Is the UK economy suffering from (post) Industrial Disease or just Dire Straits?

Today has seen the last set of economic growth figures before the General Election so no doubt all sorts of politically based conclusions will be drawn in addition to the usual economic ones. The numbers themselves are unlikely to stand up to such scrutiny as the will only have around 40/45% of the full data set and will be particularly weak on the month of March. That is the price for producing Gross Domestic Product data only 28 days after the end of the quarter itself. But it does give us an opportunity to look back over the term of this Parliament to see where we stand. Let us begin with today’s release.

Growth in the first quarter of 2015

Even allowing for the caveats described above the numbers are disappointing.

GDP is estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2015 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2014.

This poses an awkward trend as the sequence for UK economic growth since the beginning of 2014 which has gone in quarterly terms 0.9%,0.8%,0.6%,0.6% and now 0.3%. Anybody spot a trend there?

Oh and linking this to my article of yesterday it fits very neatly with the monetary stimulus applied by the Bank of England to the UK economy via the housing market. Remember it was around a year ago they applied some form of braking via the MMR overview of mortgage lending. We have regularly discussed on here the likelihood that this would fade before the election and on first viewing it has.

Let us look into the detail to see what the cause was. Doing so we notice a slow down in what is the main engine of our economy these days.

Output increased in services by 0.5% in Quarter 1 (Jan to Mar) 2015.

This was quite a fall on the previous 0.9% growth figure and it was driven by a very topical issue for the UK economy.

Growth in business services and finance slowed from 1.3% growth in Quarter 4 (Oct to Dec) 2014 to 0.1% in Quarter 1 (Jan to Mar) 2015.

That neatly fits with the housing market theme discussed above but also feeds into another issue for the UK economy.

Productivity

In the credit crunch era this has come down to a discussion about labour productivity and this has bedevilled the UK economy in the credit crunch era. The Financial Times did a report into this and concluded.

Since the crisis, productivity has been flat at a level slightly below the 2008 peak,

However it identified an area which had declined in particular.

The recorded annual productivity growth of professional services — lawyers, accountants and management consultants which account for just 7 per cent of output — stood at 3.8 per cent between 1997 and 2008. Since then, it has fallen by less than 1 per cent a year.

If we factor that into the latest numbers we see that productivity growth there has just got worse or to be more specific may continue as part of the growing list of economic statistics with a minus sign before it.

We can take the productivity issue further if we look at the other categories of the UK economy as output fell in all of them.

The other 3 main industrial groupings within the economy decreased, with construction falling by 1.6%, production by 0.1% and agriculture by 0.2%.

With employment rising we have an obvious implication for labour productivity from all of this. If we look at hours worked we see this.

5.3 million (0.5%) more than for September to November 2014.

Some care is needed as this is for the quarter to February and not March but we face the troubling possibility that productivity actually fell in the first quarter of this year. The musical accompaniment from that must be from Dire Straits.

Warning lights are flashing down at Quality Control
Somebody threw a spanner and they threw him in the hole
There’s rumors in the loading bay and anger in the town
Somebody blew the whistle and the walls came down
There’s a meeting in the boardroom they’re trying to trace the smell
There’s leaking in the washroom there’s a sneak in personnel
Somewhere in the corridors someone was heard to sneeze
‘goodness me could this be Industrial Disease?

Construction

Here is a particular (space) oddity if you live in Battersea as I do because it is crane city even if you ignore the Power Station and the new American Embassy. But the contraction poses a real problem if we think of the economic boost provided by UK house prices. It was summarised on Twitter by NicTrades.

All the demand stimulus the Tories have shoved into home buying yet there is a sharp slowdown in construction – down 1.6%

Of course the numbers include non-residential work but the residential numbers up to February were also poor in the circumstances.

The contraction in new work was driven
by private housing, the output from which fell by 1.6%. Repair and maintenance output on housing fell by 2.5%.

Care is needed as there are reports that the election has created uncertainty but right now the housing boost looks more to have driven asset price inflation rather than growth. No wonder they exclude house prices from the official consumer inflation measure!

If we return to the labour productivity theme then there appears to be a problem here too.

Economic growth

The economic growth pattern of this Parliament can be divided into quarters. We started with some and then it faded away to near flat-lining. Then just in time for the election we saw a boost provided by the “independent” Bank of England via the Funding for Lending Scheme I discussed yesterday. Accordingly the housing market fired up in terms of price rises and the UK economy followed it like a dog on a lead. However we now face the troubling prospect of what we do next if we are now seeing economic growth fade away.We find that the overall pattern is that there has been GDP growth of a bit over 8% during this Parliamentary term.

