UK GDP growth accelerates past France and Italy

Today brings us the latest data on the UK economy or to be more specific the economic growth or Gross Domestic Product number for the second quarter of this year. If you are thinking that this is later than usual you are correct. The system changed this summer such that we now get monthly updates as well as quarterly ones. So a month ago we were told this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

So we knew the position for April and May earlier than normal (~17 days) but missing from that was June. We get the data for June today which completes the second quarter. As it happens extra attention has been attracted by the fact that the UK economy has appeared to be picking-up extra momentum. The monthly GDP numbers showed a rising trend but since then other data has suggested an improved picture too. For example the monetary trends seem to have stabilised a bit after falls and the Markit PMI business survey told us this.

UK points to a 0.4% rise in Q2 tomorrow, but that still makes the Bank of England’s recent rate rise look odd, even with the supposed reduced speed limit for the economy. Prior to the GFC, 56.5 was the all-sector PMI ‘trigger’ for rate hikes. July 2018 PMI was just 53.8 ( @WilliamsonChris _

As you can see they are a bit bemused by the behaviour of the Bank of England as well. If we look ahead then the next issue to face is the weaker level of the UK Pound £ against the US Dollar as we have dipped below US $1.28 today. This time it is dollar strength which has done this as the Euro has gone below 1.15 (1.145) but from the point of view of inflation prospects this does not matter as many commodities are priced in US Dollars. I do not expect the impact to be as strong as last time as some prices did not fall but via the impact of higher inflation on real wages this will be a brake on the UK economy as we head forwards.

Looking Ahead

Yesterday evening the Guardian published this.

Interest rates will stay low for 20 years, says Bank of England expert

Outgoing MPC member Ian McCafferty predicts rates below 5% and wages up 4%

The bubble was rather punctured though by simpleeconomics in the comments section.

Considering the BoE track record on forecasting I think we should take this with a massive pinch of salt. They often get the next quarter wrong so no hope for 20 years time.

The data

As ever we should not place too much importance on each 0.1% but the number was welcome news.

UK GDP grew by 0.4% in Quarter 2 (April to June) 2018.The rate of quarterly GDP growth picked up from growth of 0.2% in Quarter 1 (Jan to Mar) 2018.

As normal if there was any major rebalancing it was towards the services sector.

Services industries had robust growth of 0.5% in Quarter 2 (Apr to June) 2018, which contributed 0.42 percentage points to overall gross domestic product (GDP) growth.

The areas which did particularly low are shown below.

 Retail and wholesale trade were the largest contributors to growth, at 0.11 percentage points and 0.05 percentage points respectively. Computer programming had a growth of 1.9%, contributing 0.05 percentage points to headline gross domestic product (GDP).

There was also some much better news from the construction sector and even some rebalancing towards it.

Growth of 0.9% in construction also contributed positively to GDP growth.

Although of course these numbers have been in disarray demonstrated by the fact that the latest set of “improvements” are replacing the “improvements” of a couple of years or so ago. Perhaps they have switched a business from the services sector to construction again ( sorry that;s now 3 improvements).So Definitely Maybe. Anyway I can tell you that there are now 40 cranes between Battersea Dogs Home and Vauxhall replacing the 25 when I first counted them.

Today’s sort of humour for the weekend comes from the area to which according to Baron King of Lothbury we have been rebalancing towards.

However, contraction of 0.8% in the production industries contributed negatively to headline GDP growth…….

Manufacturing fell by 0.9% although there is more to this as I will come to in a moment.

Monthly GDP

You might have assumed that the June number would be a good one but in fact it was not.

GDP increased by 0.1% in June 2018

If we look into the detail we see that contrary to expectations there was no services growth at all in June. Such growth as there was come from the other sectors and construction had a good month increasing by 1.4%. I did say I would look at manufacturing again and it increased by 0.4% in June which follows a 0.6% increase in May. So we have an apparent pick-up in the monthly data as the quarterly ones show that it is in a recession with two drops in a row. Thus it looks as if the dog days of earlier this year may be over,

This leaves us with the problem of recording zero services growth in June. The sectors responsible for pulling the number lower are shown below.

The professional, scientific and technical activities sector decreased by 1.0% and contributed negative 0.10 percentage points. ……The other notable sector fall was wholesale, retail and motor trades, which decreased by 0.6% and contributed negative 0.08 percentage points.

The decline of the retail trade whilst the football world cup was on seems odd. Also there overall number completely contradicts the PMI survey for June which at 55.1 was strong. So only time will tell except Bank of England Governor Mark Carney may need its barman to mix his Martini early today as he mulls the possibility that he has just raised interest-rates into a service-sector slow down.

