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.

 

 

Even if this quarter sees economic growth of 7% Germany has gone back in time to 2015

Today has brought the economic engine of the Euro ares into focus as we digest a barrage of data from and about Germany. We find that the second effort at producing economic output figures for the second quarter has produced a small improvement.

WIESBADEN – The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%).

This means that the comparison with last year improved as well.

11.3% on the same quarter a year earlier (price-adjusted)

The last figure is revealing in that it reminds us that the German economy had been in something of a go-slow even before the Covid-19 pandemic hit. Also we note that the hit was in broad terms double that of the credit crunch.

The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.

The Details

With a lockdown in place for a fair bit of the quarter this was hardly a surprise.

As a consequence of the ongoing corona pandemic and the restrictions related with it, household final consumption expenditure fell sharply by 10.9% in the 2nd quarter of 2020.

What is normally considered to be a German strength fell off the edge of a cliff as investment plunged.

Gross fixed capital formation in machinery and equipment even dropped by as much as 19.6%.

Which made the annual picture this.

 Gross fixed capital formation in machinery and equipment fell sharply by 27.9% after already dropped considerably by 9.5% in the 1st quarter.

Also a platoon of PhD’s from the ECB will be on their way to work out what has gone on here?

Gross fixed capital formation in construction also declined markedly (-4.2%) in the 2nd quarter, which was due in particular to the exceptionally strong 1st quarter (+5.1%).

The ECB PhD’s may be able to write a working paper describing what their bosses would consider a triumph. Or at least, something described as a triumph on the crib sheet provided to ECB President Christine Lagarde.

Gross fixed capital formation in construction, which was 1.4% higher than in the 2nd quarter of 2019, also had a supporting effect year on year.

Looking at the annual comparison it has not been a good year for net exporters.

Foreign trade fell dramatically also compared with a year earlier. Exports of goods and services fell by 22.2% (price-adjusted) in the 2nd quarter of 2020 year on year. Imports did not drop as strongly (-17.3%) over that period.

Something else which you might reasonably consider to be not very Germanic has been in play.

Only final consumption expenditure of general government had a stabilising effect; it was 1.5% higher than in the previous quarter and prevented an even larger GDP decrease………( and the annual data)  In contrast, an additional 3.8% in government final consumption expenditure prevented the economy from crashing even more.

We know that the unemployment numbers have been actively misleading in the pandemic but I note that the hours worked data gives a similar picture to GDP.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 10.0% over the same period.

This had an inevitable consequence for productivity.

Labour productivity per person in employment slumped by as much as 10.2% compared with the 2nd quarter of 2019.

Savings

I thought I would pick this out as it is a clear development in the Covid era.

The relatively stable incomes, on the one hand, and consumer reticence, on the other, resulted in a substantial rise in household saving. According to provisional calculations, the savings ratio nearly doubled to 20.1% in the 2nd quarter of 2020 year on year (2nd quarter 2019: 10.2%).

Looking Ahead

This morning’s IFO release tells us this.

Sentiment among German business leaders is continuing to improve. The ifo Business Climate Index rose from 90.4 points (seasonally adjusted)  in July  to 92.6 points in August. Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.

Although a somewhat different context was provided by this.

In manufacturing, the business climate improved considerably. Companies’ assessments of their current situation jumped higher. Nevertheless, many industrial companies still consider their current business to be poor. The outlook for the coming months was again more optimistic. Order books are filling once more.

That showed a welcome improvement but only to a level considered to be poor so it is hardly surprising they are optimistic relative to that. Indeed trade seems to have engaged reverse gear.

In trade, the upward trend in the business climate flattened noticeably. Companies were somewhat more satisfied with their current situation. However, their pessimism regarding the coming months was almost unchanged. In wholesale, the business climate in fact fell back.

Perhaps they are getting a little more like us in the UK as the services sector seems to be on the road to recovery.

In the service sector, the Business Climate Index rose strongly. Service providers were decidedly happier with their current business situation. Their outlook for the coming six months also improved further.

Considering the GDP numbers you might think that construction would be more upbeat.

In construction, the business climate continues to improve. Construction companies were again happier with their current situation. However, their expectations are still pessimistic, albeit less so than last month.

Comment

If we take the example below where would that leave Germany?

Germany IFO expects GDP growth of around 7% in Q3 ( DailyFX.com )

If we take the unadjusted figure of 93.46 for the second quarter then we will rise to 100 or if you prefer we will have stepped back in time to 2015. So the “Euro boom” and all the ECB backslapping will have been wiped out. The 7% economic growth recorded over the period will be ground that will have to be re-taken. That will be not so easy as we see renewed but hopefully more minor Covid-19 outbreaks in other parts of the Euro area.

I am a little unclear how @Economist_Kat gets to this.

#Germany: #ifo survey results for August are consistent with the economy moving into Boom territory.

Perhaps too much kool-aid. According to a @LiveSquawk the official view is that things can only get better.

German FinMin Scholz: Economy Developing Better Than Expected

Meanwhile official policy has the pedal to the metal with an official interest-rate for banks at -1% and two QE bond buying schemes running at once. We also have fiscal policy being deployed on a grand scale, especially for Germany. There is little scope for it to do more.

 

 

 

 

 

Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

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. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP

If Lagarde expects disinflation then we should fear inflation….

Today brings the economy of the Euro area in to focus. Over the weekend we heard from the President of the European Central Bank or ECB.

(Bloomberg) — European Central Bank President Christine Lagarde said the euro zone faces about two years of downward pressure on prices, but could see a turnaround after that because the coronavirus crisis will accelerate the transformation of the economy.

There is an obvious issue in forecasting 2 years ahead when we struggle to know what will happen in two weeks. Even worse is Christine Lagarde’s record as according to her both Greece and Argentina were going to grow in such a timescale when in fact their economies collapsed. Her policies are also doing the best they can to slow the transformation of the economy via the support of zombie banks and companies.

