UK GDP continues to rebalance towards the service sector

The UK economy has been through quite a few changes in the last few months of which the most evident has been the fall in the value of the UK Pound £. Yesterday I pointed out that its decline since the EU leave vote was equivalent to more than a 3% cut in Bank Rate as the effective or trade-weighted index fell from 87.8 to 74.1. Actually if we look even further back we see that it was at 90.4 as the year started so we have seen the equivalent of a 4% Bank Rate cuts overall. This teaches us two main things. Firstly that we were unlikely to see the sort of short-term crunch on economic activity that some forecast or as the NIESR ( National Institute for Economic and Social Research) put it.

 Real GDP is broadly unaffected in 2016 as the decline in domestic demand is offset by a positive net trade contribution derived from sterling depreciation.

Although they did make a mistake which so many other forecasters joined in with.

Secondly, as future economic prospects become more uncertain, the cost of borrowing for the government, business and households should increase to reflect this.

UK Gilt yields are of course much lower and we even had a short-term outbreak of negative yields in the 3/4 year maturity region. We have also seen record low mortgage rates and the Bank of England records that the 2 year variable rate for those with a 10% deposit fell from 2.61% in June to 2.4% in September. Secondly that the Bank of England did not need to cut interest-rates. But it is fashionable to do so as I note that the Riksbank in Sweden ( Repo rate -0.5%) has pushed possible interest-rate increases even further into the future this morning.

Banking QE

Something which one might reasonably have thought must be finally over has popped into the headlines this week. From the BBC.

Barclays has set aside an extra £600m to meet claims for mis-selling of payment protection insurance (PPI).

It brings the bank’s total provision for PPI claims to £8.4bn.

One reason for the increase is the extended deadline for PPI claims, which can now be made until June 2019. On Wednesday, Lloyds announced it was putting aside an extra £1bn.

It just goes on and on and on and yet nobody even seems to be actually responsible for it. However another £1.6 billion of banking QE seems on its way to car dealers and the like. Oh and speaking of things which seem never to actually end. From Bloomberg.

A second former Bank of England deputy governor was interviewed by U.K. prosecutors over the possible manipulation of central bank liquidity auctions at the height of the financial crisis, according to a person with knowledge of the situation……..John Gieve, a BOE deputy governor from 2006 to 2009, was questioned by the Serious Fraud Office earlier this year….Paul Tucker, Gieve’s successor, was also questioned by the prosecutor in recent months.


There was good news on this front today. From the Office for National Statistics.

GDP was estimated to have increased by 0.5% in Quarter 3 (July to Sept) 2016 compared with growth of 0.7% in Quarter 2 (Apr to June) 2016. GDP was 2.3% higher in Quarter 3 2016 compared with the same quarter a year ago.

The ONS gave this summary of the situation.

The pattern of growth continues to be broadly unaffected following the EU referendum with a strong performance in the services industries offsetting falls in other industrial groups.

There was an its the same old song feeling about this as we note again that growth was driven by the services sector.

In Quarter 3 2016, the services industries increased by 0.8%. In contrast, output decreased in the other 3 main industrial groups with construction decreasing by 1.4%, agriculture decreasing by 0.7% and production decreasing by 0.4%, within which manufacturing decreased by 1.0%.

We can draw several conclusions from this. I have pointed out many times that the numbers showing services as being 78.8% of the UK economy are increasingly out of date and are well overdue for a review.

Over the last 3 years, the services industries have driven GDP growth, growing by 9.7% since Quarter 1 2013.

If we look into the detail we see that the UK consumer was at play and as we note past numbers on women’s clothing we should take a moment and say thank you ladies.

Of particular interest was the continued growth in consumer-focused industries. For example, retail output grew 1.8%, while output in domestic accommodation and restaurants rose 1.7%. Despite only accounting for 0.6% of the whole economy, motion picture and TV programme production activity (which includes cinema ticket sales) raised GDP growth by 0.1 percentage point, growing at a very strong rate of 16.4%.