One consistent strong point in the numbers in recent times has carried on at least.

There was also a rise in motion pictures, increasing by 5.8% and contributing 0.05 percentage points.

So we should all do our best to be nice to any luvvies we come across.

Comment

We should welcome the improved quarterly numbers as GDP growth of 0.4% is double that of both France and Italy and is double the previous quarter. However whilst the monthly numbers do provide some extra insight into manufacturing as the recessionary quarterly data looks like a dip which is already recovering the services numbers are odd. I fear that one of my warnings about monthly GDP numbers are coming true as it seems inconsistent with other numbers to say we picked up well in May but slowed down in June. If we look at the services sector alone and go back to February 2017 we are told this happened in the subsequent months, -0.1%,0.3%-0.1%,0.3% which I think speaks for itself.

We also got an update on the trade figures which have a good and a bad component so here is the good.

The total UK trade deficit (goods and services) narrowed £6.2 billion to £25.0 billion in the 12 months to June 2018. The improvement was driven by both exports of goods and services increasing by more than their respective imports.

Next the bad.

The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.

If you want a one word summary of out recorded trade position then it is simply deficit. Although currently we are looking rather like France in terms of patterns as a reminder that some trends are more than domestic.

 

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UK GDP growth continues to rebalance towards services

Today has brought a new adventure in UK economic statistics. This is because we have moved to a new system where we get monthly GDP releases whilst the quarterly ones have been delayed. In terms of detail here is the change in the quarterly schedule.

The new model will see the publication of two quarterly GDP releases rather than three. The new First quarterly GDP estimate will be published approximately 40 days after the end of the quarter to which it refers. The new first estimate will have much higher data content for the output approach than the current preliminary estimate. It will also contain data from the income and expenditure approaches,

In general I welcome this as under the old model the last of the three months in question had rather a shortage of actual data and quite a lot of projections. The UK has in essence produced its numbers too quickly in the past and now they should be more reliable. There is a catch to this in that the Bank of England will have its August policy meeting without the GDP data. This has a consequence in that traditionally it is more likely to act once it has it and another in that will it get a sort of “early wire”? That sort of thing was officially stopped by seems to have unofficially started again. I also welcome the use of income and expenditure numbers as long as it is not an excuse to further increase the role of fantasy numbers such as imputed rent. Back in the day Chancellor Nigel Lawson downgraded the use of the income and expenditure GDP data and I think that was a mistake as for example in the US the income GDP numbers worked better than the normal ( output)ones at times.

The services numbers will be sped up so that this can happen.

Taken together, these releases provide enough information to produce a monthly estimate of GDP, as data on almost the entire economy will now be available.

This has two problems. Firstly the arrival of the services data has been sped up by a fortnight which can only make it less reliable. The second is that these theme days overrun us with data as we will not only be getting 2 GDP numbers we will also be getting production, construction and trade numbers. Frankly it is all too much and some if not much of it will be ignored.

Today’s Numbers

The headline is as follows.

UK GDP grew by 0.2% in the three months to May.Growth in the three months to May was higher than growth in the three months to April, which was flat. The weakness in growth in the three months to April was largely due to a negative drag on GDP from construction.

There was something familiar about this which may make Baron King of Lothbury reach for the key to the sherry cabinet.

Growth of 0.4% in the services industries in the three months to May had the biggest contribution to GDP growth.

Yes we “rebalanced” towards services yet again as we mull whether he was ennobled due to his apparently ability to claim the reverse of reality so often? As it happens the growth was driven by a sector which has seen troubled times.

Growth in consumer-facing industries (for example retail, hotels, restaurants) has been slowing over the past year. However, in the three months to May growth in these industries picked up, particularly in wholesale and retail trade.

This industry grew by 0.9% in the three months to May and contributed 0.1 percentage points to headline GDP.

If we move to the monthly data we note this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

This in so far as it is reliable confirms my suggestion that the UK economy is edging forwards at about 0.3% per quarter. Oh and if the output on social media is any guide best of luck with this.

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

Production

It was disappointing to see a drop here although maybe this was something international as France also saw a drop earlier in the day.

In May 2018, total production was estimated to have decreased by 0.4% compared with April 2018, led by falls in energy supply of 3.2% and mining and quarrying of 4.6%.

There were two ameliorating factors at play as we start with mining.

 due to unplanned maintenance on the Sullom Voe oil and gas terminal.

Also the falls in manufacturing seem to have stopped.

