What if UK GDP growth is revised up after the General Election?

Today is the last look at significant UK economic data before many people go to the polls to vote in tomorrow’s General Election. Of course a major part of the economic backdrop was set back on the 28th of March when we were told this which was a story of two halves.

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.

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

So although care is needed with the preliminary estimate we saw that economic growth continued to fade away but also that in the post credit crunch era we had over the previous year put in one of our better performances. After all the overall position is of a modest gain.

In Quarter 1 (Jan to Mar) 2015, GDP was estimated to have been 4.0% higher than the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008.

Even this modest gain erodes if we look at the numbers in the light of the population increase that the UK has had over the same period although we remain in doubt as to the exact size of this. But it is per capita GDP and its influence on real wages which leads to many people wondering if we have indeed had much of a gain at all.

Business Surveys

The Purchasing Manager’s Indices reinforced this theme for manufacturing and construction.

UK manufacturing growth slows as intermediate goods sector falls back into contraction.

This was not an especially auspicious headline as we had become unused to contraction themes over a better period for UK manufacturing although it remains some 4.9% weaker than the credit crunch peak.

The construction report was disappointing too.

Construction output growth slows in April amid weakest rise in new work since June 2013…..Business activity growth hits 22-month low

However there is a nuance here as the slow down was blamed on uncertainty before the General Election. Intriguing as whilst we often report this else where  it has so rarely got a mention in the UK this time around! Also the whole sector is mired in uncertainty due to problems with the official data.

Taken as a whole, the latest survey presents a far more upbeat picture than the curiously weak official construction output data for the first quarter of 2015.

In case you have not followed it UK official construction data is in quite a mess and whilst the business surveys have their problems they are likely to be more reliable for the immediate future.

Boom!

A completely different view of the UK economy was provided by a very upbeat survey on the UK service sector from Markit this morning.

Business activity increased at the fastest rate since August 2014, driven by a further marked rise in new business….Activity in the sector has now risen for 28 successive months, the longest sequence of growth in seven years.

The reading of 59.5 is high but the context is that the long-term average is 55.2 for this sector and we should perhaps use that rather than 50 as a benchmark. But the boom is put into the paragraph heading by this.

“The PMI surveys suggest the economy is showing robust growth momentum, expanding at a rate of 0.8% at the start of the second quarter.

Of course it is only one month out of three and we were told this at the end of the first quarter by the same source.

The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter, reviving from the slowdown seen late last year.

Were they right to be optimistic?

Today’s Economic Review from the Office for National Statistics does poses this question if you read between the lines a little. Let me open with its published view which coincides with the GDP numbers above.

Figure 1 shows that total services output fell by 0.2% in January, following relatively robust growth of 0.6% in December 2014. This fall was driven by a broad decline in the ‘business services & finance’ industries, with the largest contribution coming from a 1.4% fall in ‘professional services’ (such as architectural, management consultancy and legal services).

Okay so that is clear with one sector driving services output lower in January. But then look at this.

However, February saw a return to growth in services output at a similar rate to that seen in much of 2014.

That makes January look like an outlier or to put it another way odd. This is reinforced by this section.

Looking over 2014 as a whole, services output grew in 11 of the 12 months, and by 3.7% in the 12 months to December 2014.

There were no contractions as the twelfth month was a zero and yet suddenly we had one which then disappeared in the blink of an eye! I am reminded of Andrew Baldwin pointing out that an election in his province in Canada took place based at least partly on  changes in the unemployment data which were then revised away. There are grounds for wondering if something similar may be happening in the UK and that a change to services output will return economic growth to 0.5% or so. Or as David Bowie put it.

Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Don’t want to be a richer man
Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Just gonna have to be a different man
Time may change me
But I can’t trace time

This is especially awkward at election time!

The Balance of Payments Crisis

This continues except it is an almost silent crisis as markets so far have chosen to ignore it. As I have regularly pointed out the exchange-rate of the UK Pound has risen over the past year. But as today’s Economic Review points out.

the (current account) deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.

This made us the worst in the G7 group of countries. It also should sober up some of those who keep telling us that we have to be in the European Union for the trade benefits. Although to be fair to them there are some who do indeed benefit from this trade.

In contrast, Germany experienced the largest current account surplus in 2014.

What about a sterling crisis?

In spite of the what you might call sterling efforts of the Daily Telegraph there are no signs of a sterling crisis at all so far anyway.

What about a Gilts crisis?

Here the are signs of initial hope for the doomsayers which in this instance are being led by the Financial Times.

Investors are rapidly selling off UK government bonds, as jitters about future economic policy a day before an election

If you want such a theme then the UK ten-year Gilt yield has nudged above 2% this morning for the first time in 2015. However the situation changes when I note that the ten-year yield of Germany has risen by 0.1% to 0.56%! I did reply in such fashion to the FT on twitter and will let you know if it replies to this.

Is there an election in too as their bonds have taken a pounding recently?! In spite of

Neither a saver nor a saver be

With apologies to William Shakespeare the Economic Review confirmed something which savers have been complaining about.

While the rate of interest received on savings from deposits with financial institutions has declined since the beginning of 2013, the rate paid by households on loans has remained relatively stable. Savings rates in some cases have fallen by over a third since 2013.

Actually I think that they are confusing stock with flow a little on the impact of falling mortgage rates but it is also true that volumes there are of course much lower than pre credit crunch.

