UK GDP growth continues to rebalance towards services

Today has brought a new adventure in UK economic statistics. This is because we have moved to a new system where we get monthly GDP releases whilst the quarterly ones have been delayed. In terms of detail here is the change in the quarterly schedule.

The new model will see the publication of two quarterly GDP releases rather than three. The new First quarterly GDP estimate will be published approximately 40 days after the end of the quarter to which it refers. The new first estimate will have much higher data content for the output approach than the current preliminary estimate. It will also contain data from the income and expenditure approaches,

In general I welcome this as under the old model the last of the three months in question had rather a shortage of actual data and quite a lot of projections. The UK has in essence produced its numbers too quickly in the past and now they should be more reliable. There is a catch to this in that the Bank of England will have its August policy meeting without the GDP data. This has a consequence in that traditionally it is more likely to act once it has it and another in that will it get a sort of “early wire”? That sort of thing was officially stopped by seems to have unofficially started again. I also welcome the use of income and expenditure numbers as long as it is not an excuse to further increase the role of fantasy numbers such as imputed rent. Back in the day Chancellor Nigel Lawson downgraded the use of the income and expenditure GDP data and I think that was a mistake as for example in the US the income GDP numbers worked better than the normal ( output)ones at times.

The services numbers will be sped up so that this can happen.

Taken together, these releases provide enough information to produce a monthly estimate of GDP, as data on almost the entire economy will now be available.

This has two problems. Firstly the arrival of the services data has been sped up by a fortnight which can only make it less reliable. The second is that these theme days overrun us with data as we will not only be getting 2 GDP numbers we will also be getting production, construction and trade numbers. Frankly it is all too much and some if not much of it will be ignored.

Today’s Numbers

The headline is as follows.

UK GDP grew by 0.2% in the three months to May.Growth in the three months to May was higher than growth in the three months to April, which was flat. The weakness in growth in the three months to April was largely due to a negative drag on GDP from construction.

There was something familiar about this which may make Baron King of Lothbury reach for the key to the sherry cabinet.

Growth of 0.4% in the services industries in the three months to May had the biggest contribution to GDP growth.

Yes we “rebalanced” towards services yet again as we mull whether he was ennobled due to his apparently ability to claim the reverse of reality so often? As it happens the growth was driven by a sector which has seen troubled times.

Growth in consumer-facing industries (for example retail, hotels, restaurants) has been slowing over the past year. However, in the three months to May growth in these industries picked up, particularly in wholesale and retail trade.

This industry grew by 0.9% in the three months to May and contributed 0.1 percentage points to headline GDP.

If we move to the monthly data we note this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

This in so far as it is reliable confirms my suggestion that the UK economy is edging forwards at about 0.3% per quarter. Oh and if the output on social media is any guide best of luck with this.

The monthly growth rate for GDP is volatile and therefore it should be used with caution and alongside other measures such as the three-month growth rate when looking for an indicator of the long-term trend of the economy.

Production

It was disappointing to see a drop here although maybe this was something international as France also saw a drop earlier in the day.

In May 2018, total production was estimated to have decreased by 0.4% compared with April 2018, led by falls in energy supply of 3.2% and mining and quarrying of 4.6%.

There were two ameliorating factors at play as we start with mining.

 due to unplanned maintenance on the Sullom Voe oil and gas terminal.

Also the falls in manufacturing seem to have stopped.

Manufacturing output rose by 0.4% and is the first increase in this sector since December 2017……..due mainly to widespread growth across the sector, with 9 of the 13 sub-sectors increasing.

The leading sectors were as follows.

Pharmaceutical products and transport equipment provide the largest contributions to monthly growth, increasing by 2.4% and 1.1% respectively.

It would appear that yet again it is time for ” I am the urban spaceman baby” which younger readers may need to look up!

Within the transport equipment sub-sector, the aircraft, spacecraft and related machinery industry performed strongly, increasing by 3.3%, supported by an increase in nominal export turnover growth of 10.9%.

Those areas are still seeing export growth whereas more generally for manufacturing the boost from the lower Pound £ seems to be over. Or if you prefer the effects of the J-Curve and Reverse J-Curve have come and gone.

Trade

The picture here has been one of improvement and on an annual comparison that remains true.

The total UK trade deficit (goods and services) narrowed £3.9 billion to £26.5 billion in the 12 months to May 2018. An improvement in the trade in services balance was the main factor, as the UK’s trade in services surplus widened £4.1 billion to £111.5 billion.

However the quarterly numbers also suggest that the boost from the lower UK Pound £ has been and gone.

The total UK trade deficit widened £5.0 billion to £8.3 billion in the three months to May 2018, mainly due to falling goods exports and rising goods imports. Falling exports of cars and rising imports of unspecified goods were mostly responsible for the £5.0 billion widening of the total trade deficit in the three months to May 2018.

Tucked away in this was a rare event for the UK.

There was a small overall trade surplus on the month to February 2018, mainly due to falling goods imports;

Comment

We find that today’s data confirms our thoughts that after a soft patch the UK economy has picked up a bit. There are reasons to suspect this continued in June. For example the monetary data picked up in May so may no longer be as strong a break and the PMI business surveys for June were stronger.

The survey data indicate that the economy likely
grew by 0.4% in the second quarter, up from 0.2%
in the opening quarter of 2018.

