Today has opened with some good news for the UK economy and it comes from the car production sector. From the Society of Motor Manufacturers and Traders.
British car manufacturing rose 7.8% in July, with 136,397 new units rolling off UK production lines, according to figures released today by SMMT. Major carmakers ramped up production for new and existing models in the month ahead of summer factory shutdowns, which provide an essential period for plant maintenance, upgrades and re-tooling.
Production for the UK bounced back in July, in readiness for the important September market, following seven successive months of decline, rising 17.7% – an increase of 4,490 units – while exports also grew by 5.3%. Cars made for overseas buyers represented nearly 80% of output in the month with 106,525 units shipped abroad, compared with 29,872 which stayed at home.
Once the better news washes through there are a few things to note. We mostly export the cars we make and mostly buy foreign ones ourselves. As it happened we built more cars for both in July. However it was not enough to offset earlier declines meaning overall production was down 1.6% for the seven months of 2017 in the numbers. The fall has essentially been for domestic sales which of course matches what we have seen there. Production for export is almost unchanged in 2017 so far ( -0.2%) which poses a question for the impact of the lower UK Pound £ and of course economics 101 which would predict more exports. It may be that these things ( J-Curve theory) take longer than often assumed.
The Confederation of British Industry or CBI was upbeat on the J-Curve impact on Tuesday however.
The survey of 432 manufacturers found that total order books and export order books were strong in August. The firming in export orders relative to the previous month reflected rising orders in 10 of the 17 manufacturing sub-sectors, led by mechanical engineering and aerospace….
22% of firms said their export order books were above normal, and 10% said they were below normal, giving a rounded balance of +11% – well above the long-run average of -19%.
We will have to see how all this plays out as we hope that the optimism will come to fruition.
Company problems
The ying to the hopeful yang above has come from some of the company reports this week. I looked at the woes of the subprime lender Provident Financial on Tuesday and the role of the easy money policies of the Bank of England in its rise. Yesterday saw this from WPP which is a large advertising company. From the BBC.
Shares in WPP fell almost 11% after the advertising giant reported slowing sales and warned about future growth.
The company said that group performance had been “much tougher” for the first seven months of its financial year.
It blamed growing economic uncertainty, reflecting a “rise of populism” in the UK and the US, and “bumpy” growth in Brazil, Russia and China.
As you can see from the quote its business is far wider than just the UK but as a general point it does not fit well with what has been reported for the world economy. Then this morning there was this. From Bloomberg.
LATEST: Dixons Carphone falls 20% in London after forecasting an unexpected drop in profit.
Firstly I responded like this.
Have you noticed how these drops in profit are so often “unexpected”! What do equity analysts actually do please?
If we return to the economy we see that we seem to be getting a flow of profit warnings as we try to figure out whether they represent what has already happened or are a leading indicator?
Gross Domestic Product
The headline numbers were unchanged at 0.3% for quarterly growth and 1.7% for annual growth. However tucked away were some interesting details. It was only a few days ago I pointed out that the public finances data hinted at some sort of fiscal stimulus and today we see this.
In the expenditure measure of GDP there was relatively strong growth in government spending and investment.
Also there was something that was not new but would cheer the cockles of Bank of England Governor Mark Carney.
UK GDP in current prices increased by 0.8% between Quarter 1 and Quarter 2 2017.
Nominal GDP growth in theory helps with debt burdens. I say in theory because in practice for the ordinary person there is also the issue of wage growth.
The contribution to nominal GDP growth from wage income (compensation of employees) slowed to 1.7 percentage points in Quarter 2 2017 compared with the same quarter a year ago; this is lower than the 2.1 percentage points recorded in each of the previous 3 quarters.
Also we continue our transformation to a services based economy.
contributing 0.4 percentage points to quarterly GDP growth in Quarter 2 (Apr to June) 2017 and 1.9 percentage points to the 1.7% growth seen over the past year.
What about the housing market?
