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


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.


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.


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.


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?


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.


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.





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.


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.


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.


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.


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.


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.


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.







What do we learn about the UK economy by comparing GDP and real wages?

Today sees the publication of the economic output and growth figures for the UK for the second quarter of 2016 and thus will let us know how we did in the first quarter of 2016. We may even get a brief glimpse of post Brexit referendum UK but it will be barely a glimpse because a lot of the data for the third month in the GDP (Gross Domestic Product) preliminary report is estimated. That is a function of the UK being relatively quick in its production of GDP numbers and no doubt many of you will be thinking that especially this time around it might have been wise to take a little longer for a more complete picture.

Real Wages in the UK

One of the main themes of my work has received some new data and something of an airing in the media this morning. For newer readers it is that real wages in the UK have fallen considerably in the credit crunch era and this followed a period of slowing growth for them. This contrasted to strong growth in the past. These ch-ch-changes were of course missed by the economic models up in their Ivory Towers who continued to forecast real wage growth of around 2% per annum which may have been true for their writers and authors but not for the rest of the economy. If you want to know why they (Bank of England, OBR etc ) have been so consistently wrong that is perhaps the best place to start.

The Trades Union Congress or TUC has looked at OECD ( Organisation for Economic Cooperation and Development) data and concluded this.

The decline in UK real wages since the pre-crisis peak is the most severe in the OECD, equal only to Greece. Both countries saw declines of 10.4% per cent between 2007 Q4 and 2015 Q4. Apart from Portugal, all other OECD countries saw real wage increases, albeit mostly modest ones.

There is an interesting counterpoint to this which makes one think of old theories about a Phillips Curve style relationship between (real) wages and employment.

At the time their UK release contrasted a strong employment performance with weak earnings growth. The employment rate is at a record level, some 5 percentage points above the OECD average. On the other hand real wages “fell by more than 10% after 2007”

Sarah O’Connor in the Financial Times puts it another way.

The figures expose another side of Britain’s so-called “jobs miracle”its record employment rate of 74.4 per cent has come at the cost of lower real pay.

Productivity problems

If you look at the OECD report on the UK it tells us this.

The disappointing growth in real wages partly reflects weak labour productivity growth of only 2% from 2010 to 2015, the smallest increase in the OECD after Hungary, Italy and Greece.

Also they give a potential reason.

This may be linked to the growth in jobs with low-hours and intermittent work.


The UK real wages data presented by the OECD is different to the official data which the FT has kindly reproduced for us.

the UK’s real-wage data; the latter suggest wages fell by a more modest 4.5 per cent between 2007 and 2015.

Okay and the differences between the calculations are? From the TUC.

Note that the OECD derive real wages from national accounts information, dividing total wages by hours worked and putting into real terms with the household consumption deflator. These can differ from those based on average weekly earnings and CPI inflation that tend to be used in the UK.

Well not can as they have differed here by quite a bit.

If we look at the overall picture I would take a lot of convincing that UK real wages have fallen by the same amount as in Greece as when I recall looking at the latter they had fallen by around a quarter. But we have been reminded that rather than a miracle the UK seems to have traded real wage growth for jobs growth. If we look back this is something economists wanted but of course they will have all forgotten/redacted that now.

As to the jobs created then there has been an element of them being lower skilled ones which has likely also affected productivity growth as well.  This leads to a very awkward question which is the jobs growth has probably driven the measures of real wages and productivity lower. So as well as averages we need to see how different groups have done/performed. Otherwise we would be in danger of saying that we did not want the new jobs. That of course may be true in a few cases but would we rather have much higher unemployment.

Also we may have got a glimpse into the state of play in self-employment pay from the OECD numbers although the thorny question of calculating hours worked is likely to still be a problem.

Today’s UK GDP report

This was welcome news and to give them credit bang in line with the monthly report from the NIESR.