The reality is that the forecast is to justify decisions that have already been taken.

In the meantime, the central bank will need to keep its monetary policy exceptionally loose, and financial instruments will need to be developed that allow the economic transformation to be funded, she said.

Also there is an opportunity to find a scapegoat for an effect of her policies.

Still, she warned that pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.

You also might think that she would be too busy with the day job to take on other things but apparently not.

“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said. “We won’t do it in one day, but we must question in every domain, stress test by stress test.”

Also on Friday the ECB released this.

They’re here! We’ve just received the first banknotes featuring President Lagarde’s signature. The €5 and €10 notes will be the first with the new signature to enter into circulation, starting next week. Those with the signature of former presidents will remain legal tender.

Sadly they have ignored my suggestion that some of the notes should have been orange to mark the occasion.

German Manufacturing

This is something of a bellweather for the Euro area economy and trade. So let’s start with the positive bit.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), real (price adjusted) new orders increased by a seasonally and calendar adjusted 10.4% in May 2020 compared with April 2020.

As I am sure you were expecting the annual comparison whilst better than April’s -36.9% remains grim.

 Compared with May 2019, the decrease in calendar adjusted new orders amounted to 29.3%

If we go to the underlying index then total orders are at 71.1% of the 2015 average. There is a clear geographic pattern to this.

Domestic orders increased by 12.3% and foreign orders rose by 8.8% in May 2020 on the previous month. New orders from the euro area went up 20.9%, and new orders from other countries increased by 2.0% compared with April 2020.

Also I did start with a mention of a bellweather.

New orders in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, new orders were still more than 47% lower than in February 2020.

We can also look at turnover.

According to provisional results, price-adjusted turnover in manufacturing in May 2020 went up a seasonally and calendar adjusted 10.6% on the previous month…….

Compared with February 2020, the month before restrictions were imposed due to the corona pandemic in Germany, turnover in May 2020 was 23.5% lower in seasonally and calendar adjusted terms.

Again the car industry has been heavily affected and of course 2019 was considered a ropey year at the time.

Turnover in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, it was still nearly 47% lower than in February 2020.

Construction

We have learned that the Purchasing Managers Indices have their issues but here is this morning’s update.

The IHS Markit Eurozone Construction Total Activity Index rose sharply from 39.5 in May to 48.3 in June, indicating the weakest decline in construction activity across the eurozone since February amid a relaxation of measures designed to control the coronavirus disease 2019 (COVID-19) pandemic. Survey data showed France and Italy recorded construction output growth, while Germany posted a further marked decline.

Let us move on noting that Germany seems to be struggling across a few areas.

Retail Sales

Having seen the sad news about Ennio Morricone let is look at first the good.

In May 2020, when Member States began easing the COVID-19 containment measures, the seasonally adjusted
volume of retail trade increased by 17.8% in the euro area and by 16.4% in the EU, compared with April 2020,
according to estimates from Eurostat.

The bad is that volume is only 102% of the average for 2015 so the Euro  boom has gone for now and also this.

In May 2020 compared with May 2019, the calendar adjusted retail sales index decreased by 5.1% in the euro
area and by 4.2% in the EU.

The ugly is Greece which saw retail sales collapse as to return to my opening theme Christine Lagarde predicted “Shock and Awe”. Just to show how big the move was if we stay with 2015 as our benchmark then April 2007 was 167% of it as opposed to the 74.7% of this April. That is how you define an ongoing depression which sadly has been pushed even deeper by the economic impact of the Covid-19 virus pandemic. Also after all the reform rhetoric of the IMF and Euro area authorities I note that Greece has not yet produced numbers for May in this area.

Zombie! Zombie! Zombie!

This morning has seen the release of a ECB working paper which has made me mull those famous song lyrics, why? Well we get an official denial.

As regards the distribution of the funds, in contrast to the common perception about take-up in
central bank operations in crisis times, we do not find strong evidence that TLTRO funds end up
importantly with financially weak banks. If anything, banks with a larger capital buffer take up more.

You may note the use of “strong evidence” “importantly” and “if anything”. To which we can add “dominant” below.

The TLTRO funds do not end up dominantly with financially weak banks.

Indeed is weak banks are no big deal it makes you wonder why they bothered with this?

In addition, applying different lending benchmark requirements to banks depending on their deleveraging pressure appears to have been important to have take-up also by deleveraging banks.

or this.

namely by reducing the TLTRO interest rate and expanding the amount and types of eligible collateral.

This has become even for these times a big deal.

This paper asks what characterises and incentivises individual banks to take this “funding for
lending” which peaked at EUR 762 billion and what role the parameters of the scheme play.

Comment

Today’s article has been topped and tailed by the ECB and its activities. In the middle we have noted the effect of the lockdowns and pandemic. But if we look ahead the issue switches to what type of future it wants? For all the rhetoric the Euro area was already struggling highlighted by the way that the end of QE lasted for about 9 months. Curious as according to Christine Lagarde things are well placed.

Europe is in an excellent position to join this transition, according to Lagarde. The continent has the world’s largest circular economy and ecological innovation sector while the euro is the first currency used for the issuing of green bonds, she noted. ( Brussels Times)

Perhaps going round in circles is not the best analogy. Still there is time to be a control freak because it has gone so well?

However, this would not be enough and an economic policy framework that allows the required financing to be mobilized will need to be put in place, according to Lagarde.

Podcast

 

UK monthly GDP is a poor guide to where the economy stands

Today has opened with the media having a bit of a party over the economic news from the UK and they have been in such a rush they have ignored points one and two and dashed to point 3.

Monthly gross domestic product (GDP) fell by 20.4% in April 2020, the biggest monthly fall since the series began in 1997. ( Office for National Statistics)

Actually our official statisticians seem to have got themselves in a spin here which is highlighted by this bit.

