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 problems of UK house building and prices are a result of government policy

This morning has brought news from the UK government on an area which is regularly reported as being in crisis ( housing supply) which brings us to a related area which has been in recession since the early part of last year ( construction). From the BBC.

Construction firms that have been slow to build new homes could be refused planning permission in future under a shake-up to be unveiled by Theresa May.

The PM will tell developers to “step up and do their bit”, warning that sitting on land as its value rises is not on at a time of chronic housing need.

There are various issues here as a fair bit of this is vague such a “slow to build” and doing your bit may be far from sufficient incentive to house builders who in some cases have been doing rather well.

Bonuses in the construction sector have been under the spotlight since Persimmon announced last year that 140 staff would share a bonus pool of £500m and that its chief executive was in line for a pay-out of £110m, a figure that has since been reduced by £25m following an outcry among investors

As an aside if £110 million is so wrong I find it fascinating that £85 million is apparently okay! Still at least something was done. As to the concept of housing need the Joseph Rowntree Foundation has crunched some numbers.

Independent analysis shows that an average of 78,000 additional affordable homes (a mix of low-cost rent and shared ownership) are required in England each year between 2011 and 2031. This level of supply is required to meet newly-arising need and demand.

 

Delivery has been falling short. On average 47,520 additional affordable homes have been provided in England each year since 2011, leading to a cumulative shortfall of 182,880 homes over the last six years. A step change is needed to boost supply of affordable homes by at least 30,000 more a year.

That seems a lot lower than what we are usually told which reminds us that such numbers are open to more than a little doubt and speculation. This poses a problem for a government increasingly heading down the central planning road.

Let me add another issue which is that a factor often ignored is that it matters where you build the houses as well as how many. This often seems to be ignored as for example once you think like that an arrow points at London and the South East. But you cannot just build anything as the current travails only a mile or two away from me at Nine Elms are proving.

The economic depression

There are quite a few problems for economics 101 in the current situation. Firstly you might think that higher house prices would quite quickly generate more supply but it would not appear so. Also the housing industry was supposed to respond to monetary policy and as we find ourselves after a cut and a rise back at the emergency Bank Rate of 0.5% there is much to mull and that is before we factor in the £435 billion of Bank of England QE.

Yet house building responded little to this as if we set 2015 as 100 we get some interesting numbers. The pre credit crunch peak was 2006 and 2007 which were both in the 95s. The scale of the initial hit is shown by the fact that 2009 was 55.4 showing a big hit and then crucially very little recovery as the number oscillated around 70 for the next three years. Along the way many smaller building firms went to the wall as our supply capacity fell and I wonder if that was a much larger factor than often realised. It is hard not to wonder if some support for smaller house builders might have protected us from the need for much larger support measures later. This meant that this sector clearly had an economic depression.

The official response

This provides quite a lot of food for thought for the central planners in Downing Street and Threadneedle Street because in response to the numbers above we saw a two-pronged strategy. In the summer of 2012 the Bank of England deployed the Funding for Lending Scheme which reduced mortgage rates quite quickly by around 1% ( and later by up to 2% according to its research) and made sure the banks had plenty of cash to lend. Then in March 2013 the Guardian reported on this.

In his budget speech, George Osbornelaunched Help to Buy…………This £3.5bn scheme will run for three years from 1 April and help up to 74,000 buyers, as well as providing a boost to the construction sector, said the Treasury.

This saw the UK establishment put the pedal to the metal in this area but the most recommended reply was already on this case.

Another tax-payer funded scheme to prop up house prices. Has it never crossed Osborne’s mind that if people are not able to afford a house on the basis of prudent lending criteria, house prices might be too high and should come down? ( ReaderCmt ).

There was a clear side effect to this as the tweet below highlights.

As you can see the clear effect here was on profits for house builders which surged and financed the payment of extraordinary bonuses for those at the top. This leaves us wondering if the house builders were happy counting their cash and in no great rush to expand supply as they were doing nicely anyway. How much of the effort simply went straight to the bonuses we looked at above?

