A five year UK Gilt yield of 1.6% provides quite a contrast to the 0.14% of Japan and Germany

After spending the earlier part of this week analysing the economic travails of some of the Euro area it is comforting to return to the UK economy and observe this. From the National Institute of Economic and Social Research (NIESR) yesterday afternoon.

Our monthly estimates of GDP suggest that output grew by 0.7 per cent in the three months ending in September after growth of 0.8 per cent in the three months ending in August 2014.

As you can see the mini-boom continues although they are hinting that the pace of expansion may be slowing. Although some care is needed as the NIESR seems to be adopting the habit of revising back data upwards at the moment. An example of this is shown by this August which was originally reported at 0.6% and has been revised up to 0.8% now, indeed July has also been revised up from the 0.5% reported last month to 0.7%.

Much less well publicised by the NIESR is quite a considerable change in the pattern of the credit crunch according to it. The accompanying chart now has the various revisions to UK economic output included in it and we now passed the previous peak after 66 months rather than 77 months. That should have been worth a mention I think. It does not change the fact that this has been the slowest recovery in the modern era but does change the scale of it.


The situation here was much better than the one observed only yesterday in Germany. From the Office for National Statistics.

Total production output increased by 2.5% in August 2014 compared with August 2013. There were increases in two of the main sectors, with manufacturing output being the largest contributor, increasing by 3.9%.

As you can see not only has UK production risen over the past year but it has been driven by the manufacturing sector. Somewhat ironically considering the debate on this issue at the time of the Scottish independence election oil production dragged the numbers lower.

The subsector with the largest contribution was the extraction of crude petroleum & natural gas, which decreased by 6.9%.

Whilst we are in the middle of a positive phase it is also true that we still have a long way to go in this sector of our economy to get back to where we were.

Compared with the pre-downturn GDP peak in Q1 2008, in the three months to August 2014, production was 9.6% lower and manufacturing was 4.4% lower.

This situation has had an impact on the value of production in our economy overall.

Consistent with Blue Book 2014, the production industries account for 14.6% of the output approach to the measurement of gross domestic product (previously 15.2%).

So the drift towards our economy being ever more dominated by the service-sector goes on. Sometimes the march is halted but it never seems to be pushed backwards.

What about agriculture?

Tucked away in the figures I noted that UK agricultural output is some 9.3% lower than the pre credit crunch peak and as of the second quarter of this year was still falling.

 However, output decreased by 0.3% in agriculture, forestry & fishing.

Do readers have a good explanation of why this has taken place? If it was left to me I would be pushing for us to expand our agricultural output.

Car registrations

These continue to be very strong.

Today (6 October), SMMT has announced that  425,661 new cars were registered in September. Not only does this make it the second-largest month of the year in terms cars registered – beaten only by March – it also makes this September the biggest for 10 years.

The SMMT was quiet this month about one of the factors which have been driving the car market forwards which is access to finance. So let us take a look at the Bank of England’s quarterly credit conditions survey.

The total amount of unsecured credit made available to
households increased in 2014 Q3, and lenders expected a
further rise in Q4. Lenders have been reporting increases in
unsecured credit availability for most of the past two years.

So it would appear that whilst it has been unable to boost credit to small and medium sized businesses the Bank of England’s Funding for Lending Scheme (FLS) has boosted unsecured credit and hence car registrations.

What about house prices?

For all the talk about cooling they still seem to be increasing at a substantial rate as this morning’s figures from the Halifax show.

House prices in the latest three months (July-September 2014) were 2.7% higher than in the previous three months (April-June 2014).

Prices in the three months to September were 9.6% higher than in the same three months a year earlier. This was similar to August (9.7%) and lower than July’s 10.2%.

However the Halifax also added this to its house price report.

Annual house price inflation may have peaked around 10%. A moderation in growth looks likely during the remainder of 2014 and into next year as supply and demand become increasingly better balanced.

Of course there is likely to be an element of both special interest pleading and moral hazard in such statements but it is not the only signal of what the group the Scorpions called the winds of change. From the Bank of England credit conditions survey.

After eight consecutive quarters of expansion, lenders
reported that the availability of secured credit to households
fell significantly in the three months to early-September.