Record falls were also seen across all sectors:

    • services – largest monthly fall since series began in 1997
    • production – largest monthly fall since series began in 1968
    • manufacturing – largest monthly fall since series began in 1968
    • construction – largest monthly fall since series began in 2010

As you can see they have jumped into a quagmire as suddenly we have numbers back to 1968 rather than 1997! What they originally meant was the largest number since we began monthly GDP about 18 months ago. The rest is back calculated which did not go that well when they tried it with inflation. Oh and let me put you at rest if you are worried we did not measure construction before 2010 as we did. Actually we probably measured it better than we do now as frankly the new system has been rather poor as regular readers will be aware.

Now I can post my usual warning that the monthly GDP series in the UK has been very unreliable and at times misleading even in more normal scenarios. Or as it is put officially.

The monthly growth rate for GDP is volatile. It should therefore be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy.

So let us move on noting that the reality with data in both March and April hard to collect due to the virus pandemic is more like -15% to -25%. The 0.4% in the headline is beyond even spurious accuracy and let me remind you that I have consistently argued that the production of monthly GDP is a mistake.

Mind you it did produce quite an eye-catching chart.

Context

As we switch to a more normal quarterly perspective we are told this.

>GDP fell by 10.4% in the three months to April, as government restrictions on movement dramatically reduced economic activity

This in itself was something of a story of two halves as we went from weakness to a plunge as restrictions on movement began on the 23rd of March. There is also something of a curiosity in the detail.

The services sector fell by 9.9%, production by 9.5% and construction by 18.2%.

The one sector that did carry on to some extent in my area was construction as work on the Royal School of Art and the Curzon cinema in the King’s Road in Chelsea continued. So let us delve deeper.

Services

If we look at the lockdown effect we can see that it crippled some industries.

The dominant negative driver to monthly growth, wholesale and retail trade and repair of motor vehicles and motorcycles, contributed negative 3.5 percentage points, though falls were large and widespread throughout the services industries; notable falls occurred in air transport, which fell 92.8%, and travel and tourism, which fell 89.2%.

The annual comparison is below.

Services output decreased by 9.1% between the three months to April 2019 and the three months to April 2020, the largest contraction in three months compared with the same three months of the previous year since records began in January 1997.

Actually we get very little extra data here.

Wholesale and retail trade and repair of motor vehicles and motorcycles was the main driver of three-monthly growth, contributing negative 1.95 percentage points.

This brings me to a theme I have been pursuing for some years now. That is the fact that our knowledge about the area which represents some four-fifths of our economy is basic and limited. I did make this point to the official review led by Sir Charles Bean. But all that seems to have done is boosted his already very large retirement income, based on his RPI linked pension from the Bank of England.

Production

We follow manufacturing production carefully and it is one area where the numbers should be pretty accurate as you either produce a car or not for example.

The monthly decrease of 24.3% in manufacturing output was led by transport equipment, which fell by a record 50.2%, with motor vehicles, trailers and semi-trailers falling by a record 90.3%; of the 13 subsectors, 12 displayed downward contributions.

The annual comparison is grim especially when we note that there were already problems for manufacturing due to the ongoing trade war.

For the three months to April 2020, production output decreased by 11.9%, compared with the three months to April 2019; this was led by a fall in manufacturing of 14.0% where 12 of the 13 subsectors displayed downward contributions.

Construction

According to the official series my local experience is not a good guide.

Construction output fell by 40.1% in the month-on-month all work series in April 2020; this was driven by a 41.2% decrease in new work and a 38.1% decrease in repair and maintenance; all of these decreases were the largest monthly falls on record since the monthly records began in January 2010.

This gives us an even more dramatic chart so for those who like that sort of thing here it is.

The problem is that this series has been especially troubled as we have noted over the years. For newer readers they tried to fix it bu switching a large business from services to construction but that mostly only raised questions about how they define the difference? There was also trouble with the measure of inflation.

Anyway here is a different perspective.

Construction output fell by record 18.2% in the three months to April 2020, compared with the previous three-month period; this was driven by a 19.4% fall in new work and a 15.8% fall in repair and maintenance.

Comment

As we break down the numbers we find that they are a lot more uncertain than the headlines proclaiming a 20.4% decline or if you prefer a £30 billion fall suggest. Let me add another factor which is the inflation measure or deflator which will not only be wrong but very wrong too. The issue of using annual fixed weights to calculate an impact will be wrong and in the case of say air transport for example it would be hard for it to be more wrong in April. On the other side of the coin production of hand sanitiser and face masks would be travelling in the opposite direction.

We can switch to trying to look ahead with measures like this.

There was an average of 319 daily ship visits during the period 1 June to 7 June 2020, a slight fall compared with the previous week.

The nadir for this series was 215 on the 13th of April so we have picked up but are still below the previous 400+. . There was also a pick-up using VAT returns in May but again well below what we had come to regard as normal.

 There has been a small increase in the number of new VAT reporters between April 2020 and May 2020 from 15,250 to 16,460.

But I think the Office for National Statistics deserves credit for looking to innovate and for trying new methods here.

Meanwhile I think the Bank of England may be trying some pre weekend humour.

 

What policy action can we expect from the Bank of England?

As to world faces up to the economic effects of the Corona Virus pandemic there is a lot to think about for the Bank of England. Yesterday it put out an emergency statement in an attempt to calm markets and today it will already have noted that other central banks have pulled the interest-rate trigger.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. ( Reserve Bank of Australia).

There are various perspectives on this of which the first is that it has been quite some time since the official interest-rate that has been lower than in the UK. Next comes the fact that the RBA has been cutting interest-rates on something of a tear as there were 3 others last year. As we see so often, the attempt at a pause or delay did not last long, and we end up with yet another record low for interest-rates. Indeed the monetary policy pedal is being pressed ever closer to the metal.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years.

Also in the queue was a neighbour of Australia.

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.75 percent and 2.25 percent, respectively.