Manufacturing output rose by 0.4% and is the first increase in this sector since December 2017……..due mainly to widespread growth across the sector, with 9 of the 13 sub-sectors increasing.

The leading sectors were as follows.

Pharmaceutical products and transport equipment provide the largest contributions to monthly growth, increasing by 2.4% and 1.1% respectively.

It would appear that yet again it is time for ” I am the urban spaceman baby” which younger readers may need to look up!

Within the transport equipment sub-sector, the aircraft, spacecraft and related machinery industry performed strongly, increasing by 3.3%, supported by an increase in nominal export turnover growth of 10.9%.

Those areas are still seeing export growth whereas more generally for manufacturing the boost from the lower Pound £ seems to be over. Or if you prefer the effects of the J-Curve and Reverse J-Curve have come and gone.

Trade

The picture here has been one of improvement and on an annual comparison that remains true.

The total UK trade deficit (goods and services) narrowed £3.9 billion to £26.5 billion in the 12 months to May 2018. An improvement in the trade in services balance was the main factor, as the UK’s trade in services surplus widened £4.1 billion to £111.5 billion.

However the quarterly numbers also suggest that the boost from the lower UK Pound £ has been and gone.

The total UK trade deficit widened £5.0 billion to £8.3 billion in the three months to May 2018, mainly due to falling goods exports and rising goods imports. Falling exports of cars and rising imports of unspecified goods were mostly responsible for the £5.0 billion widening of the total trade deficit in the three months to May 2018.

Tucked away in this was a rare event for the UK.

There was a small overall trade surplus on the month to February 2018, mainly due to falling goods imports;

Comment

We find that today’s data confirms our thoughts that after a soft patch the UK economy has picked up a bit. There are reasons to suspect this continued in June. For example the monetary data picked up in May so may no longer be as strong a break and the PMI business surveys for June were stronger.

The survey data indicate that the economy likely
grew by 0.4% in the second quarter, up from 0.2%
in the opening quarter of 2018.

That poses a question for the Bank of England and its Governor. That rate of growth is above the “speed limit” that its Ivory Tower has calculated although the model used has been a consistent failure. Should the boyfriend prove to be unreliable yet again then subsequent votes will be without one of the policymakers keen to raise interest-rates. I remain to be convinced they will take the plunge.

Moving onto a past Bank of England staple which is rebalancing we see us moving towards a strength which we do not seem to like. As services seemed to be left out of the Chequers Brexit plan which seemed really odd to me. Especially if we note that other areas are in relative and sometimes absolute decline.

Production and manufacturing output have risen but remain 6.2% and 2.5% lower, respectively, in the three months to May 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

I have left out the construction numbers for May as we wait for any sort of reliability from them.

 

 

 

 

 

UK construction has been growing rather than being in recession. Ouch!

This morning brings us more on what has become the troubled construction sector in the UK. Or to be more specific what we have been told by our official statisticians is troubled. Regular readers will be aware that I found some of this bemusing partly due to geographical location as there is an enormous amount of building work going on at Nine Elms around the new US Embassy. The last time I counted there were 32 cranes in the stretch between Battersea Dogs and Cats Home and Vauxhall. Also there have been problems with the official construction data series of which more later going back some years which have led to me cautioning that the numbers may need to be taken with the whole salt-cellar rather than just a pinch of salt.

What happened last week?

I pointed out on Friday that there had been ch-ch-changes.

This has been driven by revised construction estimates, with its output growth revised up by 1.9 percentage points to negative 0.8%

This was the road on which total UK GDP growth was revised up from 0.1% to 0.2%. It takes quite a lot for something which is only 6.1% of total output to do that but as it was originally reported at -3.3% then -2.7% and now -0.8% you can see that the original number was way off. This is a familiar pattern albeit not usually on this scale and does pose a systemic question. After all if you are struggling to measure something which is mostly very tangible such as a building and the associated economic output how can you measure the more intangible outputs of the services sector?

Actually there was more as the reformist wave spread across the data for 2017 as well.

While the 0.8% fall in Quarter 1 marks the largest quarterly decline since Quarter 3 (July to Sept) 2012, it is now estimated that this is the first fall since Quarter 3 2015 – earlier estimates had recorded falling output through much of 2017.

This does alter the narrative as we had been given numbers indicating a recession and at the worst hinting at a possible start of a depression, so it is hard to overstate this. Let us drill down into the detail.

Today’s new construction estimates show a much stronger growth profile throughout 2017, with upward revisions recorded in each quarter except Quarter 3

The major shift numerically is in the first half of 2017  as the first quarter goes from growth of 2.4% to 3.2% and the second from -0.4% to 0.4% . However in terms of impression and mood the last quarter may have hit the hardest as after previous doom it had the gloom of -0.1% whereas in fact it grew by 0.3%, Adding it all up gives us this.

