Where does the events of last night leave the UK economy?

That was an extraordinary night as yet again much of the polling industry was completely wrong and the UK electorate turned up quite a few surprises. In fact it was not only the political world which spun on its axis because financial markets had cruised into this election as if asleep as I pointed out only on Wednesday. Against the US Dollar the UK Pound £ had been above US $1.29 for a while and had if anything nudged a little higher. Oh and Wednesday suddenly seems like a lifetime away doesn’t it as we sing along to Frankie Valli and the Four Seasons.

Oh, I felt a rush like a rolling bolt of thunder
Spinning my head around and taking my body under
Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)

The Exchange Rate

It was not quite like the EU leave vote night which if you recall saw a sharp rally to US $1.50 before plunging as actual results began to come in. But the UK Pound did drop a couple of cents to US $1.275 in a flash. Since then it has drifted lower and is at US $1.27 as I type this. There was a similar move against the Euro as a bit above 1.15 found itself replaced with 1.135 as Sterling longs ended the night with singed fingers.

This means that UK monetary conditions have loosened again and should the fall in the Pound be sustained then we have just seen the equivalent of a 0.5% Bank Rate cut.

Government Bonds

In spite of the fact that there has been something of a shift in the UK political axis and hence potential changes in the economy and fiscal deficit this market has met such a reality with something of a yawn. The ten-year Gilt yield is currently 1.03% meaning there is zero political risk priced into the market there and if we look at what might happen over the next 2 years an annual return of 0.08% barely covers a toenail of it in my opinion!

What we are seeing her in my opinion is how central banks have neutralised bond markets as a signal of anything with their enormous purchases. In this instance it is the £435 billion of UK Gilt purchases by the Bank of England which seem to have left it becalmed in the face of not only higher political risk but also higher inflation.

FTSE 100

This too fell in response to the exit poll forecasting a hung parliament and quickly dropped around 70 points. However then things changed and a rally started and as I type this it is up nearly 50 points around 7500. Why the change? Well there has been an inverse relationship between the value of the Pound and the FTSE 100 for a while now due to the fact that many of the larger UK companies have operations overseas.

By contrast the UK FTSE 250 has fallen by 0.9% to 19,576 on the basis that it is much more focused on the domestic economy. Again though the moves are small compared to the political shift as we mull yet another implication of the expanded balance sheets of central banks. As I wrote only a few days ago are equity markets allowed to fall these days?

Today’s Data


The numbers here start with some growth albeit not much of it.

In April 2017, total production was estimated to have increased by 0.2% compared with March 2017, due to rises of 2.9% in energy supply and 0.2% in manufacturing.

So better than last month, but once we go to the annual comparison we see a decline has replaced the rise.

Total production output for April 2017 compared with April 2016 decreased by 0.8%, with energy supply providing the largest downward contribution, decreasing by 7.4%.

Those who are familiar with the poor old weather taking the blame may have a wry smile at the fact that of a 0.75% fall some 0.74% was due to lower electricity and gas production presumably otherwise known as warmer weather.


As you can see above this was up by 0.2% on a monthly basis but was in fact unchanged on a year ago with its index being at 104.5 in both April 2016 and 17. You could claim some growth if you go to a second decimal place but that is way to far into spurious accuracy territory for me.

As we look into the detail we see something familiar which is that the erratic and volatile path of the pharmaceutical industry has been in play one more time.

Within manufacturing, there were increases in 10 of the 13 sub-sectors, but this was offset by the weakness within the volatile pharmaceutical industry, which provided the largest downward contribution, decreasing by 12.2%, the weakest month-on-same month a year ago growth since February 2013.

It has yo-yo’d around for a while now albeit with a rising trend but we will have to wait until next month to see if that continues. However there is of course the issue of what the Markit PMI ( Purchasing Managers Index) told us.

The UK manufacturing PMI sprung back to a three
year high in April after a brief blip in March…….“The British manufacturing industry is moving at
such a pace that suppliers are struggling to keep up
with demand.

The “growth spurt” with a reading of 57.3 does not fit well with an annual flatlining does it?


Again there was a monthly improvement to be seen.

The UK’s total trade deficit (goods and services) narrowed by £1.8 billion between March and April 2017 to £2.1 billion…….Imports fell across most commodity groups between March and April 2017, the largest of which were mechanical machinery, oil and cars;

This was needed as March was particularly poor leading to bad quarterly data.

Between the 3 months to January 2017 and the 3 months to April 2017, the total trade deficit (goods and services) widened by £1.7 billion to £8.6 billion;

Thus the underlying theme here is of yet more deficits. Maybe not the “thousands of them” of the film Zulu but definitely in the hundreds.

An upgrade of the past

The first quarter saw a couple of minor upgrades as the data filtered through this morning.

The total trade in goods and services balance in Quarter 1 2017 has been revised up by £1.3 billion, to £9.3 billion.

They mean revised up to -£9.3 billion and also there was this.

there has been an upward revision of 0.9 percentage points to growth in total construction output – from 0.2% to 1.1%. The potential upward impact of this revision to the previously published gross domestic product (GDP) is 0.05 percentage points.


