The UK gets an upgrade and a downgrade in a single day

The weekend just past saw plenty of action but my concentration is on Friday. As you see there were two clear events which operated in opposite directions in terms of views on the UK economy.  Let me open with the one which was reported much less but is in line with one of the themes of this blog which is that economic statistics are much less reliable that many would have you believe. From the Office for National Statistics ( ONS) on Friday morning.

The impact of the new data is largest in 2015 due to forestalling in advance of an increase in tax on dividends; the dividends revision in 2016 will be published on 29 September 2017.

Okay if you recall we thought that was happening back then but wait until you see the new estimate of the impact.

In 2015, the indicative estimate of the household and NPISH (non profit institutions serving households) saving ratio is 9.2%, revised up from the latest published value of 6.5%. The indicative estimate for growth in real household and NPISH gross disposable income is 5.3%, revised up from the latest published value of 3.6%.

Let me start with the savings issue where an extra £41.6 billion of household savings have been found in 2015. In terms of light entertainment we see that “Improvements to Illegal Activities” were £1.6 billion of that where apparently people are doing these to build a savings nest egg. Also as rent and imputed rent total some £1.9 billion I am left wondering how much imputed rent which is of course never received as it is a theoretical construct is saved? Of course Sir Charles Bean will be disappointed as well because it previously looked as though people might have listened to his calls for people not to save whereas now it looks like he was ignored.

But more seriously this update changes the whole trajectory of the UK economy as on this ratio the savings ratio has been ~9% since 2011. This is rather different to the previous number of slightly under 9% declining to 6.1%! If we move to economics we see that those who do sectoral equations and assure us that they cannot be wrong have a problem as if one bit is larger another has to be smaller. For example the ONS now think that UK companies borrowed some £41.1 billion less than in 2015 than previously reported.

Also we should note that disposable income rose considerably more quickly than previously reported.

Surpluses everywhere!

If we move to trade we see yet another example of what would have Lindsey Buckingham singing ” I think I’m in trouble”. From the Financial Times.

 

Statisticians are investigating the delicate matter of why the trade balance between the UK and the US does not balance. At various times over the past decade, the UK and the US have both simultaneously recorded a trade surplus with each other.

Excellent isn’t it? Imagine a world where in football matches both teams win!

 

Last year, for example, the UK claimed a £10bn goods trade surplus with the US, according to official statistics, while the US said it had recorded a surplus of $1bn.

Actually the real problem is below and regular readers will be aware that I have pointed out time and time again that the UK services data leaves a lot to be desired.

 

In services, COMTRADE, the UN trade statistics database, shows that the US claims a services trade surplus of $13bn with the UK, which claims a services surplus of more than $34bn with the US.

Either the FT journalists are unaware of or chose not to report this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

Oh and the US figures may be as bad it is just that I have spent quite a bit of time looking at the problems in the UK.

Moodys

More publicised in spite of the fact it was not produced until late Friday evening UK time was this.

Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts.

Which led according to their analysis to this.

Moody’s Investors Service, (“Moody’s”) has today downgraded the United Kingdom’s long-term issuer rating to Aa2 from Aa1 and changed the outlook to stable from negative.

It was a little awkward for them to forecast weaker public finances in a week which had seen better numbers released but some of the arguments seem sound. For example a minority government is likely to spend more than a majority one. Also they expect the UK economy to continue to be on a weaker trajectory.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period.

That puts them in conflict with the Bank of England which of course is now expecting a bit of a pick-up. If we look at track records we are left with problem that neither have a good track record, can they both be wrong? Also after the problems with statistics we have already looked at today can one state the sentence below with any confidence?

Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty.

In essence though the opinion and downgrade has been driven by this view.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.

Comment

Let us start with Moodys where there is some sense to be found in their view of public expenditure I think. The pattern looks set to be higher due to the consequences of minority government and that is consistent with ratings agencies often picking out useful bits of detail. Their problem is their tendency to be behind the times and of course the existence of a credit crunch driven by them labelling instruments as “AAA” which were anything but. If we move to financial markets we see something which shows what power they now have. If you project a worse fiscal position then you would expect bond yields to rise in response whereas at the time of typing this the UK 10 year Gilt yield has fallen to 1.33%. Or perhaps the currency to fall? Not that either as it has moved back above US $1.35 and Euro 1.13.

If we move back to economics the problems are very serious for those who base their work only on statistics and equations. You see it is not only the future which is uncertain it is the present and past too. There is no Dune style Bene Gesserit for the past nor a Muad-Dib for the future. Those who tell you that an economic variable has to be something because of what another is should be made to face a critique every time. This brings me to something which regularly comes back into fashion like a weed in a garden which is targeting nominal GDP ( Gross Domestic Product). This will require adjusting policy based on a variable which is often wrong and sometimes very wrong.

As to the specific data for the UK we saved more in the period up to 2015 which means that more recent figures come from a stronger base. How much the more recent ones will be revised is hard to say as you see some of the changes today have happened in the last month.

