Good news for the UK economy and GDP

Today we embark on a raft of UK economic data but before we even reach it the Financial Times has returned to the most familiar theme in UK economic life.

There is a very cool-looking apartment on sale across the street from Harrods in London. It has three bedrooms, beautiful high ceilings, striking contemporary art on the walls (not included in the sale) and a roomy kitchen done out in glossy white wood and chrome. It is not cheap at £7.25m, but it is an awful lot cheaper than it was last year.

The flat was first listed on March 1 2016 for £8.25m. In July, about three weeks after the EU referendum, its price was cut; then it was cut again in December. Today it is available for about 12 per cent — or a full £1m — less than the original asking price.

Actually that looks like a PR puff piece or indeed advertising dressed up as journalism. But we do move onto an area where the FT has caught up with us in here which is the fact that house prices have been seeing falls in central London.

A quick glance at the property website Zoopla reveals that reductions of 15 to 20 per cent for London homes priced above £1m are not uncommon. According to its research department, more than a third of homes on sale in Kensington and Chelsea have had their asking prices reduced by an average of 7.97 per cent.

The FT typically tries to blame Brexit but then finds someone who thinks it has provided a boost! That comes from this.

After the result was announced, and the pound fell to its lowest level against the dollar for 31 years, the spending power of those buyers with dollars in their pockets escalated wildly. Up about 11 per cent on the currency play alone.

Which means overall we see this.

However, once you factor in the decline in London house prices over the intervening six months, you are looking at some serious markdowns indeed. Knight Frank calculates an effective dollar discount of 22 per cent, between December 2015 and December 2016.

So there you have it the message from the Financial Times is to sing along with the band Middle of the Road about central London property.

Ooh-We, Chirpy, Chirpy, Cheep, Cheep
Chirpy, Chirpy, Cheep, Cheep, Chirp
Let’s go now

If we move on from what in some cases is the equivalent of specific property pimping there are issues here. One is simply the price as we mull if even if a one bedroom property is in Covent Garden it can be considered cheap. Also we need to compare the recent falls which estate agents emphasis with the previous rises which they do not. Next comes the issue that the flipside of a lower £ is that existing owners have lost money in their own currency. Also looking forwards the real issue for many is what you expect the UK Pound £ to do next as the future of course matters much more than the past in that regard.
There is much for me to mull on my next cycle ride into the City as once I pass Battersea Dogs Home then here I am.

Some units at Nine Elms, a new residential development in Battersea, are being marketed at about £1,300 per sq ft, after already being given sizeable reductions, according to Zoopla. For £1,300 per sq ft, you could buy a historic apartment overlooking the Duomo in Florence, or a glossy new-build apartment in Miami Beach.

Is that cheaply expensive or expensively cheap?

Boom Boom UK

It is nice to end the week with some really good news for the UK economy so let us get straight to it.

In December 2016, total production was estimated to have increased by 1.1% compared with November 2016; the only contribution to the increase came from manufacturing……manufacturing provided all the growth, increasing by 2.1%.

So an upwards push to production from manufacturing which did this.

The increase in total production was due to broad-based increases in manufacturing. Pharmaceuticals (which can be highly erratic) provided the largest contribution to the growth, increasing by 8.3%. Other large contributions to the increase came from basic metals and other manufacturing and repair not elsewhere classified, which increased by 4.5% and 3.7% respectively.

So in an, if I may put it this way Trumpton era we find that we are en vogue by boosting manufacturing? We need to dig a little deeper though as pharmaceuticals have had a good 2016 but via a volatile path.

in December 2016 compared with December 2015, total production output increased by 4.3%. All main sectors increased, with the largest contribution provided by manufacturing

They seem a little shy of telling us that manufacturing rose by 4% so let me help out. That was driven by pharmaceuticals being up by 19.1% which illustrates their volatility. This left us with positive numbers for 2016 for both production (1.2%) and manufacturing (0.7%).

If we continue with the good news theme then we have some hope of a further upwards revision to UK GDP for last year. This is the reply I received from our statisticians in what was an excellent service.

IOP and Construction combined have an impact of 0.04%. This is nearly all from IOP. ( @StatsKate )

For newer readers I have little or no faith in the official construction numbers which in the words of Taylor Swift have seen “trouble, trouble,trouble” but for completeness here they are.

Compared with December 2015, construction output increased by 0.6%, the main contribution to this growth came from new housing work.

Trade

Even these had a good news tinge to them this morning.

The UK’s deficit on trade in goods and services was £3.3 billion in December 2016, a narrowing of £0.3 billion, which is contributing to the narrowing in Quarter 4 2016.

So let us look further.

The UK trade deficit on goods and services narrowed to £8.6 billion in Quarter 4 (Oct to Dec) 2016, following a sharp widening of the deficit in Quarter 3 (July to Sept) 2016; this narrowing was predominantly due to an increase in exports of goods to non-EU countries.

