One of the features of the lead up to the UK credit crunch was that it was preceded by a house price, mortgage lending and banking boom. Then a feature of the credit crunch has been the way that the Bank of England has twisted and turned to avoid any prospect of a bust in any of these areas. So Bank Rate was cut to 0.5% where it remains 7 years later, we got £375 billion of QE (Quantitative Easing) purchases of UK Gilts, then the Funding for (Mortgage) Lending Scheme and Operation Twist to extend the term of the QE. An extraordinary effort about which globetrotter Bank of England Governor Mark Carney seems to have undertaken yet another U-Turn this morning in Tokyo. From Reuters.
There is a clear recognition that the challenges that low nominal growth (pose) won’t be solved by monetary policy alone. The developments over the course of the years are serving to reinforce these realities
Whilst readers might welcome the fact that he did not fly to Tokyo to warn us about the dangers of climate change they may well be mulling the difference between this and past claims that monetary policy was not “maxxed-out”.
UK House Prices
Governor Carney may be more cheerful about another “improvement” to official statistics on house price inflation. This was announced yesterday.
In the most recent period published (December 2011), the new UK HPI shows an average price level of £185,000 for England and Wales. This is lower than the price recorded by the current ONS HPI for England (£222,000) for the same period. ( later in the piece they claim that the price change is for the whole UK so sorry they have not checked it more carefully)
Have house prices just got cheaper? We know of course that they have remained the same and that first time buyers cannot buy more cheaply so apologies to anybody who might think they can buy some £37,000 cheaper on average. As we look into this we find an old “friend”
The general view was that the geometric mean was the preferred measure, as it is less distorted by high values, it is in line with international best practice, and is consistent with the method used in the Consumer Prices Index.
Ah the CPI as we revisit a debate between it and the RPI. What this means is that we will have a number that will either be lower than or the same as the arithmetic mean but never above it. Thus we end up with lower average house prices. Oh and a lower number is always “in line with international best practice” isn’t it?
I welcome two of the changes made. These are that cash transactions are now included which is important especially in London where there have been spells that cash transactions have soared. Also that new build properties are included although as I shall come to later there is of course the problem of benchmarking them.
I am not sure about this change.
The resulting mix-adjustment weights will be calculated annually and will be derived using the latest complete year’s worth of transactions.
I am not sure we have the data for this. We are reducing the time series from 3 years to one for this when the ONS admits it has only around 80% of the quality data it needs. Also we are reducing the time period when we have seen a much lower number of transactions which means that there must be more issues with divergence and error.
An intriguing result
Whilst average prices are lower the boom was in fact larger.
Between January 2002 and December 2011 the average annual growth was 4.9% for the ONS HPI (England), 4.6% for the Land Registry HPI (England and Wales), and 6.1% for the new UK HPI (England and Wales).
I will be interested in readers thoughts on this.
The Good The Bad and The Ugly of the UK Economy
Today’s data release was something which initially the UK establishment would cheer as a success for economic policy based on bailing out banks and pumping up house prices. So in Serge Leone style lets us open with the good.
UK GDP in volume terms was estimated to have increased by 0.6% between Quarter 3 (July to Sept) 2015 and Quarter 4 (Oct to Dec) 2015, revised up 0.1%
This had other positive consequences.
Between 2014 and 2015, GDP in volume terms increased by 2.3%, revised up 0.1 percentage points from the previous estimate. Between Quarter 4 2014 and Quarter 4 2015, GDP in volume terms increased by 2.1%, revised up 0.2 percentage points from the previously published estimate.
There was more too as the individual experience responded to the collective.
GDP per head in volume terms was estimated to have increased by 0.4% between Quarter 3 2015 and Quarter 4 2015. Between 2014 and 2015, GDP per head increased by 1.5%.
So the good bit sang along to the television series Happy Days as the UK could bask in some spring style sunshine and economic news. However there was a bad too.
In Quarter 4 2015, gross fixed capital formation (GFCF) was estimated to have decreased by 1.1%……Business investment was estimated to have fallen by 2.0% in Quarter 4 2015
Wasn’t the Funding for Lending Scheme supposed to be supporting and boosting UK investment? I guess the word “counterfactual” will be making another appearance as they claim it has regardless of the numbers. This is a change in trend and is troubling in what is supposed to be a boom.
The ugly bit is really ugly so in the manner of old-fashioned BBC children’s television let me ask you if you are sitting comfortably? Before we start.
The current account deficit in Quarter 4 (October to December) 2015 equated to 7.0% of gross domestic product (GDP) at current market prices, the largest proportion since quarterly records began in 1955, up from 4.3% in Quarter 3 (July to September) 2015.
Let me let that sink in as we see a deficit of 7% of GDP. This meant that the annual figures were ugly too.
In 2015, the UK’s current account deficit was £96.2 billion, up from a deficit of £92.5 billion in 2014. The deficit in 2015 equated to 5.2% of GDP at current market prices. This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948.
Let me put it another way. If we take out the deterioration in the UK current account then GDP growth would have been 0.9% in the latest quarter and not 0.6% and it would be 2.5% and not 2.1% in the preceding year.
Oh and whilst we are discussing ugly news.
The quarterly and annual savings ratios are the lowest since records began in 1963.
Real household disposable income decreased by 0.6% between Quarter 3 2015 and Quarter 4 2015.
The drop in savings is likely to be related to the low level of returns on them.
The effective rate paid on households’ outstanding time deposits was unchanged at 1.44% in February and the rate for households’ new time deposits decreased by 4bps to 1.33%.
The spring style news for the UK economy of improved economic growth both collectively and individually is welcome. However it comes with a familiar kicker and it is one that I have regularly warned about. If you pump up an economy via the housing market then you see a boost to consumption which tends to pull in imports. We have traditionally struggled to export more to compensate for this. This feels a bit like this from Limahl.
Written on the pages
Is the answer to a never-ending story
If you look into the detail then the UK trading position was bad in the last quarter of 2015 which made the year overall slightly worse than 2014 or “same as it ever was” in terms of trend. What has changed is matters like investment income which affects the primary income balance and a £2 billion worsening in the UK government position of which the major amount is contributions to the European Union.
Payments by general government in 2014 and 2015 was virtually unchanged at £25.9 billion.
Adding those to the existing trade problems gets you to 5.2% of GDP.
On the positive side the UK is a good economic citizen in world terms.
The UK has run a combined current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.