Where does the events of last night leave the UK economy?

That was an extraordinary night as yet again much of the polling industry was completely wrong and the UK electorate turned up quite a few surprises. In fact it was not only the political world which spun on its axis because financial markets had cruised into this election as if asleep as I pointed out only on Wednesday. Against the US Dollar the UK Pound £ had been above US $1.29 for a while and had if anything nudged a little higher. Oh and Wednesday suddenly seems like a lifetime away doesn’t it as we sing along to Frankie Valli and the Four Seasons.

Oh, I felt a rush like a rolling bolt of thunder
Spinning my head around and taking my body under
Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)

The Exchange Rate

It was not quite like the EU leave vote night which if you recall saw a sharp rally to US $1.50 before plunging as actual results began to come in. But the UK Pound did drop a couple of cents to US $1.275 in a flash. Since then it has drifted lower and is at US $1.27 as I type this. There was a similar move against the Euro as a bit above 1.15 found itself replaced with 1.135 as Sterling longs ended the night with singed fingers.

This means that UK monetary conditions have loosened again and should the fall in the Pound be sustained then we have just seen the equivalent of a 0.5% Bank Rate cut.

Government Bonds

In spite of the fact that there has been something of a shift in the UK political axis and hence potential changes in the economy and fiscal deficit this market has met such a reality with something of a yawn. The ten-year Gilt yield is currently 1.03% meaning there is zero political risk priced into the market there and if we look at what might happen over the next 2 years an annual return of 0.08% barely covers a toenail of it in my opinion!

What we are seeing her in my opinion is how central banks have neutralised bond markets as a signal of anything with their enormous purchases. In this instance it is the £435 billion of UK Gilt purchases by the Bank of England which seem to have left it becalmed in the face of not only higher political risk but also higher inflation.

FTSE 100

This too fell in response to the exit poll forecasting a hung parliament and quickly dropped around 70 points. However then things changed and a rally started and as I type this it is up nearly 50 points around 7500. Why the change? Well there has been an inverse relationship between the value of the Pound and the FTSE 100 for a while now due to the fact that many of the larger UK companies have operations overseas.

By contrast the UK FTSE 250 has fallen by 0.9% to 19,576 on the basis that it is much more focused on the domestic economy. Again though the moves are small compared to the political shift as we mull yet another implication of the expanded balance sheets of central banks. As I wrote only a few days ago are equity markets allowed to fall these days?

Today’s Data

Production

The numbers here start with some growth albeit not much of it.

In April 2017, total production was estimated to have increased by 0.2% compared with March 2017, due to rises of 2.9% in energy supply and 0.2% in manufacturing.

So better than last month, but once we go to the annual comparison we see a decline has replaced the rise.

Total production output for April 2017 compared with April 2016 decreased by 0.8%, with energy supply providing the largest downward contribution, decreasing by 7.4%.

Those who are familiar with the poor old weather taking the blame may have a wry smile at the fact that of a 0.75% fall some 0.74% was due to lower electricity and gas production presumably otherwise known as warmer weather.

Manufacturing

As you can see above this was up by 0.2% on a monthly basis but was in fact unchanged on a year ago with its index being at 104.5 in both April 2016 and 17. You could claim some growth if you go to a second decimal place but that is way to far into spurious accuracy territory for me.

As we look into the detail we see something familiar which is that the erratic and volatile path of the pharmaceutical industry has been in play one more time.

Within manufacturing, there were increases in 10 of the 13 sub-sectors, but this was offset by the weakness within the volatile pharmaceutical industry, which provided the largest downward contribution, decreasing by 12.2%, the weakest month-on-same month a year ago growth since February 2013.

It has yo-yo’d around for a while now albeit with a rising trend but we will have to wait until next month to see if that continues. However there is of course the issue of what the Markit PMI ( Purchasing Managers Index) told us.

The UK manufacturing PMI sprung back to a three
year high in April after a brief blip in March…….“The British manufacturing industry is moving at
such a pace that suppliers are struggling to keep up
with demand.

The “growth spurt” with a reading of 57.3 does not fit well with an annual flatlining does it?

Trade

Again there was a monthly improvement to be seen.

The UK’s total trade deficit (goods and services) narrowed by £1.8 billion between March and April 2017 to £2.1 billion…….Imports fell across most commodity groups between March and April 2017, the largest of which were mechanical machinery, oil and cars;

This was needed as March was particularly poor leading to bad quarterly data.

Between the 3 months to January 2017 and the 3 months to April 2017, the total trade deficit (goods and services) widened by £1.7 billion to £8.6 billion;

Thus the underlying theme here is of yet more deficits. Maybe not the “thousands of them” of the film Zulu but definitely in the hundreds.

An upgrade of the past

The first quarter saw a couple of minor upgrades as the data filtered through this morning.

