UK GDP gets quite an upgrade meaning the “Outlier” analysis has collapsed

Today is rather hot with UK economic news and we can start with the fact that the turn of the year was better than previously reported.

• UK GDP is now estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2023, revised up from a previous estimate of 0.1%, while growth across all quarters of 2022 is unrevised.

Looking into the detail we see that the Services sector was revised up by 0.2% as was construction. Actually there have been quite a few changes in the recent detail because whilst the second quarter remained at 0.2 there was a shift internally as Services growth fell to 0% and production rose to 1.2%. It is a sign there are a lot of changes going on and with growth low they are a relatively bigger deal. Also this is a really big change on what places like the Bank of England were saying as recently as last November.

As a result, the UK economy is expected to remain in recession throughout 2023 and 2024 H1,

In fact the UK economy has grown by 0.5% in the first half of 2023 which adds to their forecasting failures at the end of 2022.

Moving on we also have the Blue Book update for the post pandemic revisions.

But, combined with the better-than-thought pandemic rebound, the figures confirm that the UK’s economy now is larger than in earlier assumptions by around 2%, or £50 billion. ( Evening Standard)

By the way I am quoting the Evening Standard because at the time of writing our national broadcaster the BBC including its economics editor Faisal Islam seem to have missed the update. Anyway all the analysis about the UK under performing and being an outlier needs a revision as we shift from having GDP 0.2% lower than pre pandemic to the number below.

Taking into account all our recent revisions, this means that GDP is now estimated to be 1.8% above pre-coronavirus (COVID-19) pandemic levels in Quarter 2 (Apr to June) 2023.

Tucked away in the detail is an improvement for last year.

UK GDP is now estimated to have increased by 4.3% in 2022, revised from a first estimate of 4.1%. As announced in our previous Impact of Blue Book 2023 changes on gross

domestic product article on 1 September 2023, annual volume GDP growth in 2021 is revised up 1.1 percentage points to an 8.7% increase; this follows a revised 10.4% fall in 2020 (previously an 11.0% fall).

If we now try to bring things together the state of play is being reported like this.

The UK now surpasses France and Germany in economic growth since the pandemic, new figures show ( Bloomberg)

The problem with the league table type analysis is that it will change as others revise and update their numbers. Let me give you an example of Italy which I looked at yesterday and it has made major revisions. As we stand it gas done 0.3% better than the UK post Covid in GDP terms but looks to be weakening more than us in terms of a trajectory. I expect the “revision season” to see a relative improvement for the UK of between 0.5% and 1% of GDP due to our treatment of health and education output. So a bit under half of the reported change today is a relative change.

Looking Ahead

Whilst the news on the past is welcome partly because of the “doom and gloom” much of the media has indulged in ( for example Bloomberg are calling a 2% upgrade to UK GDP “slightly stronger” as I wonder what they would call a 2% fall?). What we need to move onto is the future and the monetary data does give us insights into this.

Net borrowing of mortgage debt by individuals saw an increase from £0.2 billion in July to £1.2 billion in August. This was the fourth consecutive monthly increase in mortgage borrowing and the highest since January 2023. Gross lending rose from £19.1 billion in July to £19.7 billion in August, while gross repayments were little changed at £18.9 billion in August.

So if we start with the central bankers favourite which is the housing market it is surprisingly strong as I recall they made a lot of effort to get numbers like this back in 2012 and 13. The surprisingly strong feeling is reinforced by this reality.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages rose by 16 basis points to 4.82% in August. Similarly, the rate on the outstanding stock of mortgages saw a 9 basis point increase, from 2.97% in July to 3.06% in August.

I think it has been so long since we saw a rise in mortgage rates like this that it is taking time for people to respond partly I think because rates were so low before. But if we look at the leading indicator here things are changing.

Net approvals (that is, approvals net of cancellations) for house purchases, which is an indicator of future borrowing, fell from 49,500 in July to 45,400 in August, the lowest level in six months.

Pre pandemic we had got used to numbers of 60,000 plus.

Money Supply

The release tells us this from UK broad money.

The net flow of sterling money (known as M4ex) fell to -£8.1 billion in August, from -£1.9 billion in the previous month. This was largely driven by a decline in the net flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money to -£6.6 billion in August, compared to -£3.3 billion in July.

As you can see there is a monthly fall which means we now also have an annual fall of 0.6%. The monthly numbers are erratic but if we simply add the last three months we have a fall of 0.6% so the Bank of England is applying quite a squeeze here with its interest-rate increases to 5.25% and its sales of UK bonds.

Indeed we can link this back to the mortgage rates section because whilst the relative UK economic performance recently has led to us being less of an outlier in bond yield terms as we have been noting the US and elsewhere have gone higher. Overall UK mortgage rates look set to remain high but with the two-year yield below 5% we may see more of this.

The average rate on a five-year fixed mortgage has fallen below 6% for the first time since early July, new figures show.

On Thursday, the typical rate dropped to 5.99%, according to the financial information service Moneyfacts. ( BBC )

Returning to the money supply issue it looks ever more that the Bank of England in its rush to look macho after its “Transitory” inflation debacle is now overtightening. Also it is selling bonds into a bond market panic and it is hard to over state how stupid I think that is.If you look back I did warn about this scenario ( as in their plans were predictably flawed.

Comment

So we see that all the analysis about the UK being an economic outlier can be thrown in the bin. Some have a lot of deleting to do or more likely simply denial as I heard Bloomberg TV call a 2% increase “slightly stronger” earlier. There is a serious point as the Bank of England, OBR, IFS and Resolution Foundation have piled this stuff on and now it no longer exists. That does matter at a time when the most likely next government is giving them a vote of confidence.

Britain’s economic institutions were created to provide stability. Under my watch they will never be undermined. ( @RachelReevesMP)

There is an irony in that we do of course have plenty of problems as whilst the new numbers make us relatively better the issue of disappointing growth continues. But there is an large elephant in the room here because it is the US with its fracking and the like which has done the best so far in this energy crisis and it is “renewables” Germany which has done the worst.

Looking ahead the money supply numbers suggest the Bank of England mat get the recession it has been so keen on so let me leave you with The Streets.

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?