The UK will continue to see quite a surge in the national debt

Today I thought it was time to take stock of the UK economic situation. This is because we find ourselves experiencing a sort of second wave of the Covid-19 pandemic.

Official figures show the UK has recorded a further 22,961 cases of COVID-19 after Public Health England announced it has identified 15,841 cases that were not included in previous cases between 25 September and 2 October due to a technical issue. ( Sky News )

Those numbers are something of a shambles and as a TalkTalk customer it does seem to have similarities to when Baroness Harding was in charge of it. Fortunately we are not experiencing a similar rise in deaths ( 33) as we try to allow for the lags in this process. But however you look at the numbers economic restrictions look set to remain and maybe increased as we note what is about to take place in Paris.

Paris and neighbouring suburbs have been placed on maximum coronavirus alert on Monday, the prime minister’s office announced on Sunday, with the city’s iconic bars closing, as alarming Covid-19 infection numbers appeared to leave the French government little choice. Mayor Anne Hidalgo is to outline further specific measures Monday morning. ( France24)

We have already seen more restrictions for Madrid. So the overall picture is not a good one for those who have asserted the likelihood of a V-Shaped economic recovery.Some area yes but others not and on a purely personal level passing bars and pubs in South-West London trade looks thin. All of this is also before we see the end of the furlough scheme at the end of the month.

Car Registrations

This morning’s update showed an area which is still in trouble.

The UK new car market declined -4.4% in September, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT). The sector recorded 328,041 new registrations in the month – the weakest September since the introduction of the dual number plate system in 1999 and some -15.8% lower than the 10-year average of around 390,000 units for the month.

There are quite a few factors at play here. The car industry had its issues pre the pandemic. But added to it was the lockdown earlier this year followed by several U-Turns. People were encouraged to drive to work as the previous official view of encouraging public transport changed. But in London this was accompanied by the sprouting of cycle lanes in many places that looked rather bizarre to even a Boris Biker like me. This was not helped by problems with a couple of bridges and now official policy is for people to work from home again.

There is the ongoing background as to what cars we should buy? The internal combustion engine is out of favour but there are plenty of issues with batteries made out of toxic elements. The net effect of all the factors is this.

 With little realistic prospect of recovering the 615,000 registrations lost so far in 2020, the sector now expects an overall -30.6% market decline by the end of the year, equivalent to some £21.2 billion2 in lost sales.

Business Surveys

This was more optimistic this morning as Markit released the main PMI data.

The UK service sector showed encouraging resilience in
September, with business activity continuing to grow solidly despite the government’s Eat Out to Help Out scheme being withdrawn……….However, growth across the services sector was uneven with gains principally focussed on areas such as business-to-business services. Those sub-sectors more exposed to social contact such as Hotels, Restaurants & Catering reported a downturn in business during the month,

The better news for the large services sector fed straight into the wider measure.

The UK Composite Output Index….. recorded 56.5 to
signal a third month of growth.

This continues a welcome trend and was much better than the Euro area which recorded 50.4. However there are contexts to this which include the fact that the UK economy contracted more in the second quarter so we would expect a stronger bounce back. Also these numbers have proved unreliable so we should take them as a broad brush.

Also even with the furlough scheme the jobs situation looks weak.

Less positive, however, was on the jobs front, with private
sector employment continuing to fall at a steep rate.
September marked a seventh successive month of job
losses, with the greater decline again seen in services.
Cost considerations amid an uncertain near-term outlook
continued to weigh on the labour market.

National Debt

This has been an extraordinary year for UK debt markets which began like this.

The Net Financing Requirement (NFR) for the DMO in 2020-21 is forecast to be £156.1 billion; this will be financed exclusively by gilt sales.

Looking back to March we see that some £97.6 billion was due to redemptions of existing bonds. So we were planning to raise £58.5 billion of new debt. Also you might like to note that back then National Savings and Investments were expected to raise £6 billion this financial year.

If we press the fast forward button we now see this.

