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.
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.
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.