This seems to be gently rumbling on according to the British Bankers Association data.
Housing market activity has been flat since the start of the year with lending and transactions both in line with 12 month averages.
But with an intriguing kicker.
First-time buyers and remortgage activity on the part of homeowners has supported lending for some time, but we anticipate the pace of growth to slow slightly.
Perhaps first-time buyers are feeling the passage of time or the Bank of Mum and Dad is at play or more simply this is just all the “Help To Buys” washing through the system. Meanwhile I am grateful to Henry Pryor for spotting this from Telegraph Property.
Steep increase in house prices slashed in London’s commuter belt
The surge in UK unsecured borrowing seems to have passed the high street banks by and I do hope it did not all go to Provident Financial.
Annual growth in credit card borrowing was 5.3%, while personal loans and overdrafts saw the recent contraction rate slow, from -1.3% to -0.9%*. Annual growth in overall consumer credit has increased from 1.9% to 2.0%.
Meanwhile I note that the UK BBA is now rebadged as part of UKFinance in a sort of leaky Windscale nuclear reprocessing plant to leak-free Sellafield sort of way.
Bank of England
This has given us the Funding for Lending Scheme and the Term Funding Scheme which it has told us will boost lending to business particularly smaller ones. Today’s numbers tell us this though.
Non-financial companies’ deposits are growing annually by 7.5%, as firms hold cashflow and reserves as a hedge against uncertainty in their trading conditions and as an alternative to making long-term funding commitments.
Is saving the new counterfactual of borrowing and lending?
Comment
The UK economy continues to bumble along with the occasional flicker of growth to be seen. If we move to the monetary situation then the stimulus level has risen as the UK Pound £ has fallen against what has been a powerful performance from the Euro in particular and 1.08 will not be welcomed by holidaymakers, especially as of course it is often expensive to change your money up. If we use the old Bank of England rule of thumb we see that the fall in the effective exchange rate since the EU Leave vote has been equivalent to a 3.3% reduction in the official Bank Rate. It makes the 0.25% reduction of the Bank of England look like a pea shooter to a bazooka doesn’t it? It also points out how bad an idea the cut was.
We are seeing what used to be called stagflation where we get a little growth with inflation. Of course the inflation is much lower than back then but you see so is pretty much everything else so it hits harder. Also the continuing rise in employment provides a boost as whilst wages per head are struggling and often failing to match inflation the aggregate number is rising. As Morpheus points out in The Matrix Reloaded.
There are some things in this world, captain Niobe, that will never change………….Some things do change.
Number Crunching
Thank you to Johannes Borgen for drawing my attention to this.
Bitcoin uses nearly 5% of total UK electricity consumption. This is ridiculous!
Just for clarity this is worldwide bitcoin use looked at in UK electricity terms.
Me on Core Finance
http://www.corelondon.tv/provident-financials-fall-grace-not-yes-man-economics/
Notayesmanseconomics's Blog 
I find it quite amusing ( and if I am honest very annoying ) the way the media report tiny movements in economic data as Armageddon and thank you Shaun for a balanced blog. If they had lived through the period of the late 60’s through to the mid 70’s they might have a calmer more rational response to things. Then ( at the risk of sounding like the Yorkshire men in Monty Python ) we suffered endless strikes, 3 day working weeks, power cuts, huge interest rates, wild gyrations in economic figures and a desperate outlook that is a world away from today’s fairly benign situation. That is why I have said before that I am cautiously optimistic. A sense of perspective is required.
Pavalaki can you please share your secret of your optimism.
I see none in the 1960’s and 1970’s people were not debt slaves jobs were plentiful,the strikes and 3 day weeks were the result of people standing up for themselves.
We are a hugely different place the rate of increase of public and private debt is frightening,we have people hugely indebted for their education housing and what happens when the final salary pension generation are no longer around,people working till they drop.
