What are the prospects for the economy of Germany?

One of the issues in economics is that we sometimes do not know what has just happened let alone where we are going. It was once explained to me as like driving a car with the front and side windows blacked out. Well maybe Germany has on this occasion provided a chink of light from one of the rear side windows.

WIESBADEN – According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 5.0% lower in 2020 than in the previous year. After a ten-year growth period, the German economy suffered a deep recession in 2020, the year of the corona, a situation similar to that of the 2008-2009 financial and economic crisis. However, the economic downturn on the whole was less serious in 2020 than in 2009 (-5.7%), according to provisional calculations.

We can look at this in several ways of which the first is that this is likely to be a relatively good performance even though care is needed as this is an average for 2020 rather than where the economy is now. Next comes the issue of whether this is an ongoing depression including the credit crunch? In Germany’s case the answer is no as it is still above the previous peak in output terms. It has been a weak period overall but there was some progress most of it in the initial rebound of 4% in both 2010 and 11. As to the comparison with 2009 the numbers get a lot tighter in calendar adjusted terms as 2009 was -5.6% as opposed to the number below.

In calendar adjusted terms, the GDP declined by 5.3% in 2020, as the number of working days was higher than in 2019.

Breaking it down

I doubt many of you will be surprised to learn which was the worst affected area.

In industry (excluding construction), which accounts for just over one quarter of the total economy, the price adjusted economic performance declined by 9.7% on 2019, in manufacturing even by 10.4%. Industry was affected by the consequences of the corona pandemic especially in the first half of 2020, for instance, due to temporary interruptions in the global supply chains.

That of course came on the back of a 2019 which was influenced by the “trade war”.

The services sector was also hard hit.

The economic slump was particularly strong in the service sector where decreases were partly as severe as never before. Examples include trade, transport, accommodation and food services where the price adjusted economic performance declined by 6.3% compared with 2019.

Although as we have seen in so many places there were large shifts within the services sector.

However, opposite trends were also recorded: online trade increased markedly, while permanent retail trade in part declined substantially. The tight restrictions in accommodation, restaurant and similar services led to an outstanding decline in accommodation and food services.

Maybe they have similar problems to the UK in measuring construction as I am unsure how it could have risen but the official number is below.

A sector that could sustain its position in the crisis was construction: price adjusted gross value added even increased by 1.4% year on year.

Domestic Demand

You will not be surprised to read that private consumption headed south.

 In contrast to the financial and economic crisis, when the economy was supported by all components of consumption expenditure, household final consumption expenditure in 2020 fell a price adjusted 6.0% year on year, which was an unprecedented decrease.

Nor that government spending boosted things.

 Government final consumption expenditure saw a price adjusted 3.4% increase and had a stabilising effect even in the corona pandemic. This was, among other things, based on the acquisition of protective equipment and hospital services.

You may note a quite different treatment to the UK official statistics as Germany measures a much higher input rather than peering into theoretical declines in output in health (and education).

Trade

This area highlights one of the problems with Gross Domestic Product numbers as GDP falls to allow for the fact that there are losers on both sides of trade.

The corona pandemic also had a massive impact on foreign trade. Exports and imports of goods and services in 2020 decreased for the first time since 2009, that is, exports by a price adjusted 9.9% and imports by 8.6%. The decline was particularly large for imports of services; this was mainly due to the high proportion of tourism, for which a sharp fall was recorded.

Whilst exporters lose 9.9% and importers 8.6% the GDP numbers only show the subtraction which is calculated as a 1.1% fall. There is another twist as in terms of the nominal numbers the statisticians then found some imported inflation to reduce the import decline to below the exports number. I wonder where that was as we are do often told there is no inflation and the Euro was strong overall in 2020?

Labour Market

There are several ways of looking at this. Even the favourable one shows us this.

On an annual average in 2020, the economic performance was achieved by 44.8 million persons in employment whose place of employment was in Germany. That was a decrease of 477,000, or 1.1%, on 2019. Due to the corona pandemic, the upward trend in employment ended, which had lasted for over 14 years

Fair play to them for pointing out an inequality that has developed.

This affected especially marginally employed people and self-employed, whereas the number of employees subject to social insurance remained stable.

Also the sentence below is doing a lot of heavy-lifting.

Dismissals seem to have been avoided especially by the extended regulations regarding short-time work.

