UK GDP shows that we are experiencing a depression rather than a recession

Today gives us an opportunity to find out what the UK economy was up to in August so let me start with the good news which is that it grew. Indeed in ordinary times this would be considered stellar growth. Although of course these times are quite some distance from ordinary.

Monthly gross domestic product (GDP) grew by 2.1% in August 2020 following growth of 6.4% in July, 9.1% in June and 2.7% in May.

As you can see we have had four months of very strong growth but the pattern has been very erratic. Although as I will come to later there is a worrying trend if you just look at the last three months.

The Services Sector

As we are looking at August I doubt many will be surprised where much of the growth came from.

In August 2020, the services sector grew by 2.4%, following growth of 5.9% in July. The accommodation and food services sub-sector was the largest contributor to the increase in August, in particular, the food and beverage service activities industry, which grew 69.7% as the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants.

So the Eat Out to Help Out Scheme was successful in its initial aim although with local lockdowns spreading it seems likely that the boost will fade. In fact the whole sector was on a bit of a tear in August.

The accommodation industry also grew by 76% as international travel restrictions boosted domestic “staycations”. These industries contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020.

Even with this growth we have a fair distance still to travel.

In August 2020, the Index of Services was 9.6% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic.

Some sectors have further to go than others.

There were four industries that failed to reach 50% of their pre-February 2020 level; these were travel agencies, air transport, rail transport, and creative, arts and entertainment.

Also I note significant growth being recorded for education ( worth 0.35% of GDP) and health ( 0.13%) of GDP as we begin to correct the extraordinary inflation recorded by out statisticians in these areas in the second quarter.

Production

This also played its part in August.

Production output rose by 0.3% between July 2020 and August 2020, with manufacturing providing the largest upward contribution, rising by 0.7%; electricity and gas also rose (1.6%), partially offset by a fall in mining and quarrying (4.1%).

But as you can see on a much smaller scale especially as mining and quarrying was a brake. However over the pandemic period as a whole it has done better than services.

production output is 6.0% lower than the level in February 2020, with manufacturing 8.5% lower.

Construction

Regular readers will know that even in much calmer times these numbers had what Taylor Swift would call “trouble,trouble,trouble” which will be even worse now. But with that caveat here they are.

Monthly construction output growth slowed to 3.0% in August 2020, following record monthly growth of 21.8% in June 2020 and growth of 17.2% in July 2020.

So the surge has slowed substantially and even so this is where we think we are.

The level of construction output in August 2020 remains 10.8% below the February 2020 level.

More Perspective

We find out a little more from this.

Gross domestic product (GDP) grew by 8.0% in the three months to August 2020 as restrictions on movement eased across June, July and August.

An extraordinary burst of growth but it is much smaller than the fall. The pattern is rather different from what we have become used to.

All the headline sectors provided a positive contribution to GDP growth in the three months to August 2020. The services sector grew by 7.1%, production by 9.3% and construction by 18.5%.

So the usual leader of the pack which is services have been an under performer. This is in spite of the fact that we have surge a surge in accommodation and hospitality of 85.5% and 16.4% in education.

So a very different structure from normal as we see that this is a services driven depression.

Back to Normal?

Er no.

August 2020 GDP is now 21.7% higher than its April 2020 low. However, it remains 9.2% below the levels seen in February 2020, before the full impact of the coronavirus (COVID-19) pandemic.

In terms of structure we have this.

The production sector remains 6.0% lower than the level in February 2020, before the main impacts of the coronavirus were seen…….The services sector remains 9.6% lower than the level in February 2020……The construction sector remains 10.8% lower than the level in February 2020.

Seasonal Adjustment

GDP numbers rely quite a bit on this and as you will see tucked away in it is some hope for September.

In normal times this works well: education outputis smoothed through the year, effectively ‘looking through’ the school holidays as they come and go.

We are back to education so let’s have some Alice Cooper who was on the ball this year.

