The UK economy puts on an economic growth spurt

Today brings us to a pretty full data set on the UK economy with the headline no doubt the monthly GDP ( Gross Domestic Product) number. This week has brought news on a sector which is often quite near to me and has been a strength we have been regularly noting. From the Financial Times.

Tax relief for UK-made movies, television series and video games is fuelling a production boom that has transformed Britain into a global hub of filmed entertainment, according to a report by the creative industries. The tax incentives have sparked a rush of inward investment as Hollywood studios and other international production companies cash in on British talent — the latest Star Wars movie was made in the UK, alongside top television series such as The Crown and Poldark.

So we should try to be nice to any luvvies that we meet as whilst they are prone to ridiculous statements they are providing a much-needed economic boost. Here is some more detail on the numbers.

The new report commissioned by the British Film Institute found that an estimated £632m in UK tax relief for the creative industries in 2016 led to £3.16bn in production spending on films, TV programmes, animation and video games — a 17 per cent increase on 2015. The industries’ “overall economic contribution” to Britain came to £7.9bn in 2016, which included £2bn in tax revenues.

Since 2016 the numbers have boomed further and the local reference is due to the fact that Battersea Park in particular is regularly used by the film industry. Much of this is a gain as I recall one cold Sunday night when the filming must have disturbed very few. However it is not all gravy as there is also a tendency to use it as a lorry and caravan park for work going on elsewhere.

Bank of England and Number Crunching

There was some numerical bingo from the Financial Policy Committee yesterday. The headline was that the UK has some £69 trillion of financial contracts with European Union counterparties which need some sort of deal for next March.Or if you prefer a derivatives book of the size of Deutsche Bank.

Also we for the assertion that debt has fallen since 2008 which looked better on their chart via comparing it ( a stock) with annual GDP (a flow). They seem to have forgotten public debt which has risen and more latterly even their data poses a question.

Borrowing by UK companies from UK banks has also been subdued, rising by just 2.7% in the past year……. household mortgage borrowing increased by only 3.1% in the year to August, broadly in line with household disposable income growth.

Both are growing a fair bit faster than the economy and of course much faster than real wages.Mind you someone has probably got promoted for finding an income number which has grown as fast, or a lifetime free pass to the cake and tea trolley.Would it be rude to point out they seem to have forgotten unsecured credit is rising at an annual rate of 8%+ as they seem to have missed it out?

UK economic growth

The number released today backed up quite a multitude of my themes. There was the evidence of a growth spurt for the UK economy, various examples of monthly GDP data being so unreliable that you have to question its introduction, and finally even evidence that the monetary slow down has hit the economy! Let us open with the latter.

The month-on-month growth rate was flat in August 2018. (UK GDP)

That looked rather grim until it was combined with something that was much better news.

Rolling three-month growth increased by 0.7% in August 2018, the same rate of growth as in July 2018. These were the highest growth rates since February 2017. The growth continued to pick up from the negative growth in April 2018,

Suddenly the picture looked very different as we got confirmation that it was a long hot summer for the UK in economic as well as weather terms. Some of that was literal as the utility industry saw rises in electricity consumption which looks to have been driven by the use of air conditioning in the unusual heat. If we look at the breakdown we see something familiar in that the major part was the services sector (0.42%), we got some production growth (0.1%) and the construction sector was on a bit of a tear (0.18%),

If we return to the travails and troubles of the monthly series we see this.

Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

That opens a can of worms. Because whilst you can argue compared to the total number for GDP the changes are minor the catch is that these numbers are presented not as totals but first and second derivatives or speed and acceleration. At these levels the situation becomes a mess and let me illustrate by switching to the American style of presentation. UK GDP rose at an annualised rate of 4.8% in July followed by annualised rate of growth of 0% in August, does anybody outside the Office for National Statistics actually believe that?

Putting it another way we can see a clear issue in the main player which is services I think.

The Index of Services was flat between July 2018 and August 2018…………The 0.7% increase in the three months to July 2018 is the strongest services growth since the three months to December 2016.

So it went from full steam ahead to nothing? The recent strength has been driven by computer programming so let us hope that has been at the banks especially TSB.

Production

This had some welcome snippets.

The rise of 0.7% in total production output for the three months to August 2018, compared with the three months to May 2018, is due primarily to a rise of 0.8% in manufacturing, which displays widespread strength throughout the sector with 10 of the 13 sub-sectors increasing.

As so often we find that the ebbs and flows are driven by the chemicals and pharmaceuticals sector which had a good quarter followed by a decline in August.

