The UK has a construction problem

Today brings us a whole raft of new data on the UK economy but before we get to that there has been some new analysis and indeed something of a confession. Let us start with @NobleFrancis who has crunched some numbers on the impact of the recent cold snap and snow in the UK.

In terms of construction work lost due to the bad weather between Wednesday and Friday last week, we estimate UK construction output has lost £1.6 billion (annual construction output in 2017 was £156.3 billion)……with the majority of new construction work postponed. External repair & maintenance (r&m) construction work was also postponed. r&m on internals of building could still be done but getting to site meant this was also hindered..

He is unconvinced that there will be a catch-up.

…theoretically it’s possible to ‘catch-up’ on work once the weather improves but in construction this rarely happens in practice.

This of course affects a sector which has been in recession since early summer last year and of course with the factor below might be an example of it never rains but it pours.

will also be adversely affected in 2018 Q1 by the liquidation of the UK’s second largest construction firm, Carillion, in January 2018.

The Markit PMI was showing something of a flat lining but it will have predated the worst of the cold weather. Also it seems to have missed this which is from this morning’s official release.

Construction output also decreased in the month-on-month series following growth in the final two months of 2017, contracting by 3.4% in January 2018.

As you can see Carillion had a big impact and added to what seems to have been weak construction output across much of Europe in January. This is the position compared to a year ago.

Compared with January 2017, construction output decreased by 3.9%, representing the biggest month-on-year decline since March 2013.

If this sector was a bank the UK establishment would be piling in like it was the US cavalry wouldn’t it?

On the other side of the coin we will have had a boost to GDP from the energy supply industry as the heating was turned up and it will be a quarter with the main Forties pipeline at full flow assuming there are no problems this month.

A confession of sorts

This came from the Bank of England in a working paper towards the end of last month. Remember the case I have made plenty of times on here that its QE bond buying inflated pension deficits which weakened the UK corporate sector and therefore was not the triumph it was claimed to be? Anyway after more than a few official denials we now have this.

Nor is this just a problem in the UK as low-interest rates have raised the value of pension liabilities around the world.

A sort of confession and attempted deflection all at once! We do however get some interesting detail on the scale of the issue which in spite of the way the sector has contracted is still substantial.

The 6000 DB pension schemes in the UK private sector are a significant source of retirement income, with around 11 million members and assets of around £1.5 trillion. The aggregate funding deficit that these schemes faced (on a Technical Provisions basis ) is estimated to have reached around £300 billion by 2015 , equivalent to more than 15% of annual GDP.

So how did things play out?

while firms with larger pension deficits had an incentive but not an obligation to act in
response to these deficits they paid lower dividends on average, but they did not invest less.

Okay so the first subtraction from the UK economy was lower dividend payments. Of course one of today’s themes Carillion and its economic impact was the opposite of this as it paid dividends rather than fixing its pension scheme. Moving on we get something which is even more damaging for QE supporters.

We show that obligations under recovery plans agreed with TPR prompted firms to adopt a different pattern of behaviour compared to their more voluntary
responses to deficits. Firms making contributions to close those deficits did reduce investment and
dividend payments on average. These effects were greater for firms that were financially constrained, reflecting the more limited options available to them to use external or other internal  funds to smooth out their expenditures. ( TPR = The Pensions Regulator ).

This had quite a big impact.

The scale of these effects was large for many FTSE 350
companies with DB deficits, and responses to them can explain some of the weakness in aggregate
dividends and investment observed since 2007.

This reinforces work first done by Toby Nangle and it is to his credit he was several years at least ahead in time. Oh and as the writers of the working paper have families to feed and one day might hope that the Bank of England tea and cake trolley might arrive again in the rather damp dungeon they have been posted to for further research there is this.

while the effects for some firms were large, by contrast the effects at the aggregate level
have been small in macroeconomic terms, and are dwarfed by the estimated positive impact of QE.
QE is estimated to have boosted the level of GDP by in the region of 1½-3% (Kapetanios et al,
2012; and Weale and Wieladek, 2016), while the negative effects of deficits are only estimated to
have reduced GDP by around 0.1% GDP since 2007.

I do like the way that one of the authors of the work about the GDP boost is the same Martin Weale who voted for it. We can imagine a paper from say Alan Pardew to the West Bromwich board stating that whilst they might be in a relegation crisis he has boosted their points haul by using counterfactual analysis. How do you think Baggies fans would treat the obvious moral hazard?

Production and Manufacturing

There was some expected good news here.

In January 2018, total production was estimated to have increased by 1.3% compared with December 2017; mining and quarrying provided the largest upward contribution, increasing by 23.5% due mainly to the re-opening of the Forties oil pipeline,

In it there was continued good news for manufacturing.

Since records began in February 1968, this sector has never recorded nine consecutive monthly growths……… ( Quarterly output was) manufacturing provided the largest upward contribution with an increase of 2.6% ( on a year ago).

Yet it was also true the monthly increase was only 0.1% and in something of a contradiction was driven by ( sorry).

Growth this month within manufacturing was due mainly to a rise of 1.9% in transport equipment. Within this sub-sector motor vehicles, trailers and semi-trailers rose by 3.2%

That is not as mad as it may seem as UK engine production has been very healthy. Also the erratic pharmaceuticals sector had a bad quarter (-7.8%) so on its past record it should rebound.


Tucked away in the numbers there was a hint of some better news. This of course has to be taken in the context of years and sadly decades of deficits but there was this.

