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.
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.
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.
(Turn and face the strain)
Don’t want to be a richer man
(Turn and face the strain)
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.
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.
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!