Construction output is now estimated to have increased by 7.1% in 2017, up from 5.7%

What has changed?

Reality is of course unchanged by the way that it has been officially measured has seen these changes.

As part of the wider improvement programme for construction statistics, ONS has introduced significant improvements to the method for imputing data for businesses that have not yet returned their ONS survey responses.

Oh! That rather sends a chill down the spine as in essence we are back to fantasy numbers yet again and yet again they are in the housing sector. I am willing to give them a chance but can we really not get a grip on the actual numbers? Also I note that things in terms of actual measurement seem to be getting worse rather than better and the emphasis is mine.

Quarter 1 2018 is affected to a greater extent than Quarter 1 2017 due to the higher number of imputations in more recent periods due to lower response rates, as well as the inclusion of the bias adjustment.

In addition there has been a change to the seasonal adjustment which I take as an admittal of the problem I have highlighted before with the first quarter of the year which has been a serial underperformer. The combination of the changes has seen the beginning of the last two years revised up by 0.8% in construction terms so maybe this is some help with this issue.

Where are we now?

Let us take Kylie’s advice and Step Back in Time to 2016 about which we were told this.

The value of construction new work in Great Britain continued to rise in 2016, reaching its highest level on record at £99,266 million; driven by continued growth in the private sector.

Just for clarity this is far from all being new work as shown below.

Aside from all new work, all repair and maintenance equated to £52,223 million in 2016. This is an increase of £1,679 million compared with 2015.

There was a common factor in both new and maintenance work in 2016 in that the growth was essentially in the private-sector.

That number represented quite a boom. The nadir for the construction sector had been unsurprisingly in 2009 at the height of the credit crunch impact when output was £65.9 billion. Things got better but then there was something of a double-dip in 2012 when it fell back to £69.7 billion. As you can see from the 2016 number it was then a case off pretty much up,up and away from then.

The numbers above are in current prices rather than the usual deflated version which reminds us again that the deflator has been singing along to Lyndsey Buckingham.

I think I’m in trouble
I think I’m in trouble

Comment

Today’s update and if you like revisionism represents quite a change. Previously 2017 had seen the UK construction industry behave like one of those cartoon characters who are going so fast they do not spot the edge of a cliff but even when they go over it carry on briefly before they drop like a stone. On the road we were in a recession with flashes of a depression. Now we see that it was a year which opened very strongly but then slowed which is very different. Annual growth of 7.1% does not to say the least fit well with a depression scenario.

Now we see that we are being told the same for 2018.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

Sound familiar? Well Kelis would offer this view.

Mght trick me once
I won’t let you trick me twice
No I won’t let you trick me twice

This really is quite a mess and regular readers will be aware it has been going on for some years. There was an attempt at an ongoing fix by “improving” the inflation measure called the deflator. Then there was an attempted “quick-fix” by switching a services company into construction. Plainly they did not work and frankly the idea of having these construction numbers as part of the monthly GDP numbers we get next week is embarassing. They are simply not up to it.

As to where we are now the Agents of the Bank of England offer a view.

Construction output remained little changed on a year ago, and contacts were cautious about the short-term outlook .

So now some 3% lower then? Also the Markit survey has its doubts.

June data revealed a solid expansion of overall
construction activity, underpinned by greater
residential work and a faster upturn in commercial
building

Indeed it was quite upbeat.

There were also positive signs regarding
the near-term outlook for growth, as signalled by the
strongest rise in new orders since May 2017 and the
largest upturn in input buying for two-and-a-half
years.

So apologies for reporting official data which has turned out not to be worth the paper it was printed on. However strategically I think it is correct to follow the official data whilst also expressing doubts about systemic issues. Next week when we get the monthly GDP number we will return to a media bubble analysing each 0.1% which needs to be looked through the lens of a sector which has just been revised by 2,5%.

 

 

 

 

 

 

The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.

Trade

We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.

Construction

This was yet again a wild card if consistency can be that.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April

Comment

There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.

 

 

UK production and manufacturing have seen a lost decade

Today brings us what is called a theme day by the UK Office for National Statistics as we get data on production, manufacturing and trade. This comes at a time when the data will be especially prodded and poked at. This is mainly driven by the fact that there have been hints of an economic slow down both in the UK and in the Euro area. Added to that we have seen rising tensions around Syria and the Middle East which have pushed the price of a barrel of Brent Crude Oil above US $70 which if sustained will give us another nudge higher in terms of cost push or if you prefer commodity price inflation. If we return to yesterday’s topic of Bank of England policy we see the potential for it to find itself between a rock and a hard place as a slowing economy could be combined with some oil price driven inflation.