This has also been added to by the furlough scheme in Germany.

Germany`s «Kurzarbeit» Program spent EUR22.1bn last year subsidizing payroll for companies working at reduced levels ( @acenaxx)

Some 1.95 million were still being supported in the final quarter of the year which provides quite an appendix to the employment numbers we looked at above.

Fiscal Policy

You could argue that Germany is finally applying some logic. As you can see their statisticians have got quite excited by it.

General government budgets recorded a financial deficit (net borrowing) of 158.2 billion euros at the end of 2020, according to provisional calculations. It was the first deficit since 2011 and the second highest deficit since German reunification and was exceeded only by the record deficit in 1995 when the debt of the Treuhand agency were integrated in the general government budget.

The reason I mention the logic point is that Germany is being paid to borrow, so why not do some? For most of 2020 ( from March) that applied to even the 30-year maturity which fell to nearly -0.5% in the March pandemic panic. There is an irony in Germany’s safe haven status as it moved away from one definition of a safe haven but then that was 2020 in a nutshell.

In terms of ratios we are told this.

Measured as a percentage of nominal GDP, this was a 4.8% deficit ratio of general government for 2020.

In relative terms this is low but does represent quite a shift on the previous surplus policy.

Comment

It is interesting that Germany has provided us with an update including the final quarter over a fortnight before it considers sensible to produce them. However as things stand the picture is in the circumstances good. As to the future there are two perspectives and let us start with the business survey or PMI.

Though down on its level between July and
October, the Germany Composite Output Index ticked up from November’s five-month low of 51.7 to 52.0.

If Germany’s Q4 GDP was indeed flat as seems likely from today’s number that has already not gone so well for the PMI. Now there are the lockdowns which seem set to last until the spring and issues with the supply of vaccines.

Angela Merkel admits Germany faces wait for Covid jabs … Germany is facing a Covid-19 vaccine shortage and may not be able to secure sufficient stocks until July, Angela Merkel privately told her MPs ( @TradingFloorAudio)

On that basis expectations that Germany will be back to pre pandemic levels at the end of this year look very optimistic.

 

 

Portugal is feeling the economic effects of the pandemic

It has been too long since we took a look at the economic state of play in Portugal, which is a delightful country. For newer readers Portugal was in the bad boys/girls club at the time of the Euro area crisis symbolised by the way that its national debt to economic output ratio ( GDP) went over the 120% level set as a signal by the Euro area. That was a particular irony as that level was set to avoid embarrassing Portugal and indeed Italy. But after that phase Portugal went into favoured child status as its economy improved and it followed Euro area instructions.

But now things are really rather different as the Euro area boom of 2017/18 was in modern language like over before the Covid-19 pandemic arrived. There were even issues for the successful motor sector.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. The automobile sector is responsible for 11% of total exportations. Portuguese technical skills in this field, the highly competitive set up and running costs and our great logistic infrastructures have been a driving force in this sector. ( PortugalIN)

This is because some of the gains came at the expense of France and Spain and also because if you head south for cheaper production you might carry on doing so and end up in Algeria and Tunisia.

What about now?

Yesterday the Portuguese statistics office updated us on the services sector.

Services turnover index, in nominal terms and adjusted for calendar and seasonal effects, presented a year-on-year
change rate of -15.3% in November (-12.1% in October).
The year-on-year change rates of the indices of employment, wages and salaries and number of hours worked adjusted of calendar effects were -8.4%, -4.1% and -11.4%, respectively (-8.3%, -6.2% and -12.7% in October, by the same order).

There are two main contexts here. The first is the scale of the decline in output and next is the way that hours worked looks to be the best measure of the impact on employment. Also we get a hint of the scale of government aid and furlough as we note that wages/salaries are only 4.1% lower.

The peak for this series was the 121 of January last year ad the nadir was the 74 of April. Whereas the 100 of November means that all the gains since 2015 had faded away, hopefully temporarily.

This morning has brought a reminder of the industrial production data as Eurostat catches up. It shows an average across the Euro area of an annual fall of 0.6% so Portugal under performed here.

The Industrial Production Index (IPI) registered a year-on-year rate of change of -3.6% in November (0.4% in the previous month)……Of the Major Industrial Groupings, only Intermediate goods showed a positive year-on-year rate of change: 1.1%. Energy registered the most
negative rate of change (-10.3%), followed by Investment goods (-8.2%) and Consumer goods (-1.9%).

