UK GDP growth was strong in January meaning we continue to rebalance towards services

This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.

Very early there was an “I agree with Mark (Carney)” as I note this.

see for example speeches by (Carney, 2019) and (Vlieghe, 2019)

The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.

First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.

The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?

To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.

Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.

Raghuram Rajan

There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.

“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.

The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.

The UK economy

The opening piece of official data today was very strong.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.

Production data has been in the news as it has internationally slowed so let us dip into that report as well.

Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.

We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.

Some Perspective

This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.

Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.

This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.

Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.

This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.

Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.

Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.

Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic  after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.

Returning to the production data this was sadly no surprise.

Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.

Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.

 was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.

Comment

We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.

If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.

The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.

Although we got a clue to a major issue here as we note this too.

Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.

So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.

In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.

Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.

 

 

13 thoughts on “UK GDP growth was strong in January meaning we continue to rebalance towards services

  1. Great articles as always Shaun.

    Ironic that the boe are moaning about the lack of business investment. One of the reasons for this is that they’re topping in pensions. Caused by gilt yields manipulated by, (yes you guessed it) the boe. Companies like BT are paying in billions each year instead of investing in the economy.

    thanks

    • Hi Anteos and thank you

      Yes good point companies have found themselves under pressure to top up pension funds for reasons which are much more intangible than claimed. But that may well be changing as Toby Nangle of Thredneedle has pointed out.

      “Strong asset performance since the referendum is one of three factors that has helped eliminate the system-wide pension deficit for the first time in a decade, despite long-dated bond yields remaining depressed (Figure 2). The other factors that have helped this development have been changes in actuarial assumptions and large-scale special contributions on the part of corporate sponsors.”

  2. How can this Indian central banker claim capitalism is under threat? When the illusion that we have capitalism ended the day the banks, speculators and borrowers got bailed out by western governments and central banks.

    Then handed money via ZIRP, QE, Term Funding Scam, Funding for Lending for over a decade with no end to this insight.

    Never before in living memory or possibly western history has there been such a blatant case of privatising profits and socialising the losses.

    We have socialism for the rich and financially illiterate, this is what the plebs are revolting against.

    • Or you could argue that this is a natural progression in unregulated capitalism – remember the Golden Rule ( they who have the gold make the rules ).

      • We never had capitalism in the first place.

        This is just an extreme version of what we had prior to the bailouts, where TPTB no longer care less about covering up their theft.

        Thatchers idea of capitalism was flogging off state owned assets on the cheap … including oil … then using the profits to stick people on the dole.

        • Interesting comment Arthur which contrasts the UK’s governments policy of handling of North Sea oil revenues which got chucked into the general taxation pot and was pissed away on dole money, welfare payments and military spending versus Norway which took the route of forming a Sovereign Wealth fund to invest its revenues, the value of which is now just over one trillion dollars.

          I remember a documentary on the collapse of Triumph Motorcycles and Tony Benn who was Trade and Industry minister at the time tried to get a similar fund going to invest in UK manufacturing to help companies like Triumph/NVT, he was told it would never happen. After Thatcher got in of course the Tories believed in letting companies go to the wall as they thought governments shouldn’t get involved in business-“laissez faire”. And if anyone tried to argue the case they had the perfect example to shut them up at the time – British Leyland.

          What a bottomless pit that was, even BMW didn’t realise what a nightmare they had bought until it was too late. They eventually gave it away to the management with a huge lump sum that kept it going for years until they could find another partner to help finance anew car design but one never materialized. So they lost all the initial purchase and the parachute payment as well estimated at a total of 15billion Marks.

          Makes you wonder what due dilligence is done by these companies? Also there is the example of Daimler Benz buying Chrysler the US equivalent of Austin Rover/BL in terms of their cars and quality. They paid $36billion for it and ten years later it was bust and sold off to Fiat even after getting $4billion in loans from the Obama government.

          • I had to laff

            these days we pi$$ money away on things like TBTF banks……

            nothing changes

            ( except the size of the losses !! )

            Forbin

            PS: sorry I forgot , its tax payer money so no one in charge cares…. ( free money!!)

  3. “re-balancing” , have you ever heard such a slippery phrase. If you separate the word from the initial context it becomes a knowing kind of concept. One where each listener knows what they think it means. However Carney is very careful never to spell out how the balance moves, from on to another. weasel word.

    • Hi Paul C

      It was one of the favourite phases of the previous Bank of England Governor Mervyn King except as the numbers show we have seen the reverse as he wanted more manufacturing. Some of the change towards services is an illusion as things which companies did in house are now more likely to be contracted out ( payroll. recruitment etc) but there has been a clear shift in the other direction.

      There was also “march of the makers” courtesy of the previous Chancellor George Osborne. So we need to expect exactly the reverse of any such official claims it would appear.

  4. Hello Shaun,

    I wonder if the UK economy would have been better if not for the “holding of breath” that Brexit is causing.

    Either way it goes, will there be a collective sigh of relief and then an economic spurt ?

    I think we’ll need a year to know how the economy will go….

    interesting times indeed ! ( as the Chinese curse goes )

    Forbin

    • Hi Forbin

      Ruth Clayton on Twitter reminded me that according to the Office for National Statistics you may now be considered an influencer. From the new inflation shopping basket.

      ” Popcorn bought at the cinema is already included in the catering services part of the baskets but a new popcorn item has been added, which is priced in shops. Popcorn has attracted increased spending over recent years and its inclusion as a shop-bought item widens the range of products in the bread and cereals class, in particular improving the coverage of snack items.”

  5. Shaun,
    See my post late yesterday re posts being moderated, you may have missed it as it was quite late when I posted it.

    • Hi Kevin

      Yes I have seen it and thanks. At least your issue has gone away but poor buzzin has been affected for more than a few days. I saw at one point he had put in several links which triggers moderation but should then clear but it has gone on. Occasionally there is a misfire like this but it usually corrects quickly so fingers crossed.

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