UK GDP growth continues to be both steady and strong

Today we find out how the UK economy performed in the last quarter of 2016 or at least the official version of that as the preliminary GDP report is issued. We can be sure that it will be rather different to that implied by one of our official seers as the person who signed this off ( Professor Sir Charles Bean) is now part of the OBR or Office for Budget Responsibility.

I am grateful to Professor Sir Charles Bean, one of our country’s foremost economists and a former Deputy Governor of the Bank of England, who has reviewed this analysis and says that it “provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy”.

I have looked at before the woeful effort which stated that the economy would shrink by between 0.1% and 1% in the quarter following an EU leave vote so let us pick something else out.

Businesses and households would start to adjust to being permanently poorer in the future by reducing spending immediately.

Actually in spite of a weaker December household spending seems to have soared.

Estimates of the quantity bought in retail sales increased by 4.3% compared with December 2015………The underlying trend remains one of growth with the 3 month on 3 month movement in the quantity bought increasing by 1.2%.

Accordingly our good Professor has ended up looking a right Charlie and of course will fit in well at the OBR. But wait there was worse as all sort of doom and gloom was predicted for our automotive sector as well. Here is this morning’s update from the Society of Motor Manufacturers and Traders or SMMT.

UK car production achieved a 17-year high in 2016, according to the latest figures published by SMMT. 1,722,698 vehicles rolled off production lines last year from some 15 manufacturers, an 8.5% uplift on total production in 2015 – and the highest output since 1999.

I guess Charlie has a different definition of “reasonable” from the rest of us! Up seems to be the new down for him. But wait there was more good news.

More cars are now being exported from Britain than ever before, the result of investments made over recent years in world-class production facilities, cutting-edge design and technology and one of Europe’s most highly skilled and productive workforces.

The UK Pound £

This has been a powerful driving force as I have argued all along and the establishment have ignored. It has been nice to see the UK Pound rebound to above US $1.26 over the past week or so but the truth is that it is now lower and the cumulative effect if we use the old Bank of England rule of thumb is of a 2.6% reduction in the official Bank Rate since EU leave vote night. This has given the economy a boost as I have explained in my articles on the money supply and the surge in unsecured credit. It is also why the Bank of England’s “Sledgehammer” was both relatively puny and a policy error.

This morning has brought some confirmation of the logic behind this from company results. From the Guardian on Diageo.

It is estimated to have boosted net sales by about £1.4bn and operating profits by £460m in the year to 30 June. The maker of Johnnie Walker whiskey and Smirnoff vodka toasted a 28% rise in first-half operating profits to £2.06bn and hiked its interim dividend by 5%. Diageo’s shares rose 4.8% on the news.

There was more in the Financial Times.

Jimmy Choo continued to shrug off difficulties in the wider luxury sector in the second half of 2016, reporting “solid growth” across most regions and enjoying a big boost from the weak pound. In a trading update ahead of its full-year results, the company said total revenues increased 15 per cent to £364m.

The GDP data

This was if you take the view that we have received a strong monetary stimulus from the weaker UK Pound no great surprise.

UK gross domestic product (GDP) was estimated to have increased by 0.6% during Quarter 4 (Oct to Dec) 2016, the same rate of growth as in the previous 2 quarters.

So the establishment and media line of volatility and panic faces a reality of what has in fact been extraordinary stability! No doubt the Ivory Towers will blame the ordinary person. Indeed as we look further we see examples of well “same as it ever was”.

Growth during Quarter 4 was dominated by services, with a strong contribution from consumer-focused industries such as retail sales and travel agency services.

Whether the travel agents were seeing a flood of people departing the UK (remember when the media headlines screamed that?) or holidaymakers coming here because the lower £ makes it cheaper is not explained. However the march of the services continues. Indeed the general pattern continued as well.

UK GDP was estimated to have increased by 2.0% during 2016, slowing slightly from 2.2% in 2015 and from 3.1% in 2014.

The Service Sector

As this is our main player let us look into the detail we get.

Within the services aggregate, the distribution, hotels and restaurants industry performed strongly, increasing by 1.7%, which contributed 0.24 percentage points to quarter-on-quarter GDP growth. Retail trade, wholesale trade and the trade and repair of motor vehicles were all strong performers.

