UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.

Production

We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.

Comment

The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

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11 thoughts on “UK GDP had a relatively good second half of 2018 but a weak December

  1. hello Shaun,

    so if we apply forbin’s constant we’re actually in a recession ! ( -2 off any figure the HMG publish, in this case 0..2% growth becomes -1.8% , ouch!! )

    Forbin

    • Hi Forbin

      I don’t think it is quite that bad but using your rule we were in recession in the first half of the year and maybe in the second (0.9% growth). Mind you if the December data is accurate using your rule gives a severe drop.

  2. Hammond interviewed by Verity on the BBC.
    In a nutshell Hammond says figures come out ahead of OBR forecasts and the economy fundamentally strong!

    Yes and pigs can fly!

    If the economy is strong at the moment when assets like house prices are way overvalued, and the working public spending more than they are earning, GOD help the UK when things deteriorate further which I expect it will with world growth slowing.

    At this moment in time with uncertainty over BREXIT nothing can be accurately predicted, however the UK are preparing for riots on the streets on an exit with no deal.

    I happen to believe however things wont be as bad as the worst predictions the £ may not fall as much as the worst case scenario against the Euro because Europe appears in a worse state than the UK at the moment.

    If the £ really does take a big hit uk inflation will spike and the UK public hurt with their finances.

    • 12:19
      Hammond: ‘Remarkable’ UK economy

      BBC
      Copyright: BBC
      Chancellor Philip Hammond has been speaking to the BBC’s Dharshini David.
      He told her that the economic growth data for 2018 of 1.4% is higher than the forecast by the Office for Budget Responsibility (which in October had forecast growth of 1.3%).
      “The economy has come in ahead of OBR’s forecast for 2018 and that’s in the context of a weakening world economy and increasing concerns about trade tensions around the world so it’s a robust performance for the UK economy in 2018 which is all the more remarkable given the uncertainty around the Brexit process.
      “The uncertainty is certainly placing a cost on the economy. Business investment is weaker. I think some of the manufacturing weakness is due to problems in the car industry, not so much about Brexit and more about changing emissions standards and the impact that’s having on vehicle output.”
      Comment
      “Remarkable” indeed!

      • Hi Peter

        I regularly criticise the OBR but let’s be fair an estimate only 0.1% out is not too bad and for them is spectacular. As to the interview I have pointed out on twitter that Andy Verity of the BBC only seems to have mentioned the bad points of today’s UK figures. But as you say things have slowed and may slow further.

  3. Food for thought:

    If the new interpretation of ‘strong’ is really weak, then when things really weaken further it will be carnage.
    Well that is my interpretation.

    The latest warnings from retailers is a no deal will mean a spike in food prices, but I don’t know how this will affect food banks as there is no guarantee we will be able to export any fresh food into the UK in any event.

    I suppose the government considered bringing back rations, and encouraging the public consider grow more at home with their limited space In their back gardens which have been reduced to postage stamp size.

    Mind you the public do throw away a lot of food and food waste would feed quite a few pigs then everything will be fine.

    • “the government considered bringing back rations,”

      I’d posit any government doing that will never be elected again ……..

      Forbin

      PS: the deal is done , apparently , it’s just the so called ” backstop ” , and that’s a backstop in case we don’t get a deal ….. but we have a deal………….erm, I guess I’m missing something…..

      • Yes it was petrol and though ration books were issued I don’t think they were needed but as its over 40 years ago cannot remember.

        All I was trying to put forward is though its over 40 years ago its not that far back and who knows what is being planned.

  4. Has anybody an opinion on MMT MODERN MONETERY THEORY? https://www.zerohedge.com/news/2019-02-07/mmt-sounds-great-theory
    If you haven’t heard about Modern Monetary Theory, or “MMT” for short, by now, you will soon. It is highly likely that MMT will be increasingly touted by economists and politicians from both sides of the aisle, as the economic prescription, even panacea, to cure our economic ills. Regardless of your view, MMT will have large effects on all asset classes, so we urge you to read this article, and others, describing this economic theory.

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