Have UK industry and businesses got the new post EU leave vote vibe? I think that it is too pat a conclusion but we did see this.

there was a much higher quarter-on-quarter growth in exports to non-EU countries in Quarter 4 2016, following a fall in Quarter 3…….Exports of goods to non-EU countries rose by 17.3% to £43.8 billion between Quarter 3 2016 and Quarter 4 2016.

So some of it was a simple rebound.

Comment

Today has seen some rather good news for the UK economy as in spite of a drag from the continuing maintenance of the Buzzard oil field production was pushed higher by strong manufacturing data driven by the pharmaceutical industry. Added to this construction at least did not fall and on a quarterly basis the trade figures were better. So there is upwards pressure on the preliminary GDP report although we cannot say exactly how much yet.

There are two main clouds in our silver lining. These are simply  that we have yet another trade deficit in an extremely long series and some perspective on production.

Since then, both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 7.6% and 4.2% respectively.

A Bank of England for the 0.0000000000000000000001%

Yesterday saw the announcement that Charlotte Hogg was to be promoted to Deputy Governor and it raised this issue.

Dear Mark Carney does promoting a daughter of a Viscount and a Baroness come under the Bank of England Diversity banner?

It certainly comes under the minority banner as I am no expect on Debretts but do wonder if she is in to coin a phrase, a class of one? Oh and it appears that Kristin Forbes is singing along to “We gotta get out of this place” by Blue Oyster Cult.

So if you hint at an interest-rate rise your current lifespan at the Bank of England appears to be 48 hours!

UK GDP growth continues to be both steady and strong

Today we find out how the UK economy performed in the last quarter of 2016 or at least the official version of that as the preliminary GDP report is issued. We can be sure that it will be rather different to that implied by one of our official seers as the person who signed this off ( Professor Sir Charles Bean) is now part of the OBR or Office for Budget Responsibility.

I am grateful to Professor Sir Charles Bean, one of our country’s foremost economists and a former Deputy Governor of the Bank of England, who has reviewed this analysis and says that it “provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy”.

I have looked at before the woeful effort which stated that the economy would shrink by between 0.1% and 1% in the quarter following an EU leave vote so let us pick something else out.

Businesses and households would start to adjust to being permanently poorer in the future by reducing spending immediately.

Actually in spite of a weaker December household spending seems to have soared.

Estimates of the quantity bought in retail sales increased by 4.3% compared with December 2015………The underlying trend remains one of growth with the 3 month on 3 month movement in the quantity bought increasing by 1.2%.

Accordingly our good Professor has ended up looking a right Charlie and of course will fit in well at the OBR. But wait there was worse as all sort of doom and gloom was predicted for our automotive sector as well. Here is this morning’s update from the Society of Motor Manufacturers and Traders or SMMT.

UK car production achieved a 17-year high in 2016, according to the latest figures published by SMMT. 1,722,698 vehicles rolled off production lines last year from some 15 manufacturers, an 8.5% uplift on total production in 2015 – and the highest output since 1999.

I guess Charlie has a different definition of “reasonable” from the rest of us! Up seems to be the new down for him. But wait there was more good news.

More cars are now being exported from Britain than ever before, the result of investments made over recent years in world-class production facilities, cutting-edge design and technology and one of Europe’s most highly skilled and productive workforces.

The UK Pound £

This has been a powerful driving force as I have argued all along and the establishment have ignored. It has been nice to see the UK Pound rebound to above US $1.26 over the past week or so but the truth is that it is now lower and the cumulative effect if we use the old Bank of England rule of thumb is of a 2.6% reduction in the official Bank Rate since EU leave vote night. This has given the economy a boost as I have explained in my articles on the money supply and the surge in unsecured credit. It is also why the Bank of England’s “Sledgehammer” was both relatively puny and a policy error.

This morning has brought some confirmation of the logic behind this from company results. From the Guardian on Diageo.

It is estimated to have boosted net sales by about £1.4bn and operating profits by £460m in the year to 30 June. The maker of Johnnie Walker whiskey and Smirnoff vodka toasted a 28% rise in first-half operating profits to £2.06bn and hiked its interim dividend by 5%. Diageo’s shares rose 4.8% on the news.

There was more in the Financial Times.

Jimmy Choo continued to shrug off difficulties in the wider luxury sector in the second half of 2016, reporting “solid growth” across most regions and enjoying a big boost from the weak pound. In a trading update ahead of its full-year results, the company said total revenues increased 15 per cent to £364m.

The GDP data

This was if you take the view that we have received a strong monetary stimulus from the weaker UK Pound no great surprise.

UK gross domestic product (GDP) was estimated to have increased by 0.6% during Quarter 4 (Oct to Dec) 2016, the same rate of growth as in the previous 2 quarters.