Knee Op

After the false dawn of a fortnight ago I am booked in for tomorrow morning for my ACL reconstruction so I will be taking a break of at least a couple of days. On that subject let me wish Billy Vunnipola  well as at least I managed more than 20 years between incidents.

 

 

 

17 thoughts on “The UK gets an upgrade and a downgrade in a single day

  1. Good luck with the op. and hope you are up and about in no time.
    Statistics who needs them, you would be very silly to make a decision on them, especially “official” ones!

  2. I have almost given up on official figures for the economy and have fallen back on ‘using my eyes and ears’ which I had to do when I worked in countries that had very poor or negligible economic data. On that basis I remain cautiously optimistic as I have stated in the past.

    Shaun, I hope your operation goes well and I wish you a swift recovery. I certainly hope it goes better than the minor op I had last thursday! I awoke from anaesthetic to discover they had operated in the wrong place and have suffered several days of unnecessary pain and bleeding and still have the original problem. Not surprisingly, I will be talking to the surgeon very soon!

    • Hi Pavlaki

      I am sorry to read that. Back in the day when I originally injured my knee I had a washout and minor repair. Before it I noted they marked my left leg with big arrows and hopefully they will do the same tomorrow! X marks the spot and all that.

    • Hi Kevin
      Thanks and I am hoping to be third time lucky as they tried to change it to later in the day and then cancelled that too. As to the logging in I was sorry to read that you have had trouble as well. From replies and messages on the WordPress forums it is a much wider issue than just on mine. Something has changed recently though as nobody had previously reported an issue for ages.

  3. Good luck with the op. It is possible (although I’ve never met you) that Billy V puts his knees through a slightly more gruelling regime so you should last longer!
    On the figures, I reckon that I could perfectly legitimately move the profit figure for any company by at least ten per cent (I am an accountant by training), so I’d be amazed if anything as big as an economy, with illegal activities, imputed rents etc, could be measured with any accuracy.
    On the illegal activities, does the fact that an increase equates to an improvement mean that the ONS condones illegality?

    • Hi James
      With Billy V’s weight and power I think you are right without a doubt! As to your point about accounts you are echoing the words of my late father who was dubious about some of the companies he dealt with.

      Moving onto the illegality issue I was wondering that myself…..

  4. Good luck with the op. It is possible (although I’ve never met you) that Billy V puts his knees through a slightly more gruelling regime so you should last longer!
    On the figures, I reckon that I could perfectly legitimately move the profit figure for any company by at least ten per cent (I am an accountant by training), so I’d be amazed if anything as big as an economy, with illegal activities, imputed rents etc, could be measured with any accuracy.
    On the illegal activities, does the fact that an increase equates to an improvement mean that the ONS condones illegality?

  5. Thanks for the continued learning curve this blog keeps me on.

    It’s laughable that the USA and UK are both claiming trade surpluses at the same time.

    As the last ten years has progressed and I’ve learned more about how the stats are constructed-or should I say misconstructed-it’s no wonder we are where we are.

    One of the few bright lights for the UK has been the failings of the credit agencies which has allowed our political class to cover things up for longer than they should have been able to.

    Good luck with the op.Had the exact same ten years ago and really felt the benefits.

    • Hi Dutch

      I am pleased the operation went well for you. I have a friend who had a very similar injury to mine and he has kept telling me to have it done and it has been added to by the fact that he is also a physio who sees it so often at work.

      As to the learning curve it is a pleasure.

  6. Great column as always, Shaun.

    With regard to simultaneous trade surpluses on UK-US trade for both countries, the UK might consider proposing to the US that it adopt the same practice in its official estimates that it does with Canada. Because of customs duties and various import restrictions, the US is likely to have better and more accurate data on its imports from than its exports to the UK, just as the UK has more incentive to closely monitor American imports than its own exports to the US. So it makes sense for both countries to establish official estimates based on US estimates of UK imports (i.e. UK exports) and UK estimates of US imports (i.e. UK exports). Experts from both countries can get together from time to time to criticize each other’s numbers and make whatever adjustments are required to get a common set of figures.

    For Canada and the US it has worked well and no-one would go back to the old way of doing things. In the NAFTA revamping negotiations ongoing in Ottawa now at least both sides agree on which country had a trade surplus when. I can’t imagine an uglier starting point for negotiating a UK-US FTA than having the two countries work with quite different statistics on trade balances.

    • Hi Andrew and thanks.

      The US/Canada deal seems both sensible and logical and I hope that your suggestion that we in the UK should copy it gets taken up. As to a UK and US deal it would be in our interests to accept the American figures on an interim basis.

  7. Good luck with the op.

    On the comment on NGDP targeting, yes all official figures are subject to revisions. But what you gonna do? A CB has to have to have a monetary policy and you have to have some kind of measurement of its effectiveness. At least Nominal can be measured directly and it is not a residual like real GDP. Also the idea to have the NGDP linked to bond prices to get the wisdom of the crowd on the problem since what actually matters is expectations about NGDP growth, not necessarily actual NGDP growth. So if the CB sees market estimates for measured NGDP fall below their target, they know to ease monetary conditions, or vice versa to tighten.

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