The UK Debt Management Office (DMO) is today publishing a further revision to its 2020-21 financing remit covering the period to end-November 2020. In line with the
update on the government’s financing needs announced by HM Treasury today, the DMO is planning to raise a minimum of £385 billion during the period April to November 2020 (inclusive) through the issuance of conventional and index-linked gilts.

So an just under an extra £229 billion and that is only until the end of next month. As of the beginning of this month we have issued in total some £330.5 billion or more than double what we planned for the whole financial year.

Bank of England

I am including it because the numbers above have been reduced in net terms by its purchases. So far it has bought an extra £241 billion. That number does not strictly match the numbers above as it began in late March but it does give an idea of the flows involved here.

That will continue this week with the Bank of England buying another £4.4 billion of UK bonds or Gilts and the Debt Management Office issuing another £8.5 billion.

Comment

We see a situation where we have seen a welcome bounce in UK economic activity but it still has quite a distance to travel. Sadly some areas look likely to be hit again. There must be a subliminal influence on going out and more restrictions seem probable. Thus the rate of recovery will slow and moving onto my next theme the size of the national debt and the fiscal deficit will grow. As to its size there are different ways of measuring it but here is the Office for National Statistics version.

At the end of August 2020, there was £1,718.0 billion of central government gilts in circulation (including those held by the Bank of England (BoE) Asset Purchase Facility Fund).

That will continue to grow pretty rapidly but there are a couple of reasons why we should not be immediately concerned. The average yield at the end of June was 0.29% so it is not costing much and the average maturity if we include index-linked Gilts was a bit over 18 years.

One way of measuring the surge in bond prices is to note that the market value then was some £2,659 billion so some have made large profits. This does not get much publicity. One area which has been affected is index-linked Gilts which if you allow for inflation were worth some £441.5 billion but had a market value of £805.2 billion. Why? Well they do offer a yield that is much higher than elsewhere as we see another casualty of all the QE bond purchases as they are at the wrong price and could manage to fall in price if inflation rises. Or their “yield” is -2.5%.

Imagine being a pension fund manager and having to match an inflation liability with that! It is a much larger issue than the debates over the Retail Price Index but strangely barely gets a flicker of a mention.

Podcast

 

 

 

The UK Public Finances conform to the first rule of OBR club yet again

Not so long ago the UK Public Finances were headline news as we faced the consequences of the recession caused by the credit crunch and the cost of the various banking bailouts. We were promised that by now the situation would be fixed as we would have a surplus it terms of our annual deficit before it transpired that our previous Chancellor George Osborne was of the “jam tomorrow” variety and specifically always promised that success was 3/4 years away from whatever point in time you were at! This meant that what we might call the ordinary national debt has steady risen as whilst much of the bank debt is off our books we have borrowed overall. If we go back to the 2010 Budget forecast we were told this by the Office of Budget Responsibility ( OBR).

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;

So we might expect the national debt to be 63.4% of GDP now. How is that going?

In November we expected public sector net debt (PSND) to peak at 90.2 per cent of GDP in 2017-18, with the August 2016 monetary policy package raising debt significantly in 201617 and 2017-18. We continue to expect debt to peak as a share of GDP in 2017-18, but at a slightly lower 88.8 per cent. As in November, we expect it to fall each year thereafter.

This is one of the factors in my first rule of OBR club ( it is always wrong…) and in a way it is quite touching that they always think that the national debt is about to shrink relative to the size of our economy.

Current issues

The first is that economic growth in the UK has continued but has slowed so that revenue growth may be under pressure. This was highlighted to some extent by yesterday’s retail sales data.

The underlying pattern in the retail industry is one of growth; for the three-months on three-months measure, the quantity bought increased by 0.6%…….Year on year, the quantity bought in the retail sector increased by 1.2%, with non-food (household goods, clothing stores) and non-store retailing all providing growth.

