UK GDP bounces back

Today will or depending when you read this has seen the return of something which if not an old friend is at least something familiar. From the Bank of England.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

Just as a reminder it will buy short-dated Gilts today, longs tomorrow and mediums on Wednesday, with just under £1.3 billion being reinvested each time. The large Gilt redemption may have an effect on the UK Public Finances because the £2 billion discrepancy in July that the Office for National Statistics is still unable to explain to me will be over £7 billion if we pro rata Gilt maturity size.

As to the wider QE issue the Resolution Foundation has been on the case. I have to say they start with what looks a load of rubbish to me.

First, QE works by signalling that the policy rate isn’t going to rise anytime soon, affecting longer-term interest rates which move with expectations of future movements in policy rates. Put simply, QE convinces people that policy rates are going to stay low for a long time;

That view can only come from an Ivory Tower. After all nobody seriously thinks interest-rates are going to rise anyway. They are on better ground with the portfolio rebalancing effect as we have seen rises in asset prices.

Overall they conclude this and the emphasis is mone.

There is also evidence linking QE to improvements in the economic outlook. Many of the studies listed in Table 1, as well as others, find that QE has led to falls in a broad range of interest rates, rises in other asset prices, and falls in exchange rates. In turn, economic models of different types imply that these effects boost economic growth. For example, for the UK, Churm, Joyce, Kapetanios and Theodoridis estimate that QE had a cumulative macroeconomic effect equivalent to a short-term interest rate cut of 1.5 to 3 percentage points (or around 1 per cent of GDP).

Only an imply?! Also 1% is not much frankly for all that effort and the distortions it created. To be fair they admit this issue with wealth effects for the already wealthy.

Around 40 per cent of the aggregate
boost to wealth from changes in financial asset prices, property prices, and inflation went to families in the highest wealth decile, while only 12 per cent of the benefit went
to the bottom half of the distribution.

They claim that the income distribution improved but this is essentially based on the rise in employment we have observed. It is true that we have seen that but we simply do not know what would have happened without QE so it is a Definitely Maybe.

The impact of QE on employment and wages provided a 4.3
per cent income boost to those in the bottom half of the income distribution, compared to a 3.2 per cent boost across the top half.

Also those are relative numbers so care is needed as 4.3% of not much is, well I am sure readers can figure that out for themselves.

Still some employment prospects have genuinely improved because if the authors of this report ever want to work at the Bank of England it will love this on their CV.

Monthly GDP

I have to admit that I had a wry smile when I saw the number as at the end of last week there were more than a few on social media telling us that the UK was in recession and one told me my argument that we may not be was “idiotic”.

GDP grew by 0.3% in July 2019, with all components apart from agriculture showing growth.

If we go to the breakdown we see this.

Production output rose by 0.1% between June 2019 and July 2019; manufacturing provided the largest upward contribution (0.3%),

The latter development was welcome in these times especially after what we have seen in Germany and was caused by this.

pharmaceutical products (3.8%); following two strong monthly growths……the weapons and ammunition industry, which rose by 12.1%, owing to the completion of high-value contracts.

We know that the pharmaceuticals sector has been an overall strength albeit an erratic one. We have noted this from the ammo sector before and I suspect the flow is more regular and is missmeasured. of course some will think it is not a good idea anyway.

The main player as ever was this.

The Index of Services (IoS) increased by 0.3% between June 2019 and July 2019……The administrative and support services sector made the largest contribution to this growth, contributing 0.09 percentage points.

Actually this number suggests it is running just about everything as that is pretty much our annual rate of growth.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018.

Tucked away in the detail was something of a critique though as to my mind it may explain at least some of the problems with the construction data as this was in services.

services to buildings and landscape activities, which increased by 4.0%, contributing 0.03 percentage points

More GDP Perspective

Here the news was good too as we recall where we started from.

Rolling three-month growth was flat in July 2019, following growth of negative 0.2% in Quarter 2 (Apr to June) 2019.

This time around it was all services though.

The services sector continued to show subdued growth in the three months to July 2019, growing by 0.2%.

However our official statisticians then get themselves into something of a mess by saying this.

This longer-term weakening has been most notable in “other services”, which has declined from the start of 2019.

As we saw a strong July after a weaker phase.

However, this relatively large growth for services in July follows four consecutive months of flat growth in the sector.