There has been a lot of discussion as to why this has not so far provided much of a feel-good factor and this can be analysed by looking at growth per capita or per person. As the population has grown then the growth per capita has been weaker.

Comment

A clear issue is the reliability of the data we receive in these times as it looks increasingly unreliable. After all  it was only earlier this month that the Markit (PMI) business survey told us this about the UK service-sector.

Overall growth in first quarter stronger than in
final three months of 2014.

And the overall UK economy.

The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter.

What a different picture that would have painted! But whilst the official data has its weaknesses we have little choice but to take it on its own terms. Firstly we have had a good run.

GDP was 2.4% higher in Quarter 1 (Jan to Mar) 2015 compared with the same quarter a year
ago.

But now we face quite a few questions. If today’s numbers turn out to be reliable the productivity issue rears its ugly head one more time. This should not be happening in a boom and it poses a real question for wage growth. Will this be yet another Bank of England forecasting failure? From the February 2015 Inflation Report.

robust real income growth (is expected in 2015)….I think the thing that we have seen in recent months is the
start of the turn of wages….

Also as we have had strong year on year retail sales figures due to the economic boost provided by lower inflation and we have apparently not produced much more in response should we fear the trade figures? Housing policy looks even more of a disaster than I thought yesterday.

There’s panic on the switchboard tongues are ties in knots
Some come out in sympathy some come out in spots
Some blame the management some the employees
And everybody knows it’s the Industrial Disease

Meanwhile over at the Bank of England they may be mulling a higher pound which using the old rule of thumb meant that in Bank Rate terms we have had the equivalent of a 1% rise in the past 12 months. A post-election cut anyone? From December 2013.

So should we see any slowing of the UK economy in 2014 and the exchange rate of the pound continues to be strong there are factors pointing towards a base rate cut. This would be reinforced if the pound strength actually pushed inflation to below its target.

The only difference is that it is now 2015.

Ch-ch-changes

One feature of economic life that has changed appears to be the way that governments finance themselves. What did they do for revenue before they started fining banks?

A Conservative government would use fines imposed on Deutsche Bank for its involvement in the rate-fixing scandal to fund 50,000 apprenticeships, David Cameron will announce later.

At least this time we are not fining a bank which received a bailout! When we did so with Royal Bank of Scotland for example was the taxpayer in effect fining themselves?

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26 thoughts on “Is the UK economy suffering from (post) Industrial Disease or just Dire Straits?

  1. Hi Shaun

    What surprises me is not that the economy appears to have slowed in the first qtr but that it hasn’t slowed before. I wouldn’t be surprised if, ceteris paribus (the get out phrase) we are not in recession in fairly short order, particularly as the external environment is looking increasingly uncertain.

    However, do not fear, because, if we have another ConLib coalition I predict we will soon have two things: a review of MMR which will relax the rules on the QT and HTB (Phase21?) which will see free taxpayer funded IKEA vouchers; free trips to Alton Towers and negative mortgage rates.

    TPTB have only our interests at heart!

    • I think there’s a school of thought-to which I subscribe-that we’ve been in a depression of some sort since 2008 and the official figures just don’t show it.
      GDP per capita and working age household incomes are down whilst at the same time unemployment is at record lows.
      Seriously,how do you have record lows in unemployment at the same time as increasing numbers are working for minimum wage?

      • Hi Dutch

        The figure which is symbolic of a depression is the one for real wages which has so far only managed a miniscule recovery after a ~10% drop. The fear expressed on here by JW if I recall correctly was that an adjustment of 20% or more was on its way.

        • Now that would be worthy of an article!

          One that also included all those stats that are remarkably similar to the Great Depression like real wages, international trade, credit growth etc. Obviously the photos are different because of the welfare state and the advent of colour but beggars can’t be choosers.

          Great article btw Shaun.

          • Thanks

            As it happens/transpired my next two subjects were on the Depression theme.Today covers our banks which plunged into an economic depression and have yet to emerge from it. Yesterday it was the Swedish Riksbank who seem to define a depression as economic growth of 2-3%. Perhaps that is the best implied critique of the GDP “improvements” of ESA 10 et al.

  2. Hello Shaun,

    Is it no wonder the TPTB can get away with our money ?

    BBC aka Minitru

    “For reasons no one can quite explain, construction in Britain has been lousy for six months.”

    Cant explain ? WTF ? perhaps they need to read you blog , Shaun !