However if we move from the rate of inflation in house prices to the level of them there is a clear sign of trouble. The house price to earnings ratio was 4.64 in September 2013 and is 5.04 this September and we know that the Halifax uses a favourable definition to keep it that low.

Looking forwards

This looks very much a push me pull me type of situation for the UK. The business surveys (purchasing managers indices) remain positive albeit not as positive as they were. Also the recent falls in commodity and oil prices will give a boost to the overall economy if not the oil and gas sector. Against that there must be a downwards pull from the weakness being exhibited in the Euro area.


At the moment there are more than a few things to be grateful for in the state of the UK economy. However the mini-boom has exacerbated old problems such as the (un)affordability of housing and the balance of payments deficit. These have traditionally applied a brake and sometimes a sharp one to the UK economy. For now one of the ways that this has happened- Base Rate rises by the Bank of England- seems rather unlikely in spite of 2 members of the MPC voting for one. With inflation below target and commodity prices and wage growth weak they seem unlikely to get support especially after these numbers released overnight by the British Retail Consortium.

Overall shop prices reported deflation for the seventeenth consecutive month, accelerating to 1.8% in September from 1.6% in August.

However something rather worrying did happen yesterday if we recall the track record of the International Monetary Fund.

The United Kingdom’s economy is expected to
continue to grow strongly. Demand is becoming
more balanced, with stronger business investment.

Given the IMF’s record which has displayed considerable anti-prescience that is indeed worrying as is this number it adds to its report.

household debt at 140% of gross disposable income remains high

Meanwhile another way out looking at the UK economy comes from the bond markets. There has been a flurry of “turning Japanese” news this morning as the 5 year bond yield of Germany fell to the same 0.14% of Japan. By contrast the equivalent UK Gilt yields 1.6%.


18 thoughts on “A five year UK Gilt yield of 1.6% provides quite a contrast to the 0.14% of Japan and Germany

  1. Hi Shaun,
    What do you think the effect of the winding of the US QE programme will be? Do you think there is any realistic prospect of them raising their interest rates and if so what would be the knock-on effect on the UK?

    • Hi Paul and welcome to my part of the blogosphere

      So far the reduction in the monthly amount of US QE has resulted in the higher US Dollar that conventional economic theory might predict. But I note that the US FOMC Minutes which have just been published indicate that it is worried about the adverse effects of this.

      “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. … At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”

      They also lobbed in weakness in the Euro area for good measure which means that we have edged a little further away from any interest-rate increase in the US. Added to that is the fact that the 2 current “dissenters” on the FOMC rotate off it at the year end. So an interest-rate rise is off the table for now as I note that now the FOMC wants to have an easier currency just like the ECB and Bank of Japan.

  2. With regard to agri it’s pretty simple.The prices they’re getting for produce aren’t worth the bother.If I were a dairy farmer I’d have given up a few years back.

    FLS was,is,forever will be an utter joke in terms of intended outcome.

    • Hi Dutch

      The agriculture one is also one of a type of national security at a time when various tensions are heightening. Whilst we do not have the natural resources of say France for agriculture it is time we raised our game I think.

      Only those who are in the heart of the Bank of England will know what the intended outcome of FLS was. As a boost to the banks and household lending it has worked as for smaller businesses it has not.

  3. Shaun,
    UK gilt yield akin to US rates rather than Japan/Germany?

    Current $ strength reduces £ benefit of lower oil/commodity prices?

    • Hi Chris

      Yes financial markets are treating UK Gilts more like US Treasuries than anything else. It is not that we have escaped the worldwide trend to lower bond yields it is that as our economies picked up bond yields rose what is a large amount for these times. So the UK Gilt 5 year pushed above 2% before the current phase pulled it lower.

      Yes the US Dollar push has weakened the impact of lower commodity prices in sterling but we still have a fairly substantial gain. What I am waiting to see is the next path for the UK Pound as we have also weakened against the Yen for example to 174 from a peak of 180.

  4. The level of household debt is certainly a worry and whilst our economy is growing could we be having the ‘wrong kind of growth’ I.e debt fuelled growth? The contrast and comparison with Germany is interesting. Whilst Germany is slowing and the UK growing I still believe that Germany is more sustainable and healthy in the long run. Our balance of payments continues to be a concern and I see little chance of the UK’s debt pile reducing anytime soon. I think the markets have picked up on this which is why Sterling is not as strong as headlines would tend to indicate it should be and the price we pay to borrow is still not as low as one might expect. Unless there is a credible plan to deal with this then lenders are going to become more wary. Having said that they appear ready and willing to lend to very risky Eurozone countries!