Construction

The official data seems to have caught up with crane-ometer ( 40 between Battersea Dogs Home and Vauxhall) although it too supposedly hit trouble in August.

Construction output increased by 2.9% in the three months to August 2018, as the industry continues to recover following a weak start to the year………Construction output declined by 0.7% between July and August 2018, driven by falls in both repair and maintenance and all new work which decreased by 0.6% and 0.8% respectively.

Comment

We see that the UK economy had a remarkably good summer. Actually it seems sensible to smooth it out a bit and shift some of it into August but if we were to see quarterly growth of 0.5% or so that is pretty solid in the circumstances. We are managing that in spite of weak monetary data and disappointing growth from some of our neighbours, although if the recent IMF forecasts are any guide France is in a surge.

Speaking of surges Andy Haldane of the Bank of England has given a speech today and yet again pay growth is just around the corner. Pretty much like it has been since he became Bank of England Chief Economist . You might have thought his consistent record of failure would have meant he was a bad choice as the new UK productivity czar but of course in Yes Prime Minister terms he is the perfect choice.

Sir Humphrey Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.

Meanwhile his own words.

That is quite sobering if, like me, you have never moved job

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The Bank of England faces quite a dilemma

At the moment the minds of the Bank of England must be getting more befuddled than usual as jet lag adds to the usual problems. Once they get back from Australia ( Haldane and Broadbent) and Canada ( Governor Carney) no doubt they will set aside time to read Governor Carney’s latest speech on climate change. That is assuming the forward guidance of their various pilots is working much better than theirs as otherwise a few more flights will be required to get home. So let us open with some relatively rare good news for them. From the BBC.

Reaction Engines Limited (REL), the UK company developing a revolutionary aerospace engine, has announced investments from both Boeing and Rolls-Royce.

REL, based at Culham in Oxfordshire, is working on a propulsion system that is part jet engine, part rocket engine.

At the moment the sums are small but it is a reminder that space technology has been a success story for the UK economy over the past couple of years. It has been getting more and more mentions in the official statistics.

Ben Broadbent

Deputy Governor Broadbent has given a speech at the Reserve Bank of Australia this morning. Tucked away in it is something of a gem even for our absent-minded professor.

I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 2011.

The last thing any sensible person would do is equate former Bank of England Deputy Governor Paul Tucker with accountability. Many of you will remember the saga but for those that do not here is the Guardian from back then.

Paul Tucker, the former deputy governor of the Bank of England, is among several figures from the world of finance to receive a knighthood in the New Year honours list, despite claims that he was involved in the Libor interest-rate fixing scandal.

What has concerned our bureaucrat is what concerns bureaucrats the most everywhere which is a challenged to the bureaucratic empire.

Some have argued that, because there are significant interactions between the two, monetary and macroprudential policy should be housed not just in the same institution, but in the same policymaking committee
within the central bank. The distinct MPC and FPC should become a single “FMPC”.

Okay why not ?

The risk is that a single committee would pay
too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently
allocated in the main to the monetary policymaker – and too little to financial stability.

Yet he seems to forget this later as he remembers his boss is on both committees so we get this.

Even if the two hands are separate, it is important that the one should know what the other
is doing, and in that respect it helps that some people sit on both committees.

Indeed they do some things together.

Many economic
issues are relevant for both and, in the Bank of England, the MPC and FPC regularly receive joint briefings
on such matters.

Poor old Ben then trips over his own feet with this as an increasing number think that what he fears is the current state of play.

I think there would be risks in asking the central bank to meet a wide range of objectives with no distinctive accounting for the use of its various tools.

The housing market

Those at the Bank of England who have trumpeted wealth effects from higher house prices will be troubled by this from Estate Agents Today.

Prices are flat nationally but there are major regional variations with London seeing the sharpest fall in prices, according to the surveyors.

Respondents in the South East of England, East Anglia and the North East of England also reported prices to be falling, but to a lesser extent than in London.

Prices increased elsewhere in the UK in the last three months.

Will they now be so keen to try to push mortgage interest-rates higher and thus drive away the claimed wealth effects? Whereas at the moment the situation according to the credit conditions survey of the Bank of England reminds us that its previous policies are still having an effect.

A narrowing of spreads reflects an increase in the level of
competition in the mortgage market. In recent discussions, the major UK lenders noted that competition remains very strong.

Can anybody please tell me where the £127 billion of funding given to the banks by the Term Funding Scheme may have gone? It does not seem to have gone here.