The business services and finance industries also performed strongly, increasing by 0.9% in Quarter 4 2016, which contributed 0.28 percentage points to quarter-on-quarter GDP growth. A particularly strong performer was the travel agency industry, which increased by 7.3%, contributing 0.05 percentage points to headline GDP growth.

Thus there was a hint that it was travellers to the UK boosting travel agencies but just a hint. Also let us check in on the main player last time around.

Growth in transport, storage and communications slowed to 0.3% in Quarter 4 2016, following growth of 2.6% in Quarter 3 (July to Sept) 2016.

Manufacturing

This had a good quarter although the overall picture is one which seems pretty much to be following the ebbs and flows of the volatile pharmaceutical industry.

manufacturing increased by 0.7% in Quarter 4 2016, mainly due to a large rise in the erratically performing pharmaceuticals industry, after a fall of 0.8% in Quarter 3 2016;

Production flatlined but was heavily affected by this.

The Department for Business, Energy and Industrial Strategy advised the decrease can largely be attributed to continued maintenance to the Buzzard oil field in the North Sea.

Comment

If we look back we see that the UK economy has managed several years in a row of economic growth now. The media and establishment panic over the EU leave vote has in fact been replaced by a period of extraordinary economic stability and what is described officially as “steady growth”. In any ordinary line of work people would be disciplined for such gross mistakes but of course different rules apply to the establishment. In essence the UK economy has relied on the consumer (again) so thank you ladies one more time, and rebalanced even further towards the service sector as we are reminded yet again of the “rebalancing” in the other direction promised by former Bank of England Governor Baron King of Lothbury and the “march of the makers” of the current darling of the expensive speech circuit George Osborne.

Yet there are disturbing sounds below the surface such as the return of inflation and another ongoing issue.

GDP per head was estimated to have increased by 0.4% during Quarter 4 2016 and by 1.3% during 2016.

So it continues to underperform the overall or aggregate numbers leading to this as summarised by the Guardian.

It is now 8.7% higher than its pre-crisis peak in 2008. But on a per capita basis (adjusted for population changes), it’s only 1.9% larger.

Also let me offer my usual critique of GDP data. It is in no way accurate to 0.1% especially on the preliminary report and has been boosted in recent years by substituting a lower for a higher inflation measure ( CPI for RPI). As the gap between the two widens that becomes a bigger issue and it is currently ~1% per annum. Regular readers will be aware that there are plenty of other flaws too.

 

 

 

 

 

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17 thoughts on “UK GDP growth continues to be both steady and strong

  1. Hi Shaun,

    Yet more examples of why economics as a discipline gets such bad press as it something fundamentally statistical but is used more like something Mystic Meg would be more familiar with. As a tool for analysing past performance it is clearly is as robust as the data. It is not surprising that revisions also emerge as improved data is gathered. However, as a forecasting tool, can anyone remember any official forecast ever being even remotely accurate. We even see forecasts for many years hence not just the next quarter or year. The vast majority of pre-Brexit predictions were clearly biased by two things, firstly the establishment was confident of a win and hence it would never be tested so they could over-egg it, secondly if the vote went for exit, that operation fear would have scared everyone so much by over-egging it they would be afraid to leave their houses let alone buy anything. The analogy of the economy being like a supertanker is probably not a bad one. If we know where we have just come from and at what course and speed we know pretty well where we, no more no less. Predicting where will be if random minor course changes occur is basically guessing that just gets more embarrassing the further out the prediction is.

    Dave

    • Hi Dave

      I am not sure what the establishment was thinking when it made its forecasts for a post EU leave vote. Perhaps they thought that there would be safety in numbers and it did not occur to them that others would not be bothered by that.

      • The establishment was thinking Agenda 21, New World Order, and how well it was doing from the status quo, and lied through its teeth in an attempt to frighten us from voting Leave.

