If UK growth has a “speed limit” of 1.5% how is manufacturing growing at 3.4%?

Yesterday saw the Quarterly Inflation Report of the Bank of England where its takes the opportunity to explain its views on the UK economy. There was a subject which Governor Mark Carney returned to several times and it was also in the opening statement.

It is useful to step back to assess how the economy has performed relative to the MPC’s expectations in order to understand the forces at work on it.

You are always in trouble when you have to keep telling your audience you got things right. I don’t see Pep Guardiola having to explain things like that or Eddie Jones and that is because things have gone well for them. Increasingly the Governor is finding himself having to field questions essentially based upon my theme that the Bank of England has a poor forecasting record. Actually tucked away in his statement was yet another confession.

GDP growth is expected to average around 1¾%
over the forecast period, a little stronger than projected in November.

I would like to present his main point in another way as we were told that policy is “transparent” and being done “transparently”. Okay so apply that test to this?

The MPC judges that, were the economy to evolve broadly in line with its February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the
November Report, in order to return inflation sustainably to the target.

So if they get things right which they usually do not then interest-rates will rise by more than the previous unspecified hint? That is opaque rather than transparent especially when you have a habit of saying things like this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced…………..It could happen sooner than markets currently expect. (Mansion House June 2014).

What actually happened? The next move was a Bank Rate cut! Also I noted this in the Financial Times from back then.

This speech marks an important change of tone from the governor……..with rates rising earlier, further and faster than markets currently price in.

I noted this because it was from Michael Saunders who was of course giving bad advice to Citibank customers as we wonder if his enthusiasm for the Governor’s thoughts and words got him appointed to the Monetary Policy Committee?

Also I note that the 0.25% Bank Rate cut and Sledgehammer QE is claimed to have had an enormous impact.

this strategy has worked with
employment rising and slack steadily being absorbed

Yet this morning Ben Broadbent has contradicted this on BBC 5 Live’s Wake Up To Money.

dep gov Ben Broadbent said that was “true to some extent”, adding he didn’t think a couple of 25 basis point [0.25%] rises in a year would be a great shock

So if two rises are no big deal how was one cut a big deal? I guess if you send out your absent-minded professor out at the crack of dawn he is more likely to go off-piste.

Our intrepid Governor was also keen to expound on the Bank of England’s improvement in the area of diversity which he did as part of a panel composed of four middle-aged white men. As to policy independence regular readers will be well aware of my theme that the establishment took the Bank back under its control some time ago.

Today’s data

This was always going to be affected by the shutdown of the oil and gas pipeline for the Forties area in the North Sea as we already knew it has reduced GDP by around 0.05%.

In December 2017, total production was estimated to have decreased by 1.3% compared with November 2017; mining and quarrying provided the only downward contribution, falling by 19.1% as a result of the shut-down of the Forties oil pipeline for a large part of December.

Ouch indeed! However if we look deeper we see that production has been on an upwards sweep.

Total production output increased by 2.3% for the three months to December 2017 compared with the same three months to December 2016……….For the calendar year 2017, total production output increased by 2.1% compared with 2016,

Now that the Forties pipeline is back to normal there will be an additional push to the numbers.

Manufacturing

This sector has been on a good run which has been welcome to see after years and indeed decades of relative decline.

In the three months to December 2017……..due to a rise of 1.3% in manufacturing;

As to the driving force well we have heavy metal football at Liverpool courtesy of Jurgen Klopp and maybe we have some heavy metal economics too.

Within manufacturing, 9 of the 13 manufacturing sub-sectors experienced growth; the largest contribution to quarterly growth came from basic metals and metal products, which increased by 5.7%.

If we look deeper we see this which compares the latest quarter with a year ago..

The largest upward contribution came from manufacturing, which increased by 3.4%, due to broad-based strength, with 9 of the 13 sub-sectors increasing. Transport equipment provided the largest upward contribution, increasing by 6.6%, with three of its four industries increasing. The largest upward contribution came from the manufacture of aircraft, spacecraft and related machinery, while motor vehicles, trailers and semi-trailers fell by 0.3%.

