The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.

Trade

We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.

Construction

This was yet again a wild card if consistency can be that.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April

Comment

There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.

 

 

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17 thoughts on “The UK joins France and Germany with falling production in April

  1. Not only did Thatcher’s, “Right to Buy” forbid the proceeds being used to build new social housing, it also prohibited their use in maintaining the remainder of councils’ stocks.
    This was for two reasons:
    1) Thatcher wanted a, “property-owning democracy,” (Tory voters) and this was the ONLY purpose of the scheme.
    2) Areas of social need tended to vote Labour, and being allowed to spend the proceeds of council house sales would have helped keep down the poll tax.
    At the start, Councils were not even permitted to spend the INTEREST on these proceeds.

    https://www.bbc.co.uk/news/business-22077190

    • Hi therrawbuzzin

      Yes fair as to the original plan I think but things have changed in two respects. Firstly the cap was not enough especially for London so it was changed to this.

      “The maximum discount is £80,900 across England, except in London boroughs where it’s £108,000. It will increase each year in April in line with the consumer price index (CPI).”

      I note it benefits someone apart from the government and therefore doe not rise by RPI.

      But also along the way the councils get some of the money. From the Local Government Association.

      “The current Right-to-Buy system only allows councils to keep a third of each RTB receipt to build a replacement home and prevents local authorities from borrowing to make up the shortfall.”

      With social housing in decline and thinking of the construction numbers it seems obvious to let them do more to me.

      • Allowing councils to use the proceeds of house sales came later and was, if memory serves, only 25% to start with.
        I was not aware it had climbed to 33%.
        With a 50% discount, this would have allowed councils to build 1 new for 6 sold.

  2. Construction running well below capacity and a social housing crisis. I have to agree with the buzzing one the fact this is happening is naked political interest. Our housing system is a joke.

    • Hi bill40

      Yes it would seem so and in the light of the reply from Chaffers below we need maybe a mini Census to find out a) how many people are living in the UK? b) what our housing stock is and how it is being used?

      • A lot of that feeds into the social care debate, because granny is often living in a family size home and getting the state pension, so there is an incentive from credit-fuelled house price rises to leave granny there, rather than taking her in.

        • David, you’re on the right lines about older people living in oversized houses but I think the family’s incentive not to make changes is because they are deterred by the high costs of sheltered/care accommodation, not that they are being greedy.

          I also agree with Shaun’s call for a census. I believe, on no evidence at all, that there is probably enough dwellings but they are either (a) in the wrong places or (b) empty. If interest rates were to return to ‘normal’ levels, a lot of empty properties would return to the market although it will be harder to relocate jobs away from the South East.

    • Yes, I agree its probably worth testing whether they are all lived in before we build another 4million. Maybe punitive tax for second and third homes would flush out a few. Of course corporation tax on the value of any homes which arent registered to humans. It would be the end of our lovely bubble though.

      • Hi Paul C

        I took a look at a block along Nine Elms as I was passing on Sunday. It was a very pleasant day and I figured the flats with balconies etc. would be popular as with the river so close it was a Spinal Tap 11 on that day. But out of 80 or so flats I saw signs of life in 7……

        • Second and third homes are one part of it, though whether this phenomenon is more prevalent than before is debatable.

          I suspect no fault divorce and the strange proclivity for people to only decide that they want children once their bodies are pretty much past it are better indicators.

          So too immigration.

          Feminist policies have consequences… Who knew right?

    • We need a look at the markets both in housing and jobs. It is clear that there is not enough social housing and every job that can be moved out of London moved out of London. A good start would be both houses of parliament.

  3. It was interesting to see the GARP newsletter talking about the three most powerful central banks all meeting this week with different views on policy. Stand fast, Carney, we don’t mean you! The Fed is going to tighten and we’ll do twice more this year, while the ECB is going to taper asset-purchase by the end of the year. That is going to see the UKP slide against the USD and euro, so we will be getting more imported inflation. Whether it will give a brief stimulus to exports is not clear as the Brexi devaluation and sledgehammer have clearly run out of steam. That will create an interesting conundrum for Brexiteers as house prices start to fall and so construction will decline too, while the population continues to grow.

    The ultimate problem, which we might call the ‘Japanese lesson’ is that all this easing ultimately fails and just exacerbates existing issues. The BoJ is planning yet more easing. However, easing everywhere has crushed consumption, while ramping up asset prices. That produces the knock-on into reduced production. Trumponics like Reaganomics will produce a boom at the expense of rising debt, but there is uncertainty over the longevity of his tariff policies – will they last any longer than Brexiteers dreams of UK production and staff to replace EU imports and immigrants? Probably not.

    The key thus becomes the ECB between the two extremes. Ultimately, with rising house prices, oil prices and debt, there will have to be a rise in rates and the recession the banks have tried to avoid for ten years will actualky be upon us.

    • Hi David

      The problem came with the central bank strategy which I have classified under “More.More, More”. I agree with the initial easing but once you keep having to depress interest-rates and add QE and then go negative you are forgetting that some of this is borrowing from the future. We are back to that poor battered can again which we keep catching up with. It was not supposed to be this way and the problem is it has been allowed to go on for too long just as you say like in Japan.

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