The economy is going down we cannot leave the EU without serious damage,like Japan and USA basket case economies on life support .Communism collapsed the form of capitalism that has been in operation for nearly 4 decades will implode it is already happening all fiat currencies fail under the debt load and expansion to infinity….’were doomed’
I was born and brought up on Tyneside and I can assure you that jobs were not plentiful, payday loans were common and the militant unions controlled everyone and everything. The 3 day weeks resulted from an attempted left wing / communist take over as they were determined to bring down the government. Anyone who just wanted to get on and work was prevented from doing so. It was absolutely terrible and my father (a shipyard worker ) and his friends suffered significantly as a result of the militant take over of the unions. It really felt as if the country was going down the pan full flush. I look around me at the quality of life today for the ordinary working people and marvel at how far we have come. I come from a very working class background, I experienced what it was like then and see what it is like now – there is no comparison. That is why I am ‘cautiously’ optimistic about the future.
I too come from a working class background and what you are optimistic about is built on a sea of unrepayable debt created out of thin air.
A false prosperity you cannot print prosperity people in those days saved up for things and never bought what they could not afford.
This will end disastrously by the way the 70’s were the greatest decade in history imho
I hope your crystal ball is better than mine.
I totally agree with your concern about unsecured debt and people living beyond their means however the improvement in the standard of living ( of the working classes) has been going on for a long time and it can’t all be fuelled by debt. There have been corrections along the way and there will be others in future but if I look at the long term trend then- I am ‘cautiously’ optimistic.
“people in those days saved up for things and never bought what they could not afford.”
I too am from A working class family and was around in the 70’s and can assure you that hardly anyone owned anything, everything was rented – another form of debt slavery. Now living standards are much higher and we still don’t own anything but we are better off materially.
trade boost expected and overall modest increase in growth in 2nd half. which ain’t at all bad and should bury the brexit recession thoughts for ever. don’t gloat mind.
Hi am
I hope we follow the £ fall of 1992 rather than the one of 2007/08 as the boost to the economy was much more marked. Most of our trading partners seem to be having decent years so fingers crossed!
With regard to your Core Finance appearance I think you ought to practice a much more sombre face! Are the car manufacturers too big to fail? Though many have failed once already.
A brilliant read always and now a frequent and excellent listen as well.
TBTFA, too big to fail again!
Hi Shaun, you really can’t expect equity analysts to understand how and why a UK domiciled company with a large retail presence such as Dixons Carphone is going to struggle when competing against the likes of Amazon who have no shops to run and who book their profits in the EU onshore tax haven of Luxembourg.
As to WPP, I am frankly amazed that any company run by Sir Martin Sorrell doesn’t blame Brexit entirely for its woes… perhaps its simply been hit by good old competition offering a better deal? The advertising industry has always stuck me as a cosy little cartel that needs a damn good shake up, whether from clients or consumers. Perhaps that is what it meant by “the rise of populism”?
Andy
Hi Andy Z
Yet again we have things which as you point out are perfectly predictable trends that are presented as “unexpected” by very well paid people. It seems only those at the lower end of the scale are held responsible for things these days.
The long history of UK Sterling devaluations is that companies take the ‘benefit’ in terms of profit margins, not lowering prices to expand market share. To be fair, that approach in the UK is probably mostly the right one. Volatility in Sterling down the years, strange monetary polices over the last few decades and not least the difficulty of ramping up production all stack up against expanding market share too fast. Plus of course the fact that inputs from abroad become more expensive and of course inflation has risen in the past.
so liam fox was right. Lazy guid for nuthins?
“Is saving the new counterfactual of borrowing and lending?”
Sarcasm does you no good but as you have started I’ll join in. Did it not occur to you for one nano second that this could be the result of the Brexit vote (which you make reference to in other parts of this post) over which the BOE had no control? Did you even bother looking at the deposits and lending numbers for non financial companies for 1 year before the Brexit vote and as near as you can get to 1 year after before pronouncing?? If you did then why didn’t you say so?