Also the impact of the EU leave vote seemed to hit construction and manufacturing which does have some logic behind it although of course the business surveys say that manufacturing is receiving a boost from exports. As to agriculture it is an erratic series so I am not sure what that tells us although as a general point I have long felt we could produce more. But in some ways we are again listening to the same old song as we note this.

In the 3 months to August 2016, production and manufacturing were 7.7% and 5.5% respectively below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

The construction numbers have been in disarray for a while with troubled deflators and switches of category.


There is a fair bit to consider here but let me point out that today’ numbers are based on data for July and August with estimates for September thus analysing them to 0.1% is unwise. But there is a fair gap between 0.5% and the -0.1% to 1% produced by HM Treasury with help.

This document has benefitted from a review by Professor Sir Charles Bean, former Deputy Governor of the Bank of England, acting in a personal capacity as an academic consultant to HM Treasury.

Of course they also told us this.

The analysis shows that the economy would fall into
recession with four quarters of negative growth.

What we actually found was that the UK consumer proved to be resilient once again and the services sector continued to outperform. The annual rate of economic growth in fact edged higher to 2.3% meaning that with employment struggling it seems likely that productivity improved and so did GDP per head but we will have to wait for later updates for more confirmation.

Rather ironically today did show an area that may have signs of a setback after the EU leave vote and I will hand over to @fwred.

Euro area credit flows to the private sector are turning… in the wrong direction. Big concern for the ECB……..When it comes to bank lending, it’s the second derivative (the impulse) that matters. And it just turned negative.

As to the UK the real news will come when inflation picks up particularly next year which of course many Ivory Tower economists such as my opponent on BBC Radio 4’s Moneybox Tony Yates have argued for. He wants a 4% inflation target. However UK economic history is that such events are damaging to the UK economy.






16 thoughts on “UK GDP continues to rebalance towards the service sector

  1. Shaun I’m fine with a 4% inflation rate ( including property) and 4 % base interest rate. Bring it on, lets see our the rebalancing goes then…..

  2. Hello Shaun,

    Inflation in food ,fuels and housing have been there all along but not “seen” in the official CPI/RPI – I’ll guess it will be SMART phones and Ipads that will tip the official “core” figures

    High inflation , a run on the pound and certain industries re-locating will cause the UK to not only scrap the Brexit but to join the Euro at unfavorable conditions , after all out PM has the power and the backing of most MPs and MSM …….


  3. Great blog as always, Shaun.
    Regarding your last point about Tony Yates calling for a 4% target rate of inflation, the Bank of Canada was also speculating about raising its target rate from 2% to 3% or 4% with the next renewal of the inflation-control agreement, although finally there was no change. Governor Poloz and Senior Deputy Governor Carolyn Wilkins testified before the House of Commons Standing Committee on Finance for about 90 minutes on October 24, the day that the renewal agreement was announced. Guy Caron, the NDP Finance Critic, asked whether an increase in the target rate of less than one percentage point, say to 2.25% or 2.5%, had been contemplated. Wilkins took the question and said that the BoC had looked at a range of rates before deciding to stay with the status quo. If she had been more candid, she would have said that effectively the BoC had moved up to a 2¼% target rate. At the time of the 2011 renewal agreement, the CPI basket changed every four years with a timeliness of basket updates of 17 months (e.g. the 2009 basket was only introduced with the May 2011 update). By the 2016 renewal agreement, the CPI basket changed every other year with a timeliness of basket updates of 13 months (e.g. the 2013 basket was introduced with the January 2015 update). Together, the two changes must have reduced the upward bias in the measurement of inflation by about one quarter of a percentage point. Also, since StatCan pledged a move to annual basket updates in 2012 or 2013 at some nebulous time in the future, there is a reasonable chance that this will happen before 2021, further reducing measurement bias and raising the effective target rate of inflation.
    The BoC is well aware of all this. A speech by then Deputy Governor Agathe Côté in November 2014 contains this footnote: “We also need to consider the possibility of reduced measurement bias in the CPI, given improvements made by Statistics Canada in the past few years. A lower bias would lead to a higher true rate of inflation for a given inflation target, thus mitigating the need for a higher target.” (At the time she spoke, StatCan had already made the switch to basket updates every two years but the timeliness of basket updates had only been reduced to 14 months.) Note the casual assumption that any reduction in measurement bias would imply an increase in the real target rate of inflation, inflicting higher rates of inflation on Canadians, and would on no account call for a reduction in the target rate from 2%.

