Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

For earlier monthly releases of UK Trade Statistics that have also been affected by this error, the versions on the website should be amended to make clear to users that the errors led the Authority to suspend the National Statistics designation on 14 November 2014.

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.

 

 

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A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

Is the football transfer market rational?

As we approach what in the UK is a Bank Holiday weekend many thoughts turn to the weekend’s sport and football in particular. News is increasingly dominated by the UK Premier League but of course there are strong European influences highlighted by yesterday’s Champions League draw and today’s Europa League one. The latter indicates a change as it replaced the UEFA Cup which had a fair bit of prestige back in the day as opposed to a league that many teams were not keen to be in although in recent times that appears to have switched again, That may of course simply be because Chelsea and Manchester United have won it as opposed to much poorer recent UK efforts in the Champions League.

If we move to the economics then the ever larger sums are having an impact and regular readers will be aware that I mull from time to time how much of this is inflation and how much genuine growth? From Deloittes.

In 2015/16 Premier League revenues rose to a record £3.6 billion. Each club generated more on average than the whole top division of 22 clubs did in total in 1991/92 and commercial revenues exceeded £1 billion for the first time in the league’s history.

It has been a heady mix of higher ticket prices and subscription TV fees which have been mostly inflationary and higher commercial revenues which I would suggest are growth. Oh and for those unaware the UK has split its subscription TV coverage so you need to pay 2 subscriptions now to get everything. Sneaky inflation I think especially as at least some of the European competitions was free to air albeit you might have to watch some advertisements.

The balance of payments issue is even more complex as we have the tap running into the sink via ever larger fees from overseas viewers of the Premiership but also a plug hole as we buy ever more foreign players. As to the wages we pay foreign players it is almost impossible to figure out how much will be spent here.  I also note with a wry smile that the Premier League all time 11 just voted for on the BBC website had 8 British players. So we continually buy foreign players when the best ones were British all along? What of course we are seeing here is the influence of emotion and irrationality which strongly influences these matters. Also if 25 years the new all-time?

Is it Rational?

The Financial Times has published some research suggesting that the various transfer fees are rational.

Data analysis suggests sums spent on players are in proportion to resources available

Care is needed with something like that as if we look at other news the woman who has won that enormous sum on the US Lottery could easily massively overpay for things and say she has plenty left. In fact it is exactly the sort of argument used to justify any raging bubble and at that specific moment in time it is usually true, the catch is of course that time only seems to be suspended and moves on. First let us update the numbers which have soared again.

 

According to Deloitte, more than £1.17bn has been splashed out this summer by clubs in the Premier League, Europe’s wealthiest division, where they have combined revenues of roughly £4.5bn. Overall spending in this summer’s window has already breached the £1.16bn spent by English sides during the same period in 2016.

Okay but let me point out the missing number here which is the wages commitment which over time might not be far off as much again. As transfer fees rise clubs are keen to sign these players up for long contracts at high wages which is an ongoing annual burden. Also it is hard to know where to start with this below.

 

Neymar’s transfer is an outlier, with the Brazilian forward’s fee representing more than 40 per cent of PSG’s revenues of €521m. However, the French club believes the global superstar will enable it to secure higher income from future commercial and merchandising deals, as well as achieve better performances in European competition.

We may be about to get a lesson in how quickly an outlier becomes the norm! Maybe not too long if this from L’Equipe is any guide.

Barcelona have agreed a deal worth up to 150m euros (£138m) to sign Borussia Dortmund’s 20-year-old France forward Ousmane Dembele.

They are also offering what only a few months ago would have been an extraordinary sum for Phillipe Coutinho at Liverpool. We get a hint here at the inflation around because he was bought by Liverpool for £8.5 million according to the BBC and he has played really well so shall we say his price should be now treble or quadruple? I would be interested in reader’s thoughts as trying that sort of analysis has a lot of growth but also lashings of inflation. We also need the caveat that the media is not entirely reliable with its price estimates as rumour is dressed up as fact.

Bubbilicious

Apparently the numbers do work.

 

21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings……….21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings.

So current prices tell us that prices are statistically current? It is hard not to think of someone proclaiming Dutch Tulip prices were statistically based back in the day. Even if we suspend such thoughts the model as presented gives some rather odd results. For example Arsenal would presumably not have bought Lacazette if they had known he was about as likely to lose as win them points. Chelsea are certainly not users of the system as for Rudiger and Bakayoko it is apparently only a question of how many points they will cost them. Let’s face it any football fan would be able to figure out that Bonucci would improve pretty much any team he joined. Those who watched the woeful keepy-uppy skills of Paulinho at his Barcelona presentation may be scratching their heads at any scenario where he will improve them.