School’s out for summer
School’s out forever
School’s been blown to pieces

How have our statisticians dealt with this?

Observing a steady increase in school attendance in June and July, and with early evidence that classroom numbers were much closer to normal in September, we will instead smooth the path of education output over the holidays. That means education output will be higher in August than July, but lower than our September estimate……As schools have returned, attendance levels have been much higher than before the school holidays. Everything else being equal, this points to a much stronger September estimate.

The whole issue of seasonal adjustment this year is quite a minefield.

A Trade Surplus

I have been pointing out that we now have a trade surplus for several months now and we have another one.

The UK total trade surplus, excluding non-monetary gold and other precious metals, increased £3.8 billion to £7.7 billion in the three months to August 2020, as exports grew by £21.4 billion and imports grew by a lesser £17.5 billion.

Unlike in the GDP arena this seems to be a services thing.

The widening of the total trade surplus in the three months to August 2020, excluding non-monetary gold and other precious metals, was driven by an £11.9 billion increase in services exports, compared with a lesser £8.9 billion increase in services imports.

Even on an annual basis we now have a surplus.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £33.9 billion to a £4.9 billion surplus in the 12 months to August 2020,

Whilst a surplus for the UK is welcome after decades of deficits the smile changes Cheshire Cat style as we note this.

 Imports of goods decreased by £76.9 billion, while exports decreased by a lesser £39.4 billion.

Comment

This morning’s release is both welcome and sobering. The welcome bit is that we have growth but the sobering bit is that we have a long way to go still. It has been a very poor day for those claiming we are in the middle of a “V-Shaped” recovery. Let me illustrate with this from Bank of England chief economist Andy Haldane.

Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third
quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having
fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in
the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising,
on average, by around 1.5% per week.

The man I have described as a “loose cannon on the decks” has been free wheeling again. Of course we might grow by 5-6% in September but in August we grew in a month by what he thought would take not much more than a week. Still I am pleased he has been doing some reading albeit of a book I read as a child.

Now is not the time for the economics of Chicken Licken.

For those of you who have never read this Chicken Licken was worried about the sky falling down. Well it looks like it has on Andy’s forecasts and on Andy himself who is now a figure of fun even amongst those that previously cheered him.

Central bankers aren’t known as innovators or thought leaders, but Andrew Haldane, a senior official at the Bank of England, is an exception. ( Time 100)

Oh how Time magazine must wish they could redact that! But the more important point is something I have been making all along. This is a depression much more than a recession and it looks as though it is going to last much longer than some claimed. Yes we have seem bounce backs in some areas but others are plainly in a mess.

As it would have been John Lennon’s 80th birthday let me finish with this.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed

 

 

20 thoughts on “UK GDP shows that we are experiencing a depression rather than a recession

  1. Hello Shaun,

    Yup that dead cat sure bounced a bit 😉

    Still we have another lock-down then we’re loking at another , what, 150-200 billion in HMG spending ??

    interesting times

    Forbin

    • The vast majority of reuters polls on forecast missed which I checked earlier on and with lockdown measures to come the next few months to come may mean the cat gets run over.

      There was more news on BRC sales today as well footfall circa over 30% down on last year and recent comments in the press suggest a fall this year for Black Friday.

      I expect things to get worse not better I happen to see today’s figures as lack lustre when you look at different sectors.

      • Breaking news:

        Edinburgh Wool Mill which alsp owns Peackocks and Yaeger on brink of collapse which is a shock for retail.

        This is Philip Day’s company which also owns the “Day” stores, historically EWM has been a well run business but the coronavirus has badly effected its business model.

        24,000 jobs at risk.

        https://www.retailgazette.co.uk/blog/2020/10/edinburgh-woollen-mill-group-calls-in-administrators-putting-24000-jobs-at-risk/
        The company, which owns the Peacocks and Jaeger brands, has lodged a notice of intention to appoint administrators to look for potential buyers to shore up its business.

