Today gives us an opportunity to look more deeply into the way that the UK economy has been rebalancing in the credit crunch era and indeed before it. The concept was first introduced all the way back in 2002 by the then Governor of the Bank of England Mervyn King.
The strength of consumption and the weakness of net exports have led to an imbalance between manufacturing and services………The need to rebalance the British economy is clear.
He even told us how this could be achieved.
There are four key prices that will determine the extent of the re-balancing that occurs. They are the sterling exchange rate, the oil price, real wages, and interest rates. It is these prices that will provide the incentives for the required shift in resources.
Some perspective is provided by the fact that an oil price of US $26 per barrel was considered high then ( it had risen from US $10) although there was something more familiar which was worries about wages.
For the economy as a whole, average earnings rose by only 0.9% in the year to February – the lowest figure recorded since April 1967.
But the issue here is that in essence that whilst the Bank of England had control over some interest-rates the main player was always likely to be the currency. In spite of this Governor King seemed confident.
This would permit the stabilisation and eventual reduction of the trade deficit, while maintaining low and stable inflation, and high and stable employment, at the same time as resources move from private consumption to the provision of better public services.
The trouble is that much of that could be written today! Over time Governor King became increasingly keen on a lower value for the UK Pound as an aid to his mythical rebalancing a path which his replacement Mark Carney seems to have adopted too.
Rebalancing in reverse
After that speech the UK Pound was stable overall but Mervyn King got his fall in 2008/09 and of course interest-rates are in general much much lower as are bond yields. Not all as I observed yesterday about credit card interest-rates but most. Also post the EU vote the UK Pound has seen a substantial fall. It is too early to fully review the impact of the latter but the latest UK GDP data provided a problem for the philosophy of Mervyn King.
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%.
As you can see not only did we rebalance towards the service sector in fact it gave an upwards push to GDP of 0.67% when it only rose by 0.5% so everything else shrunk. This is also a feature of the whole phase of economic growth we have seen since 2013.
Over the last 3 years, the services industries have driven GDP growth, growing by 9.7% since Quarter 1 2013.
That means that the service sector has provided around 7.6% of GDP growth through this period which does not leave much else.
The latest quarter marks the 15th consecutive quarter of positive growth since the beginning of 2013 with the level of GDP now 8.2% above its pre-downturn peak (Quarter 1 2008).
We can go further back and it provides really bad news for Baron King of Lothbury. At the start of 2002 UK GDP was 86.1 whereas at the start of 2015 it was 106.9 ( 2011 = 100) so the story starts well. A growing economy driven by production, er well no, as it went from 110.3 to 98.5 over the same time period. Some of this will be the decline in North Sea Oil & Gas which more than halved but over the same time period manufacturing shrank by 2% . But services growth has just gone on and on and on to coin a phrase, it was 80.6 back then and was 109 at the start of 2015 so the rebalancing was in reverse.
What about now?
Today’s data release gives us a counterpoint to the strong services performance in the credit crunch era.
In the 3 months to September 2016, production and manufacturing were 7.9% and 5.5% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.
I can bring the numbers above up to date which is that since the beginning of 2015 North Sea Oil and Gas has risen, manufacturing has slipped backwards slightly. One sector has performed well pretty much whatever time period and I will let readers add their own jokes to this.
Looking over the entire period (Quarter 2 1997 to Quarter 3 2016), the water supply, sewerage and waste management sector grew fastest, at a compound average growth rate of 0.5%
Today’s headline numbers
These were something of a mixed bag.
The monthly picture shows a decrease of 0.4% compared with August 2016. Mining and quarrying was the main sector to show a fall of 3.8%, partially offset by an increase in manufacturing of 0.6%.
Okay so maybe maintenance in the North Sea which the seasonality adjustments never seem to get a grip on partly because I am told it runs a 3 year cycle. The quarterly numbers were simply disappointing.
Quarterly estimate for production output decreased by 0.5% in Quarter 3 (July to Sept) 2016. The largest downward pressure came from manufacturing, which fell by 0.9%, partially offset by a rise in mining and quarrying of 4.3%.
That’s a nudge downwards but not by enough to effect the GDP release on its own.
Looking forwards there was optimism in the latest Markit PMI business survey.
The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter.
Not everything is bright in services
Marks and Spencer has shown that within services there are ch-ch-changes going on as we see a rebalancing from actual stores to virtual ones. From the BBC.
Marks and Spencer has announced it will close 30 UK clothing and home shops and convert dozens more into food stores………It also plans to shut 53 international stores, including all 10 in China, half of its stores in France and all its shops in Belgium, Estonia, Hungary, Lithuania, the Netherlands, Poland, Romania and Slovakia.
It seems particularly odd to be departing China. I was always somewhat dubious about the lauding of the now Baron Rose of Monewden although to be fair those in the M&S pension scheme may have cause to be grateful he fought off take-over attempts by Phillip Green.
Another burst of shrinkflation has reached my attention. From the BBC.
Mondelez International, the company behind the product, has increased the gap between the peaks to reduce the weight of what were 400g and 170g bars………The move has resulted in the weight of the 400g bars being reduced to 360g and the 170g bars to 150g, while the size of the packaging has remained the same.
I am pleased to see that the BBC covers shrinkflation so enthusiatically these days although “triangle change” and “the look” are curious ways of expressing it. This leaves chocoholics in particular singing along with Muse.
Can’t you see it’s over?
Because you’re the god of a shrinking universe.
If we look back over the 14 years or so of the rebalancing promised by Baron King we see that in fact it was always in reverse gear. The service sector has continued what appears to be an inexorable march and production and manufacturing have shrunk. Actually the official numbers are out of date but the pull is two ways. If we take their own logic and data then the service sector must now be at least 80% of the UK as opposed to the official 78.8%.
However there is a pull in the other direction as I contacted the UK ONS ( Office for National Statistics) about how industries get classified. My concern was for example that manufacturers now outsource ever more and the same work will have been reclassified whereas reality may be little changed. After looking at the classifications it is clear to me that whilst the statisticians do their best this has clearly happened. On what scale though is hard to measure particularly as some of the official criteria are inconsistent.
The truth is that a lower exchange-rate is no panacea for this.
Meanwhile it is kind of Mark Carney and the Bank of England to help us out today on defining two subjects. Firstly how far away is the long grass? And secondly how far that poor battered can can still be kicked…
Bank of England extends deadline for major banks to meet too big to fail to 2022 (from 2020)
Meanwhile if you have a vote today let me wish you good luck!