A strong performance for UK GDP but can it last?

Something of a new era in UK Gross Domestic Product or GDP measurement begins as we get a quarterly number after already receiving GDP data for two out of the three months. So in essence we will find out if Meatloaf was right about this.

Now don’t be sad
‘Cause two out of three ain’t bad.

The good news is that the extra two weeks or so mean that more data can be collected and so the quarterly number should be more accurate and less prone to revision. The not so good news is that if we look at the monthly data there are issues which look clear.

The month-on-month growth rate was flat in August 2018. Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

Does anybody really believe we actually went 0.2% followed by 0.4% and then 0% in monthly terms?

Later we will receive the latest National Institute for Economic and Social Research or NIESR estimate which will be for October so it will be a busy day on the GDP front! Here is where they previously think we stand.

Building on the official data, our monthly GDP Tracker suggests that the economy will expand by 0.7 per cent in the third quarter and by 0.5 per cent in the final quarter of this year. This amounts to a growth rate of 1.5 per cent in 2018 as a whole.  The biggest surprise was from the production sector and, in particular,manufacturing output which expanded by 0.8 per cent. This strength was across the board and the outturn was above our forecast for the same period, partly because of changes to the back data.

If I was to post a challenge to that it would be concerning the rosy scenario for manufacturing when we know that the car/automotive sector has been and continues to struggle. It in my opinion is being hit by the diesel scandal and past stimuli for the sector as if you run a high you have eventually to have a bit of a hangover.

Forecasts

Yesterday we received the forecasts from the European Commission and Pierre Moscovici. If you are in the “bad boys (girls)” club then your punishment is to have your annual growth rate forecast at 1.2% as that was what was provided for the UK and Italy, Frankly that looks optimistic on current trends for the latter. The numbers are rather tight though as the Euro average of 1.9% is pulled higher by some smaller economies. Actually even a little by Greece but care is needed here as Pierre and his predecessors have been forecasting economic growth of 2% per annum since 2012 and therefore through a severe economic depression.

Today’s data

As it is a rare event I do not want to miss the opportunity to praise the Bank of England forecasters who suggested this earlier this month.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

In one respect it was balanced.

All four sectors of output contributed positively to growth in Quarter 3 2018, with the largest contribution from the services industries at 0.3 percentage points.

If we look deeper we see this.

In the construction industry, output continued to recover following a weak start to 2018, which was in part impacted by the adverse weather. Output increased by 2.1% in Quarter 3 2018 – the fastest increase since Quarter 1 (Jan to Mar) 2017………Output in the production sector rose by 0.8% in Quarter 3 2018, following a decline of 0.8% in Quarter 2 (Apr to June). While output increased across all four main production sectors, around half of total production growth in Quarter 3 was driven by manufacturing……….In the services industries, output growth eased to 0.4% in Quarter 3 2018, contributing 0.3 percentage points to growth in GDP. This is in line with average rates seen since the start of 2017, following the relatively strong growth of 0.6% in Quarter 2 2018.

There are various messages here which have several impacts. Let me start with construction where we are building some new housing.

Q3 compared with Q2 is a rise of £872 million, primarily driven by a £507 million rise in private housing, offsetting the £162 million fall in commercial output. ( h/t @NobleFrancis ).

Then car production to which we will return later.

Transport equipment rose by 2.3% in Quarter 3, reflecting both a bounce back from a 2.7% fall in the previous quarter and strength in UK car exports in Quarter 3.

For once services did not take up all the strain and in fact growth there faded a bit with the sector most in boom, computer programming only rising 4.4% on a year before in spite of a strong quarterly performance of 2.2%.

Rebalancing

It is hard to type that word without thinking of former Bank of England Governor Baron King of Lothbury. The word that is as in fact the reality was much more elusive. However he will be cheering this from the ermine sidelines.

Net trade made the largest positive contribution to GDP growth in Quarter 3 2018 (0.8 percentage points), driven by a 2.7% rise in exports, while imports were flat……….The export growth in Quarter 3 reflects an increase in both goods (4.4%) and services exports (0.8%), with goods exports to non-EU countries growing more robustly than to the EU.

More power to their elbow and it is welcome that this mostly comes from goods exports as we have some detail on them as opposed to services where the numbers are even more of guess. Some of this will fade as we are back to the automotive sector but any ray of sunshine here is good and it was confirmed by the trade data.