    Forbin

    • Hi Forbin

      I do contact the BBC from time to time when I feel that they have or are in danger of making a glaring error, but they do not show much interest in return. Often they do not even manage the courtesy of a reply. What they mean is “no-one amongst the group of people we prefer to contact and give reflected publicity to can explain.” You will not be surprised to read that they have pretty much a clique in operation there.

      Still thanks for the compliment and be ready for the pick-up in inflation as 2015 develops to be something “no one can quite explain” according to the BBC.

  3. Hello Shaun,

    A serious point here , if we take off imputed sex trade and drugs , what growth would we have left?

    And as its implied here in the results that our economy is flat if not declining , if we dont have rising house prices , where does that lead us?

    A bigger bust when it goes wrong ? no sorry , this is not a “free” market , we have not see that since 2000 ( it died in 2008 ) .

    Or do we get the tax payer again fork out agian?

    in the mood of house ownership , why didnt Cameron back the idea of allowing renters to by their house off the private landlords? With the same discounts as LHA scheme? After all its only taxpayers money and they print that to infinity (!)

    Sorry there goes the door bell, seems to be a bunch of BTL landlords lead by the Duke of Westminster, seem to be angry about something…….

    Forbin

    • Forbin, if you look at the detailed tables with the GDP release, pharmaceuticals, in which I believe narcotics can be found, only showed 0.2% growth in 2015Q4, while other personal services, in wich prostitution is included, grew by 2.0%. Perhaps a breakdown of these estimates that would isolate narcotics and prostitution services is available somewhere else.

    • Forbin, I credit you with the most creative mind! Your housing solution is excellent, it would solve the problem overnight of FTBuyers not being able to afford to buy. I would tweak it a little however, I propose am oversubsidy, one where the BTL crowd are allowed to charge 10% over the market rate for the HelptoBuyBuytoLet (HtBBtL) scheme. The QE machine would subsidize the FTBuyers to the tune of 35%, a risk fee to those needy banks and a 10% compensation fee to the former landlords.

      You deserve a medal, having first coined MIRP and now HtBBtL you are qualified to consult the new mega coalition but only at reduced productivity. 🙂

      Working for the largest Housing Association, our necks are on the block! See FT article where Peabody trust tries to defend the sector.

      Regards Paul C.

  4. This may sound like a joke but it is a serious question. How do you measure the productivity of a lawyer or a middle manager?

    • I’d assume it’s a measurement of the output of some of the bigger firms.Likely the current trend reflects legal aid changes and the specialisation occuring in some markets where it used ot be easy money eg ambulance chasing and conveyancing.

    • Hi Bootsy

      With quite a lot of difficulty is the answer and if you read the ONS on the subject it struggles. Whilst in theory output is clear in practice there is often doubt and how do you tell the difference between a price rise and a rise reflecting quality? So there is a lot of doubt about such numbers which does not make its way to the mainstream media. It might scare the horses that sort of thing!

      i do not mean it as a criticism of the ONS and other statistical bodies as they are to some extent being asked to measure the unmeasurable.

  5. Shaun,is there anywhere you can link to that gives a good laymans expalnation of the three different approaches to calculating GDP?

  6. Only a week before the vote and despite all the spin, manipulation and adjustments, they still can’t show improving or even consistent growth in GDP. Land reg has got a .8% monthly drop in prices announcement coming on the 30th, construction,industrial and retail are all wobbly – where is the recovery good news? We still seem to be in brazen crisis mode and I’m hearing a lot of 2008.2 mutterings. Could we be in recession by end of October?

    • Hi Peter

      It was the fall in the oil price which gave the UK economy an extra boost. This covered up the fact that as discussed by me and the commenters on here that the boom engineered by housing looked likely to run out before the General Election. So as you say we will continue to have a wind at our backs for a bit. But with the oil price (Brent Crude) at US $65 that effect will fade away and what is left then?

      Mind you nearly every election these days has the feel that whoever wins might regret it. Has that already happened in Greece?

  7. Hi Shaun,
    I maybe playing an old record, but –
    Doesn’t the current state of the economy and the path of the recovery demonstrate that this was not another usual economic bust? It was, after all, triggered by the banking and financial crisis.
    After 6 or 7 years I’m coming to the conclusion that the banks were – and still are – too big to rescue. I know this argument can be challenged by the counter-factual ( the alternative would have been worse ) but how much longer can the charade of pretending debt driven asset price inflation is the same as wealth creation continue?

    How else can the continued failure of BoE policies and forecasting be explained. I don’t believe TPTB can be that incompetent so they must be hiding something in the little blue pills.

    Or am I just paranoid about the banks?

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