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

 

 

 

The UK labour market is booming Goldilocks style

Let me open by bringing you up to date with the latest attempt at monetary easing from the Bank of England. Yesterday it purchased some more UK Gilts as part of its ongoing Operation Twist effort.

As set out in the Minutes of the MPC’s meeting ending on 6 February 2019, the MPC has agreed to make £20.6 billion of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2019 of a gilt owned by the Asset Purchase Facility (APF)……….The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £1,146mn for each maturity sector.

Yesterday was for short-dated Gilts ( 3 to 7 year maturity) and today will be for long-dated Gilts ( 15 years plus). Why is this extra QE? This is because you are exchanging a maturing Git for one with a longer maturity and thus means QE will be with us for even longer. Odd for an emergency response don’t you think?

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion. Whereas we face not only a situation where nothing has been done in the meantime but today’s purchase of long and perhaps ultra long Gilts ( last week some of the 2037 Gilt was purchased) returns us to the QE to Infinity theme.

This area has been profitable for the Bank of England via the structure of UK QE as it charges the asset protection fund Bank Rate. So mostly 0.5% but for a while 0.25% and presumably now 0.75%. In the end the money goes to HM Treasury but if you get yourself close the the flow of money as Goldman Sachs have proven you benefit and in the Bank of England’s case you can see this by counting the number of Deputy-Governors. Also its plan to reverse QE at some point continues in my opinion to be ill thought out but for now that is not fully pertinent as it has no intention of actually doing it!

UK Labour Market

In ordinary times the UK government would be putting on a party hat after seeing this.

The level of employment in the UK increased by 222,000 to a record high of 32.71 million in the three months to January 2019……..The employment rate of 76.1% was the highest since comparable records began in 1971.

As you can see a trend which began in 2012 still seems to be pushing forwards and poses a question as to what “full employment” actually means? Also let me use the construction series as an example of maybe the output data has been too low. From @NobleFrancis.

ONS Employment in UK construction in 2018 Q4 was 2.41 million, 2.8% higher than in 2018 Q3 & 3.2% higher than one year earlier.

To my question about the output data he replied.

Given the strength of the construction employment data, potentially we may see an upward revision to ONS construction output in Q4 although there can be odd quarters where the construction employment & output data go in different directions.

To give you the full picture @brickonomics points out that different areas of construction have very different labour utilisation so we go to a definitely maybe although that gets a further nudge from the wages data as you see the annual rate of growth went from 3.2% in October to 5.5% in December. So whilst this is not proof it is a strong suggestion of better output news to come.

Let us complete this section with the welcome news that unlike earlier stages of the recovery we are now creating mostly full-time work.

 This estimated annual increase of 473,000 was due mainly to more people working full-time (up 424,000 on the year to reach 24.12 million). Part-time working also contributed, with an increase of 49,000 on the year to reach 8.60 million.

Unemployment

Again the news was good.

The UK unemployment rate was estimated at 3.9%; it has not been lower since November 1974 to January 1975…..For November 2018 to January 2019, an estimated 1.34 million people were unemployed, 112,000 fewer than for a year earlier. There have not been fewer unemployed people in the UK since October to December 1975.

There have been periods recently where we have feared a rise in unemployment whereas in fact the situation has continued to get better. We again find the numbers at odds with the output data we have for the economy. But let us welcome good news that has persisted.

Wage Growth

This was a case of and then there were three today.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.4%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

The total wages number which they now call including bonuses had a good January when they rose by 3.7% which means we have gone 4%,3.4%,3.3% and now 3.7% on a monthly basis. For numbers which are erratic this does by its standards suggest a new higher trend. This is good news for the economy and also for the Bank of England which after seven years of trying has finally got a winning lottery ticket. I will let readers decide whether to award it another go or a tenner ( £10) .

As to real wage growth we now have some but sadly not as much as the official figures claim. This is because the inflation measure used called CPIH has some fantasy numbers based on Imputed Rents which are never paid which lower it and thereby raise official real wage growth. Thus if we use the January data it has real wage growth at 1.9% but using the RPI gives us a still good but lower 1.2%

Putting that another way you can see why there has been so much establishment effort led by Chris Giles of the Financial Times to scrap the RPI.