So many areas need a slice of humble pie this morning that a large one needs to be baked to avoid running out. As ever I will avoid individual politics and simply point out that there will be quite a lot of uncertainty ahead although of course if you recall that seemed to actually help Belgium’s economy when it had some 18 months or so of it.

As to the economy this is the difficult patch that I have feared where higher inflation impacts. As usual there is a lot of noise as for example the April manufacturing figure is very different to the Markit  business survey. Also we have the impact of warmer weather on production ( whatever the weather is it gets blamed for something) and more wild swings in the pharmaceutical sector which must represent a measurement issue. Meanwhile as I have pointed out before I have little faith in the official construction series but this rather stands out.

a fall in private housing new work

That fits with neither what we have been promised nor the construction business surveys.


The economics of the 2017 General Election

Tomorrow the United Kingdom goes to the polls for a General Election. Yesterday’s anniversary of the D-Day invasion of Normandy in France reminded us that the ability to vote is a valuable thing that people have fought and died for. Let me repeat my usual recommendation to vote albeit with the realisation that as far as I can see it has been an insipid and uninspiring campaign. Time for “none of the above” to be on the ballot box I think.

Moving to economics there have been a couple of reminders over the past 24 hours that some themes remain the same. From BBC News.

RBS has finally reached a £200m settlement with investors who say they were duped into handing £12bn to the bank during the financial crisis.

The RBS Shareholders Action Group has voted to accept a 82p a share offer.

The amount is below the 200p-230p a share that investors paid during the fundraising in 2008, when they say RBS lied about its financial health.

If you look at the sums you see that the compensation is nowhere near the problem if you feel that there was a misrepresentation back then. Also as there was a 1:10 stock split back in 2012 is this not really an 8.2p offer? As to the theme of there being no punishment for bank directors there is also this.

A settlement means that the disgraced former chief executive of RBS, Fred Goodwin, will not appear in court.

Of course the UK is not alone in such machinations as I note this from Spain today. From Bloomberg.

Banco Popular Espanol SA was taken over by larger Spanish competitor Banco Santander SA after European regulators determined that the bank was likely to fail…..

The purchase price was 1 euro, according to the statement.

Santander plans to raise about 7 billion euros ($7.9 billion) of capital as part of the transaction. ( Bloomberg ).

That much? The situation has been summed up rather well in a reply to the article.

Santander could be buying a time bomb filled with bad debt. What is the CEO thinking? Why should shareholders bail out Popular?! ( @ ken_tex )

We are left with a general theme that the banking sector carries on regardless and simply ignores things like elections. Democracy has not reached the banking sector. There is a British implication as of course Santander is a big player in UK banking and as an aside this sees the first bail-in of a so-called Co-Co bond.

How is the economy doing?

We have the Bank of England with its foot hard down on the monetary policy pedal with a Bank Rate of 0.25% which as far as I can recall has barely merited a mention in the campaign! Amazing how that and £445 billion of QE ( including the Corporate Bonds) can be treated as something to be pretty much ignored isn’t it? Partly as a result of this we are facing a spell of higher consumer inflation which will lead to a contractionary effect on the economy due to the way it seems set to reduce real wages. But again this seems to have been ignored. Of course the Bank of England will be happy to be outside of the political limelight but when it is such a major part of economic policy there should at least be a debate.

Fortunately the edge has been taken off things by the decline in the price of crude oil back towards US $50 in Brent Crude terms and the rally of the UK Pound to US $1.29. This is a factor in the Markit business survey telling us this on Monday.

The three PMI surveys are running at levels that are historically consistent with GDP growing at a robust 0.5% rate, albeit with the slowing in May posing some downside risks to the near-term outlook.

So the economy continues to grow but at a slow pace overall. Of course the Bank of England will be concerned about this reported this morning by the Halifax.

House prices in the last three months
(March-May) were 0.2% lower than in
the previous three months (DecemberFebruary).

The mood of Bank of England Governor Mark Carney will not be improved by this as it refers back to a time before it began its house price policy push in the summer of 2013.

Prices in the three months to May
were 3.3% higher than in the same
three months a year earlier. This was
lower than April and is the lowest annual
rate since May 2013 (2.6%). The annual
rate is around a third of the 10.0% peak
reached in March 2016.

The Bank of England will also be worried by this signal that emerged yesterday. From Homelet.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…….This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis. The pace of rental price inflation across the UK has been slowing in recent months, having peaked at 4.7% last summer.

Of course whilst there will be concern and maybe some panic at the Bank of England that the £63 billion of the banking subsidy called the Term Funding Scheme has run out of puff. Meanwhile over at HM Treasury someone will be having a champagne breakfast as they slap themselves on the back for starting a rush to get rents in the official UK consumer inflation measure ( CPIH) last Autumn.

Fiscal policy

Back on the 23rd of May I looked at this.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

Whoever wins we seem set for a period of higher taxation and higher expenditure but we remain in a situation where there is a lot of smoke blowing across the battlefield. There is of course also this from Labour.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.


