What is the UK economic situation and outlook?

The UK is an example of so much going on in some areas albeit with so far no result but apparently not much in others. The latter category includes the real economy if the latest set of Markit PMI business surveys are any guide.

UK service providers indicated that business activity growth lost momentum during August and remained subdued in comparison to the trends seen over much of the past decade. The latest survey also revealed slower increases in new work and staffing levels, which was often linked to sluggish underlying economic conditions.

The slowing of the services sector added to contracting manufacturing and construction sectors to give us this overall result.

At 49.7 in August, the seasonally adjusted All Sector Output
Index dropped from 50.3 in July and registered below the
50.0 no-change mark for the second time in the past three
months……….t, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.

There are two elements of context here. The first is that this survey is not accurate enough to tell to 0.1% or to say 49.7 is any different to unchanged. Also we now that as a sentiment index it had a bit of a shocker during the last period of political turmoil in late summer 2016. Thus our conclusion is that the economy is weak and struggling but contracting? We do not yet know.

Car Registrations

There was some interesting news here summarised by Samuel Tombs of Pantheon.

Good news – car registrations were strong in August. The 1.7% y/y drop is consistent with a big seasonally-adjusted m/m% rise, as sales in Aug 2018 jumped ahead of new emissions testing rules. This points to car sales boosting q/q% GDP growth by a non-trivial 0.05pp in Q3.

So whilst the numbers were down on last year they were a solid improvement on July.

A Fiscal Boost

In perhaps the least surprising development this year the Chancellor Sajid Javid announced this yesterday.

The Chancellor has announced an increase in spending on public services for next year. Day-to-day spending on public services will grow by 4.1%, or around £13.8 billion, between 2019−20 and 2020−21 in real terms. This represents of a top-up of £11.7 billion to the provisional spending plans Mr Javid inherited from his predecessor, alongside a £1.7 billion top up to existing capital spending plans for 2020−21, meaning that total spending will be £13.4 billion higher next year than was planned in the spring. ( IFS )

If we switch to GDP as our measure then the planned increases were of the order of 0.6%. As we borrowed 1.1% of GDP in the fiscal year to March that points at 1.7% although as we were already spending more maybe more towards 2% of GDP. That is a little awkward for the Institute of Fiscal Studies which told us over the weekend the fiscal rules would be broken. Mind you as nobody else cares about them it is not that big a deal. Also the IFS seems quite keen on fantasies.

Making major spending decisions without the latest economic and fiscal forecasts is a risky move for the Chancellor. On the basis of forecasts from the spring, extra borrowing to fund today’s announcements could – just – be accommodated within the government’s fiscal targets. But the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the near-term outlook for the UK economy and public finances.

Just as a reminder the first rule of OBR club is that the OBR is always wrong. How has the IFS not spotted this? Mind you their head Paul Johnson was enthusiastically plugging the RPI news yesterday hoping that his 2015 Inflation Review might get pulled out the recycling bin and that it might have 17% of it made up of fantasy rents.

After all that I am not sure we can trust their view on austerity but for what it;s worth here it is.

This is enough to reverse around two thirds of the real cuts to day-to-day spending on public services – at least on average – since 2010, and around one third of the cuts to per capita spending.

Bank of England

Governor Carney was giving evidence to Parliament yesterday and it included this.

The negative impact of a no-deal Brexit will not be as severe as originally thought because of improved planning by the government, businesses and the financial sector, the Bank of England has said.

Governor Mark Carney told the Treasury select committee that the Bank now believes GDP will fall by 5.5% in the worst-case scenario following a no-deal Brexit – less than the 8% contraction it predicted in last November.

The Bank’s revised assessment of the possible scenarios also says unemployment could increase by 7% and inflation may peak at 5.25% if the UK leaves the European Union without a deal. ( Sky News )

Who could possibly have though that people and businesses would plan ahead? Of course when your own Forward Guidance has been so woeful maybe you have something of a block on that sort of thing. Also if I was Governor Carney I would have avoided all mention of a 7% Unemployment Rate after the 2013 Forward Guidance debacle on that subject.

Perhaps this is why some want to delay Brexit because in 2/3 years time at the current rate of progress the Bank of England will be forecasting growth from a No-Deal.

Also although he does not put it like that in the quote below is a confession that I am right about how falls in the Pound £ impact inflation.

It is likely that food bills will rise in the event of a no-deal Brexit, that is almost exclusively because of the exchange rate impact. Movements are quickly translated onto the shop shelf, and domestic prices, imperfect substitutes, also increase. That impact has lessened because of the new tariff regime the government has put in place.

Another goal I have slipped past their legion of Ivory Tower economists.

There was something else that was really odd from him via Bloomberg.

Mark Carney says there’s almost no chance of the Bank of England intervening in the foreign-exchange market to control swings in the pound

So why has the UK been building up its foreign exchange reserves then? They are now £66.8 billion.

