The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

19 thoughts on “The UK economy is doing pretty well but inflation is on the cards

  1. Nominal wage increases, more than forecast, can mitigate real wage squeeze and allow growth to be higher. But will nominal wages increase. No sign yet. But pressure for it will increase as inflation increases.

  2. Hi Shaun, another top article.

    “Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. ”

    So…fake news day?

    When politicians gripe about fake news, is it a demarcation dispute?

    • Hi therrawbuzzin

      Isn’t everyday fake news day? Today feels like it as the phrase is being bandied about in the US. Mind you if I was looking for some in the UK I would be looking towards the Bank of England as Sky News have pointed out.

      “Bank of England Governor Mark Carney: “scale of the immediate risks around Brexit have gone down” & risks are greater for Europe than for UK”

      Is that fake? Or were the previous pronouncements?

  3. Shaun,
    As you mention the 1940 desert war, you might like to know what my father (who served in an antitank regiment) had to say on the subject.
    They were able to destroy the Italian tanks., but when the German tanks entered the conflict, their fire mainly bounced off the German tanks. Incidentally, the antitank weapon of his regiment still fired a 2lb solid shot!
    Time to retreat!

    Nick

    • Hi Nick

      I watched the Desert War (1940s) episode of the World at War again the other day which pointed out our problems in that area. We relied on other guns like our 25 pounders although they were for indirect fire really which brings in my grandfather as he was in one of those batteries. One of the ironies of life was that his foreign travel was France (1940) and then North Africa followed by France, Holland and Germany in 1944/5. What was that about join the army and see the world? He never left the UK again….

  4. Figures on wage growth do not include self employment do they? Income from self employment has fallen sharply in recent years, and though still only 15% of the workforce, about 50% of all new jobs created the past year were self-employed.

  5. the official inability and at time unwillingness to measure inflation from the housing sector properly

    yes but why ?

    because TPTB know thats all we really have left now of an economy

    ( well we do have industry it just seems our leaders are in league with the TBTF banks…..)

    Forbin

    Commercial Banks and Industrial Finance in England and Wales, 1860-1913
    By Michael Collins, Mae Baker ?

    • Hi Forbin

      Because they can then tell us that GDP and economic growth are higher than they really are. Corn prices are not too bad by the way at US $3.58 although of course we are buying them in £’s which are not what they were.

  6. It should be pretty obvious that the economic black clouds have been gathering for some time. The idiotic low rate/QE policy has merely pushed inflation into asset prices, which have then sucked the life out of current consumption, so the BoE can pretend not to see inflation (due to the loss of demand pull) or “see through” it when it does appear in the RPI (supply push).

    Now that the Brexiteers have tanked the Pound, it is down at USD1.23 and e1.16, so the threat of supply push inflation is reappearing very quickly (as anyone, who goes past a petrol station regularly will know). So, there is now a panic to buy things before they go up – which is of course financed by the record level of unsecured debt. This has also shown up in the widening trade deficit in goods – financed by services (about to get hit over passporting) and selling houses to foreigners (who have taken a 15% hit in USD terms).

    Come late 17, Carney will be forced to raise rates and this whole house of cards will come falling down.

    • I remember the pound at €0.98 and that was some years prior to the announcement of the referendum.
      The foreign (based) buyers of British homes deserve their hit.

      • The Bulgarians allowed foreigners to speculate in a big real estate boom / bubble. After it popped, the Bulgarian middle class picked up cut price bargains.

        As for the property speculators who bought on the ponzi premise of ever rising prices …. fools rush in where angels fear to tread

      • 23 June 2016 (Day of referendum): £1.00 = $1.4558

        £1.00 = €1.308

        27 June 2016 £1.00 = $1.3235

        £1.00 = € 1.2003

        WAKE UP AND SMELL THE COFFEE!!

  7. UK economy doing well ?

    I don’t think so. PPP is worse than many EU nations for median incomes. Minimum wage means poverty and/or dependency on housing benefit. A budget deficit and large national debt. A trade deficit. Failed banks sucking the taxpayer dry. Horrendous traffic jams and trade unions bent on inflicting misery on everyone. Crap schools. Extortionate university tuition fees that stifle social mobility. Inflation statistics whose accuracy isn’t worth the paper to print them.

    Sorry Shaun, I disagree and think the UK economy is a mess and needs major changes starting with affordable housing and decent education.

    • Hi ExpatInBG

      There is no reason to agree on here! Especially as I know you are aware of my fuller views on such issues as housing policy. I was intrigued by your mention of the Bulgarian house price boom and bust above. When was that please?

      • British buyers started buying after EU accession was assured about 2003. Off plan sales rocketed in 2005, slowed in 2007 and bust about 2008. Russian demand followed for coastal regions, but Bansko has many half built complexes that probably will never be completed. Current prices are well below 2008 off plan prices.

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