This has been an election where the economy has been out of the limelight. In a way this is summarised  by the fact that we have heard so little from the current Chancellor of the Exchequer Phillip Hammond. This means that many important matters get ignored such as the apparent devolution of so much economic power to the Bank of England. An issue which is important as in my opinion it was captured by the UK establishment and now pursues policies that politicians would be afraid to implement.

Other important issues such as problems with productivity and real wages which have bedevilled us in the credit crunch era get little debate or mention. To that list we can add the ongoing current account deficit.

Yet some markets are at simply extraordinary levels and it is hard not to raise a wry smile at the ten-year Gilt yield being a mere 0.99%! Whatever happened to pricing an election risk? It also provides quite a boost over time to the fiscal numbers as it is well below the rate of inflation.



The General Election and its impact on the UK Public Finances

Firstly let me start today by expressing my deepest sympathies to those affected by last night’s dreadful attack at Manchester Arena. I do understand some of the feelings of those affected as I was just around the corner from the IRA Bishopgate bomb in the City many years ago. This time around though things are even worse with the apparent targeting of children at a music concert.

Today I wish to do a different form of travelling in time as it will be helpful to remind ourselves of the state of play some 7 years ago as we approached a General Election. From April 29th 2010.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So is the standard of debate, manifesto and honesty any better this time around? In terms of scale maybe a little as we see the woeful efforts from back then.

The worst offender is the Liberal Democrats who have not explained where they will find £79 billion of spending cuts which is 5.4% of national income.The Conservatives plan spending cuts but have not explained where they will find £71 billion of them which is 4.8% of national income. Labour plan spending cuts but have not explained. Labour have £59 billion of spending cuts which they have not explained which is 4.1% of national income.

What about now?

We can permit ourselves an opening sigh of relief as the numbers are much lower now as this is what we thought was the situation back then.

Our fiscal deficit for the last year was £163 billion which is 11.6% of our economic output (Gross Domestic Product or GDP).

That compares with £48.7 billion last year. So we have in fact made quite a lot of progress although much more slowly than promised as we were supposed to be in surplus by now. Oh and in a sign of how reality changes over time we now think we borrowed £151 billion in the peak year.

As to the situation post election there is more smoke than clarity but I think whoever wins the Institute of Fiscal Studies have this right.

A balanced budget can apparently now wait until the middle of the next decade.

In political terms that is beyond the furthest star! As to the detail here is the IFS again.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

The “room for manoeuvre” has been at least partly used over the issue of social care and what has become called the Dementia Tax.Which is currently unchanged or very changed and was always intended to have a cap or has a new one depending on your point of view. Personally I think the official denials of any change are the clearest guide. As to Labour there are clear plans to spend more of which an example from its Manifesto is below.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

This sounds rather like the Juncker Plan from the Euro area but we do not know how much public borrowing there will be or why private sector capital is not supporting such investment already? There are also plans for rail and water nationalisation which as the Guardian points out would work if the UK was/is a hedge fund.

At Severn Trent, for example, the dividend yield is 3.4% at the current share price. Borrowing at 1.5% to buy an asset yielding 3.4% is not the worst trade in the world. And the state, if it wanted to act like a supercharged private equity house, would be able to juice up returns by refinancing the companies’ debt at a lower rate.

In case some of you read the piece the author was somewhat confused about UK Gilt yields but somehow ended up near the right answer. We can presently borrow at 1.6% for fifty years ( for some reason they looked at 10 years) so the doubt in the issue is whether the public sector could get the same rate of return as the private sector. But the elephant in the room is the £60 billion or so required to buy the companies in the first place. They could of course just take them but that would presumably scupper the private capital for the National Investment Bank.

As to the NHS then there seems to be little variety about.

While precise comparisons are hard, there is strikingly little difference between Labour and the Conservatives in their funding promises for the NHS.

The Conservatives are promising a real increase of £8 billion over the next five years. That sounds like a lot but it won’t go far. Nor will Labour’s only slightly less modest offering.

Although the Liberal Democrats do offer something of an alternative.

Increasing spending on the NHS and social care, using the proceeds of a 1p rise in Income Tax.

Actually in a groundhog style way the latter part of that sentence does take us back our 7 years again as the musical theme for whoever is in government next comes from the Beatles.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Today’s data

Let us open with the good news.

Since the previous bulletin, the provisional estimate of central government net borrowing for the full financial year ending March 2017 has been revised down by £3.5 billion

Much of this was from higher tax receipts which particularly in the case of VAT may hint we did a little better than previously thought.

current receipts were revised upwards by £2.4 billion; VAT receipts were revised up by £1.7 billion between January and March 2017, largely due to higher than forecast cash receipts in April 2017; and Income Tax and National insurance contributions received in March were revised upwards by £0.5 billion and £0.3 billion respectively

As to April itself it was not so good.

Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016;

Tax receipts were higher but in a potentially worrying signal it was debt costs which moved the numbers as we spent an extra £2.1 billion in this area this April. We are not told why but I expect it to be the rise in inflation and in particular the rise in index or inflation linked Gilts driving this especially as they are linked to the Retail Price Index.


