The UK see higher real and nominal GDP growth as house price growth slows

Today has already brought some good economic news for the UK so let us get straight to it. From the chief economist of the Nationwide Building Society.

“UK house price growth remained subdued in March, with
prices just 0.7% higher than the same month last year”

As you can see he is not keen, but I am pleased that if we look at the trend for wage growth we are now seeing annual wage growth of over 2% with respect to house prices. So there will be some welcome relief for those wishing to trade up and especially for first-time buyers. Of course it will take a long time to offset the long hard haul that led to this being reported by out official statisticians only yesterday.

On average, full-time workers could expect to pay an estimated 7.8 times their annual workplace-based earnings on purchasing a home in England and Wales in 2018. Housing affordability in England and Wales stayed at similar levels in 2018, following five years of decreasing affordability.

If you want the equivalent of earnings ratio porn then there was this from an area I will be cycling through later.

Kensington and Chelsea remained the least affordable local authority in 2018, with average house prices being 44.5 times workplace-based average annual earnings.

However returning to the Nationwide there are ch-ch-changes going on.

London was the weakest performing region in Q1, with
prices 3.8% lower than the same period of 2018 – the fastest
pace of decline since 2009 and the seventh consecutive
quarter in which prices have declined in the capital.

Indeed as there have been discussions about the Midlands in the comments section I took a look at the quarterly data which showed them growing at 2.6% in the West and 2.5% in the East. So as ever the picture is complex although even there we are seeing real wage gains albeit only small ones.

Also we need to remind ourselves that this covers Nationwide customers only although the numbers do fit the patterns we have been observing through other sources. Also whilst I welcome the change it seems clear that The Guardian does not.

Slide driven by London and south-east slowdown as Brexit chaos seems to put off buyers.

The economy

This mornings economic growth or Gross Domestic Product release brought some further good news. Not from the last quarter of 2018 which remained at 0.2% but from this.

There has been an upward revision of 0.1 percentage points to GDP growth in Quarter 3 (July to Sept) 2018 to 0.7%, due to revisions to estimates of government services;  In comparison with the same quarter a year ago, UK GDP increased by a revised 1.4%.

So we did a little better on 2018 and in particular had a really spectacular third quarter. It does look out of kilter with the rest of the year but let me point out that something which regularly gets the blame for once gets a little credit.

 where some of this activity is likely to have reflected one-off effects of the warm weather and the World Cup.

There are two catches in the series however. The first is the issue of investment which has been having a troubled period.

There have been some upward revisions to business investment in Quarter 3 and Quarter 4 2018 because of later survey returns, but business investment still fell in every quarter of 2018.

So not as bad as previously reported but even so there has been an issue here.

Business investment has now fallen for four consecutive quarters – the first such instance since 2009 –driven mainly by declines in transport equipment as well as IT equipment and other machinery. The latest estimates show that there have been some upward revisions in the second half of 2018, with business investment now estimated to have fallen by 0.9% in Quarter 4.

These revisions to the quarterly path have resulted in an upward revision to the annual figure with business investment falling 0.4% in 2018.

This is a bit of a ying and yang factor as the issue over future trade relationships and a possible Brexit are factors here. The optimistic view is that once there is more certainty it will not only pick up it will regain much of the lost ground. Maybe we will find out more later although of course today was supposed to be the day we got certainty!

Also there is this hardy perennial.

The UK current account deficit widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of gross domestic product (GDP), the largest deficit recorded since Quarter 3 (July to Sept) 2016 in both value and percentage of GDP terms….Annually, the UK current account deficit widened to 3.9% of GDP in 2018, compared with 3.3% in 2017.

Regular readers will be aware I have major doubts about the accuracy of these numbers, specifically about the lack of detail we get about the important services sector. However the trend was worse last year probably driven by the weakening trade outlook generally. Here is how we paid for it.

The UK mainly financed its current account deficit through portfolio investment, where UK investors disinvested in foreign equity and debt securities, while overseas investors increased their holdings of UK debt securities.