So the establishment and media line of volatility and panic faces a reality of what has in fact been extraordinary stability! No doubt the Ivory Towers will blame the ordinary person. Indeed as we look further we see examples of well “same as it ever was”.

Growth during Quarter 4 was dominated by services, with a strong contribution from consumer-focused industries such as retail sales and travel agency services.

Whether the travel agents were seeing a flood of people departing the UK (remember when the media headlines screamed that?) or holidaymakers coming here because the lower £ makes it cheaper is not explained. However the march of the services continues. Indeed the general pattern continued as well.

UK GDP was estimated to have increased by 2.0% during 2016, slowing slightly from 2.2% in 2015 and from 3.1% in 2014.

The Service Sector

As this is our main player let us look into the detail we get.

Within the services aggregate, the distribution, hotels and restaurants industry performed strongly, increasing by 1.7%, which contributed 0.24 percentage points to quarter-on-quarter GDP growth. Retail trade, wholesale trade and the trade and repair of motor vehicles were all strong performers.

The business services and finance industries also performed strongly, increasing by 0.9% in Quarter 4 2016, which contributed 0.28 percentage points to quarter-on-quarter GDP growth. A particularly strong performer was the travel agency industry, which increased by 7.3%, contributing 0.05 percentage points to headline GDP growth.

Thus there was a hint that it was travellers to the UK boosting travel agencies but just a hint. Also let us check in on the main player last time around.

Growth in transport, storage and communications slowed to 0.3% in Quarter 4 2016, following growth of 2.6% in Quarter 3 (July to Sept) 2016.

Manufacturing

This had a good quarter although the overall picture is one which seems pretty much to be following the ebbs and flows of the volatile pharmaceutical industry.

manufacturing increased by 0.7% in Quarter 4 2016, mainly due to a large rise in the erratically performing pharmaceuticals industry, after a fall of 0.8% in Quarter 3 2016;

Production flatlined but was heavily affected by this.

The Department for Business, Energy and Industrial Strategy advised the decrease can largely be attributed to continued maintenance to the Buzzard oil field in the North Sea.

Comment

If we look back we see that the UK economy has managed several years in a row of economic growth now. The media and establishment panic over the EU leave vote has in fact been replaced by a period of extraordinary economic stability and what is described officially as “steady growth”. In any ordinary line of work people would be disciplined for such gross mistakes but of course different rules apply to the establishment. In essence the UK economy has relied on the consumer (again) so thank you ladies one more time, and rebalanced even further towards the service sector as we are reminded yet again of the “rebalancing” in the other direction promised by former Bank of England Governor Baron King of Lothbury and the “march of the makers” of the current darling of the expensive speech circuit George Osborne.

Yet there are disturbing sounds below the surface such as the return of inflation and another ongoing issue.

GDP per head was estimated to have increased by 0.4% during Quarter 4 2016 and by 1.3% during 2016.

So it continues to underperform the overall or aggregate numbers leading to this as summarised by the Guardian.

It is now 8.7% higher than its pre-crisis peak in 2008. But on a per capita basis (adjusted for population changes), it’s only 1.9% larger.

Also let me offer my usual critique of GDP data. It is in no way accurate to 0.1% especially on the preliminary report and has been boosted in recent years by substituting a lower for a higher inflation measure ( CPI for RPI). As the gap between the two widens that becomes a bigger issue and it is currently ~1% per annum. Regular readers will be aware that there are plenty of other flaws too.

 

 

 

 

 

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

The Demonetisation saga in India rolls on and on

As we emerge ( at least in England & Wales) blinking into 2017 then the main economic action is in the East. For example new currency controls for retail investors in China. Such factors are in my opinion what has been behind the subject of my last post of 2017 which was Bitcoin. This broke the 1k barrier in US Dollar terms and is now US $1020.68 according to Coindesk. A factor in this rise must be what is ongoing in India which is what has become called Demonetisation which I first pointed out on the 11th of November last year.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

Something that was immediately troubling was that the official view was along the lines of “please move along, there is nothing to see here”.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

The initial communique mentioned the 24th of November implying that it would pretty much be over by then and that the Indian economy would boom afterwards.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is it going?

Manufacturing

The Markit/Nikkei PMI or business survey had a worrying headline yesterday,

Manufacturing sector dips into contraction amid money crisis

Indeed it went further in the detail.

Panel members widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly.

Actually pretty much everything seemed to be going wrong here as input inflation rose and employment fell.

Meanwhile, input costs increased at a quicker rate……Cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.

So whilst small changes in a PMI tell us little a drop from above 54 in October to 49.6 in December poses a question. This is reinforced by the other PMIs for manufacturing we are seeing that have overall improved (China for example).

Actually the industrial production numbers were weak even before Demonetisation according to dnaindia.

