The UK economy puts on an economic growth spurt

Today brings us to a pretty full data set on the UK economy with the headline no doubt the monthly GDP ( Gross Domestic Product) number. This week has brought news on a sector which is often quite near to me and has been a strength we have been regularly noting. From the Financial Times.

Tax relief for UK-made movies, television series and video games is fuelling a production boom that has transformed Britain into a global hub of filmed entertainment, according to a report by the creative industries. The tax incentives have sparked a rush of inward investment as Hollywood studios and other international production companies cash in on British talent — the latest Star Wars movie was made in the UK, alongside top television series such as The Crown and Poldark.

So we should try to be nice to any luvvies that we meet as whilst they are prone to ridiculous statements they are providing a much-needed economic boost. Here is some more detail on the numbers.

The new report commissioned by the British Film Institute found that an estimated £632m in UK tax relief for the creative industries in 2016 led to £3.16bn in production spending on films, TV programmes, animation and video games — a 17 per cent increase on 2015. The industries’ “overall economic contribution” to Britain came to £7.9bn in 2016, which included £2bn in tax revenues.

Since 2016 the numbers have boomed further and the local reference is due to the fact that Battersea Park in particular is regularly used by the film industry. Much of this is a gain as I recall one cold Sunday night when the filming must have disturbed very few. However it is not all gravy as there is also a tendency to use it as a lorry and caravan park for work going on elsewhere.

Bank of England and Number Crunching

There was some numerical bingo from the Financial Policy Committee yesterday. The headline was that the UK has some £69 trillion of financial contracts with European Union counterparties which need some sort of deal for next March.Or if you prefer a derivatives book of the size of Deutsche Bank.

Also we for the assertion that debt has fallen since 2008 which looked better on their chart via comparing it ( a stock) with annual GDP (a flow). They seem to have forgotten public debt which has risen and more latterly even their data poses a question.

Borrowing by UK companies from UK banks has also been subdued, rising by just 2.7% in the past year……. household mortgage borrowing increased by only 3.1% in the year to August, broadly in line with household disposable income growth.

Both are growing a fair bit faster than the economy and of course much faster than real wages.Mind you someone has probably got promoted for finding an income number which has grown as fast, or a lifetime free pass to the cake and tea trolley.Would it be rude to point out they seem to have forgotten unsecured credit is rising at an annual rate of 8%+ as they seem to have missed it out?

UK economic growth

The number released today backed up quite a multitude of my themes. There was the evidence of a growth spurt for the UK economy, various examples of monthly GDP data being so unreliable that you have to question its introduction, and finally even evidence that the monetary slow down has hit the economy! Let us open with the latter.

The month-on-month growth rate was flat in August 2018. (UK GDP)

That looked rather grim until it was combined with something that was much better news.

Rolling three-month growth increased by 0.7% in August 2018, the same rate of growth as in July 2018. These were the highest growth rates since February 2017. The growth continued to pick up from the negative growth in April 2018,

Suddenly the picture looked very different as we got confirmation that it was a long hot summer for the UK in economic as well as weather terms. Some of that was literal as the utility industry saw rises in electricity consumption which looks to have been driven by the use of air conditioning in the unusual heat. If we look at the breakdown we see something familiar in that the major part was the services sector (0.42%), we got some production growth (0.1%) and the construction sector was on a bit of a tear (0.18%),

If we return to the travails and troubles of the monthly series we see this.

Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

That opens a can of worms. Because whilst you can argue compared to the total number for GDP the changes are minor the catch is that these numbers are presented not as totals but first and second derivatives or speed and acceleration. At these levels the situation becomes a mess and let me illustrate by switching to the American style of presentation. UK GDP rose at an annualised rate of 4.8% in July followed by annualised rate of growth of 0% in August, does anybody outside the Office for National Statistics actually believe that?

Putting it another way we can see a clear issue in the main player which is services I think.

The Index of Services was flat between July 2018 and August 2018…………The 0.7% increase in the three months to July 2018 is the strongest services growth since the three months to December 2016.

So it went from full steam ahead to nothing? The recent strength has been driven by computer programming so let us hope that has been at the banks especially TSB.

Production

This had some welcome snippets.