Even more care is needed with those numbers as when you start looking into them they are built on what are often in my opinion dubious assumptions.

Unsecured Credit

With house price growth slowing Bank of England Governor Mark Carney will have a an even deeper frown today as he reads this.

The annual growth rate of consumer credit has continued to slow, though more gradually than during the second half of 2018. At 6.3% in February , it was well below its peak of 10.9% in November 2016. Within this, the growth rate of both credit card lending and other loans and advances fell slightly.

The rest of us will have another sigh of relief although there are two problems. The first is that an annual rate of growth of 6.3% is far higher than anything else in the economy. It is around double the rate of wage growth and more than quadruple the annual economic growth we have seen. The other is that the latest two monthly numbers at £1.2 and now £1.1 billion show signs of a rebound so it is a case of “watch this space” for subsequent months.

Money Supply

We saw some broad money growth in February.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £3.6 billion in February.

The waters were muddied by a large Gilt maturity in February and the Operation Twist QE bond buying we have seen in March so far. Meaning we may see a pick up in the March data although it is unclear how much will be recorded as being the financial sector and hence ignored. The annual rate of growth at 2% in February is little to write home about but was a rise.

Comment

The UK data releases have been pretty solid today. Economic growth has been revised higher and there is a hint of better money supply growth. This comes with the usual caveats of high unsecured credit growth and a balance of payments deficit. Let me move onto the numbers which illustrate my point via something which gets widely ignored in the UK data which is inventories or stocks. I was struggling to get my head around this.

There was a £4.2 billion increase in inventories in Quarter 4 2018, including alignment adjustments and balancing adjustments. However, excluding these adjustments the estimates show a slight decrease of £1.2 billion in stocks being held by UK companies.

If you are going Eh? “You are not alone” as Olive sang but let me help out by pointing out there was a £3 billion balancing adjustment in the numbers which is quite a bit more than the economic growth reported so let us hope they were right.

Let me end on some better news as there was this also.

Nominal gross domestic product (GDP) grew by 0.7% in Quarter 4 (Oct to Dec) 2018, revised up from 0.6% in the first quarterly estimate.

 

 

 

 

 

Advertisements

Greece GDP growth is accompanied by weakening trade and falling investment

Let us take the opportunity to be able to look at some better news from Greece which came from its statistics office yesterday.

The available seasonally adjusted data indicate that in the 3
rd quarter of 2018 the Gross Domestic Product (GDP) in volume terms increased by 1.0% in comparison with the 2
nd quarter of 2018, while in comparison with the 3 rd quarter of 2017, it increased by 2.2%.

So Greece has achieved the economic growth level promised for 2012 in the original “shock and awe” plan of the spring of 2010. Or to be more specific regained it as the 1.3% growth of the second quarter of 2017 saw the annual growth rate rise to 2.5% at the opening of this year before falling to 1.7%. So far in 2018 Greece has bucked the Euro trend but in a good way as quarterly economic growth has gone 0.5%,0.4% and now 1%.

If we continue with the upbeat view there was this on Monday from the Markit PMI business survey of the manufacturing sector.

Greek manufacturing firms signalled renewed growth
momentum in November, with the PMI rising to a six month high. The solid overall improvement in operating
conditions was driven by stronger expansions in output and
new orders. That said, foreign demand was not as robust,
with new export order growth easing to a 14-month low.
Manufacturers increased their staffing numbers further
in November, buoyed by stronger production growth and
domestic client demand.

So starting from a basic level there is growth and it is better than the average for the Euro area with a reading of 54 compared to 51.8. Also there is hopeful news for an especially troubled area.

In line with stronger client demand, manufacturing firms
expanded their workforce numbers at the fastest pace for
three months. Moreover, the rate of job creation was one of
the quickest since data collection began in 1999

Concerns

If we move to the detail of the national accounts we see that even this level of growth comes with concerns.