Whilst the numbers below are true we may just have seen a change in trend.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018. This continues a weakening from the three months to April 2019 (2.1%). The growth in the three months to July 2019 was last lower in the three months to October 2013 which grew by 1.3% (was equal in April 2018).

In the end it was all services as the numbers below highlight.

For the three months to July 2019, production output decreased by 0.3%, compared with the same three months to July 2018; this was because of a fall in manufacturing of 0.7%, which was partially offset by rises from mining and quarrying (1.7%) and water and waste (0.7%).


Whilst we should welcome today’s news it does come with various perspectives. The first is that monthly GDP data needs refining and is subject to particular revision. However as it stands July was not a good month for the Markit PMI business survey which at 50.3 showed no growth at all rather than the 0.3% recorded. Also security needs to be tightened as there was a noticeable rally in the exchange rate of the UK Pound £ about 15 minutes before the official release.

Next up comes the sudden flood of research telling us that economic policy needs to be more active, for that is the gist of the Resolution Foundation report. As to monetary policy that deserves a good laugh as whilst at 1% rise in GDP is welcome it is not a lot when you consider all the efforts gone to. Frankly it makes me worry that once you throw in the side-effects such as zombie companies we may be worse off.

Lloyds Banking Group is facing an extra bill of up to £1.8bn to cover a late rush of claims for the mis-selling of Payment Protection Insurance (PPI)……..

Last week, RBS said it expected to take an additional charge of between £600m and £900m, while shares in CYBG fell sharply after it warned it could take a hit of up to £450m

Estimates suggest that the last-minute rush of claims means that banks will ultimately have set aside well over £50bn in total to pay for the PPI scandal.

Was that the 1% of GDP boost? Some of this is simply a transfer but with such large sums only a small discrepancy can be a big factor.

There is some scope for fiscal policy but everyone seems to have forgotten the long lags involved. I guess we will have to learn them all over again.







19 thoughts on “UK GDP bounces back

  1. I was looking for worse figures and growth in July was stronger than I thought but the last 6 months the figures been very lumpy indeed and thought the figures have helped the £ I think there will be more lumpy figures going forward.

    However Vlieghe speech this morning is indicating that low interest rates will stay lower for a lot longer however “negative interest rates ruled out”-this has boosted the £ this morning and its now on a short term upwards path I hope it caries on, which should ease inflation worries.

    The increase in the £ is actually good news as Borris is still determined to leave at the end of October and the resignations of various MPs and switching of parties not done any damage to the £ against the $.

    The latest voting figures show Borris is still getting a boost from his determination to leave at the end of October “come what may” despite a bill in parliament saying he has to come up with a deal and if not seek an extension and everyone knows he is determined to leave regardless of there is no deal. From the latest polls over the weekend the people who took part in the poll would rather see a no deal than have a Corbyn government!

    With regards to the boost in the services sector it may well be the case that there has been a bounce the public spending now knowing on the fears that a weak £ could cost them later on.

    Put it this way Primark have warned today that margins will be affected by the high $ and this will affect all retailers as they source mostly abroad so it makes sense to stock up now with a fear of worse to come.

    It also makes sense to have some work done at home now on fears of rising prices from a collapse in the £ with a no deal.

    As an example ost of the plastics for UPVC are imported this will affect the double glazing industry, raw material could rise significantly with a collapse in the £ and if the consumers has cash in their pockets they may as well spend it now as they get nothing on investments, the same applies to borrowing money. Do the work now on fears it will cost more in future.

    I could wrong about all this I haven’t got a proper handle of all the data these are only my thoughts on the recent data and having read what Shaun has said before and updated on todays figures.

    I do hope the UK avoids a recession but the latest figures and data the last few weeks point to a weak outlook from my perspective.

    • Hi Peter

      Thank you for the link to the Vlieghe speech. I have the view that he blows in the same direction as whatever the prevailing wind is on the MPC so he has some uses. Maybe the Gilt market thought so too as the ten-year yield rose to 0.58% although other bond market yields rose too.

      Have you been reading Danny Blanchflower again? He was claiming on social media last week that the UK was in recession. Although to be fair he did accept my rebuttal that we would not know until early November. Today’s data does not make it impossible but it does make it a fair bit less likely.

      • Yes I have been reading his tweets and he has been very downbeat on the UK for some time now and did believe we were in recession.

        He is also a remainer and has got no confidence in the conservative government but not quite sure if he was in the UK who he would vote for.