For the April-October period, industrial output declined by 0.3% as against a growth of 4.8% a year ago, as per the data released by Central Statistics Office (CSO) today……..The manufacturing sector, which constitutes over 75% of the IIP index, recorded a contraction 2.4% in October.

All this adds to the problems recorded in the services sector back in early December.

Services activity declines as cash shortages hit the sector

So according to these surveys there was a clear deflationary impact from Demonetisation leading to this.

Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.

There were hopes for this to be short-lived back then but for now those seem more to be of the Hopium variety.

A response?

Well if Prime Minister Modi was watching the cricket he may have thought of mimicking England and the UK as he has announced a pumping up of the housing market. From dnaindia.

In a bid to boost rural and urban housing post demonetization, Prime Minister Narendra Modi on Saturday announced interest subsidy of up to 4% on loans taken in the new year under the Pradhan Mantri Awaas Yojana.

Bank of England Governor Mark Carney hasn’t been to India has he? Anyway I do hope that the next bit actually happens unlike in the UK where we seem to announce the Ebbsfleet development every year like it is in a Star Trek style time warp.

Announcing a slew of measures, Modi in his national address on New Year’s eve also said 33% more homes will be built for the poor under this scheme in rural areas.

I wish India better luck than the UK where schemes under the official label of “Help” have in fact contributed to house prices becoming ever more unaffordable for those wishing to get on what is called the housing ladder.

What about other credit?

According to Gadfly of Bloomberg the banks are now awash with cash.

Almost all the 15.44 trillion rupees ($227 billion) of currency outlawed by Prime Minister Narendra Modi has entered banks as deposits, with the biggest, State Bank of India, receiving $24 billion. This “unprecedented” surge in liquidity led SBI to cut lending rates by 90 basis points on Sunday. Other government-run banks followed suit.

But in a familiar trend for the credit crunch era businesses do not seem to be that keen on borrowing more.

The average daily value of new investment proposals announced since the cash ban has slumped by three-fifths, according to the Centre for Monitoring Indian Economy.

In fact a consequence of the economic weakness following Demonetisation is that both companies and individuals in India are less able to borrow.

Supply chains greased by cash payments are broken. From diamond-polishing to shoemaking and construction, layoffs are increasing. As borrowers, both the average Indian worker and his employer are much more subprime today than they were just two months ago. Using this group to pull up credit growth, which has plunged to a 25-year low of 5.8 percent, is both impractical and risky.

Whilst in terms of deposits the Indian banks are in the opposite situation to Monte Paschi of Italy they too have capital issues. This may explain the problem with business lending which invariably ties up more bank capital than other forms of bank lending.

The Real Economy

If we move to actual experiences we see signs of trouble, trouble,trouble as India Spend reports.

Now, the government’s decision to withdraw Rs 14 lakh crore–86% in value of India’s currency in circulation–has dealt a hard blow to 80,000 workers, whose economy was defined by cash. Before notebandi, despite a growing downturn, the town soldiered on.

This is the town of Malegaon which has an economy based on the power-loom industry which has gone on a 3 day week.

In the weeks following demonetisation, power looms, known to work 16-18 hours in a day for six days a week, were working only three days a week–Saturday, Sunday and Monday–halving the wages of thousands of workers.

 

Why? Well here it is.

Most of the transactions in the power-loom sector are in cash–power loom owners buy raw material in cash, disburse wages in cash, and  sell in cash.

Thus we see how the problem feeds through the economic chain in what is a clear government driven credit crunch which hits weak industries like this one the hardest. Even more sadly the same is true of people. From @bexsaldanha.

“Business is down so we work on the farm more,” Megha Patil, Hivali village, Bhiwandi Taluka

Goods supplier Santosh Jadhav: From Wada to Vikramgad, supply chain to 203 Kiranas has broken down. Nobody has money.

Comment

There are obvious issues with the unofficial economy in India and attempts to reduce it are welcome. Except in any move you need to look at the likely side-effects and these were always going to be large from removing over 80% of the cash money in circulation. I warned about the problems back on November 11th.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Actually the gold trade has not been boosted and as The Times of India points out there is more than a little irony in the reason why.

“The business was down by more than 70% in December, primarily because of the cash crunch and weakened purchasing power of consumers and investors. Many don’t still invest in gold except for by cash transactions. Besides, the liquidity crunch is also impacting trade,” said Shanti Patel, president, Gems and Jewellery Trade Council.

So whilst very little is easy in a country where changes are even harder than turning an oil supertanker but so far the message is not good.

Number Crunching

We learn from the table below that Helicopter Money would be much easier for the Swiss Air Force than the Indian one.

https://twitter.com/BTabrum/status/816208447846907904

 

 

 

 

Does industrial disease matter in a modern economy?

