A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

Advertisements

How are UK manufacturing, trade and construction doing?

Let me commence today with some Friday humour provided by the British Chamber of Commerce. At this time of hurricanes and now an earthquake off Mexico we could do with it.

UK GDP growth forecast for 2017 is upgraded to 1.6% from 1.5%, and is expected to slow to 1.2% in 2018 (downgraded from 1.3%), before rising to 1.4% in 2019 (downgraded from 1.5%)

Yes they think they can forecast UK GDP to 0.1%! Also whilst it has caught some headlines it is pretty much what it was before. But there is a difference to what we have been hearing from the CBI ( Confederation of British Industry) and the Markit business surveys ( PMIs).

The contribution of net trade to UK GDP growth is not expected to be as strong as we previously predicted, as we see little evidence that the depreciation of the pound is materially boosting the UK’s external position.

Of course only time will tell as to whether our manufacturing industry will see a boost but it would appear that the BCC has a strong sense of humour.

Our new forecast is that the first increase in UK official interest rates, to 0.5%, will occur in Q3 2018. This is two quarters later than predicted in our Q2 forecast.

UK Manufacturing

The official data this morning brought some positive news on this front.

In July 2017, total production was estimated to have increased by 0.2% compared with June 2017, due mainly to a rise of 0.5% in manufacturing; the largest contribution to the rise came from transport equipment, which rose by 7.6%.

The good news from the motor industry was not a surprise as the industry had reported good numbers for July.

The monthly increase within transport equipment was due to motor vehicles, trailers and semi-trailers, which rose by 13.7%, the strongest growth since March 2009; evidence suggested that the production of new models contributed to the growth.

The industry which had been pushing the numbers around has been the pharmaceutical one but by its standards a 7% monthly fall had a mild impact as it was up 2% on a year ago. You get an idea of what it has been doing by the way a 7% monthly change seems mild. On the subject of pharmaceuticals there was some chilling news from a research project in the US yesterday from which I spotted this . From Alan Krueger of Princeton University and NLF is not in the US labour force.

Nearly half of prime age NLF men take pain medication on a daily basis, and in nearly two-thirds of these cases they take prescription pain medication

This of course needs further investigation as indeed does the mushrooming opium problem.

Back to UK production and the only slightly smaller gap between surveys and the official data there is this from Markit.

ONS say having best month this year in July. Further rebound expected in August according to PMI. ONS data very volatile…  ( Chris Williamson ).

There is a bit of a cheek calling the official data volatile if you look at the PMI series but also some truth.

 

Construction

There were promises of more house building from Bovis earlier this week however this bit caught my eye.

Special dividends totalling £180m equivalent to c.134 pence per share to be paid over three years to 2020…….Group will continue to be strongly cash generative and the Board is committed to reviewing further capacity for returns to shareholders over time.

There are two issues here. Firstly the main beneficiaries of the Help To Buy programme seem to have been construction company shareholders. But a more subtle point was made to me, if the outlook is as bright as we are told why are they returning money to shareholders? After all ordinary dividends are rising anyway.

Board to recommend 5% increase in ordinary dividend in 2017 to 47.5p with a further 20% increase in 2018 to c.57p, demonstrating its confidence in the business and the strong outlook.

Yet all this largesse for building company shareholders of which Bovis is just an example does not seem to have had much of a lasting impact on UK construction if today’s figures are any guide.

Construction output contracted by 1.2% in the 3 month on 3 month series in July 2017 but remains at relatively high levels……Construction output also fell month-on-month, falling by 0.9% in July 2017, predominantly driven by a 1.4% fall in all new work.

Also the outlook was none too bright either.

New orders fell 7.8% in Quarter 2 (Apr to June) 2017 compared with the previous quarter, dropping to its lowest level since Quarter 1 (Jan to Mar) 2014.

I have written before that I do not have much confidence in the official construction data. For newer readers they had a lot of trouble with the deflator ( inflation measure) and shifted a large business from services to construction which meant it was hard to keep the faith. Also the numbers tend to be revised higher over time. However they have presented a declining trend in 2017 which has persisted, perhaps the election was an influence on infrastructure projects but that of course will fade over time.

