Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

For earlier monthly releases of UK Trade Statistics that have also been affected by this error, the versions on the website should be amended to make clear to users that the errors led the Authority to suspend the National Statistics designation on 14 November 2014.

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.

 

 

27 thoughts on “Has the UK just lost £490 billion as claimed in the Daily Telegraph?

  1. So, if the fake London house prices, which draw in so much foreign capital, collapse, we really are in trouble? I have often wondered how we have managed to sustain negative trade balances and been told that it is okay, due to foreign capital coming in and our capital; abroad. Have we been trading while insolvent then (to quote the criminal offence)?

    Brian Conley is still in Strictly.

    PS: The Spelling Police would like to feel your collar as it is “pore” over accounts etc.

    • Hi David

      Yes the spelling police would be all over me for that. The spellchecker is of little use as it is a bona fide world and it is always hard to check your own work as you tend to read what you thought you wrote!

      As to the numbers the answer is that we know some things but others remain clouded in fog.

    • Hi Mike and welcome to my corner of the online world.

      The ones based on assumptions like I looked at today regarding corporate bonds and share holdings then yes. Not everything though as there was a post EU leave vote gain due to the fact that the lower Pound £ meant that our investments abroad were worth more in Pound £ terms without them doing anything.

  2. “The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose.”

    How much of the economic data was defined by UK institutions, and how much of the economic data was defined by the EU (and thus mandated for all EU states)?

    • Hi Martin and welcome to my corner of the web.

      As to your question it is a complex issue. Let me answer in relation to the UK inflation data where there is a mixed picture. Back in 2002 the UK government started the process for us to use the Eurostat style CPI inflation measure and we then put it in the Bank of England inflation target. We did it but did not have to.

      More recently having established a standard of using a European style system we then did a U-Turn and used imputed rent rather than house prices as proposed for the EU for the CPIH measure. So it is an inconsistent mess which is likely to be my topic for tomorrow as the latest inflation numbers are due.

  3. I can’t speak for all your regular readers of course but this regular took one look at the headline and thought GIGO. Very kind of you to do the research and everyone I refer here says how much they enjoy reading.

    Nobody does impending doom oration quite like A-EP and your gift of describing what is happening without resorting to graphic Anglo Saxon is admirable. More power to your keyboard!

    • Yes AEP is the proverbial broken clock that will never be proven right, he has been predicting the collapse of the Euro for nearly twenty years now, somehow forgetting in the process that it was launched and is backed by the globalists who have the firepower of unlimited capital of the central banks to back it.

      Funny how despite the almost total insolvency of the entire European banking system, the Euro remains one of the strongest of the major currencies.

      The globalists are never going to let their European project be deflected or destroyed by something as simple as fundamentals or market forces.

  4. Moving the ONS to Newport in 2009 has to go down as the worst UK economic decision in living memory.

    Probably second only to appointing Mark Carney as head of the BOE and Gordon’s 2007 budget speech announcing he had ended Tory boom and bust.

    https://www.civilserviceworld.com/articles/news/ons-move-out-london-%E2%80%9Cundermined-uk-statistics%E2%80%9D-%E2%80%93-report

    90% of staff left, you can only imagine wtf the government were thinking when the move was agreed!

    Our national accounts (GDP), trade, current account and even the initial reports monthly reports on the public finances aren’t worth the paper they are written on.

    The government are flying blind.

    Why isn’t there any desire to fix the problem? A good start would be to start planning to move the ONS back to London where people who are talented with statistics and numbers actually want to live!

    • Hi David and welcome to my corner off the web.

      There is much good work that goes on at the ONS but it has problems. Those at the top cannot see the wood for the trees. I spent a lot of time around the turn of the year arguing against the planned changes to inflation measurement. I met the National Statistician via my work at the Royal Statistical Society and put forwards my arguments. The responses sadly were simply propaganda and hype.

    • Some things most certainly aren’t though the GDP calculations seemed like a very professional and well run team to me. The others are another story entirely.

      For instance it was always interesting to see various politicians and mouth pieces citing ONS figures on immigration during Question Time or other politics shows.

      The immigration figures are derived from the passenger travel survey, which is one of the only commercial contracts the ONS has. It’s designed to tell our tourism industry how many Americans etc are visiting and relies upon people with clipboards in a select few ports and airports asking passengers a few questions about their visit. Are you a jihadi entering the country illegally to claim asylum and make contact with a terrorist cell was, suffice to say, not a question UK tourism thought relevant to ask.