Exports of goods and services increased by 2.8% in comparison with the 2nd quarter of 2018. Exports of goods increased by 1.0% while exports of services increased by 3.8%.

This looks good at this point for what was called the “internal devaluation” method where the Greek economy would become more price competitive via lower real wages. But it got swamped by this.

Imports of goods and services increased by 7.5% in comparison with the 2nd quarter of 2018. Imports of goods increased by 8.3% while imports of services increased by 2.2%.

If we look deeper we see that the picture over the past year is the same. We start with a story of increasing export growth looking good but it then gets swamped by import growth.

Exports of goods and services increased by 7.6% in comparison with the 3rd quarter of 2017. Exports of goods increased by 7.9%, and exports of services increased by 8.0%…… Imports of goods and services increased by 15.0% in comparison with the 3 rd quarter of 2017. Imports of goods increased by 15.0%, and imports of services increased by 16.0%.

This is problematic on two counts and the first one is the simple fact that a fair bit of the Greek problem was a trade issue and now I fear that for all the rhetoric the same problem is back. Perhaps that is why we are hearing calls for reform again. Are those the same reforms we have been told have been happening. Also I note a lot of places saying Greek economic growth has been driven by exports which is misleading. This is because it is the trade figures which go in and they are a drag on GDP due to higher import growth. We can say that Greece has been both a good Euro area and world member as trade growth has been strong over the past year but it has weakened itself in so doing.

Investment

An economy that is turning around and striding forwards should have investment growth yet we see this.

Gross fixed capital formation (GFCF) decreased by 14.5% in comparison with the 2nd quarter of 2018.

Ouch! Time for the annual comparison.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

Whilst those numbers are recessionary as a stand-alone they would be signals of a potential depression but for the fact Greece is still stuck in the middle of the current one. For comparison Bank of England Governor Mark Carney asserted that UK investment is 16% lower than it would have otherwise have been after the EU Leave vote so Greece is much worse than even that.

There are issues here around the level of public investment and the squeeze applied to it to hit the fiscal surplus targets. If this from National Bank of Greece in September is to turn out to be correct then it had better get a move on.

A back-loading of the public investment programme, along with positive confidence effects, should provide an additional boost to GDP growth in the H2:2018,

What did grow then?

Rather oddly the other sectoral breakdown we are provided with shows another fall.

Total final consumption expenditure decreased by 0.2% in comparison with the 2nd quarter of 2018.

But the gang banger in all of this is the inventories category which grew by 1321 million Euros or if you prefer accounts for 2.4% quarterly GDP growth on its own. This is not exactly auspicious looking forwards as you can imagine unless there is about to be a surge in demand. The only caveat is that we do not get a chain-linked seasonally adjusted number.

Comment

As you can see there is plenty of food for thought in the latest GDP numbers for Greece.On the surface they look good but the detail is weaker and in some cases looks simply dreadful. That is before we get to the impact of the wider Euro area slow down. The problem with all of this is that of we look back rather than the 2.1% economic growth promised for 2012 Greece saw economic growth plunge into minus territory peaking twice at an annual rate of 10.2%. Or the previous GDP peak of 60.4 billlion Euros of the spring of 2009 has been replaced by 48 billion in the autumn of 2018.

Meanwhile after the claimed triumphs and reform and of course extra cash the banks look woeful. So of course out comes the magic wand. From the Bank of Greece.

The proposed scheme envisages the transfer
of a significant part of non-performing exposures
(NPEs) along with part of the deferred
tax credits (DTCs), which are booked on bank
balance sheets, to a Special Purpose Vehicle
(SPV). value (net of loan loss provisions). The
amount of the deferred tax asset to be transferred
will match additional loss, so that the
valuations of these loans will approach market
prices. Subsequently, legislation will be
introduced enabling to transform the transferred
deferred tax credit into an irrevocable
claim of the SPV on the Greek State with a
predetermined repayment schedule (according
to the maturity of the transaction).

More socialisation of losses?