There is something of an irony for those who found it amusing to jest that the UK would have to export to space in future as we indeed seem to be doing so. Of course space has been in the news this week with the successful, launch of the Falcon Heavy rocket with the successful landing of two of the three boosters which according to the Meatloaf critique “aint bad” and was also awe-inspiring. As you can imagine I heartily approve of it playing Space Oddity on repeat and the way Don’t Panic flashes on the car dashboard in big friendly letters.

Returning to manufacturing we have nearly made our way back to the place we were once before as the Eagles might put it.

 both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.2% and 0.5% respectively in the three months to December 2017.

Trade

The familiar theme is as ever of yet another deficit but the December numbers were even more difficult to interpret than usual due to the impact of the Forties pipeline closure. This was its impact on the latest quarter.

The 21.6% decrease in export volumes of fuels (mainly oil) had a large impact on the fall in export volumes. When excluding oil export volumes increased by 1.3%……The value increase in fuels imports was due largely to price movements, as fuels import prices increased by 14.2% while fuels import volumes increased by 0.3%.

If we look back 2017 was a better year for UK trade.

UK export volumes up 7.4% between 2016 & 2017, import volumes were up 4.1%

This meant that the trade deficit fell by £7 billion ( not by £70 billion as was initially reported) so the cautionary note is that we still have a long way to go.

Comment

Today’s numbers provide their own critique to the rhetoric of Mark Carney and the Bank of England. Let me show you the two. Firstly the data.

The largest upward contribution came from manufacturing, which increased by 3.4%

Yet according to the Bank of England this is the “speed limit”.

the MPC judges that very little spare capacity remains and that supply capacity will grow only modestly over the
forecast, averaging around 1½% a year.

If you think it through logically it is an area where you would expect physical constraints and yet it does not seem to be bothered. Indeed the other area where there are physical constraints has done even better on an annual comparison.

 construction output in Great Britain grew by 5.1% in 2017

So as ever the Bank of England prefers its models to reality and if you listened carefully to the press conference Ben Broadbent confirmed this. What he did not say was that he is persisting with this in spite of a shocking track record.

Just for clarity the construction numbers are correct but had really strong growth followed by the more recent weakness. However as I have pointed out many times care is needed as we regularly get significant revisions..

 

 

 

 

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8 thoughts on “If UK growth has a “speed limit” of 1.5% how is manufacturing growing at 3.4%?

  1. Hi Shaun,
    Very interesting as usual. The problem that seems to exist is that two of the key measures used by the BoE (GDP and inflation) are unreliable, as you have pointed out many times. Even when we get the figures, as you mention, they are often revised and hardly anyone notices the revisions.
    In addition, the BoE has a very poor record of forecasting and policy-making, partly through living in an echo chamber (see the interest rate cut, extra QE immediately after the Brexit vote), but partly because it appears to use old-fashioned models when thinking of capacity constraints.
    When you add to this the fact that the BoE is desperate to avoid further bail-outs/bankruptcies/bank runs at the banks, and you can see why:
    1. It “looks through inflationary periods”
    2. It is desperate to keep house prices up
    3. It cannot raise interest rates as fast or as much as it would have done in the past.
    I have to say that, when you see the GDP revisions over the last few years, the changes in the way the figures are calculated, the spurious imputed rents etc etc, it is pretty laughable that
    1. We worry about 0.1% movements
    2. We should take the slightest notice of long-term numbers.
    Have a good weekend.

    • Hi James

      The unreliability of the data is one of my arguments against too activist monetary policy as we simply do not know the economic position with enough certainty for it to be used. I would say that there is a risk of being procyclical but currently some central bankers would probably take it as a compliment.

      Enjoy your weekend.