So there were two interest-rate cuts overnight meaning that there have now been 744 in the credit crunch era and I have to add so far as we could see more later today. The problem of course is that in the current situation the words of Newt in the film Aliens come to mind.

It wont make any difference

It seems that those two central banks were unwilling to wait for the G7 statement later and frankly looking at it I can see why.

– G7 Now Drafting Statement On Coronavirus Response For Finance Leaders To Issue Tuesday Or Wednesday – Statement As Of Now Does Not Include Specific Language Calling For Fresh Fiscal Spending Or Coordinated Interest Rate Cuts By Central Banks – RTRS Citing G7 Source ( @LiveSquawk )

The truth is G7 are no doubt flying a cut to see how little they can get away with as monetary ammunition is low and fiscal policy takes quite some time to work. A point many seem to have forgotten in the melee.

The UK Economy

The irony of the present situation is that the UK economy was recovering before this phase.

Manufacturing output increased at the fastest pace since
April 2019, as growth strengthened in both the consumer
and intermediate goods sectors. In contrast, the downturn
at investment goods producers continued. The main factor
underlying output growth was improved intakes of new
work. Business optimism also strengthened, hitting a nine month high, reflecting planned new investment, product
launches, improved market conditions and a more settled
political outlook. ( IHS Markit )

This morning that was added to by this.

UK construction companies signalled a return to business
activity growth during February, following a nine-month
period of declining workloads. The latest survey also pointed to the sharpest rise in new orders since December 2015. Anecdotal evidence mainly linked the recovery to a postelection improvement in business confidence and pent-up demand for new projects. ( IHS Markit)

If there is a catch it is that we have seen the Markit PMI methodology hit trouble recently in the German manufacturing sector so the importance of these numbers needs to be downgraded again.

Monetary Conditions

As you can see the situation looks strong here too as this from the Bank of England yesterday shows.

Mortgage approvals for house purchase rose to 70,900, the highest since February 2016.

The annual growth rate of consumer credit remained at 6.1% in January, stabilising after the downward trend seen over past three years.

UK businesses made net repayments of £0.4 billion of finance in January, driven by net repayments of loans.

Please make note of that as I will return to it later. Now let us take a look starting with the central banking priority.

Mortgage approvals for house purchase (an indicator for future lending) rose to 70,900 in January, 4.4% higher than in December, and the highest since February 2016. This takes the series above the very narrow range seen over past few years.

Actual net mortgage lending at £4 billion is a lagging indicator so the Bank of England will be expecting this to pick up especially if we note current conditions. This is because the five-year Gilt yield has fallen to 0.3%. Now conditions are volatile right now but if it stays down here we can expect even lower mortgage rates providing yet another boost for the housing market.

Next we move to the fastest growing area of the economy.

The annual growth rate of consumer credit (credit used by consumers to buy goods and services) remained at 6.1% in January. The growth rate has been around this level since May 2019, having fallen steadily from a peak of 10.9% in late 2016.

As you can see the slowing has stopped and been replaced by this.

These growth rates represent a £1.2 billion flow of consumer credit in January, in line with the £1.1 billion average seen since July 2018.

Broad money growth has been picking up too since later last spring and is now at 4.3%.

Total money holdings in January rose by £9.4 billion, primarily driven by a £4.2 billion increase in NIOFC’s money holding.

The amount of money held by households rose by £2.8 billion in January, compared to £3.3 billion in December. The amount of money held by PNFCs also rose by £2.3 billion.

Comment

The numbers above link with this new plan from the ECB.

Measures being considered by the ECB include a targeted longer-term refinancing operation directed at small and medium-sized firms, which could be hardest hit by a virus-related downturn, sources familiar with the discussion told Reuters. ( City-AM)

You see when the Bank of England did this back in 2012 with the Funding for Lending Scheme it boosted mortgage lending and house prices. Where business lending did this.

UK businesses repaid £4.1 billion of bank loans in January. This predominantly reflected higher repayments. These weaker flows resulted in a fall in the annual growth rate of bank lending to 0.8%, the weakest since July 2018. Within this, the growth rate of borrowing from large businesses and SMEs fell to 0.9% and 0.5% respectively.

I think that over 7 years is enough time to judge a policy and we can see that like elsewhere ( Japan) such schemes end up boosting the housing market.

It also true that the Bank of England has a Governor Mark Carney with a fortnight left. But he has been speaking in Parliament today.

BANK OF ENGLAND’S CARNEY SAYS SHOULD EXPECT A RESPONSE THAT HAS A MIX OF FISCAL AND CENTRAL BANK ELEMENTS

BANK OF ENGLAND’S CARNEY SAYS EXPECT POWERFUL AND TIMELY GLOBAL ECONOMIC RESPONSE TO CORONAVIRUS ( @PrispusIQ)

That sounds like a lot of hot air which of course is an irony as he moves onto the climate change issue. I would imagine that he cannot wait to get away and leave his successor to face the problems created by him and his central planning cohorts and colleagues.

His successor is no doubt hoping to reward those who appointed him with an interest-rate cut just like in Yes Prime Minister.

 

 

UK GDP growth is as flat as a pancake

Today brings us the last major set of UK economic data before the General Election on Thursday at least for those who vote in person. It is quite a set as we get trade, production, manufacturing and construction data but the headliners will be monthly and quarterly GDP. As the latter seem set to be close to and maybe below zero no doubt politicians will be throwing them around later. Let’s face it they have thrown all sorts of numbers around already in the campaign.

The UK Pound

This has been the economic factor which has changed the most recently although it has not got the attention it deserves in my opinion. At the time of writing the UK Pound £ is above US $1.31, 1.18 to the Euro and nearing 143 Yen. This means that the effective or trade-weighted index calculated by the Bank of England is at 81.1 which is about as good as it has been since the post EU leave vote fall ( there were similar levels in April of last year). This particular rally started on the 9th of August from just below 74 so it has been strong or if you prefer for perspective we opened the year at 76.4.