I guess few will be surprised about what has happened to tourism.

In November 2020, the tourist accommodation sector should have registered 416,000 guests and 950,000 overnight stays, corresponding to year-on-year
rates of change of -76.3% and -76.7% respectively (-59.7% and -63.3% in October, in the same order).

 

Prospects

Portugal does not feature regularly in the PMI business surveys but this from the statistics office on Monday offered some clues for prospects.

The perspectives of the exporting enterprises of goods point to a nominal increase of 4.9% in exports in 2021 vis-à-vis
the previous year. Although these figures represent an improvement compared to the perspectives indicated by
enterprises for 2020 according to the preceding forecast (-13.0% ), they still not allow a recovery to values close to
those recorded before the pandemic.
In fact, should these perspectives be confirmed, the exports of goods in 2021 will correspond to a level 12.8% lower
than the total exports of goods recorded in 2019.

This survey has proved reliable in the past. So we should take the idea of an improvement but still quite a decline on pre pandemic levels seriously. In the meantime there is the likelihood of at least a one month lockdown.

The transport sector I highlighted earlier has particular problems as it was one of the worst affected areas.

It stood out the categories Transport Equipment and parts and accessories thereof (with the highest decrease expected for 2020, corresponding to -20.3%).

But not much of an expected recovery this year.

Transport equipment and parts and accessories thereof (+4.7%), mainly for Intra-EU markets (+6.8%,
+5.7% and +5.1%, respectively).

Financial Markets and Finances

There is something of a ying and yang here. If we start with the currency then Portugal will have been affected by the stronger Euro which I note has got a mention from the ECB today.

ECB’s Villeroy: We Will Keep Favourable Monetary Conditions As Long As Necessary -We Are Closely Following The Negative Effects Of The Euro Exchange Rate ( @LiveSquawk)

Although I guess it does help with the international position in one area.

At the end of the third quarter of 2020, the Portuguese economy had a net financial position vis-à-vis the rest of the world of -101.9 per cent of GDP (Chart 2), compared to -101.3 per cent of GDP at the end of the same quarter of 2019. ( Bank of Portugal)

If we switch to debt metrics then the Portuguese government is in relative terms running a tight fiscal ship.

This result reflects the net borrowing of general government and non-financial corporations (4.0 and 2.3 per cent of GDP respectively)

The latest national debt figures are running to the same tune.

In November 2020 public debt stood at €267.1 billion , a €1.1 billion decrease from the end of October. This was mainly driven by a decrease in debt securities (€1.2 billion)

General government deposits decreased by €2.0 billion, with public debt net of deposits increasing by €0.9 billion from the previous month, to a total of €244.7 billion.

These days the public debt burden is less of a debated issue because of the way that Portugal can borrow so cheaply.In fact it can borrow for ten years for effectively nothing (0.01%). As this feeds in the Bank of Portugal projects this.

The implicit interest rate on public debt is expected to fall over the projection horizon, from 2.6% in 2019 to 1.8% in 2023, which reflects the assumption that interest rates on new issues will remain low.

Comment

There are two main themes here. The first is that the Euro area crisis seems now like it is from a place “far,far away.” Back then solvency fears sent the benchmark bond yield into the teens for a while and if I remember correctly briefly as high as 21% as opposed to the present 0%. Although there does seem to be a hangover from those days as Portugal is being relatively rather restrained in its use of fiscal policy.

The next theme is that the December projections of the Bank of Portugal look rather optimistic now.

Accordingly, an 8.1% decline in GDP is projected in 2020, followed by growth of 3.9% in 2021, 4.5% in
2022 and 2.4% in 2023 . Activity will return to pre-pandemic levels at the end of 2022.

The V-shapers have proved to be rather panglossian and even that only had Portugal back to pre pandemic levels at the end of 2022. One curiosity I find is that those concerned with “output gaps” and the like seem to have disappeared. Anyway the first half of 2021 will be grim again and will follow on from a decline at the end of last year.

Let me finish with a metric that will be announced to cheers from the Frankfurt towers of the ECB.