House Prices

We know that these measures boosted house prices as according to the official series the price of the average house rose from £167,682 in February of 2013 to £226,756 last December. This provided its own problem however because real wages have in fact failed to recover to pre credit crunch peaks so houses became much more expensive relative to them. Yes the wheels of affordability were oiled by ever lower mortgage rates but at these prices demand for house purchase was always likely to dip which puts a brake on supply.

It is however nice to see the Joseph Rowntree Foundation implictly agreeing with my argument that house prices should be in the main measure of inflation.

Real income growth among the bottom fifth of the population in recent years is mostly wiped out once housing costs are considered, with consequences for the living standards of those on low incomes.

Comment

If we look at recent years we see that economic policy in the UK was based on the housing market. It was a type of credit easing and the consequences were higher house prices with large and what can only be called excess profits for the main house builders. No doubt some economic activity was generated but those looking to get a foothold in the market have been hit by high inflation when real wages have fallen. On that basis this is pretty much breathtaking.  The quotes below are from the BBC.

Young people without family wealth are “right to be angry” at not being able to buy a home, Theresa May has said.

Announcing reforms to planning rules, the PM said home ownership was largely unaffordable to those without the support of “the bank of mum and dad”.

This disparity was entrenching social inequality and “exacerbating divisions between generations”, she said.

It is of course true but it is a clear consequence of the policies pursued by what is now her government but before one in which she was Home Secretary. It came on top of house price friendly policies from preceding governments also.  Anyway the speech shows a complete lack of grasp of how the private-sector operates.

Mrs May criticised bonuses which are “based not on the number of homes they build but on their profits or share price”.

Another way of writing the quotes below would say you can only afford the new higher prices if someone who has already benefited helps you.

“The result is a vicious circle from which most people can only escape with help from the bank of mum and dad.

“If you’re not lucky enough to have such support, the door to home ownership is all too often locked and barred.”

That in essence the problem in the central planning approach as the initial problem is the apparent failure to grasp not only reality but their own role in the problem. I fear more central planning is unlikely to help as so far what has been called help has in fact mostly hindered.

Perhaps the biggest irony of all is that house building had responded in 2017 as according to the official numbers it was 20% higher than in 2015.

 

 

Has UK housing policy taken yet another turn?

Over the weekend we saw an announcement from a cabinet minister that may usher in a new phase of UK housing policy so let us take a look. From the BBC.

The government should borrow money to fund the building of hundreds of thousands of new homes, a cabinet minister says.

Communities Secretary Sajid Javid said taking advantage of record-low interest rates “can be the right thing if done sensibly”.

There are various begged questions there as for example I can recall us being told we were building large numbers of new homes and there was something of a confession on this front.

Mr Javid said successive governments had failed to build enough homes,

We can dispute as to the issue of “enough” but it is true that government’s have failed to build the number of homes that they claimed they would. The story of the Ebbsfleet development in Kent has been the major example of that. Back in 2006 Ruth Kelly announced this.

160,000 new homes in mixed communities, built to the highest design standards.

Much of this was to be built at Ebbsfleet and wags no doubt pointed out that the homes would have to be of the highest standard as the development was on a flood plain. An international railway station was built but in case you got the impression that lots of homes had been built a different government was on the case more recently. From the BBC.

Seven parks, 15,000 homes, a major new commercial centre and improved public transport are among plans being set out for Britain’s newest garden city.

The vision for Ebbsfleet, Kent, will be developed around the international railway station over the next 15 years.

The Javid plan

This attempt to increase the supply of housing will have the following features according to the BBC.

He said between 275,000 and 300,000 homes a year – a level of house-building not seen since the 1960s – were needed in England alone to help tackle the shortage in affordable housing.
“We are looking at new investments and there will be announcements,” he said, saying these would come in next month’s Budget.

This adds to the apparent switch in policy towards the supply side of the housing market that we have seen recently from the UK government.

Recent announcements by the government include a pledge by Theresa May at the Conservative Party conference this month of an extra £2bn to build an additional 25,000 social homes.

We also get an idea of the costs involved as if 25,000 homes cost £2billion then presumably 300,000 would cost £24 billion a year.

The public finances

I do not know if it was a coincidence on not that such an announcement came on the back of better figures for the public finances on Friday but we do seem to be getting a change of tone.