Production

This opened with a worrying note although of course the issue is familiar to us.

In the three months to February 2018, the Index of Production decreased by 0.1% compared with the three months to November 2017, due to a fall of 8.6% in mining and quarrying, caused mainly by the shutdown of the Forties oil pipeline within December 2017.

If we move to the February data we see that it rose but essentially only because of the cold weather that caused trouble for services and construction.

In February 2018, total production was estimated to have increased by 0.1% compared with January 2018; energy supply provided the largest upward contribution, increasing by 3.7%.

If we look into the detail we see that the colder weather raised production by 0.43% meaning that there were weaknesses elsewhere. Some of it came from the oil and gas sector where in addition to some planned maintenance there was a one-day shut down for the rather accident prone seeming Forties field. But there was also something which will attract attention.

Manufacturing output decreased by 0.2%, the first fall in this sector since March 2017, when it fell by 0.4%. Within this sector 7 of the 13 sub-sectors decreased on the month; led by machinery and equipment not elsewhere classified, which fell by 3.9%, the first fall since June 2017, when it decreased by 4.9%.

This has been a strength of the UK economy in recent times and concerns about a possible slow down were only added to by this.

 It should be noted that the growth in this sector of 0.1% during January 2018 and published last month, has been revised this month to 0.0%, further supporting evidence provided in the January 2018 bulletin of a slow-down in manufacturing output.

Although our statisticians found no supporting evidence for this there remains the possibility that the bad weather played a role in this. Otherwise we are left with an impression of a manufacturing slow down which does fit with the purchasing managers indices we have seen. The annual comparison however remains good just not as good as it was.

 in February 2018 compared with February 2017, manufacturing increased by 2.5%.

Also there were hopes that we might regain the previous peak for manufacturing output which was 106.8 in February 2008 where 2015 = 100 but we scaled to 105.4 in January and have now dipped back to 105.2. The situation in production is somewhat worse as we are still quite some distance from the previous peak which on the same basis was at 111.1 in February 2008 and this February was at 104.8. The issue is complicated by the decline of North Sea Oil and Gas but overall those are numbers which look like a depression to me especially after all this time which one might now call a lost decade.

Trade

We traditionally advance on these numbers with some trepidation after years and indeed decades of deficits on this particular front. So let us gather some cheer with some better news.

Comparing the 12 months to February 2018 with the same period in 2017, the total trade deficit narrowed by £12.9 billion to £27.5 billion; the services surplus widened by £11.1 billion to £108.3 billion and the goods deficit narrowed by £1.8 billion to £135.8 billion.

Tucked away in this was some good news and for once a triumph for economics 101.

Total exports rose by 10.4% (£59.4 billion) to £627.6 billion compared with total imports, which increased by 7.6% (£46.5 billion) to £655.1 billion.

In true Alice In Wonderland terms our exports have to do this to make any dent in our deficit because the volume of imports is larger.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Both goods and services imports have responded well to the lower value of the UK Pound £ as well as being influenced by the favourable world economic environment.

 Goods exports rose by 11.3% (£34.9 billion) to £345.0 billion ……..Services exports rose by 9.5% (£24.5 billion) to £282.6 billion

We rarely give ourselves the credit for being a strong exporting nation because it gets submerged in our apparent lust for imports.

As to the more recent pattern I will let you decide if the change below means something as it is well within the likely errors for such data.

The total UK trade deficit (goods and services) widened by £0.4 billion to £6.4 billion in the three months to February 2018

A little wry humour is provided by the fact that in terms of good exports our annual improvement was due to exports to the European Union. However the humour fades a little as I note our official statisticians have no real detail at all on our services exports which is a great shame as they are a strength of our economy.

Construction

After the cold spell in February this was always going to be a difficult month.

Construction output continued its recent decline in the three-month on three-month series, falling by 0.8% in February 2018………Construction output also decreased in the month-on-month series, contracting by 1.6% in February 2018, stemming from a 9.4% decrease in infrastructure new work.

In the circumstances I thought this was not too bad although this may have left me in a class of two.

You see the past is better than we thought it was which also confirms some of the doubts I have expressed about the reliability of this data.

The annual growth in 2017 of 5.7% is revised upwards from the 5.1% growth reported.

So it is not in a depression but has entered a recession.