Trade

There is an element of repetition here as we note the ongoing deficit and the fact that it seems unusually stable.

Between the 3 months to April 2017 and the 3 months to July 2017, the total UK trade (goods and services) deficit widened by £0.4 billion to £8.6 billion.

But these numbers are very unreliable as the revisions below show.

A downward revision to both imports of goods and services (negative £0.6 billion and negative £0.8 billion respectively) and an upward revision of £0.3 billion to total trade exports resulted in a narrowing of the trade deficit by £1.7 billion in June 2017 compared with the previous UK trade release.

Comment

Overall today’s data brought a possible hint of good news for the UK economy as manufacturing had a better month. In terms of the detail however the boost from the car industry seems unlikely to persist so we will still wait for a clear impact ( J-Curve) from the lower level of the UK Pound £. Construction continues to struggle.

Meanwhile there was troubling news for the Bank of England from its own inflation survey. Firstly the respondents do not seem to have much faith in it hitting its target.

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, compared to 3.3% in May.

It is particularly interesting that the ordinary person seems to have a completely different view of inflation trends to central bankers. Maybe they have caught on that the central bankers are usually wrong! Or perhaps they consider  a “non-core” factor as well say vital for life.

Price inflation for food and drink rose sharply between July 2016 and July 2017, going from minus 2.6% to +2.6%.

The 3 economists who started their Underground report at the Bank of England with this are probably wondering where the tea and cake trolley has gone? If we return to the survey there was a further problem for central bankers who want higher inflation.

By a margin of 53% to 7%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster.

Oh and this on Twitter provided some food for thought.

USD has stopped out everyone this morning and hence has no other place to go but up. ( h/t @FemaleTrader_A ).

@boomsbustsshow has expressed the same view and these attracted my attention because the media is now full of reports of a weak US Dollar.

Steely Dan

As a fan let me mourn the death of Walter Becker this week and leave you with this from Aja. RIP Walter.

Up on the hill
They’ve got time to burn
There’s no return
Double helix in the sky tonight
Throw out the hardware
Let’s do it right
Aja
When all my dime dancin’ is through
I run to you

Me on Core Finance TV

http://www.corelondon.tv/uk-economy-official-figures-yet-confirm-j-curve-effect-not-yes-man-economics/

 

As UK house price growth fades so has the economy

Today has opened with news that is in tune with my expectations for 2017. This is my view that house price growth will slow and that it may also go negative. Such an event would make a change in the UK’s inflation dynamics as that would mean that official consumer inflation would exceed asset or house price inflation and of course would send a chill down the spine of the Bank of England. Here is the Royal Institute of Chartered Surveyors.

The headline price growth gauge slipped from +7% to +1% (suggesting prices were unchanged over the period), representing the softest reading since early 2013.

The date will echo around the walls of the Bank of England as its house price push or Funding for Lending Scheme began in the summer of 2013. Also the immediate prospects look none too bright.

Looking ahead, near term price expectations continue to signal a flat trend over the coming three months at the headline level……..Going forward, respondents are not anticipating activity in the sales market to gain impetus at this point in time, with both three and twelve month expectations series virtually flat.

Actually flat lining on a national scale conceals that there are quite a few regional changes going on.

house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West. By way of contrast, prices continue to fall in London…….. the price balance for the South East of England fell further into negative territory, posting the weakest reading for this part of the country since 2011.

We see that price falls are spreading out from our leading indicator of London and wait to see how they ripple out. Northern Ireland is no doubt being influenced by the house price rises south of the border. A cautionary note is that this survey tends to be weighted towards higher house prices and hence London.

The Real Economy

Let us open with the good news which has come from this morning’s production figures.

In June 2017, total production was estimated to have increased by 0.5% compared with May 2017, due mainly to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production.

It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers! Of the 0.52% increase some 0.51% was due to it and as well as the impact of a lighter maintenance cycle there was some hopeful news.