        “EWM executives wrote to staff on Friday to warn them that the national and local Covid-19 lockdowns had impacted sales.

        The company added that it has been heavily impacted by allegations of unpaid bills, which it denies.

        EWM was accused of failing to pay its suppliers £27 million in bills by the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), which is a trade organisation representing some of EWM’s Bangladesh-based suppliers.

        However, following EWM chairman John Herring’s call for an investigation into how the figure of the unpaid bills was released to the media, BGMEA) chair Rubana Huq responded to a previous letter from Herring to clarify that EWM Group has paid its suppliers “to a considerable extent” and that the amount owed is less than what was originally circulated.

        Billionaire businessman Day is now seeking for insolvency specialists at FRP to spend 10 days carrying out an urgent review ahead of further action.

        Stores will continue trading and further details will be announced in due course, the company said.

        However, changes are expected to take place in due course.

        “Like every retailer, we have found the past seven months extremely difficult,” EWM chief executive Steve Simpson said.

        “This situation has grown worse in recent weeks as we have had to deal with a series of false rumours about our payments and trading which have impacted our credit insurance.

        “Traditionally, EWM has always traded with strong cash reserves and a conservative balance sheet but these stories and the reduction in credit insurance – against the backdrop of the initial lockdown, current local lockdowns, and the second wave of Covid-19 reducing footfall have made normal trading impossible.

        “As directors, we have a duty to the business, our staff, our customers and our creditors to find the very best solution in this brutal environment.

        “We have applied to court today for a short breathing space to assess our options before moving to appoint administrators.

        “Through this process I hope and believe we will be able to secure the best future for our businesses, but there will inevitably be significant cuts and closures as we work our way through this.

        “I would like to thank all our staff for their amazing efforts during this time and also our customers who have remained so loyal and committed to our brands.”

        An FRP spokesman said: “Our team is working with the directors of a number of the Edinburgh Woollen Mill Group subsidiaries to explore all options for the future of its retail brands Edinburgh Woollen Mill, Jaeger, Ponden Home, and Peacocks.”

        In recent weeks, EWM has received a number of expressions of interest for various parts of the group and these are being assessed along with all other options.

        At the end of this process, the group will appoint FRP Advisory as administrators who will carry out the necessary restructuring of the wider business.

        On Thursday, EWM said the sale of its Peacocks brand was at jeopardy due to the allegations surrounding unpaid bills to its suppliers.

        Day brought in advisers to size up its Peacocks chain last month, following an unsolicited approach.”

        • “Edinburgh Woollen Mill” conjures up all kinds of traditional manufacture, doesn’t it?
          Wee wummen dressed in black with shawls sitting spinning away.
          Still I suppose it does have some traditional values; sweat labour & child slavery.

        • Sounds like someone might be trying to buy them on the cheap.
          Could be a lot more “unhelpful” rumours affecting UK-owned companies from January.

        • EWM, there is a branch in Sherborne, has had the look of a place that is on the brink of a closing down sale for the four years I have known it.

  2. Construction of office buildings, hotels/restaurants and private sector houses will surely be decimated for a few years.

    There is no need for more offices, hotel/restaurant chains are at best skint, and the only people that can afford houses are BTLers who took the £50k from the BBL scheme, or were awarded govt. contracts to fight CV19.

    Until Boris and the boy Chancellor start spending all these hundreds of billions on infrastructure projects instead of schemes for fraudsters then work prospects for the plebs in the private sector is looking appalling.

    • Therein lies the problem Arthur, Bojo will be advised that the best way to stimulate the economy is to give builders money as they will employ lots of people who will then hopefully spend their wages into the economy, unfortunately, whatever the economic circumstances the solution is always to give builders money, cut rates or produce house buying incentives/gifts for them, oh……did I forget to mention builders also give the fattest brown envelopes to ministers as well?
      Given my previous prediction of central banks giving free money to the sheep via central bank digital coins and therefore bypassing the precious(hence the continued lockdowns that make no sense whatsoever and are clearly not based on scientific facts or principles), are the builders the new precious???It certainly seems that way.