  2. Great blog as always, Shaun.
    However, I disagree with your contention that “[real GDP] has been boosted in recent years by substituting a lower for a higher inflation measure ( CPI for RPI)” constitutes a flaw. An August 2011 ONS article by Steve Drew, “Deflation improvements in the UK National Accounts” makes the overwhelming case for this methodology change. (Sorry, this Luddite was unable to provide a link but it is easy to Google to.)
    See page 4 of Drew’s paper for reasons why the switch is an improvement. The CPI has better coverage of the population than the RPI, its weights are taken from the household monetary expenditure components of the National Accounts and not from the LCF, and it eliminates the formula bias in the RPI due to its extensive use of the Carli formula for elementary aggregates. Of all these reasons, only the last one does not also apply to the RPIJ. The RPI was kept as the deflator for trade union subscriptions and estate agents’ fees, both of which were then excluded from the CPI. In 2012, trade union subscriptions were added to the CPI, so presumably its deflator is also now sourced from the CPI rather than the RPI. The Carli formula was never used to calculate the estate agents’ fees, so even though an RPI series is still used as a deflator for this series, the deflator should not be upward biased and the measure of volume change downward biased.
    The RPIJ was 2-3 years in the future when the change was made; it would be interesting to deflate the National Accounts with RPIJ series where RPI series were used, to see what part of the change in real GDP growth rates came from the formula change, which was bound to increase real GDP growth rates, as compared to the change in scope and weighting, whose impact was not obvious.
    Anyway, this was a signal improvement in the UK National Accounts that should be commended rather than criticized.

    • Hi Andrew and thanks!

      There is certainly no compulsion to agree on here. However I would point out in defence of the RPI that it avoids the flaw of the CPI which finds itself over 2/3rds of the way up the income spectrum due to the way it is expenditure related and thus over represents the better off.

      As to RPIJ I guess we will not find out now because of the way that people were encouraged to support it before it was then dropped without warning.

      • I don’t doubt that you are right that the CPI finds itself over two thirds of the way up the income spectrum, but is that really a flaw. If you are deflating expenditures, isn’t that the way it should be? The better off people will always have an oversized share of expenditures.

  3. Hi Shaun and thanks for another good blog.

    These figures once again endorse the fact that a drop the in base rate and more QE was a great mistake as you argued at the time.
    Going forward could be a mixed picture with some sections still performing well and others perhaps house building slowing.
    The very important service section the same.
    The rising inflation could really affect spending in the retail trade but maybe not as much as some forecast
    if wages keep rising.However visitors will keep coming whilst the GBP are at these levels.
    Either way I know you will keep us in the picture.

    • Hi Midge and thanks

      Please don’t say “perhaps house building slowing.” otherwise the Bank of England may panic and cut Bank Rate again if they fear that the housing sector and in particular house prices might decline.

  4. You ask about travel agency services. does this include technology businesses like opodo and ebookers ? In these cases, the consumers may be foreign, with journeys that do not include Britain. The commission from these web services still pays British salaries.

  5. well CPI and GDP are all gerry mandered
    lets hope we’re going to be comfortable !

    pull up the sofa and enjoy the show…………

    forbin

  6. Hi Shaun all figures are flawed all markets are manipulated the Chancellor is on Channel 4 News he is either lying or stupid or worse thinks we’re all stupid.
    Diageo profits up so in common with all large companies they will be remunerating those in the boardroom with huge bonuses although the jump in profits has nothing to do with them,then next year when this spike becomes a dip they will get rid of some of the serfs they employ to do the work.
    The supposed UK growth will be offset with the money being spent keeping the basket case RBS afloat this is the bottomless pit that cannot be filled.
    The only thing that really matters now is debt and its exponential expansion.

    • Hi PrivateFraser

      You are right to mention our reformed RBS, how is it going? From the BBC.

      “Royal Bank of Scotland has set aside a further $3.8bn (£3.1bn) to cover fines in the US, the bank has said.
      The provision is for an expected penalty over the sale of financial products linked to risky mortgages before the 2008 financial crisis.
      RBS, which is 72% state-owned, has now put £6.7bn aside to cover litigation by the US Department of Justice (DoJ).
      It means the bank is set to report a loss for 2016, the ninth year in a row that RBS has lost money.”

      Is it not amazing that nobody in authority has gone to jail for this?

      • When RBS first needed public subsidy, I commented that they should be liquidated, with depositors covered by the deposit guarantee scheme, shareholders told that the losses were their problem and employees given directions to the nearest job center.

        9 years without a profit, but Gordon Brown somehow still managed to get a very well paid bank job despite obvious financial incompentence

        • You don’t think that he’d have got that job by acting with financial prudence, do you?

          That was his reward for stealing from the taxpayer.

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