Today sees some important data for the UK but before that we get some numbers which will be the priority of the Bank of England. This matters as several members of the Monetary Policy Committee will be speaking to Parliament this afternoon. They will already be unsettled by the recent positive data and also the rally in the UK Pound to above US $1.34 and may be shaken by this from the Halifax.

House prices declined by 0.2% between July and August.

They may fear that another 17.8% fall is on the immediate horizon to fulfil the pre Brexit referendum forecast of former Chancellor George Osborne and thereby conclude that a sledgehammer squared is now required. if so they may ignore this.

This modest decrease was the smallest of the four monthly falls so far this year. The quarter on quarter change is a more reliable indicator of the underlying trend.

Okay and the quarterly picture is.

House prices in the three months to August were 0.7% higher than in the previous three months (March-May)

So still some growth here albeit slower than before which is no great surprise as we saw buy to let activity pushed earlier in the year because of the April Stamp Duty changes. Indeed the annual picture shows house price rising at around treble the rate of wage growth.

Prices in the three months to August were 6.9% higher than in the same three months a year earlier. This was down from 8.4% in July, continuing the downward trend since March when the annual rate reached 10.0%. August’s 6.9% is the lowest yearly growth rate since October 2013 (6.9%).

So if we stop and take stock we see that the main player so far this year for house price growth was in fact the Stamp Duty change. Also we see that house prices have in this latest house price boom moved from around 4.5 times earning to more like 5.5 times in response to the Bank of England Funding for Lending Scheme according to the Halifax. Meanwhile if we use the monthly average earnings series we see that it has the average wage at £26,000 meaning that the standardised average price of £213,930 is some 8.2 times it.

Manufacturing

Today’s numbers which represent output in July are in the phase where the Markit business survey told us that the leave referendum result had a bad effect.

the 41-month low of 48.3 posted in July following the EU referendum.

It will be interesting to see how this is reflected in the official figures as they do not always coincide by any means. However I wish to look at a more fundamental level as I think that manufacturing is important and therefore disagree with the thoughts of John Kay of the Financial Times.

Manufacturing fetishism – the idea that manufacturing is the central economic activity and everything else is somehow subordinate – is deeply ingrained in human thinking……….From these primitive times, we have inherited the notion of a hierarchy of needs in which food and shelter rank ahead of chartered accountancy and cosmetic surgery.  Along with the hierarchy of household needs comes a perception of a hierarchy of importance for productive activities – agriculture, primary resources and basic manufacturing rank ahead of hairdressing and television programming.

With respect to chartered accountants and cosmetic surgeons I do think that food and shelter are more important than them. John has plainly missed a career as a central banker when he would be vulnerable to his own ” I cannot eat an I-Pad” moment.

These days if we look at the financial sector the statement below changes in tone and emphasis.

As economies passed beyond the basic and all-consuming requests for food, fuel and shelter, rewards became divorced from the place activities enjoyed in the hierarchy of needs.

Many would regard that as a problem as is the issue he champions below.

Those who are lucky enough to have possess these rare talents or occupy positions of authority have often felt embarrassed by earning more than those who work to satisfy more basic elements in the hierarchy of needs.

If you find someone like that please let me know as they are a rare beast indeed! Today’s news on the Southern Health scandal reminds us that those who occupy positions of authority seem to have missed the embarrassment gene.

Where John is on better ground is that “industrial strategies” by different governments often try to occupy the same piece of ground which is why there is so much overproduction of steel. Food for thought as the UK apparently heads for its own industrial strategy.

The Credit Crunch

Even before the credit crunch the UK was seeing a decline in both production and manufacturing.

In 1997, the share of nominal GVA accounted for by production in the UK was 21.7%, around the middle of the range relative to the other economies. By 2014, the UK had become relatively less reliant on production, as its share fell to 14.2% of nominal GVA………..The same trend was observed in manufacturing, where the share of nominal GVA fell from 17.1% in 1997 to 10.2% in 2014.

The credit crunch made this worse.

In the 3 months to July 2016, production and manufacturing were 7.6% and 5.2% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

Today’s numbers

These were good in the circumstances for production.

0.1% increase in total production in July, driven by growth in mining & quarrying (+4.7%)…..In July 2016, total production output was estimated to have increased by 2.1% compared with July 2015.

However the Markit business survey has had something of a victory with the manufacturing numbers.

0.9% fall in manufacturing in July…..Manufacturing was estimated to have increased by 0.8% over the same period ( a year)

The fall was driven by a sector which has been erratic so far in 2016 as regular readers will recall.

with the largest contribution (to the fall) from pharmaceuticals

Output in that sector fell by 5.6% on the month and continues a pattern which is almost impossible to discern. On a more positive side was the motor industry.

The largest contribution within this sub-sector came from the manufacture of motor vehicles, trailers & semi-trailers, which increased by 9.0% and contributed 0.5 percentage points to total production. This was the fifth consecutive increase on a year ago.