The total trade in goods and services balance in Quarter 1 2017 has been revised up by £1.3 billion, to £9.3 billion.

They mean revised up to -£9.3 billion and also there was this.

there has been an upward revision of 0.9 percentage points to growth in total construction output – from 0.2% to 1.1%. The potential upward impact of this revision to the previously published gross domestic product (GDP) is 0.05 percentage points.

Comment

So many areas need a slice of humble pie this morning that a large one needs to be baked to avoid running out. As ever I will avoid individual politics and simply point out that there will be quite a lot of uncertainty ahead although of course if you recall that seemed to actually help Belgium’s economy when it had some 18 months or so of it.

As to the economy this is the difficult patch that I have feared where higher inflation impacts. As usual there is a lot of noise as for example the April manufacturing figure is very different to the Markit  business survey. Also we have the impact of warmer weather on production ( whatever the weather is it gets blamed for something) and more wild swings in the pharmaceutical sector which must represent a measurement issue. Meanwhile as I have pointed out before I have little faith in the official construction series but this rather stands out.

a fall in private housing new work

That fits with neither what we have been promised nor the construction business surveys.

 

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27 thoughts on “Where does the events of last night leave the UK economy?

  1. More QE, lower interest rates, more public spending, more TFS/FFL so banks can lend even cheaper into the mortgage market is the inevitable outcome.

    This Tory failure is Dave and Osbornes legacy yet they are so up themselves they fail to realise … not that anyone in the Tory party said a word when they spent 6 years and best part of a trillion £ recreating Brown/Blair economic nightmare.

    It was only a matter of time until pricing the under 45s out of owning a house came back to bite the Tory party my only surprise is it didn’t happen in 2015.

    Still they wont manage to put the pieces together to realise it is as simple as that as to why the young voted in vast numbers.

    • Hi Arthur

      You are right that there is much to consider. In the short-term I would not be surprised if we see further weakness in the London property market as if I was an overseas buyer I would probably wait and delay until things become clearer.

  2. One can’t help but feel that risk has somehow gone on a long holiday. I couldn’t believe the gilt market this morning. You are probably right in that the BOE purchases have hugely distorted the market.

    • Less of the “probably”! And don’t forget, asset purchases continue, both as expiring bonds are redeemed and the funds used to buy more, but via foreign CBs that are still buying (ECB anyone???!)

  3. Shaun, we should include the baking and consuming of humble pie in the GDP figures. Perhaps in place of banking when it moves to Luxembourg?

  4. Hi Shaun, do you do requests as after all your blog is pat DJ and part economics! I’m fasicinated with events in Germany and the mass tax avoidence (evasion?) that has been uncovered there. I’m sure I’m not the only one to appreciate your insight.

    As to the UK economy I’d be playing The Dobie Brothers and let’s go round again. There isn’t a single new idea being considered just “maybe we can turn back time” I’ve no doubt Carney is at the ready. That our sole economic idea is prop up the banks at all costs I can’t see anything changing.

    • Hi bill40

      Do you mean parties and bar mitzvah’s? No not yet anyway. I did offer to do a rock and roll themed economics show for Share Radio on a Saturday but they turned me down. I still think they should have been willing to give such ideas a go as otherwise they were always likely to fail. But of course that could be an example of “What a fool believes….”

      • More fool share radio, I keep adding song themes on my blog but feel it’s it’s a combination of plagarism and blasphemy. I’ll try to controlmyself.

  5. Trying to stick to your question, ie what does the election mean for the economy, I have a few suggestions on the economics:
    1. I would expect “austerity” to be toned down, given the fact that Tory MPs are going to try to win the next election;
    2. I would expect relatively little to be done by way of tax increases, for the same reason;
    3. I would therefore expect government borrowing to increase;
    4. In order to keep the bond vigilantes at bay, this will lead to more QE to stop interest rates going up
    5. I would expect many announcements as to new money for the NHS (probably the same money many times)
    6. I would expect the triple lock for pensioners to stay
    7. I would expect the social care budget to expand.
    In other words, the Conservatives will have noticed how popular Labour was and will try to recover ground and this will not include cuts or tax rises, but will increase borrowing.

    • With the Brexit negotiations days away, it would be in the Nation’s interest to have a joint negotiating team made up of all parties supporting leaving the EU, Tories and Labour. This would give a strong signal to the EU that the majority of the UK are backing this united position.
      As this would require cooperation between the parties, putting self interest aside, for the good of the people and their future, this will never happen!

      • “a joint negotiating team made up of all parties supporting leaving the EU .”

        aye thats the rub thou’ innit ?

        virtually all of the established parties and MSM are in the Remain camp

        52% of voters did not want to Remain but there’s no party that supports that view now since the UKIP died last night .

        bets are on for a 2nd vote ……. after all its the EU way !