As we look back that is much that is familiar about the UK Public Finances in a General Election campaign. The reality is that our politicians do not think we are not capable of accepting or dealing with the truth so we get presented with what they think we will take rather than what they think might happen. There are more holes in the various manifestoes than in a Swiss cheese!

However since the 2010 election we have made a fair bit of progress in reducing the level of annual borrowing although the concept of balance or a surplus was a mirage at best. This means that you might like to sit down as you read the change in another set of numbers. First back then it was £1.03 trillion or 65.7% of GDP. And now.

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of April 2017, which equates to 86.0% of the value of all the goods & services currently produced by the UK economy in a year (or gross domestic product (GDP)).

We should be grateful that the cost of borrowing is so low as this has provided an enormous windfall over the period to our public finances. Odd that the Bank of England does not explicitly present that as a gain from its £435 billion of Gilt purchases is it not?

The twin economic challenges facing the UK post-election are the trade deficit and house prices

This is definitely the morning after the night before. Yes I am at this point discussing the disaster that was had by the UK polling industry! Did they recruit from the Bank of England forecasting department or perhaps the Office for Budget Responsibility? For foreign readers the pollsters displayed rating agency style accuracy by forecasting a neck and neck election which somehow morphed into what looks like a Conservative majority. A very wide miss which will damage their reputation for quite some time. Although to be fair one at least has demonstrated some good grace. From Stephan Shakespeare of YouGuv.

A terrible night for us pollsters. I apologise for a poor performance. We need to find out why.

As to the result well it has been summarised with references to Maggie Simpson with her yellow face and blue body. However we also received today updates also on the two major economic issues facing the UK.

House Prices

One view of policies likely in this area has been provided by the stock market. Can anybody spot a theme in this from @econhedge ?

Foxtons gains 7.5%, Savills gains 11%. Countrywide adds 4%. Online property portals Zoopla and Rightmove add 4.7% and 5.1% respectively

Indeed the Financial Times also gets on the case.

Houses worth over £2m could see price rises of as much as 20 per cent in the next 12 months, Mr Mead predicted, and could double in the next five years.

There will be a renewed flood of cash into the capital’s housing market from foreign buyers, he said.

Giles Hannah of Christie’s International Real Estate said that buyers from Canada, the USA, the Middle East and Asia would buy in London, as they will now “view the market as a safe haven to invest in”.

Of course that is all speculation and in my opinion the last thing that the London property bubble needs is more inflation! In terms of actual data the Halifax has been on the case this morning.

House prices in the three months to April were 2.2% higher than in the preceding three months……… annual house price growth increased slightly, from 8.1% in March to 8.5%.

Exactly how does this work with an official inflation target of 2% per annum? Of course it does not which is why the UK establishment resists any change to the fact  that the UK CPI consumer inflation measure excludes owner occupied housing costs. In a way the Halifax rams this home.

This combination has kept house price inflation steady in recent months with prices increasing by 2.2-2.6% on a quarterly basis and at an annual rate of 8-9%.

it even points out that house prices are moving ever further away from wages.

House prices are continuing to increase more quickly than average earnings despite the return to real earnings growth over the past few months.

With the annual rate of earnings growth being 1.3% in February I think we can say that house prices are not being driven by wage growth? We await what house price friendly moves the new government will add to its existing portfolio but is there much else left other than trying to push mortgage rates even lower? This of course returns us to my view on the likely next move in UK Base Rates being down.

My view on Base Rates will be reinforced in the UK Pound continues the strength it has shown overnight as it has risen above US $1.54,185 Yen and 1.37 versus the Euro. At such levels it is heading towards being the equivalent of  in monetary policy tightening of Base Rates being 1% higher than a year ago. The Bank of England will be discussing that as I type this although I do not expect a change on Monday. As to the currency rise well maybe it is at least partly due to the property market. From Henry Prior.

2x emails from clients by 09.30 saying “go”. One spending £5m, one £10-£15m

Balance of Payments

A rising exchange rate brings us to another achilles heel of the UK economy which is our trade position which is in the news this morning. First let me remind you of the underlying situation which if the official statistics are any guide is dire.

However looking over a broader time period shows a general deterioration in the current account; the deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.

However there was some hope of an improvement at the end of last year so now we have the full data for the first quarter of 2015 let us take a look.

In quarter 1 January to March 2015, the UK’s deficit on trade in goods and services was estimated to have been £7.5 billion; widening by £1.5 billion from the previous quarter.

In fact both our goods and services position deteriorated in the first quarter of this year making the hopes of an improvement fade. So we find ourselves in a continuing deficit situation here which of course does not go well at all with the rally in the UK Pound overnight. It is the sort of situation which led the band Ace to pose this question.

How long has this been going on?
How long has this been going on?

In terms of a balance of payments deficit it feels like forever and has been (lost) decades. I have written in the past (2nd of April) that I feel that our services performance has probably been under-reported but even so we are on a road to nowhere with this problem. It is an area where we need to improve our data and statistics and perhaps the money below would have been much better spent at home.

The International Monetary Fund (IMF) and the United Kingdom’s Department for International Development (DFID) have launched a new project to improve macroeconomic statistics in 44 countries in Africa and the Middle East. DFID will provide £6.2 million (about US$9.3 million) over the next five years to support the project.