The total trade deficit (goods and services) narrowed £3.2 billion to £2.9 billion in the three months to September 2018, due mainly to an improving goods balance.

There was also a bit of hope for wages which would have been included on Baron King’s rebalancing theme if he was thinking ahead.

This was driven by solid growth of 1.3% in compensation of employees (CoE), which contributed 0.6 percentage points to overall growth of nominal GDP.

This section was not all roses as export led growth is usually assumed to come with rising investment but not this time.

The rises in government and private dwelling investment were partially offset by a 1.2% decrease in business investment in Quarter 3. This was the sharpest decline since Quarter 1 2016.

 

Comment

Today’s GDP release shows that the UK economy pretty much reflected the weather in the third quarter of 2018. Not as hot perhaps but pretty good and for once the trade figures boosted it. Compared to our peers it was an especially good quarter as downbeat production data from France and Germany suggested that the 0.2% GDP growth for the Euro area might be revised down to 0.1% as if we look further it was 0.16%. In terms of our debt and deficit metrics it was also a good quarter as we can add in inflation there to get this.

Growth in nominal gross domestic product (GDP) strengthened for the second consecutive quarter in Quarter 3 (July to Sept) 2018, rising by 1.1%.

However there was a building issue which we have observed previously as we return to the automotive sector as promised earlier.

Trade of motor vehicles decreased by 6.2% in September, contributing negative 0.11 percentage points to GDP growth.

This troubled area is likely to further drag on trade and GDP in the fourth quarter, We can bring in the UK’s slowing monetary growth theme as well here to suggest a weaker fourth quarter and if we add in the Euro area’s problems then maybe a much weaker fourth quarter.

The monthly GDP numbers chime in with this theme if we look at them.

Monthly growth was flat in August and September 2018, following a downwardly-revised 0.3% month-on-month growth in July.

Frankly things are not going well for the monthly numbers as they are much too volatile but they too even allowing for that suggest a slowing.

I will be releasing my first weekly podcast this afternoon after the NIESR release as there is a lot to look at their including for example please be nice to any luvvies you see today. I just saw one and missed the chance.

Motion pictures grew by 9.3% in September, making information and communication the biggest contributor to monthly growth. The rise in motion pictures was due to broad-based growth within the sector.

Podcast

Here is the link to my opening podcast.

 

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The UK economy boomed in July

Today brings us a raft of data on the UK economy including something relatively new which is the monthly update or economic growth or GDP (Gross Domestic Product). This is part of the new structure where we get the quarterly numbers a couple of weeks later than we used to, which is a good development in terms of them being based on more hard data. But it is not clear to me that having monthly GDP adds an enormous amount to what we know with the data of it being somewhat erratic and perhaps plain wrong.

Anyway we will be able to compare the number for July with the business surveys we have which in the case of the Markit PMI have told us this.

No change is expected at Threadneedle Street on Thursday when the Bank of England meets to set interest rates. The resilient pace of growth signalled by recent PMI surveys will have come as some relief after the August rate hike, but it seems likely that the Monetary Policy Committee will await further news on the economy amid the intensifying Brexit process before tightening again. Rates could rise sooner than March of next year if clarity on the Brexit deal comes earlier, however this seems an unlikely scenario.

Actually they have omitted to point out that they believe the UK economy will grow by 0.4% in this quarter although the jury is out as to whether that is resilient. Compared to the weak monetary data it is but they are not followers of it. Also is there anyone who believes the Bank of England might raise interest-rates at its policy meeting on Wednesday/Thursday? Frankly the list of people who believe it will raise any time soon might not stretch much beyond Markit.

If we stay with the Bank of England its Governor Mark Carney will have smiled at this from the economics editor of the Financial Times over the weekend.

The gambit worked. Britain soon regained economic stability.

Yes he apparently single-handedly restored the UK economy after the EU Leave vote a view I find simply breath-taking. But wait there was more.

The weeks after the referendum defined the reputation of the Canadian at the helm of the BoE and have now earned him two extra years in the post.

Yet later came rather a list of problems which exemplify the phrase “unreliable boyfriend”.

Too often his predictions have proved false. He promised to serve only five years because there are limits to the time anyone can cope with such a punishing job, but will now stay for seven; he said a Leave vote risked a recession that has not materialised, and wrongly predicted that the first rise in UK interest rates above 0.5 per cent was looking likely at the end of 2014.