Comment

We find that one more time the media pack are clustered around something of minor importance and missing a much larger issue. What I mean is the impact of the leave vote on manufacturing when in fact if the Markit business survey continues to be on form then it did not change things much if at all. Going forwards we will see a more complex picture as the initial price competitiveness ch-ch-changes meet higher costs.

In July 2016 the manufacturing industry experienced inflation in terms of the prices manufacturers pay for materials and fuels used in the production process (input prices) and the prices they charge for the goods they produce (output prices).

Meanwhile the whole manufacturing and production issue is a long-term one of decline. Some of it we cannot help unless we wish to drive wages to well below the UK minimum wage. Therefore we need a strategy for higher value products in my opinion and one bit is easy and the other is hard. With the current level of cheap borrowing costs for the government we are in a really bad state if we cannot find projects to encourage. But the truth is that longer-term growth relies much more on issues like education and creating a positive environment for innovation and invention than the fantasies and fads of politicians.

Meanwhile it was hard not to have a wry smile at this released with Germanic efficiency earlier today. Imagine if we had released this.

In July 2016,production in industry was down by 1.5% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….. Within industry, the production of capital goods decreased by 3.6% and the production of consumer goods by 2.6%.

If only German had a word to cover this……Still we can provide some musical accompaniment.

The work force is disgusted downs tools and walks
Innocence is injured experience just talks
Everyone seeks damages and everyone agrees
That these are ‘classic symptoms of a monetary squeeze’
On ITV and BBC they talk about the curse
Philosophy is useless theology is worse
History boils over there’s an economics freeze
Sociologists invent words that mean ‘Industrial Disease’

 

 

La Belle France continues to find sustained economic growth elusive

It is past time for us to hop across the channel or in this context La Manche and take a look at the ongoing economic problems of France. These have no doubt not been helped by the effect of the recent terrorist outrages on tourism but today has given us a reminder of other issues with the French economy. So let us get straight to it.

Production and Manufacturing

This morning’s data release shows that it was not a good June for either overall production or manufacturing in France. From Insee.

In June 2016, output decreased in the manufacturing industry (-1.2% after +0.1% in May). It declined again in the whole industry (-0.8% after -0.5%).

Imagine if that had been the pre-Brexit position in the UK! The Financial Times would cover nothing else. Perhaps the award of a Legion d’Honneur to its editor Lionel Barber may mean that it may be in no rush to point out that the situation in June in France was considerably worse than the UK.

If we look for more perspective we see that the problems are more than just for a single month.

Over the second quarter of 2016, output decreased slightly in the manufacturing industry (-0.2% q-o-q). It was virtually stable in the overall industry (-0.1% q-o-q).

So in essence these readings spent the second quarter on a road to nowhere. That picture does not change much if we switch to an annual comparison.

Manufacturing output of the second quarter of 2016 grew slightly compared to the same quarter of 2015 (+0.3%, y-o-y). Overall industrial output was also up (+0.4%).

The release is rather reticent or perhaps forgetful on the issue of a monthly comparison with 2015 so let me help out. In June 2015 adjusted production was 101.7 and this year was 100.4 whereas manufacturing had dropped from 102.7 to 101.2.

Factors at play

Like the UK the transport sector in France has been having a good run.

Over a year, manufacturing output soared in the manufacture of transport equipment (+7.6%) and rose more moderately in “other manufacturing”(+0.5%).

The whole transport manufacturing sector seems to have been doing well as I note this from the Financial Times earlier.

BMW sales hit fresh records in July

However the boomlet does seem to be fading so needs watching. On the other side of the coin has been what is happening in the energy industry in France.

Output collapsed in the manufacture of coke and refined petroleum products (-12.4% after -21.0%)
Output plunged in the manufacture of coke and refined petroleum products, because of the shutdown of a refinery and blockades of several others in the beginning of June.

So there should be something of a bounce back there once things return to normal.

What about consumption of goods?

In June 2016, household consumption expenditure on goods decreased: -0.8% in volume*, as in May.

Now this gets a little awkward as we note that a factor in this is something which is overall a benefit for France which is lower expenditure on energy.

In June, consumption of energy tumbled significantly (-6.3% after -0.8%); it is its highest drop since June 2013.

GDP growth

The second quarter of 2016 turned out to be quite a disappointment.

In Q2 2016, GDP in volume terms* was stable : 0.0% after +0,7% in Q1.

I will look at the way this must have disappointed the ECB (European Central Bank) in a moment but there was quite a sharp fall in domestic demand seen.

All in all, final domestic demand (excluding inventory changes) was flat: its contribution to GDP growth was flat (after +1.0 points in Q1)

This was mostly consumption falling but there was also a decline in investment. Net exports rose in case you are wondering why the numbers do not add up but even there we saw something to mull.