    • Hi Andrew

      There is an establishment obsession with changing inflation targets upwards at the moment. I would love to ask what material change they would expect from a 0.25% change especially as there has been an implicit one as you describe? In a way we had that in the UK when we switched from RPI to CPI ( in the days before the formula effect ballooned) but of course there was also the omission of owner-occupied housing. But what happened next?

      I wonder if the Bank of Canada having explicitly rejected a higher inflation target will in practice allow it to exceed it temporarily ( my financial lexicon definition).

      • I wouldn’t be surprised, Shaun. When Carney was Governor of the Bank of Canada, the inflation rate even exceeded the 3% upper bound from March 2011 to September 2011 except for July, but he never raised the overnight rate. When the inflation rate exceeds the upper bound here the Governor of the Bank of Canada doesn’t have to write a letter to the Minister of Finance to explain, which is a shame.

  4. Hi Shaun
    All down to Roald Dahl apparently.
    I can confirm that the US is currently ‘enjoying’ British TV progs, it seems possible to watch just about any prog on one channel or other, including the streamers. And Jeremy hasn’t even started yet!
    Who needs to make ‘things’ ( well except for Japanese cars), when you can sell such cultural icons to the globe.
    Still it all makes the BoE etc look like the silly pompous chumps they are.

    • Hi JW
      I was making the case that the Bank of England had made a mistake and got this reply on twitter from Julian Jessop of Capital Economics.

      “Feeling strong sense of deja vu … would Q3 GDP really have been so firm without BoE support?”

      I asked if that included July before it happened? Anyway Danny Blanchflower thinks it did.

      “presume you have heard of expectations?”

      If he ever replies to my point that on his logic the previous Forward Guidance must have done a lot of damage to the economy I will let you know….To be fair to Julian Jessop he did admit the logic of that.

      • Hi Shaun
        ‘humility’ is something foreign to these people. They will swear black is white until their dying breath.
        Keep up the great work in making them squirm.

  5. Hello Shaun ,

    As we all know that a growing population is about the only thing keeping the GDP engine growing I propose that :-

    1, We put on hold Brexit and then offer the hand of friendship to our ex member of empire, India, by offering all of them full UK citizenship and passport.

    2, We then ignore the Brexit vote and allow anyone to pass our shores into the rest of Europe as they can with a full UK EU passport .

    And as mainstream economics states a growing population means excellent growth , what’s not to love ?

    I mean 1.25Billion new EU citizens !

    What could go wrong ?


    PS: better lay in more popcorn supplies 😉

  6. HI Shaun and another good blog.
    No march of the makers but lots of talk about whether a rate cut was necessary.
    A wry smile on your face do I detect.

    • Hi Midge and thank you

      I have had quite a few wry smiles today as those who forecast that the latest quarter would see a UK economic contraction after an EU leave vote seem to be suffering from a collective amnesia. But some were at least kind enough to provide hints.

      Tony Yates
      Tony Yates Retweeted Chris Giles
      Yep. And I just threw a six on a dice, so I publicly atone for forecasting 3.5

      Chris Giles @ChrisGiles_
      Hear hear. All economists “must” atone “publicly” for all inaccurate forecasts

  7. It is rebalancing but that is a pity. Being in favour of import substitution and added value there is low hanging fruit to be picked.
    How does the increased output tie in with the economists’ letter to the Times.

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