Oh and correct me if I am wrong but is this not simply another form of extend and pretend?

 

Tim Bridge, a senior manager at Deloitte’s sports business group, says: “Clubs do not account for a transfer all upfront, instead spreading the fee across the life of the contract, so a £30m to £40m revenue uplift in one year translates to £200m in transfer spend across a five-year period.”

They do of course have some income sources which may be fixed for this period but not all of them.

Comment

Can something which depends so much on emotion ever be fully rational? I doubt it. This does not mean that there have not been pockets of rationality such as past purchases of loss making UK Premiership clubs who later turned into money machines. In some cases this involved luck as the debt that the Glazers loaded on Manchester United should have both imploded and exploded after the credit crunch but of course the central banks stepped in. So they should perhaps raise a glass to Janet Yellen and Mario Draghi as they speak later at Jackson Hole. Actually in more ways than one because if I recall correctly the loans that were used by Real Madrid to buy Cristiano Ronaldo were used as collateral at the ECB.

Over my career I have seen so many statistical models suddenly collapse as the assumptions behind them disappear into a mathematical quicksand. So in essence here apparent rationality becomes something else or the modellers can sing along with both football fans and The Monkees.

Then I saw her face, now I’m a believer
Not a trace of doubt in my mind.
I’m in love, I’m a believer!
I couldn’t leave her if I tried.

Me on Core Finance TV

http://www.corelondon.tv/consequences-parallel-currency-italy-not-yes-man-economics/

 

 

UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.

Productivity

This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.

 

Comment

We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!

 

It is UK trade and exports that George Osborne should be worried about

Yesterday was something of a strange day for analysis of the UK economy as the Chancellor of the Exchequer gave a rather odd speech in Wales. To get a full idea of the change I would like to take you back to as recently as November 25th for his Autumn Statement. Here is a flavour of it.

Since 2010, no economy in the G7 has grown faster than Britain……Our long term economic plan is working…..growth is then revised up from the Budget forecast in the next two years, to 2.4% in 2016 and 2.5% in 2017.

Also there was the wrapping of his optimism in the flag of the Office for Budget Responsibility.

The OBR has seen our public expenditure plans and analysed their effect on our economy. Their forecast today is that the economy will grow robustly every year, living standards will rise every year, and more than a million extra jobs will be created over the next five years.

So in short happy days were ahead conveniently funded by the OBR finding quite a lot of money down the back of its forecasting sofa. This posed yet another question for the role of the OBR which has been sucked back into the UK establishment in my view. There were opposing views such as ex Bank of England economist Tony Yates who said that such views were absurd.

Quite a change

This was a doppelganger of “yesterday all my troubles were so far away” as in the intervening 6 weeks or so there seems to have been something of a quantum reversal.

I worry about a creeping complacency in the national debate about our economy.

Do you mean the creeping complacency that you spread on the 25th of November George? Anyway let us look at his explanation.

Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world.

Ah it’s somebody else’s fault! What can we do then?

2016 is the year we can get down to work and make the lasting changes Britain so badly needs….. This year, quite simply, the economy is mission critical. We have to finish the job.

This is really quite a confession as after all he has been Chancellor for over five years now so what has been happening in that period if we now need “lasting changes”? Odd when we were told only in November that the “difficult decisions” had been taken “when I presented my first Spending Review” back in the summer of 2010.

Indeed we got a warning which was not far off apocalyptic.

Or it’ll be the year we look back at as the beginning of the decline.

Actually if people were to decide the UK was in decline surely they would look back to the beginning of his Chancellorship in May 2010. But those like me who criticised the OBR back in November will be wondering what has happened to the £27 billion boost they found down the back of their sofa? It does not seem to have lasted long.

We did get a reference to monetary policy that the Chancellor is likely to regret.

Let’s be clear, higher interest rates are a sign of a stronger economy.

There are two issues here. Firstly he is highlighting something that the Bank of England has moved away from as I discussed only on Monday. The idea previously pushed by Governor Mark Carney back in June 2014 that they would rise “sooner than markets expect” or in the summer of this year that they would “come into focus around the turn of the year” is to use my song of the day so yesterday. Perhaps nobody has told George yet. Actually that critique seems to apply to the UK’s political class in general as the Shadow Chancellor John McDonnell parroted a very similar line. Also I would imagine that many of you are wondering why if interest-rates are a sign of a stronger economy we have had an “emergency” 0.5% Bank Rate for nearly 7 years!

Also if something is proving to be useless you have to big it up.