    • Hi Pavlaki

      The theme of the credit crunch era was supposed to be deleveraging. Except that the area that has deleveraged in the UK has been the business sector and in particular the smaller and medium-sized business. According to the BoE figures even the mini-boom has not put much of a dent in that trend.

      There has been some develeraging in mortgage debt but the BoE did not like that and introduced FLS to reverse it and now unsecured credit is growing strongly as well. If we add in the expanding national debt it does not make the best of pictures and is only affordable with low interest-rates creating something of a trap.

      I think that lenders to the riskier Euro area countries are gambling that the ECB will back stop it all.

  5. With regard to agriculture, inputs have gone up, such as fertiliser, fuel etc and product prices have gone down, grain, meat, milk
    The British farmer has more regulatory overheads, general overheads and “environmental” overheads and has to compete with imports produced with few of these. This is first hand, as i have an interest in a farm-but not for much longer, enough is enough, i’m selling.
    The British public want to buy rubbish food, produced in poor conditions, so long as it is cheap.
    Of course, the cheap food policy was instigated long ago, to try to keep manufacturing wages down and profits up.
    Its success may be judged by the fact that we no longer have much of a manufacturing sector or agricultural sector-oh, and a huge and perpetual trade deficit.

    • the big super markets have a lot to answer too regards the “cheap” food scams , and it is a scam , they need to make 30-40% returns – in this day and age thats increasingly difficult but like the banks they have not woken up to the fact we are in a low inflation economy – 30% was fine when inflation 10/15% but when its 2% ?

      Still we cant grow popcorn here ……


    • One day this will turn around as the world will always need food and as populations grow, there will be less to export to countries such as the UK .India and rice is a good example of this. I agree as to the cheap but poor quality offered by supermarkets and I now prefer to buy less but decent quality at a higher price.

  6. Hello Shaun

    Its all relative risk really – the issue is not that we’re as good as Germany because we’re not

    Its when the markets realize we’re as good as France or Spain , then even a doubling will hit the HMG wallet hard

    in the mean time the pollies are in full election mode promising the lower end tax payer lower taxes

    Recession ? what recession ? with a flick of pen – or digit , we added sex n coke to the GDP and voila ! all gone ….

    in the meantime the Titanic slips even lower into the sea ……


    PS: re-arranging the deckchairs will not save this boat…

    • Hi Forbin

      It is a complicated picture as the markets are currently doing their best to price Germany like Japan especially at the shorter end of the maturity curve. Of course they are by no means always correct but it is hard not to think of the “lost decade” concept when you observe it.

      I had spotted the taxes swerve which seems to suggest they have to go up overall and then is followed by specific reductions! As the Nutty Boys sing “It’s Madness they call it madness…”

  7. The rates for UK, Germany & Japan are Alice in Wonderland rates. Negative real returns – it’s crazy.

    Also look at the excessive subsidies given out by the UK, loony nuclear construction subsidies, bank subsidies, farm subsidies, housing subsidies and various overly expensive PPP deals.

    Our politicians may think it’s hard to balance the budget while paying 1.6%, but they will find it tougher still if they wait until the market moves against them.

    • Hi ExpatInBG

      The nuclear issue is in the headlines today as the EU has approved the new nuclear plant at Hinkley Point. In response to the question posed by Ian King on Sky News about the extraordinary price of £92.50 per Megawatt of electricity the EDF response was essentially that as it will not happen until 2023 we should all stick our heads in the sand for now.

      Meanwhile the hype has begun from the minister Ed Davey and the DECC

      “For the first time, a nuclear power station will be built in this country without money from the British taxpayer but at a competitive rate for industry.”

      Yet again that poor battered can is kicked into the future….

      • There is an implicit insurance subsidy (this is internationally limited to an ineffectively low limit) as demonstrated by TEPCO’s dipping into the public purse.

        The 2023 construction completion is very questionable, just look at the delays and overruns in Finland. Ed Davey should wait until it is completed without public money before making those claims.

        Even if it’s built on time – I’d suggest that inflation will be used as an excuse to charge much more than £92.50 per hour

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