This morning has brought some disappointing news about the UK economy. From the Office for National Statistics.
UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017.
As the official release goes on to tell us this is slightly worse than the preliminary estimate.
UK GDP growth in Quarter 1 2017 has been revised down by 0.1 percentage points from the preliminary estimate published on 28 April 2017; mainly due to broad-based downward revisions within the services sector.
Whilst this was disappointing it was far from a complete surprise as there have been hints that the services sector had struggled in that quarter. Of course it makes up the vast majority of the UK economy these days leaving not much scope to regain the ground elsewhere.
It turns out that all sectors of the UK economy grew it is just that they did not do so by much.
In Quarter 1 2017, all four sectors show positive growth; agriculture increased by 0.3%, total production increased by 0.1% and construction and total services both increased by 0.2%.
If we look at the services sector we see that in football terms it was in a way a story of two halves.
The growth was focused in the business services and finance, and government and other services industrial groups, but there was a slow-down in growth in consumer-focused industries, such as retail sales and accommodation. Within the services industries, two of the four main sectors decreased in Quarter 1 2017; distribution, hotels and restaurants, and transport, storage and communications.
The area responsible for today’s downwards revision has ironically been a strength for the UK economy in recent quarters.
Services contributed 0.06 percentage points to the downward revision to UK GDP, the biggest contributor. Within services, the largest contributor to the downward revision is business services and finance. However, within this section, at the more detailed level, the revisions are small and broad-based, primarily reflecting late survey returns.
We can really drill down to see the state of play here.
Total services output rose by 0.2% in Quarter 1 (Jan to Mar) 2017, driven by 0.6% growth in business services and finance, and 0.4% growth in government and other services (Figure 3). Meanwhile, distribution, hotels and restaurants, and transport, storage and communication both recorded negative quarterly growth – falling by 0.6% and 0.2% respectively. This is the first negative quarter-on-quarter growth rate in each series since Quarter 4 (Oct to Dec) 2012 and Quarter 3 (July to Sep) 2013.
What about the individual experience?
The aggregate levels above do not allow for changes in the population so for example a growing population would normally lead to higher economic output and GDP, but that higher GDP would not necessarily indicate people being better off. This often gets ignored by politicians and much of the media because it has shown that we are not doing as well as the headline number would suggest.
In Quarter 1 (Jan to Mar) 2017, gross domestic product (GDP) per head was flat compared with Quarter 4 (Oct to Dec) 2016. GDP per head is now 1.7% above the GDP pre-downturn peak in Quarter 1 2008, having surpassed it in Quarter 4 2015.
That compares with us being some 8.7% higher on the headline number and the gap has just widened even further as we were on a road to nowhere on an individual basis at the start to 2017.
GDP per head in volume terms was flat between Quarter 4 2016 and Quarter 1 2017.
If the trend from the migration data also released today continues then the numbers may be pulled back closer together.
Net long-term international migration was estimated to be +248,000 in 2016, down 84,000 from 2015 (statistically significant); immigration was estimated to be 588,000 and emigration 339,000.
The catch is that these numbers are probably even more unreliable than the GDP ones.
This is the number that will attract the interest of Mark Carney and the Bank of England.
GDP in current prices increased by 0.7% between Quarter 4 2016 and Quarter 1 2017.
This is because on an economy wide level it is a measure of how we can deal with the debt issues that exist. Mostly we pay these in nominal rather than real terms. Although they avoid putting it in these terms this is why central banks target a positive rate of inflation ( mostly 2% per annum) because it is in effect a subsidy for debtors as their debts get deflated in real terms. This is also why there are regular suggestions that the target rate of inflation should be raised to either 3% or 4% so that debts can be inflated away even more quickly.
So in terms of debt worries they will be pleased to see the effect of inflation on the GDP numbers so that real growth of 0.2% becomes nominal growth of 0.7%. You may note that the period when we had solid economic growth but around 0% inflation would be pretty much indistinguishable in these terms. Of course we as workers are worse off as this from today’s monthly commentary makes clear.
Adjusted for consumer price inflation including owner occupiers’ housing costs (CPIH), average weekly earnings increased by 0.1% including bonuses, but fell by 0.2% excluding bonuses, compared with a year earlier. This is the first decline in real earnings (excluding bonuses) since the 3 months to September 2014.
There are hints that consumers are beginning to feel some of the pinch of higher inflation as well.
The slowdown in Quarter 1 2017 compared with Quarter 4 2016 reflected a decline in output from consumer focused industries, including the retail industry. As a result, private consumption was a smaller contributor to GDP growth than in recent periods, adding 0.2 percentage points.
This is something of a problem that it a hardy perennial for the UK economy and GDP. It has been at play yet again.
the total trade deficit widened by £5.7 billion to £10.5 billion between Quarter 4 2016 and Quarter 1 2017. Both the monthly and quarterly widening of the trade deficit were mainly due to increased imports of oil, chemicals, mechanical machinery and cars.
More specifically it did this.
The negative contribution to GDP came from net trade, which contributed a negative 1.4 percentage points.
So over the last two quarters it has given us a large boost and now taken it away. If we look back it has taken 1.4% away, given us 1.7% and now taken 1.4% away over the past 3 quarters. An unlikely sequence which reminds us how volatile and unreliable the trade numbers are especially for the most important sector which is the services one.
Let me open with some optimistic thoughts. Firstly this is now exactly the same rate of economic growth we had at the opening of 2016 and very little below that in 2015. So we may have a systemic problem similar to the one which has affected the United States for a while. Also we are simply not able to measure GDP to 0.1% even when all the data is in as opposed to the 80% or so we have now. If investment is any guide companies seem to be planning hopefully which coincides with the latest business surveys.
For Quarter 1 2017, the largest positive contribution to GDP came from gross capital formation, which contributed 1.2 percentage points.
However the GDP growth number has just been revised lower by 0.1% and the danger for the rest of 2017 is that the higher trajectory for inflation subtracts from economic growth. Let me leave you with a thought that I expressed to TipTV Finance which is that in any sustained slow down the Bank of England would be likely to ease monetary policy again.