Comment

The UK labour market seems to have entered something of a Goldilocks phase where employment rises, unemployment falls and added to that familiar cocktail we have real wage growth. So we should enjoy it as economics nirvana’s are usually followed by a trip or a fall. As to the detail there remain issues about the numbers like the way that the self-employed are not included in the wages numbers. Also whilst I welcome the rise in full-time work the definition is weak as the respondent to the survey chooses.

Next let me just raise two issues for the Bank of England as it finally clutches a winning wages lottery ticket. It is expanding monetary policy into a labour market boom with its only defence the recent rise in the UK Pound £. Next its natural or as some would put it full (un)employment rate of 4.5% needs to be modified again as we recall when it was 7%.

Those of you who follow me on social media will know I do an occasional series on how the BBC economics correspondent only seems to cover bad news. Sometimes Dharshini David does it by reporting the good as bad.

eyebrows raised as jobs market figs “defy” Brexit Uncertainty BUT 1) hiring/firing tends to lag couple quarters behind activity 2)as per financial crisis, workers relatively cheap so firms may be “hoarding” workers 3)some jobs will have been created to aid with Brexit prep

Podcast

 

 

UK GDP growth was strong in January meaning we continue to rebalance towards services

This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.

Very early there was an “I agree with Mark (Carney)” as I note this.

see for example speeches by (Carney, 2019) and (Vlieghe, 2019)

The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.

First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.

The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?

To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.

Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.

Raghuram Rajan

There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.

“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.

The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.

The UK economy

The opening piece of official data today was very strong.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.

Production data has been in the news as it has internationally slowed so let us dip into that report as well.

Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.

We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.

Some Perspective

This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.

Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.

This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.

Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.

This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.

Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.

Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.

Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic  after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.

Returning to the production data this was sadly no surprise.

Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.

Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.

 was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.

Comment

We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.

If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.

The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.

Although we got a clue to a major issue here as we note this too.

Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.

So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.

In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.

Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.

 

 

UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.

Production

We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.

Comment

The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Weekly Podcast

 

 

 

Trade revisions post a warning for UK GDP

This morning has shown us that the way that the UK government deals with the private-sector has issues. From Reuters.

Interserve Plc’s (L:IRV) shares sank almost 60 percent in value on Monday after the British outsourcing company announced a rescue plan that was likely to see a big part of its debt converted into new equity, potentially handing control of the company to its creditors.

Interserve, which employs 75,000 worldwide and has thousands of UK government contracts to clean hospitals and serve school meals, said on Sunday it would seek to cut its debt to 1.5 times core earnings in a plan it hopes to finalise early next year.

I am not sure that the next bit inspires much confidence either.

Interserve Chief Executive Debbie White reiterated that the company’s fundamentals were strong and that the debt reduction plan, first raised in a refinancing in April, had the support of 10 Downing Street.

This provokes echoes of this from January.

Carillion was liquidated after contract delays and a slump in business left it swamped by debt and pensions liabilities., triggering Britain’s biggest corporate failure in a decade and forced the government to step in to guarantee public services from school meals to road works.

If we switch to the Financial Times what could go wrong with this bit?

 after moving into areas in which it had no expertise, including waste from energy plants and probation services.

It is hard not to feel that this particular company is yet another zombie that will be kept alive as another failure will be too embarrassing for the establishment. The share price is understandably volatile but at the time of typing had halved to a bit over 12 pence. This compares to the around £5 as we moved into 2016.

Also according to the FT there is something of a queue forming behind it.

The crisis at Interserve is the latest to hit Britain’s troubled outsourcing sector, with Kier, Capita and Mitie also seeking to rebuild their balance sheets. Kier, another construction and support services company, launched a £264m emergency rescue rights issue last month as it warned that lenders were seeking to cut their exposure to the sector. Kier, which employs 20,000 in the UK, emphasised that it needed the “proceeds on the group’s balance sheet by December 31 . . . in light of tighter credit markets”. It said its debt had increased from £186m in June to £624m at the end of October.

I do not know about you but debt trebling in a few months is something that is in financial terms terrifying.

Monthly GDP

This morning brought the latest in the UK’s monthly GDP reports and the opening salvo was better than what we have seen recently.

Monthly growth rose to 0.1% in October 2018, following flat growth in August and September 2018.

If we look into the detail we see that yet again this was driven by the service sector which on its own produced 0.2% growth in October. Here is some detail on this.

The professional, scientific and technical activities sector made the largest contribution to the month-on-month growth, contributing 0.11 percentage points.