Some of you may already be thinking that UK pollsters could have done with the money too!

Oh and as I have pointed out before the UK is a remarkably good European for which it rarely gets the credit.

By area, the UK’s deficit with the EU widened by £1.6 billion to a record £21.5 billion, while the UK’s deficit with non-EU countries narrowed by £0.8 billion.

The idea of them cutting us off from trade is beyond laughable if you look at those numbers. Also the good news above did not require any union indeed it was with a country which forcibly rejected it some time ago.

Outside the EU, exports to the USA reached a record high £11.5 billion.


In a way for the UK economy one could summarise matters with an album title from Tom Petty and the Heartbreakers.

Damn the torpedoes (full speed ahead)

Or it would be full speed ahead if the economic growth figures had not showed a slowing! Perhaps some of that will be revised away as I discussed on Wednesday but we march onwards with a bubblicious housing market and continuing balance of payments problems which have tripped the UK economy up many times in the past. What could go wrong?

As to the election itself well here is a song from my album of the day for the losers as the winners do not need one.

Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes

Meanwhile yesterday’s European bond market crash had disappeared like the evidence of a shower on a hot summers day. As the equity flash crash has been blamed on a semi in Hounslow I do hope that this particular flash crash does not get blamed on a David Brent in Slough!

What if UK GDP growth is revised up after the General Election?

Today is the last look at significant UK economic data before many people go to the polls to vote in tomorrow’s General Election. Of course a major part of the economic backdrop was set back on the 28th of March when we were told this which was a story of two halves.

GDP is estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2015 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2014.

GDP was 2.4% higher in Quarter 1 (Jan to Mar) 2015 compared with the same quarter a year ago.

So although care is needed with the preliminary estimate we saw that economic growth continued to fade away but also that in the post credit crunch era we had over the previous year put in one of our better performances. After all the overall position is of a modest gain.

In Quarter 1 (Jan to Mar) 2015, GDP was estimated to have been 4.0% higher than the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008.

Even this modest gain erodes if we look at the numbers in the light of the population increase that the UK has had over the same period although we remain in doubt as to the exact size of this. But it is per capita GDP and its influence on real wages which leads to many people wondering if we have indeed had much of a gain at all.

Business Surveys

The Purchasing Manager’s Indices reinforced this theme for manufacturing and construction.

UK manufacturing growth slows as intermediate goods sector falls back into contraction.

This was not an especially auspicious headline as we had become unused to contraction themes over a better period for UK manufacturing although it remains some 4.9% weaker than the credit crunch peak.

The construction report was disappointing too.

Construction output growth slows in April amid weakest rise in new work since June 2013…..Business activity growth hits 22-month low

However there is a nuance here as the slow down was blamed on uncertainty before the General Election. Intriguing as whilst we often report this else where  it has so rarely got a mention in the UK this time around! Also the whole sector is mired in uncertainty due to problems with the official data.

Taken as a whole, the latest survey presents a far more upbeat picture than the curiously weak official construction output data for the first quarter of 2015.

In case you have not followed it UK official construction data is in quite a mess and whilst the business surveys have their problems they are likely to be more reliable for the immediate future.


A completely different view of the UK economy was provided by a very upbeat survey on the UK service sector from Markit this morning.

Business activity increased at the fastest rate since August 2014, driven by a further marked rise in new business….Activity in the sector has now risen for 28 successive months, the longest sequence of growth in seven years.

The reading of 59.5 is high but the context is that the long-term average is 55.2 for this sector and we should perhaps use that rather than 50 as a benchmark. But the boom is put into the paragraph heading by this.

“The PMI surveys suggest the economy is showing robust growth momentum, expanding at a rate of 0.8% at the start of the second quarter.

Of course it is only one month out of three and we were told this at the end of the first quarter by the same source.

The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter, reviving from the slowdown seen late last year.

Were they right to be optimistic?

Today’s Economic Review from the Office for National Statistics does poses this question if you read between the lines a little. Let me open with its published view which coincides with the GDP numbers above.

Figure 1 shows that total services output fell by 0.2% in January, following relatively robust growth of 0.6% in December 2014. This fall was driven by a broad decline in the ‘business services & finance’ industries, with the largest contribution coming from a 1.4% fall in ‘professional services’ (such as architectural, management consultancy and legal services).

Okay so that is clear with one sector driving services output lower in January. But then look at this.

However, February saw a return to growth in services output at a similar rate to that seen in much of 2014.

That makes January look like an outlier or to put it another way odd. This is reinforced by this section.

Looking over 2014 as a whole, services output grew in 11 of the 12 months, and by 3.7% in the 12 months to December 2014.

There were no contractions as the twelfth month was a zero and yet suddenly we had one which then disappeared in the blink of an eye! I am reminded of Andrew Baldwin pointing out that an election in his province in Canada took place based at least partly on  changes in the unemployment data which were then revised away. There are grounds for wondering if something similar may be happening in the UK and that a change to services output will return economic growth to 0.5% or so. Or as David Bowie put it.