        He has made his position clear on both UK and the US on interest rates which he thinks should not have risen and need to be cut further.

        I really don’t know what to make of him to be honest but do read look in on his twitter site to see what others say as well.

  2. Excellent sound cloud! Your warning on low interest rate long term bonds (gilts etc) being decimated in value by tiny increases in rates is misunderstood by everyone except professional statisticians like yourself (sadly-are they dumped in government/private pension funds?!?) Who’s working for whose best interest? A European bank borrowing that much money at 2.65 per cent from the fed? Seems a ‘tad’ bit high.

    My Yes Minister “theory” on this (though shaun you probably know the real reason-(I know it’s a ‘secret’)

    ECB Bank Mandarin: They did what and need how much USD? Well I’m not signing off on this. I have my career and pension to think of. If this blows up it will be my signature on this document! You tell them to talk to the US fed.

    Another grinding market day. Thanks for the fun!

    • Hi Canuckistinian and thank you

      As to the Euro area bank going cap in hand to the Fed it does pose a few questions. Only $46 million was borrowed the previous week so why was another $800 million plus required? Some have suggested to me that it may be related to the rally in the price of Silver meaning someone needed US Dollars. But we are to some extent singing along with Johnny Nash.

  3. the Resolution Foundation do have a (weakish) point regarding the signalling effects of QE. If you believe that QE will be unwound before rates will be pushed appreciably higher, then whilst the CB continues to maintain its stock of Gilts, you will expect rates to stay low. My view, however, is that QE isn’t going to be fully unwound. The assets might end up being permanently held by commercial banks, rather than the central bank, but I expect that the bank deposits that were created by QE will need to stay in existence, if only to replace the bank deposits that had to be permanently destroyed to create the new bank equity capital and non-deposit liabilities subject to bail-in that banks now have to use for a fair chunk of their funding. That’s only my view, though, and If enough people think differently and believe QE has to be unwound before rates can rise appreciably, then the signalling effect will work.

    As to QE pushing up asset prices, I just don’t buy it. Sure, when looked at in isolation, taking a chunk of one asset class out of circulation and replacing it with an equal amount of another asset class is going to push the price of the first asset up and depress the value of the second, but when you consider that over the period since the GFC the BofE has taken £435bn of Gilts out of circulation but the Treasury has added back about £1trn, its hard to argue that the net effect of the aggregate add to the private sector by the actions of the public sector, of £565bn of Gilts and £435bn of bank deposits, has pushed the price of Gilts (and other assets both financial and physical) higher. Selling more of something than you had been expected to sell rarely pushes the price of that thing higher!

    The price of financial assets, particularly high quality liquid financial assets (which includes Gilts and bank deposits) is elevated because demand outstrips supply. We all want to accumulate financial assets, or IOUs, but there’s not enough IOUs being written.

    • Hi Robert

      The issue of asset prices is a complex one. In terms of net supply of bonds then QE has reduced it and in the most extreme case I can think of ( Germany) gave it negative net supply for a while and look where we are with the negative yields there. If we switch to Japan then if we look at the Nikkei 225 it has trebled at its recent peak compared to when what was then a proposal called Abenomics and now what is called QQE. But it is also true that the first tranches of QE ( £375 billion) in the UK had not significantly turned house prices in the UK which is why we got the Funding for Lending Scheme.

      So it is a complex picture and far from what people expected back in the day. Some thought it would lead to hyper-inflation.

      The Bank of England however has its mantra.

      “Suppose we buy £1 million of government bonds from a pension fund. In place of the bonds, the pension fund now has £1 million in money. Rather than hold on to this money, it might invest it in financial assets, such as shares, that give it a higher return. And when demand for financial assets is high, with more people wanting to buy them, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.”

      • if a pension fund sold £1m of Gilts to the BofE on a Monday, it received £1m in bank deposits in return……and on Friday it used that £1m of bank deposits to purchase £1m of newly issued Gilts from the Treasury (I might have got the days wrong, but you get the gist of what was happening).

        Sure, pension funds and insurance companies were buying additional financial assets – equities, corporate bonds, more government bonds etc. and physical assets such as commercial real estate, because they were receiving huge inflows. There was, and still is, huge demand from the non-bank private sector to accumulate financial assets and physical assets that replicate financial assets. In summary, there is huge demand for savings.