Comment

The UK economy has been remarkably resilient in 2019 so far. We have had all sorts of Brexit and non-Brexit plans, the trade war and much else. Somehow we have got by. Financial markets are in flux as no sooner had the Financial Times started to cheer the way the UK Pound £ fell below US $1.20 it reversed and is now above US $1.23.

The FT has a problem because 1% moves lower in the UK Pound £ are a plunge and yet the 9% fall in the 2068 Index-Linked Gilt yesterday was described like this by economics editor Chris Giles.

Price of the 2068 index-linked gilt dropped today, but complete stability in market and prices still higher than a month ago – – showing those who claimed changing the RPI would kill the market to have exagerated wildly

I will ignore the second straw(wo)man bit and simply point out it has now fallen 13%. The losers will not be the “Gnomes of Zurich” as Chris claimed at the Royal Statistical Society but the ordinary pensioner looking for safety. It gives us a new definition for “complete stability” in my financial lexicon for these times.

The Investing Channel

8 thoughts on “What is the UK economic situation and outlook?

  1. How do we compare to the rest of Europe and comparable economies? In a world slowdown this is the most valuable measure of performance.

    • Hi Pavlaki

      As it has been Markit PMI week let us stay with them. The US is the leader.

      ““At current levels, the August PMIs are indicating
      annualized GDP growth of 1.0%, putting the economy
      on course for growth of just below 1.5% in the third
      quarter”

      The Euro area is on target for another quarter of 0.2% GDP growth and the UK for -0.1%.

      Assuming Markit are correct of course…

  2. Love your investing channel video with video clips!! Precise and to the point (this is lacking in N.A. Business news format-as a data troll I’m drenched daily in it). Global syndication awaits?!?

  3. Not wanting to be the prophet of doom I have been predicting in my posts for some time the UK economy on a downward spiral and the latest data from the ONS and other sources is evidence of that.

    In the short term I see little uplift particularly while business investment is holding back.

    The recent spending review may have an uplift and so would a reduction in interest rates as borrowing is cheap.

    Fortunately the £ has taken a small bounce the last few days.

    However the political situation seems to get worse by the hour, I noticed this morning Joe Johnson, Borris brother resigned that was a further knife in Borris back and one which he is unlikely to forget very soon.

    The world is up the creek at the moment if the economic war between China and the US eases it would name a difference.

    In the short term I see no uplift in the UK economy I think it will get worse before it gets better the UK has to contend with a world growth slowdown, BREXIT and political uncertainty and lack of business investment and sentiment. Consumer confidence is bound to the hit.

    All I am waiting for is a cut in interest rates as I have an excellent tracker at 0.45% over base and will end up paying virtually nothing on my mortgage. So for some folks there is a silver lining in the dark clouds in the sky.

    • The trade war is an interesting issue. I don’t want to bring politics into this blog and I can’t defend Trump’s actions because I can’t see a coherent strategy but I do think his trade policy is (if it’s successful) perhaps a reasonable way to force positive change in China.

      China’s theft of intellectual property is a problem for western companies who are investing in research and their dumping of subsidised products damages foreign competitors. Their attitude to democracy and their treatment of the Tibetan and Uighur communities are absolutely awful but have been overlooked because we want their money. And they are starting to flex their military might overseas, in the South China seas and through their Belt and Road initiative.

      So perhaps, if the trade war forces change in the way China operates in these areas, then it would be worth being a little poorer (or less rich if we still grow but at a slower rate) to avoid a worse confrontation down the road.

  4. Absolutely hilarious, is Carney hoping to secure the role played by Jim Carrey in Liar Liar! in an upcoming sequel? Where an amoral compulsively lying lawyer(are there any other kind?) is compelled to tell the truth, and the more he tries to lie, the truth still comes out!

    First he blurted out the current fiat money system and the dollar as the worlds reserve currency were coming to an end and needed to be replaced at the G7 in Jackson Hole, and now he’s saying he won’t defend the pound in the event of “swings” in the forex market, perhaps more accurately, he meant to say “falls” as any rises would be met with the usual negative projections, predictions and threats to send buyers running for the hills as he has been since he took office.

    Hey Mark, since you are now somehow compelled to tell the truth here is a list of some future “truths” for you to expose!!!(in no particular order).
    1.The Bank of England policies are mainly focused on the housing market – the rest of the economy doesn’t really matter.
    2.Inflation is grossly under-measured and has been for decades.
    3.It is official bank policy to continually devalue the pound in order to perpetuate 1. and fund the structural trade deficit.
    4.I was brought over by George Osborne with one sole objective: to re-flate the housing bubble in order to save the UK banks.
    5.Banks create the capital for loans from thin air and then charge interest -THEY DO NOT LEND RESERVES.
    6.The Bank of England was directly involved in the LIBOR fixing scandal, but arranged for executives and directors at Barclays to take the fall.

    Oh I could go on and on, feel free to add any others I may have left out…..:))))

    • Hi Kevin

      There has been one piece of news to cheer up Governor Carney today.

      Mind you should he get the job of his dreams it seems that Christine Lagarde left behind ever more trouble.

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