  2. Hello Shaun,

    As we all know that GDP is over rated by 2% ( and inflation underrated by 2% too)

    As for growth well thats anybody’s guess – and that appears to be the case 😉

    Forbin

    • Actually Forbin, probably it is the other way round – as we saw the other day the statistics people are really slow to incorporate hedonic style improvements in things like internet services and telecoms. But let’s say you are right. In that case the UK is in recession. But where is the associated unemployment? Unemployment is at at 40 year low, and employment at a 40 year high? A strange recession indeed.

      • actually thats a very good point

        and I’ll answer thus – we’ve been very good at hiding unemployment by
        using the self employed and then topping up bennies

        also the so called “gig” jobs , basically piece work of old given a new name – again wages topped with bennies .

        we’ve also kept the young in either job schemes or education ( a wizard wheeze in that the young take the cost on themselves – what could go wrong?)

        and if you’re old , well over 55 and you’re not counted or again on bennies after loosing a full time job and now doing meet and greet …..

        I can reduce unemployment tomorrow to ZERO by giving all unemployed a zero hours contract – job done!

        I’m sure you’d see the problem there .

        Forbin

  3. Great blog as usual, Shaun.
    During the Inflation Report press conference Cat Contiguglia of Politico said t Carney: “I had a question about whether you were concerned about the impact of Brexit on just the overall perception of economic forecasting. It requires making assumptions, and at this point in time, unfortunately, any assumption that you make tends to look somehow politically leaning.” She just co-authored a quite interesting article on the Brexit negotiations:
    https://www.politico.eu/article/no-plan-b-if-citys-post-brexit-strategy-doesnt-fly/
    Carney’s response invoked what he called “a smooth transition to an average of endstates”. It seemed like a strange comment since the Brexit date is only set for March 2019, and the BoE’s projections only run to 2020. Whatever happens, one would think the UK economy in 2020 will be a long way from any kind of new stable relationships with its main economic partners, and the transition may be anything but smooth. Does the BoE plan to provide their projections for all scenarios, including abandoning Brexit? I can already guess which one it would show coming out on top.
    I was struck by how differently the Bank of Canada treated the NAFTA renegotiations in its January 2018 Monetary Policy Report, where “the Bank’s base-case scenario is predicated on existing trade arrangements over the projection horizon”. In a sense, it is delusional given the background with the US levying punishing duties against Bombardier, which sideswiped UK manufacturing, and Canada cancelling a fighter jet contract with Lougheed in retaliation. But at least it does have the advantage that the central bank can’t be construed as taking a stand for or against a particular outcome. There isn’t nearly the political controversy over NAFTA in Canada that there is over Brexit in the UK. One really wonders why the BoE would muddle the boundaries between forecasting and punditry as it seems to be doing.

  4. GROWTH WITHOUT SUBSTANCE?

    Candyfloss – known as cotton candy in the United States – is a long-established confectionary product, much enjoyed by young and not-so-young visitors to fairgrounds and the seaside. Traditionally sold on a stick, it consists (apart from some flavouring and colouring) entirely of sugar. It is made by spinning a relatively small amount of sugar into a much larger confection of very low density. It is, then, a fluffy, largely hollow product whose apparent volume far exceeds its substance.

    The resemblance between candyfloss and the modern developed economy is a lot closer than you might think.

  5. Larry Elliott of the Guardian said in the press conference: “Effectively, is what you’re saying that the bank is done here, that we are entering a different era where you’ve done all you can on the demand-side in terms of providing stimulus, and now you’re actually looking more towards, you know, the old remit of the bank, which was to keep inflation low rather than to support the economy?” Both Carney and Broadbent interpreted his question as relating to the remit before 2013, when the Bank of England just said inflation targeting rather than flexible inflation targeting, much like the Bank of Canada did before Carney took over as Governor. I suspect though that Larry Elliott was thinking farther back to the remits before December 2003. There was not a single time in the whole period from October 1992 to December 2003 when the RPIX inflation rate was outside of its target range and would have required a letter from the Governor to the Chancellor.
    Good luck to all the UK athletes in PyeongChang. I hope they do well.
    https://olympic.ca/2018/02/07/mixed-doubles-curling-opens-pyeongchang-2018-for-team-canada/

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