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.
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.
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.
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.
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.