      • Best way would be to build 100,000 council houses or more every year for the next 10 years. But that’d mean socialism for the housing market and the British housing market is a 100% … bonafide … no question about it … capitalist market!

        I have to say i found it wonderful that Boris was talking about free market solutions for the economy the other day, then in the next sentence boasting about providing state backed 95% mortgages for the lowest rung of debt slaves aka the young.

        I feel like Winston Smith.

    • Be fair, at least they’ve now extended state aid to those poor private-equity owned companies that carry so much debt they haven’t paid tax for years.

  3. How much has the goverment borrowed during COVID so far? 300bn? That’s approx 10% of GDP already. Imagine how bad GDP would be without all the government spending !!

    • He only started dishing it out 6 months ago, the bill will be in the trillions come the end of this charade in a few years time, not bad for a mere cold thats so bad you need to be tested to know you’ve got it.

      But its free market money printing so all is good!

  4. When I saw this today, I thought I should just repeat what I said yesterday (well, that Internet handle MysticDave is there for a reason).

    “This shows up the two faulty beliefs currently running the show:

    First, that printing money to buy bonds will stimulate the economy. As the mortgage broker I mentioned said to James O’Brien, it just ramps rents and house prices, sucking away people’s ability to consume.

    Secondly, that the money that people have saved will all return to consumption. It will not, any more than companies will have the same cash flow after having to cover fixed costs and repay debt they have taken on. Many people will use what they have saved to pay down their own debts, save or pay for pricier assets – essentially the paradox of thrift.

    We come back to the same question: how do we move back to a world of normal rates? I suspect most of us will be carried out feet first before that happens.”

    We have spent 12 years crushing consumption, not that Haldane ever seems to have noticed, in order to ramp house prices. Now, he seems to think that all that commuting cost or that lunchtime Costa will reappear in consumption demand. Most has already gone into saving or debt reduction due to the current situation we are in. It is consumption now lost to the economy, which will only reappear as the savings are cashed or the debt interest does not have to be paid (albeit most of the latter is so small now that it will make little difference). We have been kidding ourselves for 12 years that we can restore growth by printing money, when it has just raised living costs and thereby reduced consumption and suppressed wages. We have now got a bad flu (unless you are vulnerable) and the solution has been to damage consumption even more, so that EWM goes into admin, but Amazon (Home of low pay and cr*p conditions) is taking up the slack.

    At the same time, Boris pushes for more house price ramping with 5% deposits for Tory donors – although today’s FT would suggest the banks have told him to stick it where the sun don’t shine. To add to the punch in the face every country has had, we have contrived to short ourselves in the foot with Brexit at the same time, bringing Farage garages to the major ports, 50,000 customs jobs have been created – more people than the whole EU employs. Our kakistocracy has now become a kleptocracy as a company set up by Cummings’s mates in May has been awarded a £100k contract to supply PPE to the NHS.

    I used to think that Suzanne Vega was music to top yourself to, but this outdoes it all.

    • Hi Dave

      I guess in Andy Haldane’s models the higher house prices scream “Wealth Effects! Wealth Effects!”. The real world sadly for him is not so compliant.

      As to the 5% deposits suggestion I expect some sort of move to back it. The Bank of England already has the Term Funding Scheme so it is a Treasury thing now. If they really want it then they will have to guarantee the next 10% or so. Another liability for the taxpayer….

    • “The prospect of people with a house worth £1m. & starving is not, imv, very far off.”
      Have you been reading this ‘climate catastrophist’ (realist?)?
      ” 18:40 if that plays out as i expect it to
      18:43 then this fall we will have a pretty
      18:46 catastrophic failure
      18:48 of the major grain crops corn and
      18:50 soybeans . . . ”

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