Comment

There is a fair bit to consider as we note that any continuation of the recent falls will see manufacturing continue its own lost decade as we note that overall production seems trapped in one with little hope of  what might be called “escape velocity”. That means that the Bank of England faces a scenario where the picture for this particular 14% of the economy has seen the grey clouds darken. By contrast construction went from a really good phase into a recession which  the bad weather has made worse. I would expect the weather effect to unwind fairly quickly but that returns us to a situation which looked weak,

This leaves the expressed policy of the “unreliable boyfriend” in something of a mess as his forward guidance radar seems to have looked backwards again. Perhaps his new private secretary James Benford will help although I note his profile has been so low Bloomberg had to look him up on LinkedIn, I hope they got the right person. Also life can be complex as for example Russians in the UK might be thinking as they go from threats of financial punishment to seeing the UK Pound £ rally by 2% today and by over 10% in the past week to around 91 versus the R(o)uble .

Let me remain in the sphere of the serially uncorrelated error term by congratulating Roma on a stunning win last night.

 

 

Individual measures of GDP and household income show weak UK growth since 2008

Today has opened with not so good news for a sector of the UK economy that has been troubling us for the last year or so. From the SMMT or Society of Motor Manufacturers and Traders.

The UK new car market declined in March, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT), with registrations falling -15.7% compared with the same month last year. March 2017 was the biggest month ever for new car registrations, as buyers seized the chance to purchase cars before new Vehicle Excise Duty (VED) rates came into force in April last year. However registrations are still running at a historically high level and last month’s market was the fourth biggest March on record.

As you can see they are in a rush with explanations but we do get some more perspective from this.

New car registrations have fallen for the 12th consecutive month, with year-to-date performance down -12.4%.

The domestic car market has been contracting for a while now and sadly we have to review a scenario that involves government meddling as we note this.

Continuing the recent trend, diesel registrations declined in March, down -37.2%

So far this year diesel sales are down a third from 361,000 in 2017 to 241,000 this year as people wait to see what government policy will be in this area. After the Volkswagen scandal people are much less likely to believe the industry that the new diesels are clean and of course that adds to people like me who were pushed into clean diesels by government company car tax policy back in the previous decade only to discover that by clean they meant poisoning myself and other Londoners.

Whilst sales of hybrid cars are doing better I wonder if more and more buyers are wondering how green they really are?

 In the first quarter of this year 146,614 of these vehicles hit British roads, an increase of 2.7%, as the inclement weather appeared to lead to a boost in registrations.

There are two issues with the green agenda here in my view. Firstly the resources cost of a new car regularly gets ignored and secondly the technology uses some relatively rare elements.

Returning to diesels this is also a problem much wider than for the UK. From Reuters.

Volkswagen AG (VOWG_p.DE) has paid more than $7.4 billion to buy back about 350,000 U.S. diesel vehicles through mid-February, a recent court filing shows. The German automaker has been storing hundreds of thousands of vehicles around the United States for months.

Volkswagen has 37 secure storage facilities around the United States housing nearly 300,000 vehicles, the filing from the program’s independent administrator said.

Should these now be subtracted from German exports, production and GDP figures?

Economic impact

The SMMT tells us this.

 Some 200,000 people are employed in new car retail alone, while UK-based car finance firms employ over 45,000 more, with an annual £12.5 billion economic contribution. On the road, the vehicle fuel industry supports 40,000 jobs, and a further 347,000 are employed in vehicle servicing and repair.

The fall in sales will impact on production but not as much as you might think as we mostly export what we make and some of these numbers are good as this from the 29th of March highlights.

More than a quarter of a million engines produced by British factories in February.Exports jump 16.1% in the month as 157,880 units head overseas – 62.0% of all output. Engine manufacturing up 10.3% so far this year as strong start to 2018 continues.

The future

There was some positive news from Vauxhall yesterday.

PSA, which last year acquired Opel/Vauxhall from General Motors (GM.N), will build Peugeot and Citroen models as well as the next Vauxhall Vivaro van in Luton, north of London. Production will rise to 100,000 vehicles from 60,000 in 2017. ( Reuters).

The banks

There is an interrelation here in addition to the obvious as we note that via the growth of car financing the car companies now effectively have banking subsidiaries. From Bloomberg.

Moody’s cut Barclays’ long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. The bond grader assigned a stable outlook to the ratings for Barclays. Rival Deutsche Bank AG is currently rated one notch higher.

However, the ratings agency gave the British lender a stable outlook and highlighted its “strong franchises in U.K. retail, business banking and global credit cards.”

Things are not so hot when you are a notch below my old employer Deutsche Bank. But I note that the credit agencies suggest times are good in domestic credit as when have they told us that before?