In addition, use of the re-developed Schiehallion oil field and use of the new Kraken oil field are contributing to the increase in oil production. Both are expected to increase UK Continental Shelf (UKCS) production over the longer-term.

If we move to manufacturing then the position was flat as a pancake.

Manufacturing monthly growth was flat in June 2017.

However this concealed quite a shift in the detail as we already knew that there has been a slow down in car and vehicle production.

Transport equipment provided the largest downward contribution, falling by 3.6% due mainly to a 6.7% fall in the manufacture of motor vehicles, trailers and semi-trailers.

This was mostly offset by increases in the chemical products and pharmaceutical sectors with some seeing quite a boom.

Chemical products provided the largest upward pressure, rising by 6.9% due mainly to an increase of 31.2% within industrial gases, inorganics and fertilisers.

If step back we see that over the past year there has been some growth but frankly not much.

Total production output for June 2017 compared with June 2016 increased by 0.3%, with manufacturing providing the largest upward contribution, increasing by 0.6%

There is an irony here as a good thing suddenly gets presented as a bad one and of course as ever the weather gets some blame.

energy supply partially offset the increase in total production, decreasing by 4.6% due largely to warmer temperatures.

If we look at other data sources we can say this does not really fit with the Markit PMI business surveys which have shown more manufacturing growth. It may be that they have been sent offside by the fact that the slowing has mostly been in one sector ( vehicles). If the CBI is any guide then the main summer months should be stronger.

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

The overall perspective is that the picture of something of a lost decade has been in play.

Since then, both production and manufacturing output have risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (January to March) 2008, by 7.8% and 4.4% respectively in the 3 months to June 2017.

Trade

One of the apparent certainties of life is that the UK will post an overall trade deficit and the beat remains the same.

Between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, the total trade deficit (goods and services) widened by £0.1 billion to £8.9 billion as increases in imports were closely matched by increases in exports.

So essentially the same as there is no way those numbers are accurate to £100 million. Even the UK establishment implicitly accept this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

If the problems were minor this would not be ongoing more than 2 years later would it? But if we go with what we have we see that as we stand the lower level for the UK Pound post the EU Leave vote has not made any significant impact.

In comparison with Quarter 1 and Quarter 2 of 2016, the total trade deficit over Quarter 1 and 2 of 2017 has been relatively stable.

This gets more fascinating when we note that prices and indeed inflation have certainly been on the move.

Sterling was 8.7% lower than a year ago, with UK goods export and import prices rising by 8.2% and 7.8% respectively over the period Quarter 2 2016 to Quarter 2 2017.

Construction

This is sadly yet another area where the numbers are “not a National Statistic” and I have written before that I lack confidence in them but for what it is worth they were disappointing.

Construction output fell both month-on-month and 3 month on 3 month, by 0.1% and 1.3% respectively.

This differs from the Markit PMI business survey which has shown growth.

Comment

We are finding that the summer of 2017 is rather a thin period for the UK economy. I do not mean the weaker trajectory for house prices because I feel that it is much more an example of inflation rather than the official view that it is economic growth. Yes existing owners do gain ( but mostly only if they sell) but first time buyers and those “trading up” lose.

Meanwhile our production sector is not far off static. So far the hoped for gains from a lower exchange rate have not arrived as we mull again J-Curve economics. Looking forwards there is some hope from the CBI survey for manufacturing in particular and maybe one day we can get it back to previous peaks. But we find ourselves yet again looking to a sector which appears to be on an inexorable march in terms of importance for the services sector dominates everything now and for the foreseeable future.

Meanwhile there is plainly trouble at the UK Office for National Statistics as the rhetoric of data campuses meets a reality of two of today’s main data sets considered to be sub standard.

Me on Core Finance TV

http://www.corelondon.tv/bank-england-mpc-confusion/

http://www.corelondon.tv/bitcoin-will-5000-next-level/

http://www.corelondon.tv/ecb-hardcore-operators-inflation-targets/

 

 

 

 

 

UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.