The rise of 0.7% in total production output for the three months to August 2018, compared with the three months to May 2018, is due primarily to a rise of 0.8% in manufacturing, which displays widespread strength throughout the sector with 10 of the 13 sub-sectors increasing.

As so often we find that the ebbs and flows are driven by the chemicals and pharmaceuticals sector which had a good quarter followed by a decline in August.

Construction

The official data seems to have caught up with crane-ometer ( 40 between Battersea Dogs Home and Vauxhall) although it too supposedly hit trouble in August.

Construction output increased by 2.9% in the three months to August 2018, as the industry continues to recover following a weak start to the year………Construction output declined by 0.7% between July and August 2018, driven by falls in both repair and maintenance and all new work which decreased by 0.6% and 0.8% respectively.

Comment

We see that the UK economy had a remarkably good summer. Actually it seems sensible to smooth it out a bit and shift some of it into August but if we were to see quarterly growth of 0.5% or so that is pretty solid in the circumstances. We are managing that in spite of weak monetary data and disappointing growth from some of our neighbours, although if the recent IMF forecasts are any guide France is in a surge.

Speaking of surges Andy Haldane of the Bank of England has given a speech today and yet again pay growth is just around the corner. Pretty much like it has been since he became Bank of England Chief Economist . You might have thought his consistent record of failure would have meant he was a bad choice as the new UK productivity czar but of course in Yes Prime Minister terms he is the perfect choice.

Sir Humphrey Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.

Meanwhile his own words.

That is quite sobering if, like me, you have never moved job

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6 thoughts on “The UK economy puts on an economic growth spurt

  1. The first thing you notice about these numbers is that they are erratic. The economy is not nearly so erratic so that must mean that these numbers are of relatively little use, as you imply in your write up. In the last eight years or so GDP growth seems to have averaged a little less than 2% per annum and there seems no compelling reason why it should be far more than this, particularly so long after such a long period of (admittedly) tepid growth.

    The second thing, related to the above is discussed in your blog of 1 October and that is the growth in unsecured credit. In summary I doubt if these good numbers are little more than the spending of borrowed money which has gone overwhelmingly into consumption. Seen in this light they could be seen more as a symptom of weakness than strength.

    In my view the underlying position is weak and getting weaker and we are more likely to be entering into a growth trend much lower than in the past.

    • Hi Bob,
      “In summary I doubt if these good numbers are little more than the spending of borrowed money which has gone overwhelmingly into consumption. Seen in this light they could be seen more as a symptom of weakness than strength.”

      My thoughts entirely. I wont be breaking open a bottle of bubbly se my other comments on this day.

  2. hello Shaun,

    first off yes that GDP figure , if not revised downwards( I believe we tend to revise up months later when no-one is looking) is good . Of course you have to deduct Fobin’s constant from it ,2% GDP p.a. ( if its actually 0.7% 3 month GDP sustained – that means we did grow by 0.8% p.a., or will ).

    Still with austerity off the blackboard and back to what appears to be “prudence” mk II , we shall see……

    Forbin

    • Hi Forbin

      The problem with the austerity being abandoned theme is that we were told that in October 2016 as well. Perhaps they just forgot. Mind you many more days like today and it might be best not to rely on revenue from capital gains tax on shares.

  3. If these figures are supposed to be good, I dread to think what things will feel like when GDP weakens. This is what the FT said:

    https://www.ft.com/content/a7454000-cc67-11e8-b276-b9069bde0956

    The hot weather does make people feel good and they sill spend more when they feel good but they may also spend more than they can really afford as well.

    The UK growing below its long term trend however, and as such I am a tad surprised at some of the headlines, these GDP figures aren’t inclining me to break open a bubbly there are mounting concerns voiced by the IMF today at UK debt.

    FT
    “Britain is languishing close to the bottom of the international league table for the strength of its public finances, the IMF said on Wednesday, with only Portugal’s long-term position deeper in the red.”

    “The new figures, which compare the assets available to government with its long-term liabilities, show the UK government having less than £3tn in assets and £5tn of liabilities, indicating a negative net worth of more than £2tn.”

    “Countries with deep negative net worth are likely to have to tax more heavily in future and run budget surpluses to bring assets back into line with liabilities.”

    More taxes mean less to spend and less available spend will hurt the service sector!

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