Thus using the old Bank of England rule of thumb we have seen the equivalent of more than a 1% rise in official interest-rates or Bank Rate in 2019 so far. This has produced two economic developments or at least contributed to them. The first is that inflation prospects look good and I mean by my definition not the Bank of England one. The CPI versions could head below 1% in the months to come and RPI towards 1.5%. The other is that it may have put a small brake on the UK economy and contributed to our weak growth trajectory although many producers are probably used to swings in the UK Pound by now.

Some good news

The trade figures will be helped by this from UK wind.

GB National Grid: #Wind is currently generating 13.01GW (33.08%) out of a total of 39.34GW

The catch is that of course we are reliant on the wind blowing for a reliable supply. Also that it is expensive especially in its offshore guise, as it it both outright expensive to add to the costs of a back-up.

GDP

As to growth well our official statisticians could not find any.

UK GDP was flat in the three months to October 2019.

If we look at the different sectors we see what has become a familiar pattern.

The services sector was the only positive contributor to gross domestic product (GDP) growth in the three months to October 2019, growing by 0.2%. Output in both the production and construction sectors contracted, by 0.7% and 0.3%, respectively. The weakness seen in construction was predominantly driven by a fall of 2.3% in October.

So services grew and production shrank with construction erratic but also overall lower. If you wish to go to another decimal place you can find a small smidgeon of growth as services pushed GDP up by 0.17%, production cost 0.1% and construction cost 0.02% leaving a net 0.05%. But that is spurious accuracy as that puts the numbers under too much pressure.

Services

There was something of note in the monthly series ( October).

Services also grew by 0.2% in October, with widespread growth in several industries. The most notable of these were real estate activities and professional, scientific and technical activities, which both contributed 0.06 percentage points to gross domestic product (GDP) growth. The latter was driven by strength in both architectural and engineering activities, and research and development.

Two things stand out from this. Firstly the quarterly growth was essentially October  and next that much of it was from real estate and architecture. Is Nine Elms booming again? But more seriously something is perhaps going on here that has not been picked up elsewhere.

Production

Here the news has been pretty gloomy all round although the energy part is good news in terms of better weather and less expense for consumers.

Total production output decreased by 0.7% for the three months to October 2019, compared with the three months to July 2019; this was led by manufacturing output, which fell by 0.7%, followed by falls in mining and quarrying (2.6%) and electricity and gas (1.0%).

This reminds us that these areas have been seeing a depression in the credit crunch era.

Production output in the UK remained 6.2% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008……..Manufacturing output in the UK remained 3.5% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008.

It was not so long ago that it looked like manufacturing was about to escape this but then the trade war happened.

There was a flicker in October alone but the impact of the swings in the pharmaceutical industry are usually much stronger than that.

The growth of 0.1% in total manufacturing output in October 2019, compared with September 2019, was mainly because of widespread strength, with 8 of the 13 subsectors displaying upward contributions. The largest of these came from the volatile pharmaceutical products subsector, which rose by 2.1%, following two consecutive periods of significant monthly weakness during August and September 2019.

Trade

The issue here is the uncertainty of the data which today has illustrated,

The total UK trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019, as imports grew faster than exports

That seems clear but then again maybe not.

Excluding unspecified goods (which includes non-monetary gold), the total trade deficit narrowed £4.3 billion to £2.9 billion in the three months to October 2019.

The oversea travel and tourism problems have still not be solved.

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.

Moving on there is also this.

In current prices, the trade in goods deficit widened £6.8 billion to £35.6 billion, largely driven by rising imports; the trade in services surplus widened £4.4 billion to £28.4 billion, largely driven by rising exports.

So there is hope for the UK services exports which seem to be doing well and I have long suspected have been under recorded. For example smaller businesses are likely to be missed out. The scale of this is simply unknown and as we have issues here this must feed into the wider GDP numbers which are so services driven.

So our trade problem is a case of definitely maybe.

Comment

We perhaps get the best perspective from the annual rate of GDP growth which is now 0.8% using the quarterly methodology. If we take out the spring blip that has been declining since the 2% of August 2018. There are some ying and yangs in the detail because of we start with the positive which is services growth ( 1.3%) it has been pulled higher by the information and communication category which is up by 5.4% and education which is up by 3%. But on the other side of the coin the depression in production and manufacturing has worsened as both have fallen by 1.5%. I have little faith in the construction numbers for reasons explained in the past but growth there has fallen to 0%.

There are lots of permutations for the General Election but yet another interest-rate cut by the Bank of England just got more likely. It meets next week. Also political spending plans are getting harder to afford in terms of economic growth,

 

 

 

Worrying signs for the economy of France as the manufacturing downturn bites

Today has opened with some troubling news for the economy of France and the area driving this will not be a surprise. The official confidence survey series has produced this headline.

In October 2019, the business climate has deteriorated in the manufacturing industry

This is a sign that the problems we see in so much of the world have been hitting France and there has been a particularly rapid deterioration this month.

According to the business managers surveyed in October 2019, the business climate in industry has deteriorated compared to September. The composite indicator has lost three points to 99, moving just below its long term average (100).

If we look back at this series we see that it peaked at 113,5 back in February 2018 and is now at 99.4 so quite a decline which has now moved it below its long-term average, This matters as it is a long-running series and of course 100 for manufacturing means relative decline.

If we look for specific areas of weakness we find these.

In the manufacture of equipment goods, the business climate has lost three points and moved below its long-term average (97). In the in the electrical equipment and in the machinery and equipment branches, the balances of opinion have get worse, more sharply than in September, to stand significantly below their average.

And also these.

The business climate has deteriorated in almost all subsectors, particularly in chemicals where the deterioration is the most significant. In this subsector, as in basic metals, the business climate indicator stands largely below its long-term average.

Maybe a little surprisingly this area seems to be hanging in there.

In the manufacture of transport equipment, the business climate indicator has lost two points in October, after a stability in the previous month, and stands slightly below its long-term average.