In the 3rd quarter of 2020, the House Price Index (HPI) grew by 7.1% when compared with the same period of 2019……On a quarter-to-quarter basis, the HPI increased by 0.5% (0.8% in the 2nd quarter of 2020). By category, the existing dwellings prices increased by 0.6%, above that observed for new dwellings (0.1%).

First-time buyers will need a process of re-education before they understand how good this is for them…….

 

 

 

How is the Swedish experiment going?

These days the headline above no doubt has you thinking about an alternative approach to the Coronavirus pandemic. However, I would also like to remind you that Sweden was at the fore front of applying negative interest-rates to a country and in addition applied them into something of an economic boom. Or if you prefer they applied exactly the reverse of the old saying that the job of a central banker is to take away the punch bowl as the party gets going. Instead they decided to give it a refill.

The first perspective is that for all the past talk of a different approach they now seem to be in the same boat as the rest of us.

During the summer, a recovery was initiated, but in recent months the spread of infection has increased again and restrictions have been tightened in many countries. This setback shows the great uncertainty that the global economic recovery is still facing. The economic prospects for Sweden and abroad have been revised down, and the economy is expected to weaken again in the near term ( Riksbank)

Where do we stand?

This morning Sweden Statistics has updated us.

GDP increased by 4.9 percent in the third quarter, seasonally adjusted and compared with the second quarter. The recovery was mainly driven by increased exports of goods and household consumption following the historic decline in the second quarter. Calendar adjusted and compared with the third quarter of 2019, GDP decreased by 2.5 percent.

This is a relatively good performance compared to what we have become used to and as the paragraph above notes has been driven by this.

Household final consumption increased by 6.3 percent. Consumption of transports, as well as hotel and restaurant services contributed most to this increase……..Exports increased by 11.2 percent and imports increased by 9.2 percent. Overall, net exports contributed upwards to GDP growth by 1.1 percentage points.

The return of the hospitality sector boosted many economies in the third quarter and I note Sweden benefited from trade. Although if we look at the trade detail the numbers were heavily affected by the oil price.

Exports of mineral fuels and electric current decreased by 40 percent in value and by 10 percent in volume. The large difference between the value and volume trends is due to lower prices on petroleum products……….Imports of crude petroleum oils decreased by 45 percent in value and by 17 percent in volume.

The story shifts a little if we take a look at Sweden’s Nordic peers. This morning we have also learnt some more about Finland.

According to Statistics Finland’s preliminary data, the volume 1) of Finland’s gross domestic product increased in July to September by 3.3 per cent from the previous quarter. Compared with the third quarter of 2019, GDP adjusted for working days contracted by 2.7 per cent.

So for all the talk of differences of approach in fact the annual economic change in Finland and Sweden is well within the margin of error. Maybe the real difference here is that they have populations which are spread out.

Looking Ahead

We see that the retail sector saw some growth in October.

In October, the retail trade sales volume increased by 0.5 percent, compared with September 2020. Retail sales in durables increased by 0.9 percent and retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.1 percent.

This meant that the annual picture looked healthy.

In October, the year-on-year growth rate in the volume of retail sales was 3.6 percent in working-day adjusted figures. Retail sales in durables increased by 4.8 percent and retail sales in consumables (excluding Systembolaget) increased by 0.7 percent.

However that was then and this is now according to the Riksbank.

The growth forecasts for the coming six months
have therefore been revised down…. However, high-frequency data show signs that demand is now slowing down again…….GDP is expected to decline again during the fourth quarter and the situation on the labour market to deteriorate further. The forecast assumes that GDP growth will decline also for the first quarter of next year before it
picks up again both abroad and in Sweden during the second quarter.

The Swedes seem yo be preparing for a rough start to next year which does differentiate them as most have yet to get past a contraction in this quarter.

The Riksbank Response

You might think as an enthusiast for negative interest-rates the Riksbank would have rushed to deploy them in 2020. But we have got something rather different.

The repo rate is held unchanged at zero per cent and is expected to remain at this level in the coming years.

So they have cast aside a past central banking orthodoxy but joined in with a new one.The latter is the plan to apply ZIRP ( in this instance literally at 0%) and to say interest-rates will stay there for some years. So not quite as explicit as the US Federal Reserve which has guided towards a period of 3 years but essentially the same tune. The abandoned orthodoxy is the enthusiasm for negative interest-rates which leaves the Riksbank with quite a lot of egg on its face. After all they have applied negative interest-rates in a boom. Then raised them in a period of economic weakness ( unemployment was rising pre pandemic). Now they do not use them in a clear example of a depression.