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP was estimated to have increased by 0.6% in Quarter 2 (Apr to June) 2016 compared with growth of 0.4% in Quarter 1 (Jan to Mar) 2016.

There was something both welcome and sadly rare in recent times in the numbers.

Growth in the production industries in Quarter 2 2016 increased by 2.1%, contributing 0.30 percentage points to quarterly GDP growth….

Indeed it was back by this which from memory saw a boost from the pharmaceutical industry.

manufacturing increasing by 1.8% in Quarter 2 2016 following a decrease of 0.2% in Quarter 1 2016

I have nothing against the UK service-sector but it is nice for once for it not to be the main player as our economy was getting ever more unbalanced.

Let us also look for some perspective as to where we stand.

GDP was 2.2% higher in Quarter 2 2016 compared with the same quarter a year ago……In Quarter 2 2016, GDP was estimated to have been 7.7% higher than the pre-economic downturn peak of Quarter 1 2008.

Of course the performance in GDP per capita has been nothing like as rosy and only recently struggled into positive territory. We learned little on that today as that comes in the later reports.

Whilst it is the main area which may have been genuinely affected by the wet weather this was not so good.

agriculture decreased by 1.0%.


There is a fair bit to consider here. If we start with the GDP numbers then we saw a welcome boost to production a fair bit of which was due to manufacturing especially of pharmaceuticals in the spring. Rather than an accelerating picture for 2016 so far it seems likely to turn out that we saw sustained consistent growth I think. Of course we all want to know what happens next!

We however get a somewhat different picture from the data for real wages for the UK. Inflation measurement matters a lot here and whilst I think that the position is worse than the official UK data mostly because they use CPI which under reports inflation via the way it ignores owner occupied housing costs. If we go back to the UK GDP post credit crunch growth figure of 7.7% well real wages have fallen by a similar amount which as ever leaves us singing along with Johnny Nash.

There are more questions than answers
Pictures in my mind that will not show
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know

Also today has seen examples of L.I.F.E.G.O.E.S.O.N from City-AM.

London City Airport, probably my favourite airport, is expanding in a £344m investment deal…….GSK invests £275m in three UK manufacturing sites






A good day for UK Manufacturing makes a bad day for UK economists

Today gives us more information on two of the current problems facing the UK economy. The more recent is the apparent slow down going on where quarterly economic growth has dipped from around 0.7% to 0.4% and according to the latest business surveys perhaps now also done this.

The data so far indicate that the second quarter is likely to see the economy grow by just 0.2%.

We find out more on that front this afternoon when the NIESR publishes its latest monthly GDP (Gross Domestic Product) update. The associated issue which became a theme on here around 18 months or so ago was the apparent decline of UK manufacturing which has helped push overall industrial production lower with it.

Today is also a type of central banking day as the ECB continues the expansion of its policies by starting purchases of corporate bonds by buying some issued by utilities. So let us jump into the TARDIS of Doctor Who and go back to April 2002 when Bank of England Governor now Baron King of Lothbury told us this.

How will this re-balancing of demand come about?

Ah yes the rebalancing towards manufacturing which required in his opinion a lower exchange-rate.

but the relative strength of sterling and the dollar against the euro has been surprising. Over the past five years or so, sterling has risen by almost 40% against the euro.

Let us now leap forwards to January 2013 when Governor King was well past the period that this below should have brought the benefits he promised.

The fall in our own exchange rate, of some 25% between late 2007 and the beginning of 2009, has reduced the gap between our exports and imports in real terms from around 3 ½% of GDP to around 1 ½%.

Poor old Merv! The idea now after ever higher current account deficits that it had rebalanced is laughable but he hammered it home.

But the persistence of the current account deficit is evidence that an adjustment of sterling of that order was certainly necessary for a full rebalancing of our economy.

Except of course we never really rebalanced and in fact we have moved in the opposite direction as the service sector has continued to growth and manufacturing has not only declined in relative terms we have seen contractions in absolute terms as well. Oh and just continuing a bit of a European theme Baron King seemed to enjoy blaming the Euro.