That is in spite of this.

The climate indicator has decreased again in the automotive industry and has practically returned to the low point of July. The balance of opinion on general production prospects contributes the most sharply to this deterioration.

They do not say it but the motor industry has fallen to 91.

On the other side of the coin the computing and optical sector seems to be improving.

If we bring it all together then there are concerns for other economic measures from this.

Considering employment, the balances opinion on their past variation and perspectives have declined slightly. Both indicators stand however largely above their long-term average.

That does not seem set to last and for what it is worth ( it is volatile) there is also this.

The turning-point indicator has moved down into the area indicating an uncertain economic outlook.

For context the official output series has been telling us this.

In August 2019, output diminished in the manufacturing industry (−0.8%, after +0.4%)……..Over the last three months, output declined in manufacturing industry (−1.2%)……Manufacturing output of the last three months got worse compared to the same three months of 2018 (−0.8%),

That was something of a troika as all three ways of measuring the situation showed falls.

Is it spreading to other sectors?

So far the services sector is not only ignoring this it is doing rather well.

According to business managers surveyed in October 2019, the business climate in services is stable. At 106, it stands well above its long-term average (100).

The only real flicker is here.

More business managers than in July have reported demand difficulties only.

Construction is apparently continuing the boom which began in 2015.

According to the business managers in the building construction industry surveyed in October 2019, the business climate is stable. The composite indicator stands at 112, its highest level since May 2008, largely above its long-term average (100).

This brings me to the official forecast for economic growth from the beginning of the month.

However, the macroeconomic scenario for France remains virtually unchanged since the June 2019 Conjoncture in France report (with projected growth of +0.3% each quarter through to the end of the year, and +1.3% as an annual average in 2019.

The problems you see are all the fault of whatever is French for Johnny Foreigner.

The international economic environment is deteriorating, due to a combination of several factors: protectionist pressures, uncertainties surrounding Brexit, doubts about the orientation of economic policies in certain countries, etc. Growth forecasts for most of France’s economic partners are therefore revised downwards.

Indeed their statisticians seem to abandon European unity and indulge in some trolling.

These international shocks have had a more negative impact on economic activity in Germany than in France. Indeed, growth in Germany stagnated in the spring (–0.1% after +0.4%), with the weakening of international trade and the slowdown in corporate investment hitting industry much harder than services.

If only German had a word for that. Meanwhile this bit just seems cruel.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

Monetary Policy

Here we go.

the European Central Bank (ECB) extended its highly accommodating monetary policy in September, among other things by lowering the deposit rate and resuming its bond purchases as of November 2019 for a total of €20 billion per month.

I like the way they have cottoned onto my idea that markets mostly respond to QE before it happens and sometimes quite a bit before.

As a result, Eurozone sovereign yields entered negative territory (in the spring for the German ten-year yield and in the summer for the French yield).

Fiscal Policy

There is a clue above that there have been ch-ch-changes. That is represented by the ten-year yield in France being -0.1% as I type this. Borrowing is not a complete freebie as the thirty-year yield is 0.7% but ECB policy ( 420 billion Euros of French government bonds and about to rise) means France can borrow very cheaply.

France is taking more of an advantage of this than my country the UK because it borrowed at an annual rate of 3,5% of GDP in the first quarter of the year and 3.4% in the second. Contrary to much of the official rhetoric we see rises of the order of 1% of GDP here so we can see how domestic demand in the economy has been “resilient”. It is also presumably a response to the Gilet Jaunes issue.

France in debt terns is quite tight on a big figure change and Japan excepted the big figure change as the debt to GDP ratio was 99.6% at the end of June. It will be under pressure from the extra borrowing and thus very dependent on economic growth remaining to stay under 100%.

The number being like that explains why the Governor of the Bank of France diverted us somewhat when he was in New York a week ago.

The euro area has a lower level of public debt (85%) than in the United-States (104 %) or the UK (87%),

Actually the UK is in fact below 85% so it was not his finest hour.

Comment

Today’s journey brings us two main themes. The first is that the French economy has been boosted by some extra government spending. This is in stark contrast to Germany which is running a fiscal surplus. But the ~1% of GDP increase seems to have got a little lost in translation as economic growth has only been ~0.6% so far. However it is a case for counter cyclical fiscal policy as otherwise the French economy may have contracted.

Now we see signs of a downwards turn in the already weakened manufacturing sector which poses a problem with fiscal policy already pushing the boundaries of the Maastricht rules. Also if we look deeper I find this deeply troubling from the Governor of the Bank of France.

Despite this gloomy context, the French economy is resilient, with growth at 1.3% close to its potential.

This is a reference to what is the new central banking standard of annual GDP growth having something of a speed limiter at 1.5%. Let me give you two problems with it. Firstly they seem to get a free pass as to their role in this as one of the biggest changes has been their own actions. Secondly it ignores countries like Spain which may now be slower but have in recent times done much better than this.

 

 

 

 

The UK Services sector is the shining star of the economy and GDP

Today brings us a whole raft of data on the UK economy or what out official statisticians call a theme day. Actually we get too much in one burst with the trade data usually being ignored which may well be a Sir Humphrey Appleby style plan. But before we get to that we can look at the economy from the viewpoint of the Bank of England.

Turning to prices, the headline price balance sees a flat trend in house price inflation. However, there is once again a mixed picture across the UK with negative momentum in London and the South East, and solid gains in Northern Ireland, Scotland and the North West.

Looking ahead, price expectations for the coming three months stand at -16% pointing to a modest decline on a UK-wide basis. However, the twelve-month outlook points to a turnaround, with +18% more respondents expecting prices to rise (rather than fall) over the coming year.

That is from the Royal Institute of Chartered Surveyors or RICS. As you can see there are no “wealth effects” to be found presently unless they can somehow only draw Governor Carney’s attention to the North or Scotland and Northern Ireland.

A little innovation will be required to present this as good news.