Productivity

This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.

 

Comment

We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!

 

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

The UK labour market gives a different view on construction output

Today sees the latest labour market data for the UK and as well as employment and unemployment numbers we get the most crucial metric of these times which is the average earnings data. However having noted that the BBC Breakfast business section informing everyone that we will get post Brexit data the picture is in fact more complex than that as the main numbers only cover June so we will only get a flicker, maybe. That is unless you wish to base your analysis on the long discredited claimant count numbers. I still remember the Yes Minister episode from 1983 which cast doubt on them. So what we will really get is a much clearer idea of the effect on the uncertainty caused by the run-up to the referendum.

What has been the impact of migrants on the UK labour market?

The Resolution Foundation has looked at the impact and decided this.

The increase in inward migration experienced over the course of the past decade coincided with a stagnation and then a fall in earnings, which some have linked.

They give us an idea of the change that took place.

It is now estimated that there are approximately 8.1 million migrants (or non-UK born individuals) living in the UK, up from 3.5 million in 1993

We learn something about wages as well.

On pay, migrants from the countries that joined the EU in 2004 earn around £8.30 an hour, compared to approximately £11.10 for natives. Workers from the EU ‘original’ countries earn the most, while the earnings of native workers and workers from the rest of the world are similar.

However they conclude this.

The result of our version of this approach shows that, in aggregate, migrants have had no effect on the wages or employment prospects of natives. However it is wrong to say that migration has had no effect at all on native wages because this overall picture masks the fact that across the distribution of natives of different educational levels or in different occupations there has been some effect, albeit very small.

Later though we get something which is rather awkward for that conclusion. The numbers below cover the 15 occupation sectors where we see the most migrants present. The highest percentage is in food manufacture and production where 25.5% of the workers are migrants.

Pay in these sectors averages £9.32 an hour, significantly below average native wages of £11.09. We know that lots of workers in these sectors are migrants from the EU ‘accession’ countries, whose average earnings are £8.33, £2.76 below that of natives

Sadly there is a fair bit of politicking in the report which as ever I have avoided. However I am l not convinced by the argument that you can be sure of a result by running an Ivory Tower style regression analysis. If you have a large increase in labour supply as it looks like food production has seen and then relatively low wages I am unclear as to how you can argue that effect is “small”. I would suspect that someone who had worked in that area might not think so. Care if needed though because there are quite a few areas that are much less affected and it is also true that this did not cause lower wages on its own but looks like something which gave them a nudge lower.

Today’s numbers

Firstly we saw a rather familiar trend in employment continue.

There were 31.75 million people in work, 172,000 more than for January to March 2016 and 606,000 more than for a year earlier…..The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the highest since comparable records began in 1971.

On the other side of that coin we also saw this.

There were 1.64 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for January to March 2016, 207,000 fewer than for a year earlier and the lowest since March to May 2008.

So the quantity situation continues on a positive path and the number below hints at a good quarter for productivity as measured by output per hour as we recall that GDP growth was 0.6%.

 ( Hours worked were ) 1.2 million (0.1%) more compared with January to March 2016

If we move to the wages numbers they were slightly better as well.

Between April to June 2015 and April to June 2016, in nominal terms, total pay increased by 2.4%, little changed compared with the growth rate between March to May 2015 and March to May 2016 (2.3%).

Moving to real pay we see this.

Between April to June 2015 and April to June 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.9% and total pay increased by 2.1%.

Thus we learn that the picture running up to the Brexit referendum looks of the Goldilocks variety with employment rising, unemployment falling, real wages rising and probably productivity improving as well.

As to the one post Brexit number we got here it is.

For July 2016 there were 763,600 people claiming unemployment related benefits. This was: 8,600 fewer than for June 2016 (the first monthly fall since February 2016) and 27,100 fewer than for a year earlier.

So a fall except I stick with my point from earlier in the article that whilst we learn something from this care is needed. However it is hard not to have a wry smile at this from the Guardian an hour or so before.