That suggests there is a fading of the consumer sector with implications for revenue although of course Value Added Tax is on value and not volume so will get a boost from this.

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3% (non-seasonally adjusted).

The general picture was summed up in yesterday’s monthly economic review.

GDP growth has slowed in the first two quarters of 2017, while the economy has grown 1.5% compared with the same quarter a year ago – the slowest rate since Quarter 1 2013.

Also in a week where there has been a lot of news on problems with economic statistics there was this.

we will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

I admire the ambition here but not the brains. I particularly wait to see how the quarterly services surveys will give monthly results! Ironically the same monthly review suggested grounds for caution.

The latest figures include significant revisions due to improvements in the measurement of dividend income, which have led to an upwards revision of the households and NPISH saving ratio by an average of 0.9 percentage points from 1997 to 2016, with a revised 2016 estimate of 7.1% (revised up from 5.2%).

So places like the OBR can produce reports sometimes  hundreds of pages long on the wrong numbers?

Inflation

This is proving expensive because the UK has a large amount of index-linked Gilts which are linked to the Retail Price Index which is currently growing at an annual rate of 3.9%. The effect is described below.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

Today’s data

The deficit numbers were in fact rather good in the circumstances.

Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016…….Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £32.5 billion in the current financial year-to-date (April 2017 to September 2017), compared with the same period in 2016.

The main factor in the improvement is that revenue growth continues to be pretty solid.

In the current financial year-to-date, central government received £334.5 billion in income; including £250.5 billion in taxes. This was around 4% more than in the same period in the previous financial year.

You may have already guessed the best performer which was Stamp Duty on property which has risen from £6 billion in the same period last year to £7 billion this. By contrast Corporation Tax has been a disappointment as it has only risen by £100 million to £29 billion on the same comparison.

The National Debt

Here it is.

The amount of money owed by the public sector to the private sector stood at nearly £1.8 trillion at the end of September 2017, which equates to 87.2% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Oh and thanks Mark Carney and the Bank of England as yet another bank subsidy turns up in the figures.

£100.3 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility; including £84.6 billion from the Term Funding Scheme (TFS).

Comment

We see that for all the many reports of woe the UK economy continues to bumble along albeit more slowly than before. We can bring in that theme and also the first rule of OBR club as I expect another wave in November.

The OBR is likely to revise down potential productivity growth in its November forecast, weakening the outlook for the public finances.

As they have been consistently wrong they are also likely to change course at the wrong point so this may be the best piece of news for UK productivity in a while! Actually I think a lot of the problem is in how you measure it at all in the services sector? In fact any resources the ONS has would be much more usefully spent in this area than producing a monthly GDP figure.

For those of you who measure the economy via the tax take then a 4% increase in the year so far is fairly solid. There will be a boost from inflation on indirect taxes but so far not so bad. Also we can look at revenue versus the National Debt where £726 billion last year compares with our national debt of about 1800 billion or around 40%

Meanwhile there was some good news for the UK economy from Gavin Jackson of the Financial Times.

The UK has 6.5 per cent of the global space economy!

Plenty of room for expansion (sorry). Intriguingly it may be led by Glasgow which would be a return to past triumphs.

 

 

 

 

 

 

How the UK establishment tries its best to mis-measure inflation

Today I wish to cover two areas. The first is something which I discussed on TipTV yesterday which is the power of the establishment where my message was that they can be thwarted if you are able to be both intelligent and persistent. The particular subject was inflation and this area was subject to an intervention on the subject of housing inflation by the UK National Statistician John Pullinger later in the day.

Firstly let me set out why this is an important issue. A feature of the credit crunch era was booming asset prices which the inflation targeting regime of the Bank of England missed entirely. It targets a measure called the Consumer Price Index which ignores owner-occupied housing costs. My contention is that with a better measure which includes that hardy perennial of the UK economic environment which is house prices we would have had a least a fighting chance of signalling any future burst of inflation in that area. Also we are in a period of disinflation where some including central bankers have spread a type of deflation paranoia. This would have been very different if we measured consumer inflation properly as the dips into negative inflation would have been avoided.