(Turn and face the strain)
Don’t want to be a richer man
(Turn and face the strain)
Just gonna have to be a different man
Time may change me
But I can’t trace time

This is especially awkward at election time!

The Balance of Payments Crisis

This continues except it is an almost silent crisis as markets so far have chosen to ignore it. As I have regularly pointed out the exchange-rate of the UK Pound has risen over the past year. But as today’s Economic Review points out.

the (current account) deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.

This made us the worst in the G7 group of countries. It also should sober up some of those who keep telling us that we have to be in the European Union for the trade benefits. Although to be fair to them there are some who do indeed benefit from this trade.

In contrast, Germany experienced the largest current account surplus in 2014.

What about a sterling crisis?

In spite of the what you might call sterling efforts of the Daily Telegraph there are no signs of a sterling crisis at all so far anyway.

What about a Gilts crisis?

Here the are signs of initial hope for the doomsayers which in this instance are being led by the Financial Times.

Investors are rapidly selling off UK government bonds, as jitters about future economic policy a day before an election

If you want such a theme then the UK ten-year Gilt yield has nudged above 2% this morning for the first time in 2015. However the situation changes when I note that the ten-year yield of Germany has risen by 0.1% to 0.56%! I did reply in such fashion to the FT on twitter and will let you know if it replies to this.

Is there an election in too as their bonds have taken a pounding recently?! In spite of

Neither a saver nor a saver be

With apologies to William Shakespeare the Economic Review confirmed something which savers have been complaining about.

While the rate of interest received on savings from deposits with financial institutions has declined since the beginning of 2013, the rate paid by households on loans has remained relatively stable. Savings rates in some cases have fallen by over a third since 2013.

Actually I think that they are confusing stock with flow a little on the impact of falling mortgage rates but it is also true that volumes there are of course much lower than pre credit crunch.


So in summary the UK has had a good spell of economic growth but at the familiar price of pumping up house prices and a worsening balance of payments. All very deja vu if you look at our economic history. Missing this time has been a rise in inflation and indeed wages but the former I think has been singing along to the Beatles.

Please, don’t wake me, no, don’t shake me
Leave me where I am, I’m only sleeping

Inflation in the services sector remains above the target and as for goods inflation well the oil price (Brent Crude) is continuing to rebound higher and has moved over US $68 now. Thus headline inflation will pick-up and the economic boost provided will fade.

If I come across a party at this election that looks likely to deal with our economic problems I will let you know!

The election forecasts for the UK’s fiscal deficit and national debt are pretty much useless

Today has seen the last set of UK Public Finance figures before the upcoming General Election. So no pressure there then! Of course the UK political establishment keep misrepresenting the numbers and the statistical establishment has not helped either by its changes in the course of this Parliament. It is all quite a tangled web and the media does not help at times either for example Stephanie McGovern the business presenter assured us this morning that the UK fiscal deficit was of the order of £30 billion. Oh if only! Let us therefore go straight to the actual numbers and skip the hype and debate.

UK deficit and debt

The opening salvo is already rather ominous for the view that we only have a £30 billion problem.

In March 2015, PSNB ex was £7.4 billion; a decrease of £0.4 billion compared with March 2014.

Only one month of twelve in a year and nearly a quarter has been used. As we have just completed a financial year we can see the full picture for it.

In the financial year ending 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £87.3 billion; a decrease of £11.1 billion compared with the same period in the financial year ending 2014.

From this number we see the general pattern which is that after a period earlier this fiscal year when there was no improvement in the data that latter part has seen us borrow less which is welcome. For example the income tax take in the self assessment period was an improvement on 2014 which replaced an earlier period where income tax receipts were lower year on year. So the UK economic boom is having an effect albeit one which is smaller than one might have expected or hoped if you had known how quickly the economy would grow. However if we return to what the next government will face it will be a still substantial deficit, one which is trending lower, but one that will take a long time to be eliminated at the current rate of decline.

It was not supposed to be like this

Back in the heady days of the beginning of this Parliament we were told by the then new Office for Budget Responsibility or OBR that the deficit would be well on its way to being eliminated by now. It was supposed to be £37 billion and having fallen by £23 billion on the year before. So quite a wide miss on both counts.

Or as the Rolling Stones put it.

You can’t always get what you want

What about the National Debt?

Our political establishment love to use phrases like “paying down the debt” whereas the reality is that the UK National Debt has sung along to the Electric Light Orchestra.

You took me, higher and higher
It’s a livin’ thing,

The rises in it are a consequence of the fact that not only have we have continued to borrow we have found ourselves borrowing at a much higher rate than expected.

At the end of March 2015, public sector net debt excluding public sector banks (PSND ex) was £1,484.3 billion (80.4% of GDP); an increase of £82.2 billion compared with March 2014.

It was supposed to be 69.4% of GDP and falling rather than rising.

Actually there is another problem as our numbers are much lower than if we used what is the international standard or benchmark.

At the end of March 2015, General Government Gross Debt (Maastricht debt) was £1,598.5 billion (86.6% of GDP) and General Government Net Borrowing (Maastricht deficit) in the calendar year 2014 was £102.4 billion (5.7% of GDP).