The perceived availability of credit to small businesses decreased slightly in 2018 Q1, according to respondents to the Federation of Small Businesses’ (FSB) Voice of Small Business Index.

Also if we return to the argument provided by Ben Broadbent that a separate FPC is vital I wonder what he and they think of where the biggest impact of their TFS has been.

 competition remains very strong
and since November has increased in the higher LTV market,………..Consistent with this, the difference
between quoted rates on two-year fixed rate 90% and 75%
LTV mortgages has narrowed from 90 basis points in August to 69 basis points in March. ( LTV = Loan To Value).

As I understand it this is officially called vigilance these days.

Consumer Credit

Another example of “vigilance” can be provided here from today’s survey. You may recall that the Bank of England has taken something of a journey on this subject after Governor Carney told us this in February 2017.

This is not a debt-fuelled consumer expansion
that we’re dealing with.

Now the survey tells us this.

There has been a modest tightening in the availability of
consumer credit over the past year.

This is a reining back from the promises of a reduction that we saw in the survey for the third and fourth quarters of last year which they are no doubt hoping we have forgotten. Of course we see a sign of the Term Funding Scheme at play yet again.

Lending spreads have tightened in recent months as interest rates remained broadly unchanged following the rise in Bank Rate.

This provides two problems for the Bank of England. Firstly it has boosted consumer credit with its “Sledgehammer” policies and now we will have to face the consequences. Next is a confirmation of the earliest theme of this blog which is that Bank Rate has very little and sometimes nothing to do with the interest-rates charged in this area. In effect therefore it is somewhat impotent.

 

Comment

Yet again our absent-minded professor has been somewhat forgetful. For example his own move from being an “external” member to an internal one at the Bank of England was clearly beneficial for him but was bad for the idea of external members bringing fresh ideas and dare I say it independence to the Bank. Now that Rubicon has been crossed they too may now be hoping for promotion and monetary gain and hence influenced in the same way their appointment was an attempt to avoid.

Also the empire building of the current Governor who has overseen inflation in the number of Deputy Governors such as Ben is clearly something that cannot be challenged within the Bank. For example I am no great fan of macro prudential policy as when it was used in the past it failed and I notice the fanfare in favour has gone much quieter as reality has replaced hype.

Moving to the interest-rate issue that presently seems to be the topic du jour every day the Bank of England is facing something of a crisis as its forward guidance has put it between a rock and a hard place. The rock is the increases seen and expected in US interest-rates and the hard place is the trajectory of the UK economy.

Nigeria

The honesty is admirable but it is hard not to smile as you read why Nigeria released its inflation data an hour early today. The Hat Tip is to @LiveSquawk

It will be shortly. I published one hour earlier by accident. Forgot Watch still on London time so I released 8am instead of 9am as published 😊😊. Probably need a break/holiday. My apologies

 

 

The Bank of England FPC is like the dog that barks but has no bite

One of the economic themes of 2015 has been disinflation as we have seen consumer inflation fall across most of the world and sometimes fall into negative territory. Another example of that has been seen this morning as consumer inflation in Tokyo fell to an annual rate of -0.1%. However there have been areas as I have been recording in recent days of asset price inflation (particularly house prices) which has been exacerbated by the loose monetary policy being deployed by the majority of central banks around the world. Of course the falling headline rates of inflation have encouraged even looser monetary policy as we saw from Norway yesterday.

Norges Bank’s Executive Board decided to lower the key policy rate by 0.25 percentage point to 0.75 percent.

This also came with a clear hint that it would not be feeling lonely.

The current outlook for the Norwegian economy suggests that the key policy rate may be reduced further in the coming year.

So yet another central bank cutting interest-rates in 2015 which I think makes 40 for this year but it is hard to keep up! Meanwhile on the interest-rate rise side of the equation we seem to be getting promises via Forward Guidance instead. From Janet Yellen of the US Federal Reserve last night.

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.

If the interest-rate rise is as small a deal as they keep telling us then why did they not do it last week? Regular readers will be aware of my view that Forward Guidance currently involves promising interest-rate rises to hopefully change expectations and markets thus making the actual rise unnecessary. So if you like she is the girl who cried wolf and Governor Carney of the Bank of England is the boy who cried wolf.

Asset Price Inflation

This provides a problem if the previous weapon of interest-rate rises is unavailable. On that note we have yet another message from the land of the rising sun as it was 20 years ago this week that the Bank of Japan cut interest-rates to 0.5% a level they have yet to exceed. In fact interest-rates there are pretty much zero or if we look at the latest estimate of average deposit rates in Japan 0.02%.