RPIJ 

Back in 2013 the UK establishment was in a rush to discredit the Retail Price Index or RPI. As part of this it introduced a new variant which as a result of methodological changes would give a lower reading or ” prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI)”.

Therefore, an improved variant of the RPI will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

It was hoped that it would take over from the RPI but yesterday’s announcement told us this.

For the avoidance of doubt, RPIJ would no longer be published.

Is that the shortest lived “improvement” in the history of mankind? This poses all sorts of questions as you see what if they had overrun my protests and succeeded in replacing RPI with RPIJ? There is some 22% of the UK National Debt of the RPI Index Linked variety and many organisations such as National Rail have issued such debt. Also many wage deals are expressed in its terms as well as are many mobile contracts. In addition how are ex Governors and Deputy Governors of the Bank of England going to have a comfortable retirement? You get my point that for what in some cases are ultra long-term issues you cannot bob and weave on a 3 year timescale.

Andrew Baldwin has pointed out at the Royal Statistical Society that RPIJ could easily have been improved and I mean the normal persons definition of improved here not the official one.

Strip the RPIJ of its house depreciation component and replace it with a component for equity payments on mortgages and it has a payments approach to owner-occupied housing.

The issue of Europe

This is a simple one where the UK establishment decided to align inflation measurement with Europe and that led to the introduction of the CPI as an inflation target just over a decade ago. Dr Mark Courtney puts it thus.

All European Union countries have been obliged to publish a national HICP since March 1997.

So a harmonisation with Europe and in this instance Eurostat and in itself there is plainly logic in a consistent measure which can be compared internationally. However in a move of which Mark Carney would be proud the National Statistician John Pullinger has performed a hand brake U-Turn.

I also consider that it is important that we focus on a measure that can continue to be developed to meet the needs of UK users without being constrained by international regulations

Paul Johnson of the Institute of Fiscal Studies got rather upset when I pointed out this inconsistency at his public meeting a year ago. We got this measure to align with Europe and now it is a good idea that we don’t!

Housing Inflation

This is the nub of the issue because you see Europe via Eurostat is introducing a measure of consumer inflation that includes house prices. However the UK establishment wants us to use CPIH which includes rents. Just to be clear using rents for those who rent is correct but using them for owner-occupiers is not and of course gets us in the zone of imputed rents.

Even the UK Statistics Authority warned only last week about the problems of what is called rental equivalence.

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

You might think that not having a reliable rental series was a barrier to using them, well not for our intrepid National Statistician. This will surprise even supporters of the series such as the economics editor of the Financial Times Chris Giles who told me this on Twitter last week.

True, but only once data probs sorted. And they’ve not been.

Perhaps even more damning for Paul Johnson and John Pullinger who both want CPIH to be the main UK inflation measure was this bit.

CPIH is used by almost no one

The UK Statistics Authority put it another way.

There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses,

To explain that I have seen statisticians query the numbers used for example in the arena of weighting and get what they and I consider to be unsatisfactory replies. I do not wish to get too bogged own in the detail today but below is a link to my post from the 4th of September 2015 when I explained the flaws in the system.

https://notayesmanseconomics.wordpress.com/2015/09/04/how-you-measure-inflation-in-rents-matters-a-lot-to-those-on-the-living-wage/

If we return to the issue of Imputed Rents then the numbers have been “aligned” in recent times. So we have trouble with the rental price series for both inflation and GDP or Gross Domestic Product.

A New Hope

There was some good news in the release and it relates to something which Jill Leyland of the Royal Statistical Society and John Astin have produced in response to the arguments made there by me amongst others.

Second, I have listened to calls for a measure showing the effect of changes in payments for goods and services, which has been referred to as a ‘Household Inflation Index (HII)’. The HII – as a ‘payments index’ – presents an idea that is fundamentally different in a number of important aspects to the traditional measurement of consumer inflation. These include the potential inclusion of asset prices and interest payments, plus giving each household’s expenditure equal weight.