By contrast they are more than happy to support any borrowing by the Swedish government.

To improve the conditions for a recovery, the Executive Board has decided to expand the envelope for the asset purchases by SEK 200 billion, to a total nominal amount of up to SEK 700 billion, and to extend the asset purchase programme to 31 December 2021. The Executive Board has also decided to increase the pace in the asset purchases during the first quarter of 2021, in relation to the fourth quarter of 2020.

They have also decided to interfere in the private-sector as well.

The Executive Board has moreover decided that the Riksbank will only offer to buy corporate bonds issued by companies deemed to comply with international standards and norms for sustainability.

So another central bank sings along with The Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

If they were an army this would be called mission creep.

Comment

As you can see the Riksbank seems to have pretty much abandoned the interest-rate weapon it previously waved with such abandon. There is an additional nuance to this if we shift from the domestic to the external situation. The Krona has been rising against the Euro. There have been ebbs and flows but the 11.2 of March 2020 has been replaced by 10.2 now. If we note that the Euro has also been firm then the Krona has had a strong 2020 and it is interesting that the Riksbank is ignoring this. Perhaps it thought more QE would help, but as I pointed out earlier this week pretty much everyone is at that game.

But like elsewhere the Riksbank is keen to make borrowing cheaper for its government in a new twist on the word independent. With Sweden being paid to borrow ( ten-year yield is -0.13%) no doubt the government is suitably grateful.

 

 

A curious treatment of inflation has knocked more than 3% off UK GDP

This morning has brought us up to date on the UK economy in the third quarter of this year. These days we get the numbers with a bit more of a delay than in the past and in this confused pandemic period our official statisticians must be grateful for it. It gives them more time to check matters and collect a fuller set of quarterly data.

Following two consecutive quarters of contraction, UK gross domestic product (GDP) is estimated to have grown by a record 15.5% in Quarter 3 (July to Sept) 2020. This is the largest quarterly expansion in the UK economy since Office for National Statistics (ONS) quarterly records began in 1955.

So we see quite a bounce back, but it is also true that momentum was lost.

The monthly path of GDP in Quarter 3 2020 reveals that there has been a slowdown of growth in August and September as momentum has eased through the quarter. GDP increased by 6.3% in July, driven by accommodation and food services as lockdown restrictions were eased.

That was the peak followed by this.

GDP grew by 2.2% in August, driven by accommodation and food services because of the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme, as well as growth in the accommodation industry as international travel restrictions boosted domestic “staycations”.

Of course, there is a different perspective to the Eat Out to Help Out Scheme as we mull how much it contributed to the second wave of the Covid-19 pandemic and thus reduced GDP later on. Fortunately we continued to grow in September as some thought we might not.

In September, GDP further slowed to 1.1% where professional, scientific and technical activities had the largest contribution and legal activities, accounting and advertising saw strong growth after a muted August.

Actually September saw a swing back in something I drew attention to in the second quarter data where the UK statisticians treated education in a really rather odd way. From August 12th.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020.

That as I pointed out at the time was really quite bizarre and led to around 5% being subtracted from UK GDP. This time around they put some of it back as I note this in the September detail.

Education also had a large positive contribution in September as schools made further advances in returning to a level of teaching similar to before the lockdown started on 23 March 2020, primarily through increased attendance.

The state sector in GDP

This has long been a problem in GDP numbers which rely on prices and therefore hit trouble in areas where you do not have them.With much of UK education and health provision being state provided there is not a price mechanism and instead we see all sorts of often dubious assumptions. As a reminder I recall Pete Comley telling me that he had looked into the inflation measure for this sector ( called a deflator), when I provided some technical advice for his book on inflation  and felt they simply made the numbers up. Well in that vein remember the deflator which surged by 32.7%, well in Question of Sport style what happened next? We get a hint from the nominal data.

Nominal GDP increased by 12.6% in Quarter 3 2020, its largest quarterly expansion on record

So a 2.9% gap between it and the real GDP number with this causing it.

The implied deflator fell by 2.5% in the third quarter, the first quarterly decline since Quarter 4 (Oct to Dec) 2015. This primarily reflects movements in the implied price change of government consumption, which fell by 7.0% in Quarter 3 2020.