        Forbin

        • I want a second vote, Farage’s 350 million per week for the NHS was a damned lie that didn’t last a day. The real health related economics of Brexit are that UK nationals will need to purchase private health insurance when travelling to Europe and/or living overseas. The elder Brexit voting generation will face the highest costs, especially those with second homes in France.

          Freedom of movement is a 2 way street and I know lots of Brits who work / live in Europe …. and work visas are a pain, even for the highly skilled

  6. Hello Shaun ,

    I dont think this election result will affect the down turn in the economy thats already backed in from last year

    What happens next will bite in 12-18 months time

    all parties will go for negative austerity anyway , conservatives may just be , um, more conservative on how much , well compared to Corbyn….

    Interesting times

    prediction

    over the next few months the economy will have negative growth ,
    results in a crisis politically
    we’ll drag our heels on Brexit
    then
    get to vote on re-joining
    Price? we’d be badgered into dropping the pound and joining the Euro

    Forbin

    • Hi Forbin

      I agree about the negative austerity as all parties will note how offering to end student debt affected constituencies with students in them! Actually I am wondering that about mine ( Battersea) which saw one of the biggest swings and does have one or colleges here ( Royal College of Art for example).

      As to the economy this part of 2017 always looked like the rough patch as we have discussed many times before.

  7. I’ve always believed that Brexit. perhaps the dominant factor in our economic outlook, is a sideshow; important to us but not very important in a European context. In the short term this election result gives more uncertainty to the Brexit process and this will have at least a short term negative impact on the UK economy; greater than it would have been anyway.

    Despite the better figures coming out of the EU I don’t think that the position of the euro has changed: it is unsustainable and cannot succeed in the long term. What this means is that our problems are more likely to come from the EU turmoil rather than our own turmoil; after all the EZ is far bigger than the UK and its problems are huge, as you document on here quite regularly, and the effect of trouble in the EZ, very likely in my view, will be far more important to us than whether we get a hard or soft Brexit.

    What was strange about the election is that the economy and all its many problems were hardly aired, perhaps for very good reasons: that no one has a clue how to fix them.

    Also strange is that we don’t have interest rates at 0.10% by now; it would appears that Carney’s trigger finger is learning a thing or two.

    • Hi Bob J

      Perhaps Carney’s thoughts are now mostly on 2019 and what he will do then. I have long thought his objective was the IMF although his visit to the US Federal Reserve could be part of a plan B. As to the economy it only featured a little in that there were mentions of some nationalisation ( Labour) but very little at all from the Tories.

      As to the Euro it is in a favourable part of its economic cycle and lets face it some parts badly need it ( Italy and Portugal). We will see how long they can sustain it.

  8. Shaun, its early days for a call on the economic consequences but my perception form here in Italy is that the UK is still in “kindergarden”. Talking to a hotel owner in this morning he recounted 60% falls in property in his country in 2011 but was now postitive about the price levels supporting economic growth in IT.

    Again compare the UK to Ireland, spain or USA. There has been no right setting of property valuations, a whole corhort of oldies are are still bathing in inequity “gold”. We are now to believe that the young have started voting whereas actually a young to middle-aged cohort have actually gained a voice in this election and the next one in the autumn.

    This is the beginning of the reset. I dont care how many govt bonds QE buy or shares. Those fakery posjtions will be found out. Its been a long time coming.

    Early days for ftse and very slow media but theyll figure it out in a month.

    Paul

    • Hi Paul C

      You have the advantage of distance as over here the coverage has become too overpowering. I have switched it off for a bit and look forwards to the rugby and football tomorrow. After all it looks like being a hectic summer!

  9. If you want to inspire confidence, give plenty of statistics. It does not matter that they should be accurate, or even intelligible, as long as there is enough of them. — Lewis Carroll

      • Here’s my first report on the Lions tour; direct from NZ –

        Uninspiring! The highlight of the first game in Whangarei was the fireworks.
        As for the second game – the Blues don’t often win so Wednesday was the highlight of the year for them.
        It’s the Crusaders next – unbeaten so far this year….. so I’m not betting on this one.
        Warren has his feet firmly planted in the clouds.

        • I’ll have a large slice of that Humble pie now, Shaun.

          Well done the Lions.

          Eric in NZ.

  10. One positive thing about the election, whatever your views. BBC radio was simply a pleasure all day on 8th June, as the BBC is banned from political stuff on election days. It made such a difference!

  11. Excellent blog as always Shaun.

    As a bit of a blues man myself I’ll leave it to Jimmy Witherspoon:

    Well, money’s gettin’ cheaper, prices gettin’ steeper
    Found myself a woman but I just couldn’t keep her
    Times gettin’ tougher than tough
    Things gettin’ rougher than rough
    I make a lot of money, I just keep spendin’ the stuff

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