Purchasing Managers Indices

This morning Markit have completed their sequence of surveys and have told us this.

March data signalled a slowdown in business
activity growth across the UK service sector, with
the latest expansion the weakest for over one-and a-half
years. However, survey respondents noted
that snow disruption and unusually bad weather
conditions in March had been a key factor holding
back business activity growth.

The poor old weather always gets the blame for bad news! Some areas will have benefited ( energy suppliers ) but they are invariably silent. I am sure there was some impact via not being able to get to work but more deeply I wonder if this reflects the fact that some output for construction comes under services. We have noted this before when a large company was shifted from services to construction a few years back. Records and statistics seem to be rather malleable.

Moving onto the wider impact we were told this.

“The UK economy iced up in March……..The PMI surveys collectively
signal a quarterly GDP growth rate of just under
0.3%, down from 0.4% in the fourth quarter, albeit
with the rate of growth sliding to just 0.15% in
March alone.”

We will have to see as the last time they told us the UK economy had lurched lower post the EU leave vote Markit ended up with a lot of egg on its face. If we look back to weather related issues it reversed quickly back in 2010.

Encouragingly, in January 2010 and
December 2010, the PMI fell sharply due to heavy
snow but in both cases the decline was more than
reversed in the following month.

Comment

There is a fair bit to consider here. UK manufacturing seems to be still doing okay in spite of the woes of the domestic car market ( partly because we import so many cars) and engine production is strong perhaps because of petrol engine shortages in Europe. Construction was hit by the weather and whilst this seemed to miss manufacturing it did hit services. So we seem likely to see lower first quarter GDP numbers which after a panic will probably then bounce back.

However if we look at some official statistics also released today at the individual level economic growth has been less than the aggregate.

Gross domestic product (GDP) per head grew by 0.8% in real terms in Quarter 4 (Oct to Dec) 2017 compared with the same quarter a year ago.

On this metric we have only grown by 3% since 2008 and if we continue and shift to income we see this.

Real household disposable income (RHDI) per head increased by 1.0%;  ( on a year before)

Slightly odd if we look at wages and inflation until we note it was this.

Furthermore, net property income (in nominal terms) contributed 1.0 percentage point to RHDI per head, leading to an overall positive position. Property income is not (as might be suggested by the name) the income generated by the ownership of buildings (rental). It is in fact, made up of interest, the distributed income of corporations (dividends, repatriated profits and so on) and rent on land.

Overall it is up 4.1% since 2008. So now we shift from wondering about a slow down to mulling how little we have grown at all.

Me on Core Finance TV

http://www.corelondon.tv/financial-asset-valuations-stretched-shaun-richards-notayesmaneconomics/

 

 

The UK has a construction problem

Today brings us a whole raft of new data on the UK economy but before we get to that there has been some new analysis and indeed something of a confession. Let us start with @NobleFrancis who has crunched some numbers on the impact of the recent cold snap and snow in the UK.

In terms of construction work lost due to the bad weather between Wednesday and Friday last week, we estimate UK construction output has lost £1.6 billion (annual construction output in 2017 was £156.3 billion)……with the majority of new construction work postponed. External repair & maintenance (r&m) construction work was also postponed. r&m on internals of building could still be done but getting to site meant this was also hindered..

He is unconvinced that there will be a catch-up.

…theoretically it’s possible to ‘catch-up’ on work once the weather improves but in construction this rarely happens in practice.

This of course affects a sector which has been in recession since early summer last year and of course with the factor below might be an example of it never rains but it pours.

will also be adversely affected in 2018 Q1 by the liquidation of the UK’s second largest construction firm, Carillion, in January 2018.

The Markit PMI was showing something of a flat lining but it will have predated the worst of the cold weather. Also it seems to have missed this which is from this morning’s official release.

Construction output also decreased in the month-on-month series following growth in the final two months of 2017, contracting by 3.4% in January 2018.

As you can see Carillion had a big impact and added to what seems to have been weak construction output across much of Europe in January. This is the position compared to a year ago.

Compared with January 2017, construction output decreased by 3.9%, representing the biggest month-on-year decline since March 2013.

If this sector was a bank the UK establishment would be piling in like it was the US cavalry wouldn’t it?

On the other side of the coin we will have had a boost to GDP from the energy supply industry as the heating was turned up and it will be a quarter with the main Forties pipeline at full flow assuming there are no problems this month.

A confession of sorts

This came from the Bank of England in a working paper towards the end of last month. Remember the case I have made plenty of times on here that its QE bond buying inflated pension deficits which weakened the UK corporate sector and therefore was not the triumph it was claimed to be? Anyway after more than a few official denials we now have this.