Imports significantly stepped back (-1.3% after +0.5%), while exports still modestly declined (-0.3% as in the previous quarter).

So yes trade was a positive influence but only because imports fell faster than exports.

Looking Ahead

We are not too early for the Bank of France indicator which in its usual over optimistic fashion predicted GDP growth of 0.3% and the 0.2% for the second quarter of this year. From Reuters.

France’s economy will expand 0.3 percent in the third quarter, returning to growth after stalling in the previous three-month period, the said on Monday in its first estimate for the period.

The central bank gave its estimate in its monthly business climate survey, in which it said industrial sector confidence picked up slightly in July, increasing by one point on the previous month to 98. However confidence within the services sector dipped by a point to 96.

There is food for thought in the numbers which are long-running series where the average is 100. Earlier this month the PMI survey for the Euro area pointed out this.

whereas France continued to hover around the stagnation mark……However, France continued to stagnate, acting as a significant drag on the region.

If we look into the detail of the reports specifically on France we see this.

The service sector returned to growth at the start of the third quarter, compensating for ongoing manufacturing weakness and leaving overall private sector activity broadly flat on the month.

The ECB

Mario Draghi and his colleagues must be wondering what to do next as France joins Italy in the economic slow lane with Germany and Spain in the fast line and of course Ireland which according to its statisticians overtook the Starship Enterprise in 2015. That is a problem of one size fits all monetary policy.

But France has benefited from a lower exchange rate with the trade-weighted Euro at 94.6 as opposed to the 104.5 of March 2014. Also the official interest-rate is set at -0.4% ( below the lower bound for the UK claimed by Bank of England Governor Carney) and as of the beginning of this month had purchased some 179.2 billion of French government bonds. This means that at the 2 and 5 year maturities France is paid to borrow and even at the benchmark 10 year it currently pays a mere 0.12%. As to whether the low level of bond yields boosts the economy is a moot point but it certainly helps the fiscal position of the French government.

With growth low more eyes will turn to this number especially as it approaches 100%.

At the end of Q1 2016, the Maastricht debt amounted to €2,137.6 billion, a €40.7 billion increase in comparison to Q4 2015. It accounted for 97.5% of GDP, 1.4 points higher than the Q4 2015’s level.

Comment

This has been a long running saga where the French economy recovered well from the initial credit crunch impact in 2010 and 11. But the follow-up blow of the Euro area crisis has seen its economy stagnate and now even with the ECB monetary accelerator pressed to and sometimes beyond the metal there seems to be more problems. Sustained economic growth seems to be singing along with Bonnie Tyler.

I was lost in France

Bank of England

Yesterday it failed to purchase as many UK Gilts as it wanted to buy. This was a consequence of trying to buy ultra long-dated UK Gilts which is something I have critiqued many times as well as before the event yesterday. I suggested a solution on Twitter.

Dear Bank of England Simply buy some extra medium-dated Gilts today! Yours Shaun

Instead the solution was well not a solution.

The Bank will incorporate the Stg 52mn shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme.

Talk about making yourself look inflexible and leaden footed. The markets will take them as well as sadly us as taxpayers for fools now.

The new Bank of England QE program explained

Today brings us quite a bit of new information on the state of play of the UK economy post the Brexit leave vote and the Bank of England response to it. It is a rather moot point that the Bank of England should have waited for such data before pressing the trigger on its monetary sledgehammer. After all it may yet crack the wrong nut! Let me start with what we have discovered about the new Bank of England QE (Quantitative Easing) machine which fired up its new engines yesterday. Just as a reminder I pointed out on August 5th that the salvo of £70 billion ( including £10 billion of Corporate Bonds) may well have been fired straight into the nearest foot.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

Ah so a one for one ratio with the planned QE increase! At this point Mark Carney and the Bank of England are wearing a collective Dunces cap. Let us move onto the technical details of the new QE era. Back in 2012 the Bank of England reported on another issue

that would give an estimate of the total increase in household wealth stemming from the Bank’s £325 billion of asset purchases up to May 2012 of just over £600 billion, equivalent to around £10,000 per person if assets were evenly distributed across the population.

Apart from an implicit confession that it is aiming at equity and house prices the obvious catch is that the assets are not “evenly distributed” as they are concentrated in much fewer hands as the echoes of the 1% and 0.1% appear. Or to be put another way.

And the survey suggested that the median household held only around £1,500 of gross assets,

The Purchases

This will be made on a Monday, Tuesday and Wednesday at which point the Bank of England’s presumably exhausted bond buyers will retire for the next four days. Each day they will do this.

Between 8 August 2016 and 31 October 2016, the size of auctions will initially be £1,170mn for each maturity sector.

They buy a particular part of the maturity spectrum on a particular day so today Tuesday is for long-dated Gilts.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays.