      The system which could have produced accurate figures was built for HMCI. The devs on the project were refused permission to add a simple incrementer / decrementer for people entering or leaving the country as it was against EU rules. 🙂

      One line of code….

  5. Good piece. The actual ONS data shows AEP is just trying to make waves.

    Analysed here: https://www.kingdomcomment.com/blog/uk-61bn-richer-is-now-490bn-poorer

    The revised net asset/liabilities balance position (even after the revision) is £61bn better than Q2 2016 and £268bn better than Q3 2015. Absolutely nothing to write home about and very “coincidental” a two week old revision suddenly makes headlines the day of talks in Brussels?

      • I don’t think they did spend it. I suspect the treasury has been “overborrowing” in readiness for any possible debt ceiling showdown when congress decides whether to raise the debt ceiling on the already extended date of 8 December 2017.

        This precautionary borrowing will buy the Treasury and the USA a bit more time in the event of an impasse and hopefully avoid a default. All eyes on Trump and his tax cuts…..

  6. Whilst I worked on the ONS system which calculates all this guff it was as a software engineer, hence my understanding of the issues might well not be up to par.

    Saying that how does a revision of almost half a trillion in investment positions not translate to a large change in GNI? There was a change listed but it seemed to be less than £6 billion.

    The ONS is a very… dusty.. place. I moved from the above to a different project and 6 months later found out that it was 2 years late!

    The last major revision to the calculations I recall was in order to include prostitution and drugs into the nation’s balance sheet. Which itself was based upon some work carried out to ascertain the likely economic effects.

    Whilst the chap who did the research for the prostitution side was good enough to credit them with 50 pence expenses per transaction for use of a condom his workings indicated that each and every working girl in the country must be earning over £100,000 a year. Which, apparently enraged some Madams and massage parlour owners so much that they rang in to complain.

    This was the revision which lead the EU to demand an extra £2 billion from us, which Cameron refused to pay. And then did.

    The French statistics authority was also told by the EU to revise their figures. They said non.

    • Great story.

      “We send the EU £38m every week because we count drugs and prostitution in GDP. Lets spend it on the ONS instead”

      Seems like that one on the bus would get past the UK Statistics Authority

      • Amusingly the fieldwork stated that all values used to calculate the prostitution based GDP were under-estimates.

        Which seemed to be 20-30 transactions per week at hourly rates listed on a smutty website, multiplied by the number of working girls operating in central London as a representative sample of the population of the rest of the country.

        Which backdated to, I think it was, 2004 resulted in an extra £2 billion.

        I suspect this… underestimate… probably cost the country as a whole at least ten times the ONS’ annual budget.

  7. Shaun
    Really interesting as usual. Am I correct in thinking that the extra GDP created by imputed rents (and the miscalculation of our net wealth) have two other effects
    1. It makes the tax take lower as a percentage of GDP
    2. It actually increases our payments to the EU.
    I hope that I’m wrong as these would be pretty perverse outcomes from using fantasy figures

    • As to point 2 this is what I can’t get my head around..

      Payments to the EU are calculated on our GNI, the flow of money from both our domestic elements and foreign holdings. Profits which aren’t denominated in Sterling, dividends from pension fund holding of foreign firms etc.

      If our foreign holdings are half a trillion less than previously thought then surely that has to affect the flow, the GNI.There is a change listed of about a £6 billion reduction in GNI but this seems unfeasibly low.

  8. So what is the real story here?
    Is it that statistics emanating from the ONS have such a huge “margin of error” that they are effectively useless at informing us of the current state of the UK economy?
    If that is true then it is very worrying indeed because the ONS is one of the most important sources of research for organisations like the OBR, Centre for Policy Studies, Adam Smith Institute, the Bow Group etc.
    Can we believe anything that these organisations predict or are we just building poorly-informed assumptions on previous, poorly-informed assumptions and dodgy estimates? Or was I just being naive to take any of what they had to say seriously in the first place?

  9. “…we might find some round £1 coins to take to the bank as they are no longer legal tender.”

    You are a monumental idiot. You can’t even get that right.

    Let’s make light of a serious accounting error.

    I cannot believe half a trillion £ is a brush off!

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