So we got a bit under a quarter of it back. The explanation would have been described by the Alan Parsons Project as Psychobabble.

This decrease occurred because the volume of government activity in the third quarter increased at a much greater rate than nominal government expenditure. This is partly because of the unwinding in some of the movements that occurred in the second quarter, which saw a fall in the volume of government activity at the same time as an increase in government expenditure in nominal terms.

This really is a bit of a dog’s dinner.

 In education, the large fall in the volume of education activity in the second quarter followed by the large increase in the third quarter help explain the most recent quarterly movement in the implied deflator.

The same happened to health.

In the third quarter, nominal spending on health was largely unchanged, while volumes increased, which has impacted upon the growth rate of the implied deflator in the third quarter.

Applying normal metrics to abnormal times has them singing along with Kylie Minogue.

I’m spinning around, move out of my way
I know you’re feeling me ’cause you like it like this
I’m breaking it down, I’m not the same
I know you’re feeling me ’cause you like it like this.

We can compare this with others to see the scale of what has happened here. We do not have numbers for the full Euro area but Germany for example saw its deflator rise by 0.5% in the second quarter and then returned to a slightly lower level in the third quarter. So very different. France saw more of a move with its deflator rising by 2.4% but has now reduced it to below the previous level. Spain saw barely any change at all

A Trade Surplus

The UK finds itself maybe not quite in unknown territory but along the way.

In the 12 months to September 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £35.9 billion to a surplus of £5.2 billion.

Yes you did see the word surplus which is a rare beast for annual data for the UK and we can continue the theme.

The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased £3.4 billion to £4.2 billion in Quarter 3 (July to Sept) 2020, as imports grew by £17.3 billion and exports grew by a lesser £13.8 billion.

However the theme does hit rougher water with the latest monthly data.

The total trade balance for September 2020, excluding non-monetary gold and other precious metals, decreased by £3.6 billion to a deficit of £0.6 billion; imports increased by £3.6 billion while exports remained flat.

Comment

The pandemic has created all sorts of issues but in terms of economics we find ourselves here, or rather this is where we were at the end of the third quarter.

the level of GDP in the UK is still 9.7% below where it was at the end of 2019. Compared with the same quarter a year ago, the UK economy fell by 9.6%.

In spite of the media obsession with recessions this is a depression and we should call it such. Looking ahead we know that things will be depressed by the four week lockdown we are presently in meaning the economy looks set to shrink again in this quarter. There are some newer official surveys for October which suggest we had lost more growth momentum as restrictions began again.

BICs for 5-18 October 2020, found that of businesses currently trading, 45% reported their turnover had decreased below what is normally expected for October, compared to 48% reporting decreases in September……While it is not clear exactly how strong a relationship there is between GDP and BICs, the business survey data suggests the outlook has improved only modestly, if at all, as we moved into October. ( @jathers_ONS )

However if we return to the overall pattern for 2020 we see that a decision by the Office for National Statistics has depressed the way it records UK GDP and that it is ongoing with less than a quarter being reversed. This makes international comparisons very difficult especially for those unaware of the situation. We need I think to add at least 3% to the UK number when we try to compare internationally.

On a statistical level I regularly find the ONS justifying things on the basis of “international standards” so it needs in my opinion to explain why it has taken such a different path this time.

 

 

 

 

 

UK GDP is a case of The Good, The Bad and The Ugly

Today is an example of be careful what you wish for. No doubt the UK Office for National Statistics thought it would be clever to produce monthly GDP data. But now in addition to the usual problems they find them not only being scanned beyond their capabilities but for the unwary comparing them to the quarterly and annual ones creates quite a of confusion. Indeed we can go through them in Spaghetti Western style.

The Good

This comes from this part of the release where we how have had three months of economic growth in a row.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020 as lockdown measures continued to ease, following growth of 8.7% in June and 2.4% in May.

In terms of detail we are told this.

“Education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements. Car sales exceeded pre-crisis levels for the first time with showrooms having a particularly busy time.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover.”

The latter component will, of course,please the Bank of England. I have to confess a wry smile at the mention of distillers, have we been driven to drink? As to car sales this was reinforced elsewhere.

wholesale, retail and repair of motor vehicles subsector (in particular, the motor vehicles industry), which recovered to above its February 2020 level after seeing record low levels of output in April and May.