A more rational and composed assessment would be that yes he did his job on the day after the EU Leave vote but that there is a much longer list of failures. Also I note that the FT has omitted pumping up house prices as one of his failures. Added to that a failing that he was also criticised for in his time at the Bank of Canada is presented as a strength.

It is rare to find central bankers as willing to take a brave stance on important political questions.

Also it is nice of the FT to admittedly very belatedly confirm my long-standing view on his real objectives.

Having agreed to extend his term at Threadneedle Street, Mr Carney need not worry about the merry-go-round of international top jobs.

Did we miss the news that he had extended his term? If so someone needs to inform the Bank of England website.

Mr Carney has announced that he will serve to 30 June 2019

Good news for the UK economy

This morning has brought some sunshine for the UK economy.

Rolling three-month growth in July 2018 was the highest since August 2017, when it was also 0.6%. This continued a pickup from flat growth seen in April 2018.

As is regularly the case this was driven by the services sector.

with a rolling three-month growth of 0.6% in the services industries resulting in a large positive contribution. Production industries had growth of negative 0.5%, dragging on GDP growth. However, construction had a larger contribution to GDP growth than last month, with a large rolling three-month growth of 3.3%.

The strong construction performance rather nicely coincides with my own measure where I count the cranes along Nine Elms between Battersea Dogs and Cats home and Vauxhall Cross. This has risen to a record of 40 which does not count the 2 just before the Dog’s home nor the 6 the other side of Vauxhall Bridge.

Putting it chronologically this was driven by a strong performance in the month of July.

The month-on-month gross domestic product (GDP) growth rate was 0.3% in May 2018, 0.1% in June and 0.3% in July.

Whilst welcome this to my mind highlights a problem with monthly data. Do we really believe that as a pattern where we have two really good months and a poor one? The problems with highlighting monthly data are shown by an area which is a strength of the UK economy.

Within this industry, architectural and engineering activities was the largest contributor with a monthly growth of 4.4%, although this follows a month-on-month growth rate of negative 2.6% in June.

As you can see the June data was rather poor whereas if we take some perspective we note this.

 This industry has shown substantial growth over the past two years.

There is another area where a local guide is performing well as I note the Movie Makers vans and lorries currently residing in Battersea Park.

motion pictures, which increased by 4.1%, contributing 0.04 percentage points

Let us move on with only one cloud in our sunny skies.

Rolling three-month manufacturing growth to July was negative for the fifth consecutive rolling period at negative 0.1%.

Trade Wars

We advance on this data with some trepidation as it is a perennial problem for the UK.

The total UK trade deficit (goods and services) narrowed £1.4 billion to £3.4 billion in the three months to July 2018. Removing the effect of inflation, the total trade deficit narrowed £2.0 billion to £2.5 billion in the three months to July 2018.

If we look at this in terms of the good, the bad, and the ugly we see the following.

The total UK trade deficit (goods and services) narrowed £13.8 billion to £17.0 billion in the 12 months to July 2018. ………The main driver was the trade in services surplus, which widened £8.4 billion to £117.1 billion in the 12 months to July 2018; services exports rose £10.7 billion compared with £2.3 billion for imports………The goods deficit narrowed £5.4 billion to £134.1 billion in the 12 months to July 2018; exports of goods increased £20.2 billion, while imports of goods rose by a lesser £14.8 billion.

The good is plain to see via the improvements seen but that also illustrates the bad as even with good news we still have a deficit. The ugly part comes in when we note that our deficits have lasted not only for years but also for decades.

Comment

Today has brought good news on the UK economy and we should consider how much it changes our view on economic events. To my mind only a little as at least some of this is if you like a “catch-up” from the weak weather related data seen around the end of the first quarter. The overall view of around 0.4% quarterly growth still holds true as we wait to see what happens to the monetary data. As to the trade figures any improvement is welcome although I have ongoing doubts about their accuracy.

Moving to the Bank of England the GDP data will put a positive gloss on its August Bank Rate rise although of course it is supposed to look forwards and not backwards, as today’s data precedes it. Also I note an example of what the French call plus ça change, plus c’est la même chose. Remember this?

I have therefore decided that pre-release access to ONS statistics will stop with effect from 1 July
2017. ( National Statistician John Pullinger)

Whereas rather than being officially told they are now unofficially told or something like that.

, exceptional pre-release access for the Bank of England has been granted for this release.

Okay why?

would only be considered in exceptional circumstances, where denying such access would significantly impede the taking of action in the public interest.

As the policy meeting is this week I can see no such exceptional circumstances.