Tuesday’s are particularly significant as they are the day that not only our children are committed to the consequences of QE but our grandchildren as well. The category “over 15 years” includes our longest-dated UK Gilt which matures in 2068 and as part of previous operations the Bank of England owns some £989 million of it.

As the size of the operation increases then this factor will become more significant.

The Bank does not currently intend to purchase gilts where the Bank holds more than 70% of the “free float”, i.e. the total amount in issue minus government holdings. The Bank will, however, continue to keep the gilts eligible for purchase by the APF under review.

The consequences

These are to be seen in UK Gilt prices which are surging and consequently in yields which are falling. The benchmark ten-year yield has fallen below 0.6% this morning for the first time ever and the thirty-year yield has fallen to yet another new low of 1.41%. Of course the latter will be seeing Bank of England purchases today as it buys the highest Gilt prices we have ever seen.

Those who have the ability to remortgage might well be noting that the UK five-year Gilt yield is a mere 0.17% as that particular rate is used for the various derivatives used to set the rates for fixed-rate mortgages. So there could be a bonanza set of offers to come unless of course the banks suck the gains into their margins.

Differences with the ECB

Yesterday showed up a couple so let me explain. The ECB will not buy bonds yielding less than its deposit rate currently -0.4%. Whereas the Bank of England bought a 2019 Gilt yielding a mere 0.03% proving that it is quite content to buy UK Gilts at a yield much lower than its Bank Rate of 0.25%. As it finances its purchases at Bank Rate it may lead to some head-scratching however! Perhaps nobody has thought that through yet.

But the concept of a 0% or even negative yield does seem to put the Bank of England off as there were offers for Gilts around that area it rejected and I suspect that the cause was along those lines. We will have to wait and see as this will not recur until next Monday.

Index-Linkers

Just for clarity the Bank of England does not buy these as part of its QE operations so around 22% of the UK Gilt market is not available to it. It has of course purchased then in the past for its pension fund.

Today’s data

This opened with the most timely in the series from the British Retail Consortium. From Reuters.

Retail spending in July was 1.9 percent higher than a year earlier, the biggest rise in six months and up sharply from 0.2 percent growth in June, when bad weather added to uncertainty around June 23’s referendum, the British Retail Consortium said.

This news added to yesterday’s.

The data are in line with figures on Monday from credit card company Visa which showed consumer spending picked up in July, as Britons’ behaviour failed to match a post-Brexit slump in sentiment reported in earlier surveys.

So we should note that the BRC numbers do not always coincide with the official data and single month retail sales figures are unreliable but so far so good especially compared to the worst fears. It adds to the positive tourism figures reported yesterday.

Next up came some solid production data although it was for June so maybe only slightly affected by the Brexit result.

Total production output is estimated to have increased by 0.1% in June 2016 compared with May 2016……..Total production output is estimated to have increased by 2.1% between Quarter 1 (Jan to Mar) 2016 and Quarter 2 (Apr to Jun) 2016.

So month on month positive albeit by the smallest margin but the quarterly data was reviewed like this by Andy Verity of the BBC.

Industrial output grew in the second quarter of the year faster than it had since 1999 (ONS).

A little care is needed as the boost was earlier in the quarter and may have been affected by the Easter seasonal adjustment misfiring but still good.

Manufacturing was down on the month by 0.3% but overall had a good quarter.

The largest contribution to the quarterly increase in total production came from manufacturing, which increased by 1.8%. The largest contribution to the increase in manufacturing came from the manufacture of transport equipment, which increased by 5.6%.

I have highlighted the transport sector because it was it after a good quarter which was the main player in June manufacturing dipping.

Trade problems

These are ongoing for the UK economy and I have been writing about them for years and years. As the monthly figures are pretty hopeless as for example the important services data is only collected quarterly here is the state of play.

Between Quarter 1 (January to March) 2016 and Quarter 2 (April to June) 2016, the total trade deficit for goods and services widened by £0.4 billion to £12.5 billion.

Persistent deficits are the name of the game here. How much of a difference the lower UK Pound will make is open to speculation although some sections of the Financial Times appear to believe it should have been affecting the trade figures before it had happened?! Perhaps they have been watching too many time travel episodes of Dr.Who.

Comment

There is something of an irony in that as I look through and analyse the new QE operations of the Bank of England program that today’s evidence suggests it is not necessary. There are always dangers in any data series but retail sales and production (albeit modestly) being higher do not a case for QE make. If QE helped a trade position then we should have started it some 20 years or more ago!

Yet the siren voices at the Bank of England cry out again. From Reuters.

“Bank rate can be cut further, closer to zero, and quantitative easing can be stepped up”, McCafferty wrote in an op-ed for the Times.

Has Ian McCafferty forgotten already that he voted against the extra QE? No doubt he hopes people will forget how his votes for an interest-rate rise turned into the reality of an interest-rate cut. He must be dizzy from all the U-Turns and spinning around.