Economists polled by Reuters are expecting a 9,500 jump in claims last month, following a rise of 400 in June.

Single month analysis

We can drill down further to single months but this also comes with a dose of caution. What we see on this basis is that wages growth was unchanged in June at 2.2% whereas employment did this 74.2% (April) then quite a surge to 74.7% in May then 74.6% in June. So it was better than the previous quarterly high but was a dip on May.

June did see a rise in the unemployment rate to 5.1% so maybe some pre Brexit uncertainty but it did come with the employment numbers described above.

Comment

Let me open with something which highlights the fact that we cannot take official numbers as gospel. Remember the lower construction output data? From @NobleFrancis

Construction employment in April-June 2016 was 2.0% higher than in January-March & 5.4% higher than a year ago.

I have made the point that these are inconsistent and they are. Here are the replies I got from him and another source of data in this area.

Lag indicator? Mix of work – building employs > infrastructure? But I don’t disagree with you  ( @brickonomics)

it would still be odd to see rising employment despite lags. ( @NobleFrancis )

So we know less than we sometimes think. We can say that the run up to the referendum was not “the end of the world as we know it” but we have a mixture of signals here. We could see upwards revisions to construction output which changes the narrative there and the numbers today are overall good. But the silver lining does come with a cloud which is the hint of more unemployment in June.

As to the Bank of England Agents they expect flat employment over the next 6 months and this for wages.

Growth in total labour costs had edged higher in manufacturing, but was little changed overall, with the majority of pay awards remaining in a range of 1%–3%.

 

 

 

 

UK GDP is an example of the march of the services and not makers

Today gives us our first full insight into how the UK economy performed in the first three months of 2016. Let me open with a sector which was turbo- charged in that period. From the British Bankers Association or BBA.

Gross mortgage borrowing of £17.1 billion in March was 64% higher than a year ago and the highest borrowing since April 2008 following a reported sharp increase in purchase of buy-to-let and second homes, ahead of the increase in stamp duty on 1 April 2016.

As you can see the pedal had pushed nearer to the metal and if we look to the future we see that we can expect a follow-on effect in the second quarter of this year.

The number of mortgage approvals in March was 20% higher than a year ago, with remortgaging up 25% and house purchase up 14%.

So it was time for the Outhere Brothers in the quarter just gone.

I say, boom boom boom now let me hear you say wayoh
(Wayoh)

The BBA itself summed up the position as shown below.

A surge in buy-to-let and second home buying ahead of the new stamp duty surcharge in April led to a sharp rise in March’s gross mortgage borrowing as people brought transactions forward.

If we look back to yesterday’s article then one of the last things we need is buy-to-let buying driving house prices even lower and I note that even the BBA is unable to avoid pointing that out.

This has fuelled a hike in house price inflation in the first quarter of this year, with the ONS suggesting in its latest report that annualised increases in house prices were 6.1%. Indeed, the ONS House Price Index points to an even larger house price increases of 7.2%.

Unsecured Lending is rising fast too

Regular readers of this website will be aware that other forms of personal lending have been seeing a boom too. For instance we have tried to peer into the data to see if we can find our more about car loans. Here is the BBA view.

However, there is evidence of a stronger pick-up in lending elsewhere; as mortgage affordability rules have worked through the system, lending has shifted to personal loans and overdrafts as well as to credit cards. The difference between credit card lending and repayments shows that consumers are taking advantage of low interest rates and building their net borrowing . The same is the case for overdrafts and personal loans.

There is a clear issue here as pre credit crunch when mortgage lending was likely to be over the rules then borrowers were “helped” by being given personal loans and the like. It seems as though that might be happening all over again and is a powerful critique of macroprudential policies. In other words whilst the sky may be clear at the altitude of an Ivory Tower down at ground level reality is foggy.

We have seen evidence of this impacting on car sales and no doubt this has also been a factor in the UK’s strong period of retail sales growth. But here the boom theme starts to fade away as we note that by the end of the quarter monthly growth had gone negative and annual growth had slowed to 2.7%.