By asset prices they mean house prices in the main and they are looking to cover what is an ordinary household’s experience of inflation. Accordingly they include mortgage payments and thereby other interest payments to be consistent. Personally I am not too sure about the latter bit and have argued against it but you see no inflation measure is perfect and this in my opinion is the best proposal we have.

Comment

There are quite a few issues here but I wish to return everyone to the fundamental points which are that the last boom and hence the credit crunch and the current deflation paranoia have as factors the way we measure inflation. The UK establishment has consistently headed in the direction of lower numbers or “improvements” and I feel that this is a major reason why people are unhappy with what they are being told. For example the switch from RPI to CPI in 2011 raises economic growth on average by some 0.5% per annum according to Dr.Mark Courtney.

The establishment will always find those willing to do its bidding and I am reminded of Us and Them by Pink Floyd.

Us and Them
And after all we’re only ordinary men
Me, and you
God only knows it’s not what we would choose to do
Forward he cried from the rear
and the front rank died
And the General sat, as the lines on the map
moved from side to side

TipTV

Here is my interview from yesterday.

http://www.tiptv.co.uk/finance/global-economy-didnt-learn-the-japanese-lesson/

 

Better news for UK Public Finances accompanies a slowing of Retail Sales growth

Back just before Christmas I wrote how the claimed austerity of the UK government was in fact looking awfully like a fiscal boost. After all we have had a sustained period of economic growth now which has run for 3 years and yet the claimed Holy Grail of a balanced budget does not appear to be getting much closer. Indeed it is not here right now as it was supposed to be because we are now in the year that the original coalition forecasts from the summer of 2010 told us we would reach it. Actually we are supposed to be in surplus on both the cyclically adjusted current budget and cyclically adjusted net borrowing. However in spite of the get out clauses provided in those two definitions we are nowhere near.

Temporary factors

The official review of the November numbers wants us to ignore the long-term issues described above and to concentrate on what it regards as temporary and one-off factors which the OBR ( Office for Budget Responsibility) defines as follows.

but receipts were also boosted last November by £1.1 billion of fines levied on banks by the Financial Conduct Authority related to failings in foreign exchange business practices. This month’s data include only £0.1 billion of FCA fines;

Were we planning on relying for our nations finances on bad behaviour in the finance industry? Whilst I agree that this is clearly a growth area it poses questions. Also if we move to the expenditure side of the ledger we see this.

central government spending relative to last November was boosted by a £1.0 billion rise in EU contributions and a £0.8 billion rise in DfID spending related to payments to the World Bank, with the effects of both expected to unwind next month.

The swirling around from the extra EU payments and the smaller repayment has created a land of confusion and I have to confess that such large payments to the World Bank are a new one on me.

Economic growth

If we are not doing so well in a period when we have solid economic growth then a question is begged as to what will happen if things slow. If we look at the latest figures we may be seeing something of that. The January Economic Review put it like this.

GDP grew by 0.4% in Q3 2015, revised down from the previously published estimate of 0.5%. Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.

Whilst any quarterly figures are unreliable we seem to have a weakening trend and of course we saw this added to it.

by 2.1% when compared to the same quarter of the previous year……(partly due to)  0.2 percentage point downward revision for growth compared to the previous year.

Index Linked Gilts (Gilt-Edged Stock)

A factor often ignored is the impact of the lower inflation rate on the cost of UK debt. I have just quickly added up the amount of UK index-linked Gilts and come to £369 billion as the amount that is indexed. Now whilst the government would love to be paying CPI or pretty much nothing in 2015 they are linked to the Retail Price Index.But you would still rather be adding the 1% or so of 2015 than the 2%+ of most of 2014 and much more so than the 5%+ of much of 2011.

It is also true that the cost on normal Gilts is very low as in spite of all the interest-rate promises of Bank of England Governor Mark Carney we can borrow for ten years at only 1.68%.

