The UK economy continues to motor ahead or if you prefer is on drugs

Today sees us advance on some key data for the UK economy as we receive production, manufacturing and trade data. But before we even get to it there has been a warning from France which has already opened the day with something of a conundrum.

In January 2017, output decreased sharply again in the manufacturing industry (−1.0% as in the previous month).

Whereas the Markit PMI ( Purchasing Managers Index ) told us this.

 The index was down from January’s reading of 53.6

We were told that the french economy was doing well in January. From Reuters.

“The expansion was broad-based with marked increases in output evident in both the manufacturing and service sectors, driven by firm underlying client demand. In turn, this filtered through into the labor market.”

Markit has had trouble before with France ironically for producing numbers which were lower than official estimates. But this is another issue for a series which has proved to be disappointing in its accuracy in more recent times.

UK monetary policy

This remains extremely expansionary with the Bank of England adding to its holdings of UK Gilts ( government bonds ) and corporate bonds this week. Indeed at £434.2 billion the UK Gilts part of the QE (Quantitative Easing) program has only one day left but at £8 billion so far there is more corporate bond QE to come. If we add in the £43.9 billion of the Term Funding Scheme we get an idea of the total scale of Bank of England monetary policy in balance sheet terms and that is before we note a Bank Rate set at 0.25%.

The other factor at play is the lower level of the UK Pound £ which post the EU leave vote in the UK has provided an economic stimulus equivalent to a 2.75% cut in Bank Rate if we use the old Bank of England rule of thumb. It would have created quite a shock would it not if we had somehow had the same exchange rate as before but with a Bank Rate of -2.5%!

Today’s data

Production and Manufacturing

Unlike the numbers for the French I quoted above these start brightly for the UK.

In the 3 months to January 2017, total production was estimated to have increased by 1.9%, with manufacturing providing the largest contribution increasing by 2.1%, its strongest growth since May 2010.

However manufacturing output continues to see-saw each month along with the pharmaceutical industry.

In January 2017, total production decreased by 0.4% compared with December 2016 with manufacturing providing the largest downward contribution, decreasing by 0.9%…………The monthly decrease in manufacturing was largely due to a decrease in pharmaceuticals, falling by 13.5%,………. pharmaceuticals can be highly erratic, with significant monthly changes, often due to the delivery of large contracts.

I am glad to see that our official statisticians have caught up with the view that I have been expressing on here for the best part of a year now as this recent pattern began last spring. However if we look back over the past year there is some call for a smile for spring.

Total production output for January 2017 compared with January 2016, increased by 3.2%, supported by growth in all 4 main sectors, with manufacturing providing the largest contribution, increasing by 2.7%.

The pharmaceutical sector is up some 6.1% on a year ago which is good news. But of course that only regains some of the ground which we lost.

Since then, 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 3.3% respectively in the 3 months to January 2017.

What about trade?

This is an ongoing worry for the UK economy that stretches back for around 30 years or so. Actually I recall days when these numbers were considered very important and as a young man working in the City it was “all hands on deck” when they were released. These days they do not get much of a mention especially if they are better because the financial twitter community if I may call it that do quite a bit of cherry picking. But the “same as it ever was” theme continued in January.

The trade deficit in goods and services in January 2017 was £2.0 billion, unchanged from December 2016.

It is odd that such an erratic number is the same for two months in a row but let us take a deeper perspective.

Between the 3 months to October 2016 and the 3 months to January 2017, the total trade deficit (goods and services) narrowed by £4.7 billion to £6.4 billion.

We find some cheer here in the improvement so let us probe further.

At the commodity level, the main contributors to the narrowing of the total trade deficit in the 3 months to January 2017, were increased exports of non-monetary gold, oil, machinery and transport equipment (mainly electrical machinery, aircraft and cars) and chemicals.

So the chemicals numbers are consistent with the reported growth of the pharmaceutical industry which is a relief as they do not always coincide. Also increased production and thence exports of vehicles has helped.

The latest data shows that passenger motor vehicles were the UK’s second highest exported commodity behind mechanical machinery in 2016. The value of cars exported by the UK increased by 14.8% in the year to January 2017 with export growth stronger to non-EU countries (17.9%) compared with the EU (10.0%).

Indeed if you want something hopeful take a look at this.

However one of the problems with these statistics is that they are unreliable and frequently heavily revised. For the UK this is a particular issue as the numbers for the service sector are collected quarterly at best. However this time the revisions were cheerful ones.

The trade in services balance (exports less imports) has been revised upwards by £2.7 billion in Quarter 4 2016, to a trade surplus of £26.6 billion. This reflects an upwards revision of £1.7 billion to exports, and a downwards revision of £1.0 billion to imports.

So a nudge higher for UK GDP (Gross Domestic Product) growth in the last quarter of 2017 although not enough to be especially material.

Another way of looking at this is to note how few countries we do so much of our trading with.

In 2016, nearly 50% of all UK exports of goods went to just 6 countries: the United States, Germany, France, Netherlands, Republic of Ireland and China. The United States are our biggest export partner, receiving 15.7% of all UK exported goods.

The UK’s largest import partner was Germany in 2016, supplying 14.8% of all goods imported to the UK. Similar to exports, over 50% of the UK’s imports of goods come from 6 countries: Germany, China, United States, Netherlands, France and Belgium.

Comment

This morning has seen some more relatively good news for the UK economy. The pattern for production and manufacturing has been relatively solid if erratic on a monthly basis and if we add in the noted improvement to services trade there is good news here. The worry ahead is of course the impact of inflation on the economy mostly via its impact on real wages. I note that according to the Bank of England’s latest survey the ordinary person is noticing it.

Asked to give the current rate of inflation, respondents gave a median answer of 2.7%, compared to 2.3% in November………. Median expectations of the rate of inflation over the coming year were 2.9%, compared with 2.8% in November.

They seem much more in touch with reality than the 2.4% for 2017 forecast by the Office for Budget Responsibility on Wednesday.

For those who follow the UK construction sector the numbers are below, but take them with not just a pinch of salt and maybe the whole salt-cellar.

Construction output fell by 0.4% in January 2017, following consecutive rises in November and December 2016 (0.8% and 1.8% respectively).