You may note that the borrowing figure is a fair bit higher too.


An awkward truth

This is in spite of the fact that the annual cost per unit of borrowing as represented by bond yields has dropped by a large amount. At the time of the UK 2010 election the ten-year Gilt yield was just over 4% and in spite of a jump up yesterday it ended less than half that at 1.7%. That saves a lot of money when you consider that new issuance for the UK is of the order of £150 billion per year. Also things which reduce your borrowing tend not to be emphasised by a government when it is overshooting its borrowing as it leads to the (correct) view that things are worse than it is claiming. If we were borrowing now at 5% as the OBR expected we would be paying a lot more on debt interest leading people to ask what happened to the money?

Reality was once a friend of mine

This Parliament has seen some extraordinary attempts at misrepresentation. Of course that is no surprise when reality has seen more borrowing than expected. But we saw the Royal Mail sell-off reduce the numbers by £28 billion when in fact it was an expected liability for UK taxpayers. The effect of Bank of England QE was to flush money in and out of the numbers on a large-scale with frankly bizarre Euro area rules on what counts – some £’s are more equal than others – meaning that the fog got thicker. Then of course the statisticians joined in as the effect of ESA  was to raise GDP by around 4% but also to raise our national debt by around £120 billion. Aren’t you glad that it is so clear?! The effect has been along the lines of this from Those Magnificent Men in their Flying Machines.

They can fly upside with their feet in the air,
They don”t think of danger, they really don”t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.

Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.

What do we know about what will happen post-election?

Much less than you might think. You see in spite of the wall to wall coverage that frankly has been tiresome for a while there is a lack of clarity and often no clarity at all. From today’s Institute of Fiscal Studies analysis.

All four parties have said they would reduce borrowing in the coming parliament. None has managed to be completely specific about how much they want to reduce borrowing, or exactly how they would do it.

They mean the traditional 3 parties and the SNP. The next swerve comes on the subject of eliminating tax avoidance which is the got to area if your numbers are not adding up!

The Conservatives have squared this circle with an aspiration to raise 0.2% of national income (around £5 billion) from clamping down on tax avoidance

Ah an “aspiration” as we flick through my financial lexicon for these times to check its real meaning. Also if it is an aspiration we are left wondering where it has been the last five years? This is compounded by the fact that their colleagues claim to have been keen on it all along too.

The Liberal Democrats……. relying heavily on unspecified
measures to reduce tax avoidance and evasion (£7 billion)

Seems a bit weak after five years in government does it not? In a way it is a confession of failure although of course both will spin it very differently. Not to be left out Labour seem to have won the game of Top Trumps here as they predict an even larger number.

On top of this, Labour have also said that they would aim to raise a further £7.5 billion from tax-avoidance measures by the middle of the coming parliament.

As these three parties have been in government in the UK throughout the lifetime of everyone in the UK perhaps someone might sit them down and ask why they have not bothered with this before? I am reminded one more time of Alice In Wonderland.

Why, sometimes I’ve believed as many as six impossible things before breakfast

The SNP approach to this area is by contrast refreshing.

Unlike the other three parties, the SNP have not factored into their main plans any revenue increase from anti-avoidance measures.


The last five years have taught us that the economic and financial future is as hidden from us as it has ever been. You might think that the leaps in information technology would help but I note that the UK fiscal and national debt picture is nothing like what we were told. Of course some of that is due to the rose-tinted forecasts that were used back then. If you look at today’s forecasts we have not learned much! Accordingly the flood of media headlines about the expected world in 2019/20 are meaningless and to coin a phrase tomorrow’s fish and chip wrapping.

The deficit looks set to be with us for a while and the debt will continue to rise too. As long as interest-rates and bond yields remain low we can accomodate that but the catch of such can-kicking into the future is that our capital burden rises and we are weaker. It reminds me of the real question of these times, what happens when the next recession hits us?

The UK Election Manifestoes hide and mispresent our fiscal situation

The UK is now well into its election season and the main political parties are firming up their economic strategies for the next parliament should they be elected. Last time around there was a large element of fantasy in their plans as none of them faced up to the difficult problems posed by the UK banking crisis on the UK fiscal deficit and national debt. If we step back in time to the last election debate then I pointed this out on April 15th 2010.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges…… This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

In itself the concept of politicians misrepresenting the truth is hardly a surprise but this did matter as we ended up with two of the main parties in coalition. The problem highlighted above was exacerbated by the fantasy economics of the UK political establishment where we were quickly assumed to grow by 3% per annum perhaps forever! Reality was not so convenient as we were supposed to be approaching at a fiscal balance by now (-1.1% of GDP this year and a surplus next) whereas we continue to borrow at quite a substantial rate which looks set to be around 5% of UK GDP. Quite a miss and it has had quite an effect on the size of our national debt which the original Office of Budget Responsibility forecasts post the June 2010 Budget told us this.

public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

Wouldn’t it be nice as the Beach Boys sang if that were true?! Instead reality for the UK national debt sang along with Jeff Lynne and ELO.

