The UK Services sector is the shining star of the economy and GDP

Today brings us a whole raft of data on the UK economy or what out official statisticians call a theme day. Actually we get too much in one burst with the trade data usually being ignored which may well be a Sir Humphrey Appleby style plan. But before we get to that we can look at the economy from the viewpoint of the Bank of England.

Turning to prices, the headline price balance sees a flat trend in house price inflation. However, there is once again a mixed picture across the UK with negative momentum in London and the South East, and solid gains in Northern Ireland, Scotland and the North West.

Looking ahead, price expectations for the coming three months stand at -16% pointing to a modest decline on a UK-wide basis. However, the twelve-month outlook points to a turnaround, with +18% more respondents expecting prices to rise (rather than fall) over the coming year.

That is from the Royal Institute of Chartered Surveyors or RICS. As you can see there are no “wealth effects” to be found presently unless they can somehow only draw Governor Carney’s attention to the North or Scotland and Northern Ireland.

A little innovation will be required to present this as good news.

 In keeping with this, newly agreed sales fell, with a net balance of -27% (from -11% previously), with activity reportedly slipping in virtually all parts of the UK. As far as the near-term outlook is concerned, sales expectations stand at -9%, suggesting sales will remain subdued in the coming three months………This will not only be a direct hit on the housing market itself but could have ramifications for the wider economy as the normal spend on furniture, fittings and appliances that typically accompanies a house move is also put on hold.

One possibility for the morning staffer presenting such information to an irascible Governor is to appeal to his plan to be a fearless climate change champion and say it is in line with this.

The TCFD provides the necessary foundation for the financial sector’s role in the transition to net zero that
our planet needs and our citizens demand.

He is indeed so enthusiastic about this that he has flown to Tokyo to point this out. This contrasts the highly important nature of his flights as to the extremely unimportant climate change causing flights of plebs like us.

This backs up what the Halifax told us on Monday and the emphasis is mine because the date is pretty much when the effect of the Funding for Lending Scheme arrived,

“Annual house price growth slowed somewhat in September, rising by just 1.1% over the last year. Whilst
this is lowest level of growth since April 2013, it remains in keeping with the predominantly flat trend we’ve
seen in recent months.”

UK GDP

This brought some welcome news.

UK GDP grew by 0.3% in the three months to August 2019.  Rolling three-month GDP growth increased for the second consecutive month after falling in Quarter 2 2019.

It is put in neutral terms but the UK moved away from recession in this period although in monthly terms it did so in a slightly odd fashion.

Monthly gross domestic product (GDP) growth was negative 0.1% in August 2019, following growth in both June and July 2019…….Overall, revisions to monthly GDP growth were small. However, both June and July 2019 have been revised up by 0.1 percentage points, giving extra strength to the most recent rolling three-month estimate.

As you can see we had a dip in August ( assuming that is not revised higher over time) but that was more than offset by upwards revisions in both June and July. For those of you wondering if the June figure affects the second quarter contraction of -0.2% the answer is not so far although it must have an impact if we move another decimal place.

The shift to Services

I have long argued that the services sector must now be over four-fifths of the UK economy and it seems the Office for National Statistics is picking this up.

The main contributor to gross domestic product (GDP) growth in the three months to August 2019 was the services sector, which grew by 0.4%. This was driven by widespread strength across the services industries in June and July, following a period of largely flat growth in the previous three months. Meanwhile, the production sector fell by 0.4% in the same period, while construction output grew by 0.1%.

For newer readers this has been the trend for years and indeed decades or as Talking Heads put it.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

This means somewhat ironically that the UK may well do relatively well in the manufacturing recession that we are seeing in much of the world. The irony is that we have often wanted to be more like Germany with its success in this area but for now out more services based model works better. This does not mean that the manufacturing sector we have is avoiding the chill winds blowing.

Rolling three-month growth in the production sector was negative 0.4% in August 2019, with growth in manufacturing at negative 1.1%.

There were widespread falls across manufacturing, offset partially by the manufacture of transport equipment, which is still seeing a bounce back from the weakness in April 2019 as a result of car production plants bringing forward their summer shutdowns.

There is another example of same as it ever was if we look at the detail of the services growth.

However, the sub-industry that had the largest contribution to gross domestic product (GDP) growth was motion pictures (including TV and music), which has been one of the best performing sectors over the last year, growing at a notably faster rate than services as a whole.

So if you pass a Luvvie today please be nice to them as they are doing a sterling job.

August

It looks as though there was something we have been noting for several years was behind the 0.1% GDP fall in August.

Within production, manufacturing fell by 0.7%. This was driven largely by a fall-back in the often volatile manufacture of pharmaceuticals, following strong growth in July.

It would seem that the production pattern is not monthly and thus is over recorded and  then under recorded. So that the  truth seems likely to be that we should take a bit off July and add it to August. More fundamentally it exposes one of the problems of producing a monthly GDP series.