Asked about the change in tone from the Tories’ previous approach to borrowing, Mr Javid said a distinction should be drawn between “vitally important” deficit reduction and “investing for the future” in housing and infrastructure.
“So for example… you borrow more to invest in the infrastructure that leads to more housing – take advantage of some of the record-low interest rates that we have. I think we should absolutely be considering that,” he said.

Most people will be scratching their heads as to how “deficit reduction” and “investing for the future” go together. Governments love this sort of thing where they claim that a part of their spending should be excluded from the numbers! Hence developments like cyclical budget deficits which can easily be manipulated by simply changing the cycle. Of course housebuilding is a type of investment both literally ( bricks & mortar) and conceptually although I have to confess the distinction between investment and consumption has faded in recent times. I do not mean the theory I mean the practice.

Number Crunching

Are interest-rates at a “record low”? Yes in terms of Bank Rate but I do hope that the Communities Secretary realises that it is not the relevant one here. If we move to UK bond or Gilt yields then he is not literally telling the truth as they happened as the Bank of England charged into the Gilt market like a bull with £60 billion to spend in a china shop last summer. But the 50 year Gilt yield is in historical terms rather low at 1.7% albeit not as low as the 1.1% bought by Mark Carney and his ilk.

So you could build houses and assuming the numbers above apply you could set a level for rent at the low yield plus an allowance for repaying the capital as a type of mortgage. The biggest begged question is around could be issue say £25 billion of a 50 year Gilt and at the moment I think we could as investors remain thirsty for yield. Or the properties could be sold and the money repaid that way.

Why are houses unaffordable?

This is really rather awkward for the UK government and Bank of England as they have done their best to make them so. Indeed the government announced a new effort on this front as recently as this month as I pointed out on the 2nd.

The government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder, Theresa May has said.

So in basketball terms they pumping the ball up at the same time as letting air out of it! Also the Funding for Lending Scheme of the Bank of England reduced mortgage rates and in the words of the Bank of England led to this.

Lower mortgage rates and increased availability of credit have helped to release pent-up demand and encourage new demand for house purchase. ( August 2013 Inflation Report).

Meanwhile according to the Office for National Statistics once those policies came in effect UK house price inflation has pretty much been between 5% and 10% per annum. So job done in terms of house prices! Except of course it has made ever more of them unaffordable or created the problem this new plan is supposed to solve.

Gazumping

Mr Javid had a busy weekend as according to the BBC he also wants to improve the way houses are sold.

Home-buying and selling in England and Wales could be “faster and less stressful” under plans to simplify sales and tackle gazumping.

Communities Secretary Sajid Javid launched an eight-week review, saying he wanted to “hear from the industry” on how to streamline home-buying.

Ways of locking in deals and stopping sellers accepting higher offers at the last-minute will be considered.

It would be welcome so let us see if anything happens on this front. Maybe we could learn from Scotland which has less of it.

Comment

There is a fair bit to consider here especially if we note that the record of UK governments this century has been as follows. Policies to raise demand for houses ( economic policy and immigration) quite a lot and policies to increase supply of housing much fewer. As to whether building more houses will reduce prices and make housing more affordable well that does seem to have worked rather close to me. From the Telegraph on the 29th of July.

In the south London area, new-build luxury apartments continue to flood the market. Figures from LonRes reveal that there are 10,937 homes currently under construction or with planning permission there, many of which are luxury flats priced out of reach of ordinary Londoners.
With low levels of transactions and high prices, there is a dearth of buyers. The average price per sq ft of homes for sale in the area was 6.2pc lower in the second quarter of 2017 than the same period last year.

One group that has done well out of UK housing policy has been the house builders. There has not been a share price rally in response to the latest news but this may well be because the ones I looked at had seen pretty strong rallies recently anyway. Meanwhile is this a case of one bubble meeting another? From the Evening Standard.

Buyers of a Notting Hill mansion going on sale this month for £17 million will have to pay in Bitcoin, in what is believed to be a first for London.

The owners of the six-storey stucco-fronted home near Portobello Road will accept only the digital currency as payment and will not take cash.

At the current exchange rate the price is equivalent to about 5,050 bitcoin,