You took me, higher and higher
It’s a livin’ thing,

We find ourselves reviewing a national debt that as of February was in fact of this size.

At the end of February 2015, public sector net debt excluding public sector banks (PSND ex) was £1,468.5 billion (79.6% of GDP).

Sadly for the OBR its credibility has sung along to the same song as the error count has risen.

Takin’ a dive ‘cos you can’t halt the slide

Oh but one clear difference between then and now is that this time around there has been some inflation it looks as though six manifestoes will matter on a national scale as opposed to three back then.

Does it matter?

The question is partly rhetorical and partly valid. The driving force behind even asking to it is because in the intervening five years something which impacts the dynamics of this area has changed very substantially. You see the cost of a financing new UK borrowing has plummeted. If we look back to the previous election then the UK benchmark ten-year Gilt yield rotated around 4% per annum and now it is 1.6% so borrowing now only costs 40% of what it did then at that maturity.If we look at the annual running cost of the 30 year Gilt it has fallen from 4.5% then to 2.34% now for another substantial drop. Even index-linked Gilts (UK inflation linked Gilts use the Retail Price Index) are costing very little extra right now as RPI inflation is at a relatively low 1% as even the oil price has come to help in this area.

This has created what you might call a perfect storm for the financing of our national debt. Contrary to the claims of our political class this windfall in pretty much a worldwide trend as for example a country I expect to default which is Portugal also has a 1.6% ten-year bond yield! Much of this has been driven by the actions of the world’s “independent” central banks who have used this “independence” to do what the political establishment in these countries would have struggled to do in their own name driven asset prices higher ( The FTSE 100 closed last week at a record 7089 last week) and bond yields lower. Of course they will not discuss the way that they have received a windfall as all sides of the political debate can gain by spending more or as seems more likely claiming to be fiscally prudent. Indeed the coalition government is deliberately being fiscally imprudent right now by paying 2.8% for one-year debt and 4% for three-year debt of which the latter is by far the most expensive form of UK national borrowing right now. But in an election atmosphere where it is know that the over-65s are proportionately likely to vote not even opposition parties seem likely to point this out!


Fans of Keynesian style economics would be pointing out that now is a time that the UK could and indeed should be borrowing. After all it is historically cheap- in some instances very close to all-time lows- meaning that the rate of return on projects financed by the debt needs only to be at a low-level as well.

The rub as Shakespeare would put it is that returns look set to be low too especially if we consider our troubled productivity figures.

The Capital Problem

The numbers and bond yields looked at above only consider the interest or running costs of our debt. If we look at the potential capital burden then we get quite a different picture as the annual review of the Debt Management Office highlights.

The DMO raised £153.4 billion via gilt sales in 2013-14; this was the sixth year in a row that the gross gilt sales programme has exceeded £140 billion, over which period the size of the gilt market has more than quadrupled to almost £1.4 trillion.

This is a problem as we will have to refinance the debt one day and the cost of a considerable portion of it is outside our hands. We have just seen UK inflation pushed lower by the oil price and it could just as easily do the reverse and leave us with a substantial bill for 23.6% of our national debt.

If we put that into numbers then a 1% fall in RPI inflation reduces the annual UK debt cost by around £3.5 billion. So the recent fall in inflation due to the oil price is saving us around £5 billion a year. This is a  big impact because it applies to all our index-linked debt. By contrast falls in bond yields take time to build as they apply to new and refinanced debt only but if we use some rules of thumb and try to estimate the impact then changes since the last election could be worth around £10 billion a year.

What is austerity?

This is a question we have regularly debated on here. At the moment the various UK political parties are mostly being considered as applying austerity going forwards according to the mainstream media. But as you can see  from the quote above our national debt has tripled with nobody having any particular plan to pay it back. On that road what is called austerity has in fact been much more like Keynesian economics! Especially if we consider the annual fiscal deficits which we have run.If we look at the coalition government you could argue it loosened its plans from around 2012 which everyone now uses as a starting-point.

So to coin a theme introduced in the comments section recently how much of a fiscal deficit is that threshold for it to be called “austerity” these days? As it is plainly no longer zero.


I expect there to be much misrepresentation over the coming weeks as we head towards the General Election on May 7th. However my purpose today was to highlight the underlying financial situation concerning our fiscal deficits and debt. I doubt many others will be analysing the fortunate situation we find ourselves in because that will mean admitting that they have spent the money.Oh Well! Of course should the favourable debt circumstances reverse and in particular the inflation ones we may well see Cilla Black again.


Meanwhile on we go with Labour saying they will fully fund all new policies with no extra borrowing. The Liberal Democrats say they will borrow £80 billion less than “no extra borrowing” with the Conservatives who you might think would plan to borrow even less suddenly telling us this.

Our manifesto will commit to a minimum real-terms increase in NHS funding of £8bn in the next 5 years.

No wonder voters get confused!Meanwhile the NHS lumbers on as something which apparently cannot even be questioned a bit like the previous situation with immigration. This troubles me and I write as someone who has seen his parents get good treatment from the NHS in recent times albeit some of it was chaotic at times. Which part of the extra spending will be real growth and which just inflation?