Comment

So in summary the UK has had a good spell of economic growth but at the familiar price of pumping up house prices and a worsening balance of payments. All very deja vu if you look at our economic history. Missing this time has been a rise in inflation and indeed wages but the former I think has been singing along to the Beatles.

Please, don’t wake me, no, don’t shake me
Leave me where I am, I’m only sleeping

Inflation in the services sector remains above the target and as for goods inflation well the oil price (Brent Crude) is continuing to rebound higher and has moved over US $68 now. Thus headline inflation will pick-up and the economic boost provided will fade.

If I come across a party at this election that looks likely to deal with our economic problems I will let you know!

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14 thoughts on “What if UK GDP growth is revised up after the General Election?

  1. The Euro areas has massively helped German exports of cars into the UK at the expense of production in the UK. BMW 3 series is now more popular than the Ford Mondeo and if you track the relative prices you will see why. Some of the Mondeo was UK made whereas non of the BMW is. The UK scrappage scheme as a nice little boost for Germany as well.

    Maybe people don’t care about foreign imports as they will just leave the UK when it goes bankrupt and have no long term concerns.

    • All we make of a Mondeo are some of the engines/transmission components… the cars are assembled in Spain. There are all sorts of good reasons for the BMW outselling the Ford, and only one of which is the exchange rate.

    • I’ll grant you that the 09 mondeo drives well. But there’s a gulf of difference between the quality of a Mondeo & a BMW. It shows in many ways, from niggly little faults to the ease of changing a bulb. I can change a headlight bulb on my 5 series in 20 seconds, but the wife’s Mondeo needs the headlight removed, change the bulb and replace the headlight. The BM is quieter & the suspension more capable – despite being 12 years older. I only bought the Mondeo because it was dirt cheap secondhand ex-lease. At 7, my BM drove like new, at 17 it’s showing niggles & soon to be sold. The Mondeo ages quicker so no surprise when private buyers prefer the BM.

      • So, in effect, your preference is based on one car having caring previous owners, and the other, in effect, thrashing a (long-term) rental vehicle?

        I don’t believe in capitalism.
        I believe it died in 2008, just as surely as soviet “communism” died in 1991.
        Further I believe that neo-liberalism has enough blood on its hands to justify its violent overthrow.

        • No – both cars second hand ex-company cars. Point is that 1 is robust, quiet and small things like changing bulbs well thought out and the other is built as cheap as possible with less design effort and cheap components. It ain’t a fair comparison coz my BM cost more than a new mondeo.

          Violent overthrow, in Russia they replaced Tsarist tyrants with more diabolical commissars as particularly well demonstrated by Stalinist purges and GULAGS.

        • PS. A central tenet of democratic capitalism is the freedom to leave and seek a better alternative – you’re welcome to immigrate and try alternatives like Russia, Venezuela, North Korea, ISIS or Boko Haram ….

  2. oh well glad to see the British Establishment still wandering along like senile pensioner

    I wonder if the oil price rise will cause the SNP to call for more money ? maybe they’ll do us all a favour and declare UDI !

    on oil , it was predicted a while back that the oil boom for the UK just delayed and made the grounds worse for the balance of payments as our HMG of either colour took to using the monies as current revenues and not banked them , or do anything useful with the loot

    So now as we run out of this pot of gold we have nothing to show for it except more debt

    Same goes for the Bankers Charity Fund aka bailouts

    When any of them sell off the banks shares ( to us , who funded it anyway! ) will the actual costs to the tax payer be reimbursed in full ?

    I think they must all be drunk !

    Forbin

    • The Scottish economy benefitted from the drop in oil price.
      We make things, we don’t just cut each other’s hair.

  3. Hello Shaun,

    thinking about this , what can we do to really rebalance the economy ?

    We took the chance on a city of london based banking business but that blew up in 2007/8

    we spend the majority of the oil money as well with nothing to show

    each time we seem to just press the housing bubble , this time with lack luster resaults

    printing money didnt help , thats QE , but that was know not to work ( Japan as example) but it was still done

    rely on management ? Rover’s fab V come to mind !

    defense? well thats also been declining since the 60’s aircraft – well we make wings and engines…..

    If I had 375billion I think I could have revived manufacturing , along with throwing out biased free market hookum !

    what would your other readers do ?

    Forbin

    • govt revive an industry ? It didn’t work well at British Leyland, did it ? It’s not working well in the city either. Better to set up good conditions (like modest taxes and affordable housing AKA German Industry).

      And remember that UK car manufacturing is doing well, even though our bankers and pension funds don’t hold the title deeds. That’s been outsourced/sold to more capable management (Honda, Nissan, Jaguar and Mini come to mind)

    • Forbin, theres long overdue investment needed in our infrastructure. Helping folk get to work or use energy better. 375bn would have been a start but of course we gave it to our banker friends and they “invested” it.

    • Hi Forbin

      My fathers view was that we should go back to the era of technical colleges. He felt that the Brixton School of Building gave him the right training to start a career as a surveyor and many times bewailed the way that he came across graduates from other disciplines who therefore had few relevant skills in important positions building companies. Money was wasted on issue such as inwards sloping balconies for example that anyone with a modicum of building skill would have figured are a no-no!

      Of course we have gone the other way by prioritising the academic over the technical rather than realising there are strengths in both

  4. Shaun,

    I’ve been on the ONS website today looking for GDP data,mainly because I want to read about how it’s constructed.I find it a bit of a maze.

    My main interest is imputed rents(shock),do you have any quicklinks that explain in detail how it’s worked out?

    Cheers if you can help

    Dutch

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