Today’s retail sales figures

This morning’s numbers have thrown a little more unease into the mix. Let me open with what has been a familiar pattern as oil prices have driven inflation lower and real wages higher.

Year-on-year estimates of the quantity bought in the retail industry showed growth for the 32nd consecutive month in December 2015, increasing by 2.6% compared with December 2014.

So the year on year boom continues as does the disinflation which has helped to drive it.

Average store prices (including petrol stations) fell by 3.2% in December 2015 compared with December 2014, the 18th consecutive month of year-on-year price falls.

However the situation here also shows a possible sign of a turn downwards.

Compared with November 2015, the quantity bought in the retail industry is estimated to have decreased by 1.0%.

There was also an interesting little quirk which will impact on such things as VAT (Value Added Tax) revenues.

The amount spent in the retail industry decreased by 1.0% in December 2015 compared with December 2014 and decreased by 1.4% compared with November 2015.

Prices fell by more than volumes rose and is a type of deflation although only a nominal one.

Care is needed with any single month of retail sales data as it is an erratic series and the advent of Black Friday in the November figures seems only likely to exacerbate that. However wasn’t Black Friday supposed to have been a disappointment? The ONS (Office for National Statistics) believes it had a weaker impact than last year which on its own should have boosted the monthly change. If we look for some perspective the worries return.

Throughout most of 2015, the retail sales growth rate has fluctuated around the 4.0% to 5.0% range, which is higher than just before the downturn. However, the latest data shows an easing in retail sales growth to 3.7% in the 3 months to December 2015, the lowest rate for 2015, when compared with growth of 5.1% in the 3 months to November 2015.

Still there is always that standby scapegoat which is the weather!

Sales of clothing and footwear fell 4.2% due to mild weather in Dec 15

This month’s public finances

There was some better news in December from the headline borrowing figure.

Public sector net borrowing excluding public sector banks decreased by £4.3 billion to £7.5 billion in December 2015 compared with December 2014.

The revenue figures were as they have mostly been in 2015 pretty solid with taxes on income and sales (VAT) doing well and only slightly undermined by a dip in Corporation Tax. However the cut in expenditure was by UK standards pretty spectacular.

Central government expenditure (current and capital) in December 2015 was £58.5 billion, a decrease of £1.1 billion, or 1.8%, compared with December 2014.

It has otherwise been rising in this financial year ( 0.8% including December) but as we look into the detail some may wonder if the reduction was in the right area.

central government net investment (capital expenditure) decreased by £0.9 billion, or 24.5%

The picture regarding local authorities is rather opaque but was £1.4 billion better than December 2014.

If we move to the longer perspective we see this.

Public sector net borrowing excluding public sector banks decreased by £11.0 billion to £74.2 billion in the current financial year-to-date (April 2015 to December 2015) compared with the same period in 2014.

This is in spite of a better month and is progress at a snail’s pace.

Corporate Debt

We get plenty of protestations from politicians about “paying down the (national) debt” whereas it continues to rise.

£1,542.6 billion, equivalent to 81.0% of Gross Domestic Product; an increase of £53.2 billion compared with December 2014.

However the UK has reduced one debt burden according to the Bank of England

with the net debt stock of UK non-financial corporates falling by more than 20% of nominal GDP.

Of course it cannot be the banks fault so the companies themselves have to take the rap.

In this post, I argue that the root cause of this divergence was a fall in UK corporates’ demand for debt, rather than a hit to credit supply.

Comment

It is nice to see a better month for the UK Public Finances and in terms of good news a continuation of retail sales growth. However the picture for the public finances remains troubled and disappointing overall and worryingly for next week’s economic growth or GDP number retail sales have dipped. This has possible implications for future public finance numbers.Also if we were looking to reduce a debt burden we would not have wanted to reduce the corporate one especially after the over three years of the Funding for Lending Scheme which was supposed to boost it.