The UK is an example of so much going on in some areas albeit with so far no result but apparently not much in others. The latter category includes the real economy if the latest set of Markit PMI business surveys are any guide.
UK service providers indicated that business activity growth lost momentum during August and remained subdued in comparison to the trends seen over much of the past decade. The latest survey also revealed slower increases in new work and staffing levels, which was often linked to sluggish underlying economic conditions.
The slowing of the services sector added to contracting manufacturing and construction sectors to give us this overall result.
At 49.7 in August, the seasonally adjusted All Sector Output
Index dropped from 50.3 in July and registered below the
50.0 no-change mark for the second time in the past three
months……….t, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.
There are two elements of context here. The first is that this survey is not accurate enough to tell to 0.1% or to say 49.7 is any different to unchanged. Also we now that as a sentiment index it had a bit of a shocker during the last period of political turmoil in late summer 2016. Thus our conclusion is that the economy is weak and struggling but contracting? We do not yet know.
There was some interesting news here summarised by Samuel Tombs of Pantheon.
Good news – car registrations were strong in August. The 1.7% y/y drop is consistent with a big seasonally-adjusted m/m% rise, as sales in Aug 2018 jumped ahead of new emissions testing rules. This points to car sales boosting q/q% GDP growth by a non-trivial 0.05pp in Q3.
So whilst the numbers were down on last year they were a solid improvement on July.
A Fiscal Boost
In perhaps the least surprising development this year the Chancellor Sajid Javid announced this yesterday.
The Chancellor has announced an increase in spending on public services for next year. Day-to-day spending on public services will grow by 4.1%, or around £13.8 billion, between 2019−20 and 2020−21 in real terms. This represents of a top-up of £11.7 billion to the provisional spending plans Mr Javid inherited from his predecessor, alongside a £1.7 billion top up to existing capital spending plans for 2020−21, meaning that total spending will be £13.4 billion higher next year than was planned in the spring. ( IFS )
If we switch to GDP as our measure then the planned increases were of the order of 0.6%. As we borrowed 1.1% of GDP in the fiscal year to March that points at 1.7% although as we were already spending more maybe more towards 2% of GDP. That is a little awkward for the Institute of Fiscal Studies which told us over the weekend the fiscal rules would be broken. Mind you as nobody else cares about them it is not that big a deal. Also the IFS seems quite keen on fantasies.
Making major spending decisions without the latest economic and fiscal forecasts is a risky move for the Chancellor. On the basis of forecasts from the spring, extra borrowing to fund today’s announcements could – just – be accommodated within the government’s fiscal targets. But the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the near-term outlook for the UK economy and public finances.
Just as a reminder the first rule of OBR club is that the OBR is always wrong. How has the IFS not spotted this? Mind you their head Paul Johnson was enthusiastically plugging the RPI news yesterday hoping that his 2015 Inflation Review might get pulled out the recycling bin and that it might have 17% of it made up of fantasy rents.
After all that I am not sure we can trust their view on austerity but for what it;s worth here it is.
This is enough to reverse around two thirds of the real cuts to day-to-day spending on public services – at least on average – since 2010, and around one third of the cuts to per capita spending.
Bank of England
Governor Carney was giving evidence to Parliament yesterday and it included this.
The negative impact of a no-deal Brexit will not be as severe as originally thought because of improved planning by the government, businesses and the financial sector, the Bank of England has said.
Governor Mark Carney told the Treasury select committee that the Bank now believes GDP will fall by 5.5% in the worst-case scenario following a no-deal Brexit – less than the 8% contraction it predicted in last November.
The Bank’s revised assessment of the possible scenarios also says unemployment could increase by 7% and inflation may peak at 5.25% if the UK leaves the European Union without a deal. ( Sky News )
Who could possibly have though that people and businesses would plan ahead? Of course when your own Forward Guidance has been so woeful maybe you have something of a block on that sort of thing. Also if I was Governor Carney I would have avoided all mention of a 7% Unemployment Rate after the 2013 Forward Guidance debacle on that subject.
Perhaps this is why some want to delay Brexit because in 2/3 years time at the current rate of progress the Bank of England will be forecasting growth from a No-Deal.
Also although he does not put it like that in the quote below is a confession that I am right about how falls in the Pound £ impact inflation.
It is likely that food bills will rise in the event of a no-deal Brexit, that is almost exclusively because of the exchange rate impact. Movements are quickly translated onto the shop shelf, and domestic prices, imperfect substitutes, also increase. That impact has lessened because of the new tariff regime the government has put in place.
Another goal I have slipped past their legion of Ivory Tower economists.
There was something else that was really odd from him via Bloomberg.
Mark Carney says there’s almost no chance of the Bank of England intervening in the foreign-exchange market to control swings in the pound
So why has the UK been building up its foreign exchange reserves then? They are now £66.8 billion.
The UK economy has been remarkably resilient in 2019 so far. We have had all sorts of Brexit and non-Brexit plans, the trade war and much else. Somehow we have got by. Financial markets are in flux as no sooner had the Financial Times started to cheer the way the UK Pound £ fell below US $1.20 it reversed and is now above US $1.23.
The FT has a problem because 1% moves lower in the UK Pound £ are a plunge and yet the 9% fall in the 2068 Index-Linked Gilt yesterday was described like this by economics editor Chris Giles.
Price of the 2068 index-linked gilt dropped today, but complete stability in market and prices still higher than a month ago – – showing those who claimed changing the RPI would kill the market to have exagerated wildly
I will ignore the second straw(wo)man bit and simply point out it has now fallen 13%. The losers will not be the “Gnomes of Zurich” as Chris claimed at the Royal Statistical Society but the ordinary pensioner looking for safety. It gives us a new definition for “complete stability” in my financial lexicon for these times.
The Investing Channel