This is an area which was affected by the lockdown as when I took my car in for its MOT in August I was told that in April last year they had done 110 and this year 18. Another area which was similarly affected also boomed in July.

Monthly construction output increased by 17.6% in July 2020 compared with June 2020, rising to £11,922 million, because of growth in all construction sectors.

Then and slightly confusingly not directly linked to the GDP numbers ( which are output not expenditure ones) these will not be included.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £5.9 billion to £6.4 billion in the three months to July 2020, as imports fell by £8.5 billion and exports fell by a lesser £2.7 billion.

I point it out as it is rare for the UK to record a trade surplus which continues as we look for more perspective.

The total trade balance, excluding non-monetary gold and other precious metals, increased by £35.8 billion to a surplus of £3.7 billion in the 12 months to July 2020.

The Bad

Our perspective shifts as we switch to something approaching the more normal quarterly measure for GDP.

Gross domestic product (GDP) fell by 7.6% in the three months to July 2020 following two consecutive quarterly falls, as government restrictions on movement dramatically reduced economic activity.

In case you are wondering how we can grow for 3 individual months but shrink over the total it is because we are comparing the latter with the previous 3 months which include some pre pandemic data.

The Ugly

This comes if we directly compare with where we were or more strictly where we thought we were before the Covid-19 pandemic hit.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020, following growth of 8.7% in June 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020 and was still 11.7% below the levels seen in February 2020,

So we have picked up but the peak is still a fair way ahead. Or if you prefer.

July 2020 GDP is now 18.6% higher than its April 2020 low. However, it remains 11.7% below the levels seen in February 2020,

There is a sub-plot to this which is unusual for the UK.

In July 2020, the Index of Services is 12.6% below February 2020, the last month of “normal” trading conditions prior to measures introduced as a result of the coronavirus (COVID-19) pandemic…..There was a rise of 6.1% in the Index of Services between June 2020 and July 2020.

The area which is normally a strength and pulls the numbers higher has in fact under performed. One feature of this is hardly a surprise although we can expect a pick-up from the “eat out to help out” policy when we get the August numbers.

Total services output decreased by 8.1% for the three months to July 2020, compared with the months to April 2020; this was led by accommodation and food service activities, which fell by 62.7%.

On the other side of the coin production has been helping in relative terms.

In July 2020, the Index of Production (IoP) was 7.0% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic…..Production output rose by 5.2% between June and July 2020, with manufacturing providing the largest upward contribution, rising by 6.3%; there were also rises from electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%).

It was led by this.

The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 subsectors displayed upward contributions.

However it had been in a weak spell anyway and then was hit hard so care is needed.

Comment

There are a lot of contexts and warnings required here many of which are driven by the unreliability of monthly GDP data. The unreliability will be worse right now due to the pandemic as we note something I was pretty much alone in reporting on August 12th.

This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

More was recorded as less which is a UK peculiarity and made our GDP numbers look worse by maybe 5% on the fall. But now we are seeing the other side of some of that as we note this from the July data.

The largest contribution to monthly growth is education, rising by 21.1%.

Now let me look at the mess which is health.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

If course for a spell Covid-19 treatment was booming well if we counted it.

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Oh and if you are struggling with quarterly numbers please run me by how you can get monthly GDP numbers?

For example, the quarterly activity estimates are only made available with a lag, necessitating a form of activity nowcasts.

That is a bit like the services monthly trade data which come mainly from a quarterly survey.

So we did not contract by as much as we thought and have not rebounded by quite as much either.

Looking ahead there are some further strengths for August as we have noted the potential rise in eating out and the Markit PMI reporting this.

A further surge in service sector business activity in August
adds to signs that the economy is enjoying a mini boom as
business re-opens after the lockdowns,

But the PMIs have been downgraded in importance quite a bit as time has passed. Looking further ahead there is this.

The UK has secured a free trade agreement with Japan, which is the UK’s first major trade deal as an independent trading nation, and will increase trade with Japan by an estimated £15.2 billion ( Sky News)

Oh and these things always promise more trade…..

Back to now whilst it was nice to have a bit of variety and be able to report a UK trade surplus it is also true it came from a bad route which is lower imports due to a weaker economy.