 In keeping with this, newly agreed sales fell, with a net balance of -27% (from -11% previously), with activity reportedly slipping in virtually all parts of the UK. As far as the near-term outlook is concerned, sales expectations stand at -9%, suggesting sales will remain subdued in the coming three months………This will not only be a direct hit on the housing market itself but could have ramifications for the wider economy as the normal spend on furniture, fittings and appliances that typically accompanies a house move is also put on hold.

One possibility for the morning staffer presenting such information to an irascible Governor is to appeal to his plan to be a fearless climate change champion and say it is in line with this.

The TCFD provides the necessary foundation for the financial sector’s role in the transition to net zero that
our planet needs and our citizens demand.

He is indeed so enthusiastic about this that he has flown to Tokyo to point this out. This contrasts the highly important nature of his flights as to the extremely unimportant climate change causing flights of plebs like us.

This backs up what the Halifax told us on Monday and the emphasis is mine because the date is pretty much when the effect of the Funding for Lending Scheme arrived,

“Annual house price growth slowed somewhat in September, rising by just 1.1% over the last year. Whilst
this is lowest level of growth since April 2013, it remains in keeping with the predominantly flat trend we’ve
seen in recent months.”

UK GDP

This brought some welcome news.

UK GDP grew by 0.3% in the three months to August 2019.  Rolling three-month GDP growth increased for the second consecutive month after falling in Quarter 2 2019.

It is put in neutral terms but the UK moved away from recession in this period although in monthly terms it did so in a slightly odd fashion.

Monthly gross domestic product (GDP) growth was negative 0.1% in August 2019, following growth in both June and July 2019…….Overall, revisions to monthly GDP growth were small. However, both June and July 2019 have been revised up by 0.1 percentage points, giving extra strength to the most recent rolling three-month estimate.

As you can see we had a dip in August ( assuming that is not revised higher over time) but that was more than offset by upwards revisions in both June and July. For those of you wondering if the June figure affects the second quarter contraction of -0.2% the answer is not so far although it must have an impact if we move another decimal place.

The shift to Services

I have long argued that the services sector must now be over four-fifths of the UK economy and it seems the Office for National Statistics is picking this up.

The main contributor to gross domestic product (GDP) growth in the three months to August 2019 was the services sector, which grew by 0.4%. This was driven by widespread strength across the services industries in June and July, following a period of largely flat growth in the previous three months. Meanwhile, the production sector fell by 0.4% in the same period, while construction output grew by 0.1%.

For newer readers this has been the trend for years and indeed decades or as Talking Heads put it.

Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was
Same as it ever was

This means somewhat ironically that the UK may well do relatively well in the manufacturing recession that we are seeing in much of the world. The irony is that we have often wanted to be more like Germany with its success in this area but for now out more services based model works better. This does not mean that the manufacturing sector we have is avoiding the chill winds blowing.

Rolling three-month growth in the production sector was negative 0.4% in August 2019, with growth in manufacturing at negative 1.1%.

There were widespread falls across manufacturing, offset partially by the manufacture of transport equipment, which is still seeing a bounce back from the weakness in April 2019 as a result of car production plants bringing forward their summer shutdowns.

There is another example of same as it ever was if we look at the detail of the services growth.

However, the sub-industry that had the largest contribution to gross domestic product (GDP) growth was motion pictures (including TV and music), which has been one of the best performing sectors over the last year, growing at a notably faster rate than services as a whole.

So if you pass a Luvvie today please be nice to them as they are doing a sterling job.

August

It looks as though there was something we have been noting for several years was behind the 0.1% GDP fall in August.

Within production, manufacturing fell by 0.7%. This was driven largely by a fall-back in the often volatile manufacture of pharmaceuticals, following strong growth in July.

It would seem that the production pattern is not monthly and thus is over recorded and  then under recorded. So that the  truth seems likely to be that we should take a bit off July and add it to August. More fundamentally it exposes one of the problems of producing a monthly GDP series.

Comment

As I look at the numbers I note that yet again we see to be reverting to the mean growth level of around ~0.3% per quarter that I suggested a couple of years ago. In the current circumstances that is pretty good although I note Torsten Bell of the Resolution Foundation calls it “Growth is really rubbish”. Mind you I note that he is retweeting something which describes the 0.3% rise in the quarterly or 3 monthly growth rate as a “small rebound” which speaks for itself.

The situation is that we should be grateful for our services sector which is keeping the UK out of a recession for now. So instead of the “march of the makers” promised by former Chancellor George Osborne we are seeing a “surge of the services”. This brings its own issues but at a time like this we should welcome any growth we can find. A particular success is the film and music industry and some of this is near to me as Battersea Park is regularly used these days. In a away this represents cycles as what has suited Germany (manufacturing) fades and we see something where the UK is strong (services) replacing it. How long that will last I do not know.

Meanwhile some of you may have followed my debate with former Bank of England policymaker Danny Blanchflower on social media. When I pointed out to him that today saw 2 more upwards revisions to UK GDP ( as opposed to his continual promises of downwards ones) he replied thus.

So what? Go and look at the supporting data

 

The Investing Channel

UK manufacturing surges as we see some Mervyn King style “rebalancing”

Today brings a torrent of UK economic data bringing us up to the end of the first quarter of this year. Actually this particular “theme day” provides too many numbers and data points to be analysed in one go and is another in a sadly long list of examples of our national statisticians barking up the wrong tree. Moving to the numbers themselves this morning’s news has already unwittingly provided its own critique. From the BBC.

A replacement for how Britain’s emergency services communicate is set to go over budget by at least £3.1bn, a spending watchdog has warned.

The Home Office has already delayed switching off the existing system by three years to 2022.

But the National Audit Office (NAO) has raised doubts about whether the project will be ready by then

We observe another in a growing list of IT infrastructure projects for the NHS which are both late and way over budget. The track record is so poor that we may end up being grateful it works at all, assuming it does. But here is the GDP link because that extra £3.1 billion is likely to go straight to the future UK GDP bottom line in an example of us being worse off but it being recorded as a gain. That is the problem with using a measure which counts spending as an automatic gain rather than a type of inflation.