Comment

As I look at the numbers I note that yet again we see to be reverting to the mean growth level of around ~0.3% per quarter that I suggested a couple of years ago. In the current circumstances that is pretty good although I note Torsten Bell of the Resolution Foundation calls it “Growth is really rubbish”. Mind you I note that he is retweeting something which describes the 0.3% rise in the quarterly or 3 monthly growth rate as a “small rebound” which speaks for itself.

The situation is that we should be grateful for our services sector which is keeping the UK out of a recession for now. So instead of the “march of the makers” promised by former Chancellor George Osborne we are seeing a “surge of the services”. This brings its own issues but at a time like this we should welcome any growth we can find. A particular success is the film and music industry and some of this is near to me as Battersea Park is regularly used these days. In a away this represents cycles as what has suited Germany (manufacturing) fades and we see something where the UK is strong (services) replacing it. How long that will last I do not know.

Meanwhile some of you may have followed my debate with former Bank of England policymaker Danny Blanchflower on social media. When I pointed out to him that today saw 2 more upwards revisions to UK GDP ( as opposed to his continual promises of downwards ones) he replied thus.

So what? Go and look at the supporting data

 

The Investing Channel

13 thoughts on “The UK Services sector is the shining star of the economy and GDP

  1. Hello Shaun,

    Although I worry about the accuracy of the GDP figures and no doubt the GNP/GNI has fallen yet again ( low productivity ) I welcome the rise .

    Mind you describing it as “we are seeing a “surge of the services”. ” is not really correct , more of “whimper of services” or ” slight gust of services ”

    Well better I guess than having services fall 😉

    Forbin

    • Hi Forbin

      I was counterpointing my “surge of the services” with this reality of the “march of the makers”.

      “Total manufacturing output for the three months to August 2019 decreased by 1.1%, compared with the three months to May 2019. This is the fourth consecutive three-monthly decline and follows a fall of 1.6% during July 2019”.( UK ONS).

      But yes you have a point….

  2. Slightly off topic although it does relate to your mention of a debate with Blanchflower on twitter. He comes across as an incredibly sanctimonious person who goes to bed every night praying for a total collapse in the UK economy while believing himself to be right about everything. Almost as bad as ‘Climate-change-Carney’ who has just got back from Tokyo this week where he was…..talking about climate change in relation to companies. He’s off to the IMF in Washington next week I think to talk about ‘Big Tech’. Difficult not to get a little angry with these people sometimes.

    • Hi Tim

      I do not mind a bit of a debate on Twitter. But it ends up unbalanced because Danny Blanchflower never really addresses the issues I raise as he just ignores data that does not suit his case like today’s UK GDP release. Also I recall him tweeting for ages that his insight into the monthly unemployment numbers meant it was going to surge whereas the employment bull market made him wrong.

      In the end this summed it up.

  3. Rhythm
    @Rhythmtrader
    Secretary of the Treasury said to be considering 100 year bonds.

    Perspective, ~100 years ago:

    – Cocaine was legal
    – Women weren’t allowed to vote
    – Las Vegas had 2,000 people living there
    – Life expectancy 48 yrs
    – No speed limits
    – No minimum wage
    – 50% w/o full plumbing

    • given another 100 years and I suspect that the last 5 will be true again (!)

      and depending on the dice gods we’ll have either no women voting and cocaine still illegal or only “women”** will still have the vote ( patriarchy don’t you know ) and all drugs will be legal , and possibly free 🙂

      Forbin

      ** men will be declared male facing transgendered lesbians …..

      sorry Shaun , politics crept in there …..

    • Hi mwhite

      I thought the European Union was supposed to be against protectionism?

      “Even so, elevating the issue is likely to trigger a broader debate within the EU about how to protect domestic businesses from lower-cost competitors abroad. ”

      Also how does that work for a bloc that already ( mostly via Germany) runs quite a trade surplus and will be even larger should the UK Brexit?

  4. I new they were stupid but finally getting to grips with Extinction Rebellions core demands.

    https://order-order.com/2019/10/10/extinction-rebellion-finally-subjected-media-scrutiny/

    “flying would have to come to an end; all cars would have to be confiscated; meat would have to be rationed by the state; and all gas boilers and cookers would have to be removed from every home”

    Andrew Neil interviews Extinction Rebellion spokesman Zion Lights

  5. Shaun, apologies that my comment is not todays topic but I just wonder what your thoughts are about Greece selling 488 Million Euro 3 month T bills at a negative yield! has the world gone mad?

    • Hi Pavlaki

      There is a sort of convention that central banks stand behind Treasury Bills meaning that you will always get paid you nominal amount when it matures, as they can print the money required if necessary. So there seems to be a shift towards the ECB now standing behind the Bank of Greece in a way it did not before. Not fully though as the implied interest-rate would be heading for the -0.5% of the Deposit Rate.

      But also

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