’t miss her either, so she gets to see more of her family from 2015 onwards.

  7. Perhaps the pause in QE was deliberate; to see what the market reaction would be to stopping/reducing the level of support for Gilts. Have rates started to creep back up since buying stopped (I appreciate this has been just over a week)?

    From your blog, there appears to be a lot of cash looking for a safe home right now so, just maybe, there’s enough demand to absorb the UK Gov’t new issues. Or at least, the BofE would like to find out what the strength of demand really is.


  8. Hi Shaun,
    An interesting piece. I slightly disagree with your prediction this time. Whilst I agree the increased GDP is a “blip”.

    I think it will be a “longer blip”, because I think the real cause of this is money supply growth going back 6 – 12 months ago making itself felt. If right, this false growth will continue until about next Spring. If I’m wrong every one here is welcome to remind me of this post and I’ll consider joining Adam Posen et al in the Forecasting hall of shame.

    • Hi John

      Yes and no particular response from the Gilt market so far. Our 30 year yield actually dropped but 0.01% isnt much of a signal…

      It will be interesting to see the minutes of the MPC in a fortnight to see what the actual vote was.

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