On a more technical level I looked at the area of the public-sector and GDP a few years back when I provided some technical advice to Pete Comley for his book on inflation. He had investigated the deflator ( inflation measure) used for GDP in the public-sector and found it to have more holes than a Swiss cheese.

Football

This week has seen some extraordinary progress into the Champions League and Europa League finals but what is it worth in economic terms? @SwissRamble has produced some estimates.

Due to the significant increase (around 50%) in Champions League revenue in 2018/19, all English clubs will earn much more than prior season (2017/18 comparatives in brackets). As it stands:

€107m (€81m)

€102m (€61m)

€93m (€64m)

€93m (€40m)

As you can see it was a good year to do well as there is much more money in it and for those of you wondering why Liverpool and Spurs have not done much better than the two Manchester clubs it is because Manchester City got more out of the TV pool and because of  a coefficient based on the last 10 years.

On this basis, English clubs received following payments: €31m, €24m, €23m and €16m.

Mind you with the inflation in the price of players that total represents what you might pay for a world-class one. As a Chelsea fan I await the Europa League update with particular enthusiasm.

Today’s Data

Former Bank of England Governor Baron King of Lothbury must be very disappointed that he missed an opportunity to shout “rebalancing” from the rooftops as we were told this in the GDP report.

driven by growth of 2.2% in manufacturing output.

If we look for some detail we see this.

The quarterly increase of 2.2% in manufacturing is due mainly to rises of 9.4% from pharmaceuticals, 2.7% from food products, beverages and tobacco, and 3.2% from metals and metal products.

The first sector is hard to read because we know form past research that the UK pharmaceutical sector has erratic output levels that do not conform to monthly and sometimes quarterly timetables. As to the others I guess maybe nicotine addicts were stockpiling against the horrible fear of going cold-turkey!

Returning to the GDP numbers we see that production gave it a tug upwards.

Production output rose by 1.4% in Quarter 1 (Jan to Mar) 2019, compared with Quarter 4 (Oct to Dec) 2018, due to rises from manufacturing, and mining and quarrying.

There was a minor curiosity in this as we wonder who was getting ready for war?

basic metals and metal products (3.2%), driven by monthly strength during January 2019 from the weapons and ammunition subindustry, which increased by 25.5%.

Continuing our rebalancing journey the usual suspect for UK economic growth was taking something of a breather.

Growth in the services sector slowed to 0.3% in the latest quarter,

The slow down was particularly marked in these areas.

Professional, scientific and technical activities fell by 0.6% in Quarter 1 2019. However, this decrease broadly reflects a fallback following particularly strong growth throughout the second half of 2018. In addition, financial and insurance services output continued to fall in Quarter 1 2019, decreasing by 0.4%. The quarterly fall predominantly reflected a fall in financial service activities, which has not contributed positively to growth since Quarter 1 2017.

Moving to the headline number there was some good news.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.5% in Quarter 1 (Jan to Mar) 2019 having slowed to 0.2% growth in the previous quarter.

If we take this in round numbers terms we see that a combination of production and construction which rose by 1% pulled us up from 0.3% growth to 0.5%. Just addressing the construction numbers they do seem to coincide with my Battersea Dogs Home to Vauxhall crane count of 49 but the official series remains troubled.

The annual picture improved too.

In comparison with the same quarter a year ago UK GDP increased by 1.8% to Quarter 1 (Jan to Mar) 2019; up from 1.4% in the previous period.

This all happened in spite of this.

Monthly GDP growth was negative 0.1% in March 2019, as the services and construction sectors contracted.

Stockpiling?

This is a more complex issue than some would like to think and indeed have already claimed. Let me illustrate by opening with this.

Breakdown of Q1 suggests stockbuilding added 0.7 percentage points (pp) to quarterly growth, but note that net trade – including the imports being stockpiled -subtracted 0.6pp (excl. volatile components). ( @JulianHJessop)

As you can see the lazy response is to look at the stockbuilding adding to GDP forgetting that a lot of it was probably imported.

Trade

Our usual problem was added to by the increase in imports and thus turned into quite a subtraction from the numbers.

The total trade deficit (goods and services) widened £8.9 billion to £18.3 billion in the three months to March 2019, as the trade in goods deficit widened £6.4 billion to £43.3 billion and the trade in services surplus narrowed £2.5 billion to £25.0 billion.

There are several issues with this. As I regularly point out we have very little idea of our services trade data which tends to be fleshed out a year or two after the event. Also the fact we are large custodians of and traders in gold makes discerning the true trade position even more complex.

Excluding erratic commodities, such as non-monetary gold, the total trade deficit increased £3.1 billion to £14.5 billion in the three months to March 2019.

Comment

These numbers especially the pick-up in the annual rate of GDP growth are good news for the UK. There are of course issues looking ahead and one of them seems set to be in the headlines today as the Chinese arrive to meet President Trump. The news looks bad but was there a reason why the Chinese stock market rose by more than 3% today?

Moving back to GDP then a couple of media establishment themes took a knock from the GDP breakdown. Let me start with business investment.

Following four consecutive quarters of decline throughout 2018, business investment grew by 0.5% in the first quarter of 2019, driven by higher investment in IT equipment and other machinery and equipment.

The wider concept of investment provided more food for thought.

Gross fixed capital formation (GFCF) increased by 2.1% in the first three months of 2019

And as for austerity?

Government consumption increased by 1.4% in Quarter 1 2019, following growth of 1.3% in Quarter 4 (Oct to Dec) 2018.

Pump-priming? Well they were at play in the investment ( GFCF) numbers too.

mainly reflecting the 8.1% increase in general government investment.

So perhaps the Rolling Stones summed it all up some years ago.

You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes you might find
You get what you need