        There’s no getting away from the fact that since the GFC, the government sector, working with the central bank and the commercial banking system, has supplied roughly £1trn in financial assets to the non-bank private sector. £565bn of these assets are in the form of longer dated bonds (equivalent to savings accounts) and £435bn in the form of bank deposits (or current accounts). If there had been no GFC and no need for QE and if the Chancellor’s deficit reduction had gone to plan (a big if, granted), the government sector would have supplied maybe £200bn of financial assets to the non-bank private sector, probably all longer dated bonds.

        Now, for sure, the GFC has had an effect on the desire of the non-bank private sector to save (fear of recession, losing your job etc), but this would have been marginal compared to the desire that was already there and would have been ever increasing, to save for retirement.

        As I might have mentioned here before, QE has had no effect on the total quantity of financial assets available to the non-bank private sector to accumulate, just the composition of those assets. Only the government running a deficit can supply net financial assets to the non-bank private sector. This it did. £1trn of them. Those in the non-bank private sector that wanted bonds, got bonds. Those that wanted bank deposits, got bank deposits. The non-bank private sector probably still wants to be supplied with more net financial assets by the government. The BofE can’t really help with that. Only the government can – by running larger deficits and buying the output that the private sector wants to net sell.

  4. “There is also evidence linking QE to improvements in the economic outlook.”
    That would be on the basis that “if you throw enough money at a problem, something might improve?”
    I sympathise with financial Market Traders. It’s really hard to be competitive, when your rival bidder is allowed to print their own money!
    Currently the world’s Central Banks own 18% of all stocks & shares & bonds.. and rising!!
    Logically, if we continue QE the world’s Central Banks will eventually own all the assets.
    Thus most people who “work in finance” especially around the Bourses, will therefore become unemployed, and the World’s Economy will then closely resemble the Soviet Union’s economy before it collapsed, ie Centrally owned by The State(s).

    • All of the GEMMs can ‘print their own money’.

      That’s how QE works. The GEMMs purchase Gilts from their customers by crediting those customer’s accounts. The GEMMs then sell those Gilts to the BofE which credits the GEMM’s accounts held at the BofE.

      The second step doesn’t really have any effect on anything material (sure it expands the central bank’s balance sheet, but so what?), but was the method chosen by the BofE to force the banks to do what banks should be doing, which is acquiring financial assets from their customers by creating bank deposits for those customers, (which is predicated on those customers wishing to switch those financial assets for bank deposits.)

      And, yes, if the non-bank private sector continues to express a desire to hold savings in the asset class called ‘bank deposits’ rather than other financial assets, then the central bank (or commercial banks) can continue to purchase those assets from them, crediting their accounts with bank deposits. If the non-bank private sector doesn’t wish to swap the financial assets it holds for bank deposits, then it doesn’t have to.

  5. Great blog as usual and great podcast, Shaun.
    In your remarks on the UKSA decision on the RPI, Shaun had no time to mention the household cost indices (HCIs), UKSA’s adaptation of the Household Inflation Index conceived of by John Astin and Jill Leyland. The HII would have measured owner-occupied housing (OOH) using a broadly defined money outlays concept, including equity repayments on mortgages and renovation expenditures. It also would include real estate transaction costs, like estate agents’ fees and stamp duty. The HCIs somewhat emasculated this concept, excluding both equity repayments and renovation expenditures. The National Statistician’s statement on June 28 declared that there would be no expansion of the scope of the HCIs but a new HCIC (HCI – Capital) variant would be created that would contain equity repayments. No mention was made of renovation expenditures. The HII was conceived of as a household-oriented measure, for use in upratings, collective bargaining and so forth, like the RPI itself. If the UKSA considers the accounting approach to OOH used in the RPI to be unacceptable, and the only remedy an imputed rents approach, it is hard to see why they would want to go any further with the HCIs, which have the same alleged defect the UKSA associates with the RPI, the explicit measurement of mortgage interest costs. (See the 2018 document “Shortcomings of the Retail Prices Index as a Measure of Inflation”.) It seems the UKSA is bent on making the CPIH the one index to rule them all and in the darkness bind them. The HCIs are just there as a distraction, much like the RPIJ when it was introduced.

    • Hi Andrew

      The story of the HII/HCI is unfortunately becoming a sorry one. I supported the introduction and was part of those at the Royal Statistical Society who gave the ONS a rough ride for their original attempt to neuter them. I know you are aware but for others reading this they planned to only issue it once a year.