And the third is the crisis in our main trading partner – the euro area – where the near term outlook is weak,

Actually I have just checked that he had got the fall against the Euro he wanted but still did not like it!

Rebalancing ahoy!

As I am often critical of Baron King let him have a moment in the British sun. From this morning.

Total production output is estimated to have increased by 1.6% in April 2016 compared with April 2015. There were increases in all 4 main sectors, with the largest contribution coming from manufacturing (the largest component of production), which increased by 0.8%.

That is very different to what we have been getting so what drove it?

Total production output is estimated to have increased by 2.0% in April 2016 compared with March 2016. There were increases in 3 of the 4 main sectors, with the largest contribution coming from manufacturing, which increased by 2.3%, the largest rise since July 2012.

Let us break out an old familiar TV theme song.

Tuesday, Wednesday, Happy Days,…….

Goodbye grey sky, hello blue,

Thunderstorms appear

Sadly like the UK weather even a sunny day has its thunderstorms which start well.

The largest contribution to the increase in manufacturing came from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which increased by 12.5%, the largest rise since April 2009.

That is what you call a surge and it was driven by monthly production rising by 8.6%. This meant that industrial production was 0.7% higher than a year ago due to this alone. Even better for the rebalancing theme it was driven by this.

Anecdotal evidence suggested increased exports were the main contributing factor to the rise.

As it was an extraordinary change I rang the Office for National Statistics to check and they replied that they had double-checked the numbers. They agreed with my view that this was an erratic series which does not fit months well and said that they had similar issues with February. So whilst there was a surge in April it may raise fears for May for a side-effect of the drugs boom should we go cold turkey after the party. Thank you to the ONS for providing a helpful service.

A more solid foundation

This was provided by a sector which has been in a good run.

231,628 engines produced in April, up 14.6% on the same period last year…….
Total engine output up 6.2% for the year to date, to 899,516 units.

Those numbers are from the SMMT ( Society of Motor Manufacturers and Traders) and they provide the basis for the fact that it was car production which drove the category Transport Equipment higher. The official data does not break this down but the ONS did confirm over the phone that this was the driver of a 0.7% increase in total UK production over the past year.

A sadder perspective

The thunderstorms appear again as we not how little growth there has been since 2012. Overall production has risen by 3.2% which one might try to excuse saying that oil and gas output will be affecting it. However then we have the problem that manufacturing has in spite of today’s numbers only risen by 2.7% since then. Remember this has been a boom for the UK economy overall.

If we look back further maybe we get some of the flash flooding which hit South East London yesterday.

In the 3 months to April 2016, production and manufacturing were 9.4% and 6.4% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

Wasn’t it the banking sector that was supposed to have been pummeled by the credit crunch. Where has the QE for manufacturing been?


It is nice to be able to review some better numbers and have a wry smile as the NIESR  recalculates its GDP numbers ( in a good way) for later. However whilst we have had a flicker of life I am reminded of what happened in Ireland a while back when the pharmaceutical industry had a big monthly move. Take a look at this.

The UK Manufacturing PMI fell below its critical 50.0 mark for the first time in over three years in April, ( Markit Economics)

They in essence have a tick sheet which misses large individual moves. But sadly whilst we have seen a good month the pattern remains mostly the same. Nice while it last though. But we have seen this develop.

The same trend was observed in manufacturing, where the share of nominal GVA fell from 18.4% in 1997 to 10.6% in 2014………..The slower output growth and increased productivity, therefore, reflect the falling share of the labour force employed in manufacturing, which fell from 16.5% to 9.6% between 1997 and 2015.

I wonder if some of this is due to reclassification of output on the UK and emailed the ONS last month to find out more. Sadly their services section have failed to reply.

Meanwhile it was not a good day for the UK’s “Top Economists” who found that 2% is the new 0%. Odd that apparently they can see so far into out future…….