Business lending not so good

The Funding for Lending Scheme was supposed to be for lending to small and medium-sized businesses. But as I have explained so many times that was something of a red herring to allow them to push hard for more mortgage lending. They do not put it like that but even the BBA is in agreement.

This may be because lending to the private sector overall, including businesses, is less buoyant

This reminds us of an area which is much less buoyant itself to coin a phrase.

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013. The largest contribution to the fall came from manufacturing, which decreased by 1.8%.

We are not up to the end of the quarter with the numbers ( and perhaps GDP should wait for a fuller data set) but you can see that the “rebalancing” promised by Baron King of Lothbury and indeed the “march of the makers” by Chancellor Osborne seem to have gone missing.

Construction

This is a very troubled data series and should be taken with a lot more than the proverbial pinch of salt. But it too hints at a slowing.

In February 2016, output in the construction industry was estimated to have decreased by 0.3% compared with January 2016…..Compared with February 2015, output in the construction industry increased by 0.3%. All new work was flat while there was an increase of 0.8% in repair and maintenance.

I think that the position is better than that although I may be suffering from local bias as there are plenty of cranes for me to count as I cycle past Nine Elms.

The banks

You might think that with all the help they have received then bank profits would be surging and helping the recovery. But apparently not seems to be on repeat.

Barclays has reported a 25% drop in profits for the first quarter of the year, mainly due to a weak performance in its investment banking division.

Pre-tax profit for the first three months of the year was £793m, down from £1.1bn for the same period last year.

Although I am reliably informed that if you take out all the losses then the numbers are superb! Speaking of spinning, the BBC and GDP I am troubled by this from its economics editor.

It is likely – in fact probable I would say after speaking to those close to Mr Osborne – that the Chancellor will claim “referendum uncertainty” as one of the reasons for the stuttering economy.

You see this was published in the 24 hour purdah period when those who are close to the Chancellor may well be aware of the numbers as he certainly will have known them.

Services

In the end it all comes down to what in gang terms is the Master G of UK GDP numbers these days. The official weights remain back in 2012 at 78.6% for this sector but it must be much more like 80% now. Anyway this morning’s update gives signs of a slowing here too.

The Index of Services is estimated to have increased by 2.5% in February 2016 compared with February 2015……The latest Index of Services estimates show that output increased by 0.1% between January 2016 and February 2016. This follows growth of 0.1% between December 2015 and January 2016, which is revised down 0.1 percentage points from the previous estimate.

If we continue at around 0.1% a month then the annual growth rate will halve. Also business services and finance only rose by 2% in the year to February but of course the latest mortgage numbers are not in there yet.

The Overall Numbers

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP is estimated to have increased by 0.4% in Quarter 1 (Jan to Mar) 2016 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2015.

In annual terms this translates to.

GDP was 2.1% higher in Quarter 1 (Jan to Mar) 2016 compared with the same quarter a year ago.

Comment

It is good news that our economy continues to grow and in annual terms our performance will be solid relative to Europe. However the ying to that yang is of course the fear that the slowing of the growth will continue. Care is needed as the numbers are not in themselves accurate enough for us to be absolutely sure but of course other numbers have been consistent with a slower beating of the economic drums.

Also if we ignore the official hype then the “march of the services” goes on.

Services increased by 0.6%, contributing 0.50 percentage points to Quarter 1 (Jan to Mar) 2016 GDP growth

Yes you do read that correctly and yes other sectors did in fact shrink.

There was a downward contribution (0.05 percentage points) from the production industries; (mostly mining and quarrying but manufacturing fell 0.4% as well)……There was a downward contribution (0.05 percentage points) from construction;

Make what you will of the construction numbers as it is very unlikely that they are correct but you never know and indeed the ONS doesn’t either!

All of my past critiques of the use of GDP numbers apply here so as ever caution is the watchword and here is another thought. How do we define services? Has the definition somehow spread? I am reminded of the large exchange between it and construction around a year ago which of course was a much bigger deal for construction due to their relative sizes.