      Sadly whilst we were able to temporarily right the ship the establishment shifted its attack to Student Loans and House Prices. They started with stalling ( they are not ready) which is ridiculous in the case of house prices.

      It is disappointing and I hope to meet Jill and John soon to discuss what we can do about it.

  6. Since we’re on the topic of printing money by countries and what is acceptable-can anybody offer a comment on this printed money in circulation conundrum in my mind?
    (I hope I got the stats right)
    UK -printed money in circulation 69.84 billion GBP
    US-“. ” 1.5 trillion USD

    UK-GDP per capita international dollars 45,705
    US-GDP”. “. 62,600

    UK- pop 65 million
    US- pop 329 million

    By any measure Gdp/per capita/per population adjustment- there seems to be several times more printed money per person circulating in the US than UK. This would be a tremendous advantage to an economy wouldn’t it? Thank you in advance for your comments (I think Shaun has briefly touched on this issue in the past).

    • by ‘printed money’ I take it you mean actual, physical notes, issued by the central bank? If so, i don’t know why you would want to measure it and try to divine something from it.

      In days gone by, before we had debit cards, contactless payment, Apple pay etc, it was a useful indicator or predictor of consumer spending, with consumers drawing down their bank deposits as cash before going on a spending spree. These days, it’s a pretty meaningless number. You can switch between holding bank deposits or paper currency and bank again remarkably easily, and up to the FSCS limit, they are both of similar credit quality. The amount of paper currency in circulation might still be a small indicator of some consumer spending – the amount in circulation tends to go up over a weekend, before being ‘paid in’ on a Monday. Long bank holidays, such as Easter and Christmas and New Year also see a small spike in demand for paper currency. But this is very predictable and the banking system can ensure there is plenty in ATMs and bank branches.

      As to why there is so much paper USD currency in circulation? Maybe it\s because US payment systems aren’t as advanced, so paper money is still used for a lot of transactions, whereas in the UK we use debit cards and other payment methods more frequently. It’s also because well over half the USD notes that have been issued circulate outside the US. It’s the favoured currency for drug dealers, black marketeers and money launderers!

  7. Wow! $800 USD million is huge money call! Bit to big for silver market?!? Data trolls love puzzles. Hmm?!?
    1. A US(NY) bank is on the other side of the bet?!?(go to talk to the US Fed).
    2. Everybodies been gambling in US interest rate changes (big money/big bets/big losses).
    3. I’ll go with my original assumption of somehow tied in with USD Libor rate movements (or similar instruments). Backwardization bet gone wrong?!? Hmm…

    • just some background: in the weeks leading up to the 29th Aug, 2 banks (we might assume the same two banks) were regularly drawing down $40m to $45m from the ECB in its regular 7day USD tenders.

      Then in the tender for the period from 28th Aug to the 5th Sep, 3 banks drew down a total of $871.5m. We can assume the same 2 banks were taking their $40m, so 1 bank had a requirement for $830m (it’s big, but not huge). We don’t know if it needed that amount for the full 7 days, or if it just needed to cover an o/n position, since the minimum period offered by the ECB is 7 days.

      For the tender for the period 5th sep to 12th sep, we’re back to the 2 banks drawing down $40m.

      So whoever it was (and it would be unlikely to be a bank with direct access to Fed funds, such as Deutsche), only needed those funds for a short period, which would lead me to conclude the requirement came from the most common of reasons – a settlement screwup. The period in question included the Labour Day holiday in North America. It is quite possible that a bank had been expecting to receive USD funds on one day in that period (from an old cross currency swap maybe), and were due to pay them straight out again to another counterparty, but had realised late in the day that the funds were actually going to arrive 1 day later than they had booked in their system, due to the holiday, but the other counterparty was expecting funds on the originally booked day. It might have worked out cheaper (or just face saving) for the bank to draw down the funds it only required just for the 1 day for a full 7 days.

      Just a theory. I don’t have any inside knowledge of this particular situation, but from experience, settlement screw ups of this order of magnitude aren’t that uncommon.

  8. Or something to do with the us natural gas price spike?!? A US gas producer. And a synthetic derivative they provided a loan against?!? And it blew up (real good!!) So many ways to lose money!! It’ll show up in somebodies quarterly report.

  9. Thank you Robert! Little people only have access to reading “trails in the snow” after an animal has passed by – instead of an actual “trail camera”. Merely past memory and speculation on my part!

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