Central bank inflation

One area where there is plenty of inflation is in well paid jobs for central bankers which is a trend that is booming under the current Governor Mark Carney. However even before he arrived the UK establishment formed a Financial Planning Committee back in 2011 as an interim measure. Presumably because the bureaucratic response to a policy failure (inflation was about to go over 5%) is of course more bureaucrats! Oh and i do not know if he drove it but on Governor Carney’s watch this happened to salaries.

In February 2014, the Committee reviewed, in the light of experience, the time commitment involved for the members of each of these committees, and decided to increase the fees of an FPC external member to £90,698p.a., and of an Independent member of the PRA Board to £102,326p.a.,

That was an increase of 17% for the FPC and 32% for the PRA. Good to see the Bank of England doing its bit for real wages isn’t it?! Oh and with inflation according to the CPI measure which they tell us is best at 0% so far in 2015 then we have seen another nudge up.

For 2015/16, these fees were increased by 1.5%.

Perhaps Ben Broadbent of the Bank of England was referring to them in his speech on the changing composition of the UK workforce. We have higher wages but where is the productivity?

What does the FPC actually do?

I am afraid that the following is the written equivalent of something of a mouthful.

The Committee is charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.

What have they said today?

The opening salvo is in central banker speak.

Overall, the FPC judges that the outlook remains challenging.

Really? Anyway let us look for specific examples.

The UK current account deficit remains close to a record high.

I agree that this is a risk so what are they going to do about it?

Although the capital flows financing the deficit remain mostly long-term in nature and do not give rise to material mismatches, the Committee will continue to monitor closely risks associated with the current account.

Ah okay nothing! But they have protected their backs should it blow up in future. Note I said their backs not ours..

UK housing market

Again we get something of a warning and it comes with an expectation of worse to come.

In the United Kingdom, house prices continue to rise faster than incomes, with forward-looking indicators suggesting that house price inflation will pick up further in the near term.

This was backed up by this weeks data from the British Bankers Association.

Gross mortgage borrowing in August was £12.2 billion. This was 14% higher than a year ago and the largest increase since 2008. Net borrowing of £2.0 billion was the highest monthly rise since August 2010.

If my role was financial stability then I would be concerned that mortgage lending and house prices were surging ahead of the economy but business lending was stagnant. But apparently officially everything is fine.

The Committee judges that the insurance provided by its June 2014 housing recommendations for the owner-occupier market remains warranted.

What about buy to let?

The FPC points out that it has been on the march.

The outstanding stock of buy-to-let mortgage lending has increased by over 40% since 2008. Over the same period, the stock of owner-occupier mortgage lending rose by only 2%. The share of buy-to-let in the stock of outstanding mortgage lending has risen to 16% from 12% in 2008.

What it does not do is point out the role of the Bank of England in this. After all from July 2012 it drove house prices higher via its Funding for (Mortgage) Lending Scheme or FLS which meant that house prices became ever more unaffordable. That is plainly a challenge to future financial stability. There is no mention either of the UK becoming more of a rentier style society or of the economy being tilted towards the housing market one more time.

Help To Buy

Governor Carney and the FPC have written a formal letter this morning on this subject and the crucial sentence is below.

Under current market conditions, the Committee assesses that the scheme does not pose material risks to financial stability.

Can you see the swerve? It says that it is fine but should it go wrong they will blame “market conditions”. So it is pointless in reality. Oh and this bit is interesting.

While the share of high LTV lending has picked up slightly over the past year, it remains low relative to the level before the crisis.

“The crisis” is hardly a benchmark unless we intend to plunge over the same cliff. Also it begs the question of why high LTV (Loan To Value) mortgage loans are required? My contention would be that a major factor is that house prices are too high and in particular they are too high relative to incomes.

Comment

The FPC is worse than the dog that didn’t bark as it promises a bite but does not deliver it. It provides plenty of platitudes and words its Minutes so that should there be a future collapse it can say that it warned us but what does it actually achieve? My contention is that it is part of the central banking theme to claim that they are not “maxxed out” with policy options. As the UK has not and seems very unlikely to use the interest-rate weapon against asset price inflation then the central bank has to offer something else. Or at least appear to offer something else because macroprudential policies were abandoned in the past because they did not work.

This is a trend way beyond the UK as macroprudential polices are spreading as central banks come to a similar conclusion. The taxpayer is paying for more bureaucrats who then spend their time giving us open mouth operations.