That poses a question for the Bank of England and its Governor. That rate of growth is above the “speed limit” that its Ivory Tower has calculated although the model used has been a consistent failure. Should the boyfriend prove to be unreliable yet again then subsequent votes will be without one of the policymakers keen to raise interest-rates. I remain to be convinced they will take the plunge.

Moving onto a past Bank of England staple which is rebalancing we see us moving towards a strength which we do not seem to like. As services seemed to be left out of the Chequers Brexit plan which seemed really odd to me. Especially if we note that other areas are in relative and sometimes absolute decline.

Production and manufacturing output have risen but remain 6.2% and 2.5% lower, respectively, in the three months to May 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

I have left out the construction numbers for May as we wait for any sort of reliability from them.

 

 

 

 

 

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13 thoughts on “UK GDP growth continues to rebalance towards services

  1. I am assuming you are looking for full year GDP of circa 1.2% then? If so that is considerable lower than BOE forecast of 1.4% reduced from 1.8%.

    Industrial production is indeed disappointing at 0.4% and German economic sentiment figures plunged to -24.7 released this morning, well below forecasts.

    https://in.reuters.com/article/germany-economy-zew/german-investor-morale-hits-six-year-low-on-trade-angst-idINKBN1K0106

    So will the BOE raise rates on current figures?

    With the recent resignations in the cabinet, trade tariffs causing a lot of concern, it will be brave of the BOE to raise rates in August in my view. The £ weakened after the data release!

    • Hi Peter

      You make a good point that they would be raising after what has been bad news which is the sort of thing to deter an unreliable boyfriend. Also whilst I avoid politics it is a case of timber! As we count the government resignations.

      Moving to forecasts for the year I think they have become almost impossible. We have a trajectory of 0.3/4% bumped up in June to maybe 0.6%. Which will win out. I do not know except the Bank of England has a poor track record which means something will probably derail 1.4%.

  2. Shaun, I guess you are just joining in having a laugh at this ridiculous minutae. That our govt and their quangos are capable of any output or financial measurement to 0.1% or 0.2% is joke of the highest order.

    They can’t even calculate the sectoral balance between Govt, Private and RoW correctly to whole numbers let alone fractions of numbers. This is just an organised distraction to mislead the public and hide that 10 years of QE and crony capitalism has made the 95% far worse off ( even if some are paper property millionaires) whilst the other 5% think its all really great and don’t want it to end.

  3. Great blog as usual, Shaun.
    The UK monthly GDP estimates are going to be published with substantially greater timeliness than the Canadian estimates are. The May real GDP estimates for Canada won’t be out until July 31. The analytical detail of the new publication is impressive, but also creates a problem for policymakers: which numbers do they put most weight in? The “Percentage change, latest 3 months on previous 3 months” growth rates you referenced aren’t to be found in the StatCan release, which only publishes one-month (not annualized) and 12-month rates of change. For a long time, I have been keeping track of the annualized latest three months on previous three months percent changes for Canadian monthly real GDP myself. It may be questionable to annualize rolling quarter percent changes, which even if they aren’t as volatile as one-month percent changes, are still volatile enough. However, probably a lot of people, when they see such numbers, automatically multiply the growth rates by four in their head. In any case, annualized the “Percentage change, latest 3 months on previous 3 months” for monthly GVA show a 0.1% growth rate for April rising to a 0.6% growth rate for May. (Since the ONS publishes an index with only one decimal place, my calculation is subject to rounding error.) This is, of course, in stark contrast to the 12-month growth rate of 1.5% for May 2018, unchanged from April 2018. The strong entering May 2018 monthly growth rate of 0.3% didn’t raise the annual growth rate because the exiting May 2017 growth rate was also 0.3%. A glass-half-full analyst would say the growth rate seems to be moving up well, and this favours a bank rate hike. A glass-half-empty analyst would say that a 0.6% growth rate wasn’t even close to Carney’s speed limit, and the first ever monthly real GDP update in no way favoured a rate hike.
    Off topic, I know, but it’s hard to believe that it is already 50 years since The Band’s first album, “Music from Big Pink” came out. The drummer, Levon Helm, was from Arkansas; the other four members were from southern Ontario., but Levon did a lot of the lead vocals, like on this song, written by the group’s lead guitarist, Robbie Robertson, so they often sound more like a Southern than a Canadian band.

    • Hi Andrew and thank you.

      I am just listening to the song and you are right about the singing and guitar playing which have a southern feel. As to the numbers I can see some consistency in the Canadian approach but the catch is that quarterly numbers do make everything less volatile. The outlier amongst first world countries is Japan that still has an unreliable quarterly series for GDP. God help us if they switch to monthly numbers!

      For the UK I think you are right with your implication that there will be a lot of cherry picking. At least we are currently in their season but its not so hot for autumn, winter and spring.

  4. The increase from a revised 0.2% to 0.3% looks good on first glance but the high higher growth pre financial crisis will never be the same for a long time to come.

    • Hopefully Shaun will provide the average. We are probably above average over the last 10 years but under average the previous 10 years.

      The National Institute of Economic and Social Research has just updated if GDP forecasts and sees 0.2% first quarter 0.4% second quarter and 0.5% third quarter.

      I think they are over optimistic on third quarter.

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