Nor is this just a problem in the UK as low-interest rates have raised the value of pension liabilities around the world.

A sort of confession and attempted deflection all at once! We do however get some interesting detail on the scale of the issue which in spite of the way the sector has contracted is still substantial.

The 6000 DB pension schemes in the UK private sector are a significant source of retirement income, with around 11 million members and assets of around £1.5 trillion. The aggregate funding deficit that these schemes faced (on a Technical Provisions basis ) is estimated to have reached around £300 billion by 2015 , equivalent to more than 15% of annual GDP.

So how did things play out?

while firms with larger pension deficits had an incentive but not an obligation to act in
response to these deficits they paid lower dividends on average, but they did not invest less.

Okay so the first subtraction from the UK economy was lower dividend payments. Of course one of today’s themes Carillion and its economic impact was the opposite of this as it paid dividends rather than fixing its pension scheme. Moving on we get something which is even more damaging for QE supporters.

We show that obligations under recovery plans agreed with TPR prompted firms to adopt a different pattern of behaviour compared to their more voluntary
responses to deficits. Firms making contributions to close those deficits did reduce investment and
dividend payments on average. These effects were greater for firms that were financially constrained, reflecting the more limited options available to them to use external or other internal  funds to smooth out their expenditures. ( TPR = The Pensions Regulator ).

This had quite a big impact.

The scale of these effects was large for many FTSE 350
companies with DB deficits, and responses to them can explain some of the weakness in aggregate
dividends and investment observed since 2007.

This reinforces work first done by Toby Nangle and it is to his credit he was several years at least ahead in time. Oh and as the writers of the working paper have families to feed and one day might hope that the Bank of England tea and cake trolley might arrive again in the rather damp dungeon they have been posted to for further research there is this.

while the effects for some firms were large, by contrast the effects at the aggregate level
have been small in macroeconomic terms, and are dwarfed by the estimated positive impact of QE.
QE is estimated to have boosted the level of GDP by in the region of 1½-3% (Kapetanios et al,
2012; and Weale and Wieladek, 2016), while the negative effects of deficits are only estimated to
have reduced GDP by around 0.1% GDP since 2007.

I do like the way that one of the authors of the work about the GDP boost is the same Martin Weale who voted for it. We can imagine a paper from say Alan Pardew to the West Bromwich board stating that whilst they might be in a relegation crisis he has boosted their points haul by using counterfactual analysis. How do you think Baggies fans would treat the obvious moral hazard?

Production and Manufacturing

There was some expected good news here.

In January 2018, total production was estimated to have increased by 1.3% compared with December 2017; mining and quarrying provided the largest upward contribution, increasing by 23.5% due mainly to the re-opening of the Forties oil pipeline,

In it there was continued good news for manufacturing.

Since records began in February 1968, this sector has never recorded nine consecutive monthly growths……… ( Quarterly output was) manufacturing provided the largest upward contribution with an increase of 2.6% ( on a year ago).

Yet it was also true the monthly increase was only 0.1% and in something of a contradiction was driven by ( sorry).

Growth this month within manufacturing was due mainly to a rise of 1.9% in transport equipment. Within this sub-sector motor vehicles, trailers and semi-trailers rose by 3.2%

That is not as mad as it may seem as UK engine production has been very healthy. Also the erratic pharmaceuticals sector had a bad quarter (-7.8%) so on its past record it should rebound.

Trade

Tucked away in the numbers there was a hint of some better news. This of course has to be taken in the context of years and sadly decades of deficits but there was this.

Comparing the three months to January 2018 with the same period in 2017, the UK total trade (goods and services) deficit widened by £0.4 billion.

Which if we allow for the £2.2 billion increase in oil imports and fall in oil exports should show an improvement. Exports have also had a good year.

Although total (goods and services) exports increased by 5.6% (£8.4 billion)

We of course need a lot more of that.

Comment

If we step back and look at the overall position the UK economy continues to bumble its way forwards.We have seen a good run of manufacturing production which means that output is now only 0.3% below its pre credit crunch peak. However the fact it is still below after so much time shows the scale of the damage inflicted. Industrial production is also in a better phase.

On the trade issue there are flickers of improvement but we have a long journey to travel to end the stream of deficits. As to construction it seems to have hit something of a nuclear winter and as government policy has been involved in the creation of this via the impact of Carillion you might think it would be paying more attention, especially as other companies have not dissimilar weaknesses. If this was the banking sector the money would be pouring in. Also are we not supposed to be in the middle of a house building surge?