So I’ve created a powerful new Financial Policy Committee in the Bank of England

According to the Halifax UK house prices are rising at an annual rate of 9.5% whilst the FPC is wondering whats on the lunch menu?

Trade is a problem for the UK

Yesterday I exchanged some data with Andrew Sentance about UK exports and today one part of the trade figures backs up his argument.

UK export growth averaged 5.6% per year over the past 20 years, between 1994 and 2014

This is rightly called a “strong performance” but there is a rub as shown below.

UK’s export growth has been relatively low among the G7 since 2012. UK exports fell by 1.5% in 2014, the only country in the G7 to see negative export growth.

Regular readers will be aware of my argument that the Bank of England made a mistake in 2012 by rebalancing the UK economy towards the housing market in the summer of 2012 via its mortgage and banking subsidy effort called the Funding for Lending Scheme. Is it a coincidence that as the UK obsessed about house price gains our eye was not on the ball of export growth? I would argue not. There are always issues with any extrapolation so take care but the number below provides food for thought.

estimates for 2014 suggest that UK goods exports were 8.7 percentage points below their long run average.

How has this come to be? Well take a look at the breakdown.

UK goods exports, in nominal terms, have been contracting at an average rate of -1.6% since 2012, and have been at the bottom of the G7 range. In 2014, UK goods exports fell by 4.1% – the only G7 economy to see negative growth. This was also the lowest growth rate seen since 2009.

The bright light for the UK for so long has been services exports as shown below.

UK exports of services, in nominal terms, have been close to the top of the G7 range since 1994 and consistently saw positive growth. They have grown at an average rate of 7.6% in each year over the 20 year period- which was also the highest average growth rate among the G7 countries

It is nice for us to be able to bask in the pleasure in being the top of a positive league table. However here too our eye seems to have drifted off the ball.

Recent data suggests that UK exports of services slowed in 2014 compared to 2013 by 6.5 percentage points, down to 2.3%. UK exports of services had the lowest positive growth rate in 2014 compared with its G7 counterparts, growing by 2.3%.

A (space) oddity

Apologies as there are actually two. Let me open with the rather odd development that in a booming economy we seem to be importing less.

Imports decreased by £1.2 billion (1.1%) to £101.7 billion in the 3 months to November 2015

Some of that is oil but by no means all of it. Also in spite of the recovery in many of our trading partners in Europe we are exporting less as well.

Exports decreased by £0.3 billion (0.5%) to £71.0 billion in the 3 months to November 2015

A little awkward which even if we allow for lower oil prices has us mulling the fact that world trade seems to be in decline in an apparent boom.

Trade feeds into economic growth

Apologies for a statement of the obvious and let me switch to the more precise net trade feeds into economic growth. This really is something for George Osborne to worry about in my opinion. From today’s UK Economic Review.

The drag from net trade on GDP growth

As we look into the detail we see this.

This has largely been driven by the absence of growth in the export of goods, which in Q3 2015 were 1.7 percentage points lower than the average level in 2008 (as a percentage of nominal GDP), while the import of goods increased by 1.1 percentage points over the same period.

It has been a dragging anchor on the UK economy and its GDP in the credit crunch era as the latest quarter indicates..

Net exports pulled down GDP growth slightly by 0.2 percentage points, for the quarter on quarter a year ago growth, but by 1.0 percentage point for quarter on quarter growth.

Comment

This morning’s UK Economic Review sort of backs George Osborne and the OBR’s past optimistic position.

this still represents the eleventh consecutive quarter of GDP growth and continues the positive trend in rising output that started in 2013.

However the new “realism” seems to have come from this development.

Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.

In economic terms as we review the situation we see that according to the ONS (Office for National Statistics) analysis of this morning the issue is mainly one of trade. Odd that the Chancellor failed to point that out.

Also this is something of a record for even the hapless OBR as only 6 weeks later even the Chancellor has abandoned its forecasts. Time to put it out of its misery.

We are good Europeans

The credit for this never seems to quite arrive at our door but look what we have been doing to help the rest of Europe.

This resulted in a widening of the trade in goods deficit with EU countries to a record level of £22.9 billion in the 3 months to November 2015 compared with the 3 months to August 2015.

There is something rotten in the state of Denmark

One of the most famous quote in literature so let me apply it to the Nationalbanken which did this yesterday.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point.

They do not seem to be keen on pointing out that it makes the new rate -0.65% so let me help out. But who outside the world of central banking thinks that a 0.1% change in interest-rates materially changes anything? It will be a long road back to 0% at this rate! Also the costs of changing interest-rates around the economy seem likely to outweigh any benefit. So let me leave you with a musical summary from the nutty boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha