Today sees the production of the UK service-sector Purchasing Manager’s Index for February and this is eagerly awaited. The main reason for this is that the recent data on the UK economy has shown signs of a further slowing in the rate of economic growth. Yesterday’s Economic Review reminded us that whilst 2015 was a relatively good year it was not as good as 2014.
GDP growth for the final quarter of 2015 was unrevised at 0.5%, resulting in a level of GDP 1.9% higher than in the same period in 2014. While growth has continued for the sixth successive year, it moderated somewhat between 2014 and 2015, dropping from 2.9% to 2.2%.
So we were slip-sliding away to quote Paul Simon although the UK ONS did present anew perspective on the credit crunch era.
GDP growth has averaged 2.0% per year since 2009, making growth in 2015 slightly above the recent average.
It hasn’t always felt like that as I recall the fears back in the day that there might be a triple-dip! As time passes revisions tend to mark the numbers higher and such a concept has disappeared. According to the ONS now we have had this.
this continues a six-year period of continuous expansion,
Some care is needed here as there were two quarterly falls in 2012 either side of the Olympics boost.
Also I am reminded of the view that 2% economic growth per year may well represent standing still in the modern era. The GDP per head figures largely support such a view.
A little help from my friends
Regular readers will be aware that I have long criticised the change referred to below which according to analysis presented at the Royal Statistical Society has improved our annual growth rate by something of the order of 0.5% per year. The ONS puts it like this.
The UK shows larger revisions to GDP growth estimates than many other countries over this longer period, but this is mainly due to the switch from RPI- to CPI-based deflation in 2011, a methodological improvement that was not implemented in other countries at the time.
It seems to have slipped their mind to tell us which why it impacted on economic growth! Something to hide?
This welcome period of UK economic expansion has had two familiar features which have ended up causing trouble in the past.
Much of the growth in the expenditure measure of GDP in recent years has been driven by household consumption and investment
Is investment a euphemism for buying houses? Anyway this tends to be followed by a persistent bugbear.
Net exports have tended to act as a drag on GDP growth, and this trend continued in 2015, with a downward contribution of 0.5 percentage points (against GDP growth for the year of 2.2%).
I was reading a hopeful analysis yesterday from Nordea bank using our effective exchange rate as a predictor. They forecast a boom in UK exports on that basis. Let us hope so but I also note that their chart missed out the 2007/08 devaluation which of course saw a disappointing export response.
Oh and the definition of austerity in my financial lexicon for these times chalks up another victory.
Government consumption made modest, positive contributions to growth in 2014 and 2015 of 0.5 and 0.3 percentage points, respectively, compared with an average of 0.2 percentage points over the past 6 years.
Up is again the new down.
Only last weekend the man responsible for monetary policies which were supposed to rebalance the UK economy away from services and towards manufacturing returned to the news. Apparently a £8 million pension pot does not buy what it used to even when it is indexed to the Retail Price Index ( the lower CPI being for the likes of us….) and so Baron King of Lothbury has written a book. Having not read it I cannot say if it explains this development.
In Quarter 4 (Oct to Dec) 2015, production and manufacturing were 9.8% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008……….Manufacturing output decreased by 0.2% in December 2015 compared with November 2015.
If we look at Monday’s PMI we see this.
The breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall.
So expansion in January was followed by stagnation in February and it came with an ominous side-effect.
The slowdown was also reflected in the labour market, with job losses registered for the second straight month.
Thus we see that the picture for UK manufacturing remains troubled. There are dangers in relying on such business surveys but the truth is that they are timely and official data is not what it was once perceived to be. As it happens both are playing the same song right now its Dire Straits.
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
The Service Sector
The pattern here has been of rebalancing towards it as opposed to the away promised by Baron King.
The service industries increased by 0.7% in Quarter 4 2015 (Figure 3), unrevised from the previous estimate, marking the twelfth consecutive quarter of positive growth. This follows a 0.6% increase in Quarter 3 2015.
Putting it another way if we put Q1 of 2008 as 100 it is now at an index level of 111.6 with the 2008/09 dip consigned to history.
Today’s catch is that according to the PMI data even it may be slowing.
The UK’s dominant service sector lost momentum in February…… Growth of both total business activity and new business were the weakest since March 2013, leading firms to raise employment at the slowest pace in two-and-a-half years.
So growth but not as we know it to coin a phrase and it was driven by this.
The weaker increase in services activity mainly reflected a slower expansion in the volume of incoming new business.
In terms of an explanation there are some already blaming Brexit which seems to have replaced the weather these days as the scapegoat. So much so in fact I have been surprised that Arsene Wenger has not brought it into play.
The irony is that even at a PMI of 52.7 we are still rebalancing towards the service sector and if it slows as this survey predicts then there is a kicker to this below.
However, the slowdown in services is arguably the most worrying, as the sector has provided an important support to UK economic growth in recent years, not least due to its sheer size
There is much to consider here but if the UK service sector is slowing and the PMI survey is correct it adds not only to the construction and manufacturing surveys but also to the signs of slowing in the official data as described above. Now let me remind you of the words of the Bank of England’s most recent recruit Gertjan Vlieghe that I reported on the 24th of February.
I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.
How quickly Gertjan? Perhaps a little more quickly if he looks at GDP per head as opposed to aggregate GDP. Oh and those who remortgaged on the back of Forward Guidance on interest-rate rises from Governor Carney may be wondering what this from that day means.
We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,
Down is the new up and I await the 5.45 pm speech from Andy Haldane on this subject although of course he may have written it some days ago. You see I would expect him to vote for a cut first.
Just to be clear as I hinted at yesterday this would be a bad idea in my opinion but it is looming larger on the horizon.
The Bank of England Funding for Lending Scheme is still ongoing so let is look at this.
Net lending by FLS Extension participants to SMEs was £0.6bn in the fourth quarter of 2015
At least the number was positive albeit weaker by £200 million than in the previous quarter. How much did this cost?
Of these, ten participants made total drawdowns of £6.6bn during the fourth quarter of 2015. Participants also repaid £0.7bn, taking total outstanding drawings to £69.5bn.
Now if I gave you £10 at ultra low interest-rates you would probably be happy to loan £1 to a small business at a much higher interest-rate. I do hope this is not funding the record low mortgage rates that keep being announced.