However as it outperformed total GDP growth there had to be issues elsewhere and we find the main one in the production sector.

In October 2018, total production output fell by 0.6%, compared with September 2018, due to a fall of 0.9% in manufacturing; this was partially offset by a 1.8% increase in mining and quarrying.

Whether that number will prove to be a general standard I do not know but we do know production in Germany fell by 0.5% in October as we looked at that only on Friday. As for more detail there is this.

The monthly decrease in manufacturing output of 0.9% was due mainly to weakness from transport equipment, falling by 3.2% and pharmaceutical products, falling by 5.0%; 5 of the 13 manufacturing subsectors increased.

Anyone who has been following the news will not be surprised to see the transport sector lower as for example there was a move to a 3 day week for at least one of the Jaguar Land Rover factories. Regular readers will be aware that the pharmaceutical sector has regular highs and lows and recently June was a high and October a low as we wait for a more general pattern to emerge.

Maybe there was also some food for thought for Interserve and the like here.

Construction output decreased by 0.2% in October 2018

Quarterly GDP

The performance was more solid than you might have expected from the monthly data.

UK gross domestic product (GDP) grew by 0.4% in the three months to October 2018.

In case you were wondering how this happened? Here is the explanation.

While the three most recent monthly growths were broadly flat, the lower level in the base period gives a comparatively strong rolling three-month growth rate.

If we move forwards to the detail we see something that is rather familiar,

Rolling three-month growth in the services sector was 0.3% in October 2018, contributing 0.23 percentage points to GDP growth.

But this time around it was using the words of Andrew Gold much less of a lonely boy.

The production and construction sectors also had positive contributions, with rolling three-month growths of 0.3% and 1.2%, respectively.

If we start with the construction sector then this time around we start to wonder how some of the outsourcing companies we looked at above seemed to have done so badly at a time of apparent boom? Moving on to production.

Rolling three-month growth in the production industries was 0.3%, while in manufacturing industries growth was flat. Production growth was driven by broad-based increases within the sector.

Peering into the transport sector we get a rather chilling reminder of the past.

Three-months on a year ago growth for manufacture of transport equipment was negative 0.9%, the lowest growth rate since November 2009.

Returning to services we get a reminder that the transport sector can pop up here too.

 with a softening in services sector growth mainly due to a fall in car sales.

On the other side of the coin there were these areas.

Accounting contributed 0.08 percentage points to headline GDP growth, while computer programming contributed 0.07 percentage points.

Comment

We see that considering the international outlook the data so far shows the UK to be doing relatively well. An example of a comparison was the Bank of France reducing its estimate for quarterly GDP growth to 0.2% this morning. Sticking with the official mantra we have slowed overall but saw a small rebound in October. So far so good.

Less reassuring is the simply woeful state of the outsourcing sector which looks a shambles. Also there was something troubling in the revisions and updates to the trade figures which included this.

Removing the effect of inflation, the total trade deficit widened £3.0 billion in the three months to October 2018.

So we did well to show any growth at all in October but there was more.

The total trade deficit widened £5.4 billion in the 12 months to October 2018 due mainly to a £5.1 billion narrowing in the trade in services surplus.

It is nice of our official statisticians to confirm my long-running theme that we have at best a patchy knowledge of what is going on in terms of services trade, but not in a good way in terms of direction. This especially impacted in the quarter just gone.

In Quarter 3 2018, the total trade balance was revised downwards by £6.9 billion, due mainly to exports, which were revised down £5.9 billion; imports were revised up by £1.0 billion.

The goods deficit was revised downwards by £3.1 billion in Quarter 3 2018 as exports of goods were revised downwards by £2.0 billion and imports revised upwards by £1.1 billion.

This would be a rather large factor pushing us from growth to contraction but for two factors. One may wash out to some extent in other parts of the national accounts.

A large component of the revision to trade in goods in the most recent quarter was revisions to unspecified goods (including non-monetary gold).

You would think that movements in gold would be easy to account for. Silly me! Also we now get into the geek section which is that trade is in the expenditure version of the national accounts and it is the output version which is officially assumed to be the correct one. So numbers which suggest the UK may have contracted in Q3 are likely to perhaps drag growth slightly lower to 0.5% or 0.4% on the grounds that you cannot ignore them entirely as we sing along to Genesis one more time.

Too many men, there’s too many people
Making too many problems
And not much love to go round
Can’t you see this is a land of confusion ?