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.

UK GDP

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.

Comment

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.