Comparing the three months to January 2018 with the same period in 2017, the UK total trade (goods and services) deficit widened by £0.4 billion.

Which if we allow for the £2.2 billion increase in oil imports and fall in oil exports should show an improvement. Exports have also had a good year.

Although total (goods and services) exports increased by 5.6% (£8.4 billion)

We of course need a lot more of that.


If we step back and look at the overall position the UK economy continues to bumble its way forwards.We have seen a good run of manufacturing production which means that output is now only 0.3% below its pre credit crunch peak. However the fact it is still below after so much time shows the scale of the damage inflicted. Industrial production is also in a better phase.

On the trade issue there are flickers of improvement but we have a long journey to travel to end the stream of deficits. As to construction it seems to have hit something of a nuclear winter and as government policy has been involved in the creation of this via the impact of Carillion you might think it would be paying more attention, especially as other companies have not dissimilar weaknesses. If this was the banking sector the money would be pouring in. Also are we not supposed to be in the middle of a house building surge?






If UK growth has a “speed limit” of 1.5% how is manufacturing growing at 3.4%?

Yesterday saw the Quarterly Inflation Report of the Bank of England where its takes the opportunity to explain its views on the UK economy. There was a subject which Governor Mark Carney returned to several times and it was also in the opening statement.

It is useful to step back to assess how the economy has performed relative to the MPC’s expectations in order to understand the forces at work on it.

You are always in trouble when you have to keep telling your audience you got things right. I don’t see Pep Guardiola having to explain things like that or Eddie Jones and that is because things have gone well for them. Increasingly the Governor is finding himself having to field questions essentially based upon my theme that the Bank of England has a poor forecasting record. Actually tucked away in his statement was yet another confession.

GDP growth is expected to average around 1¾%
over the forecast period, a little stronger than projected in November.

I would like to present his main point in another way as we were told that policy is “transparent” and being done “transparently”. Okay so apply that test to this?

The MPC judges that, were the economy to evolve broadly in line with its February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than it anticipated at the time of the
November Report, in order to return inflation sustainably to the target.

So if they get things right which they usually do not then interest-rates will rise by more than the previous unspecified hint? That is opaque rather than transparent especially when you have a habit of saying things like this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced…………..It could happen sooner than markets currently expect. (Mansion House June 2014).

What actually happened? The next move was a Bank Rate cut! Also I noted this in the Financial Times from back then.

This speech marks an important change of tone from the governor……..with rates rising earlier, further and faster than markets currently price in.

I noted this because it was from Michael Saunders who was of course giving bad advice to Citibank customers as we wonder if his enthusiasm for the Governor’s thoughts and words got him appointed to the Monetary Policy Committee?

Also I note that the 0.25% Bank Rate cut and Sledgehammer QE is claimed to have had an enormous impact.

this strategy has worked with
employment rising and slack steadily being absorbed

Yet this morning Ben Broadbent has contradicted this on BBC 5 Live’s Wake Up To Money.

dep gov Ben Broadbent said that was “true to some extent”, adding he didn’t think a couple of 25 basis point [0.25%] rises in a year would be a great shock

So if two rises are no big deal how was one cut a big deal? I guess if you send out your absent-minded professor out at the crack of dawn he is more likely to go off-piste.

Our intrepid Governor was also keen to expound on the Bank of England’s improvement in the area of diversity which he did as part of a panel composed of four middle-aged white men. As to policy independence regular readers will be well aware of my theme that the establishment took the Bank back under its control some time ago.

Today’s data

This was always going to be affected by the shutdown of the oil and gas pipeline for the Forties area in the North Sea as we already knew it has reduced GDP by around 0.05%.

In December 2017, total production was estimated to have decreased by 1.3% compared with November 2017; mining and quarrying provided the only downward contribution, falling by 19.1% as a result of the shut-down of the Forties oil pipeline for a large part of December.

Ouch indeed! However if we look deeper we see that production has been on an upwards sweep.

Total production output increased by 2.3% for the three months to December 2017 compared with the same three months to December 2016……….For the calendar year 2017, total production output increased by 2.1% compared with 2016,

Now that the Forties pipeline is back to normal there will be an additional push to the numbers.


This sector has been on a good run which has been welcome to see after years and indeed decades of relative decline.

In the three months to December 2017……..due to a rise of 1.3% in manufacturing;

As to the driving force well we have heavy metal football at Liverpool courtesy of Jurgen Klopp and maybe we have some heavy metal economics too.

Within manufacturing, 9 of the 13 manufacturing sub-sectors experienced growth; the largest contribution to quarterly growth came from basic metals and metal products, which increased by 5.7%.

If we look deeper we see this which compares the latest quarter with a year ago..

The largest upward contribution came from manufacturing, which increased by 3.4%, due to broad-based strength, with 9 of the 13 sub-sectors increasing. Transport equipment provided the largest upward contribution, increasing by 6.6%, with three of its four industries increasing. The largest upward contribution came from the manufacture of aircraft, spacecraft and related machinery, while motor vehicles, trailers and semi-trailers fell by 0.3%.

There is something of an irony for those who found it amusing to jest that the UK would have to export to space in future as we indeed seem to be doing so. Of course space has been in the news this week with the successful, launch of the Falcon Heavy rocket with the successful landing of two of the three boosters which according to the Meatloaf critique “aint bad” and was also awe-inspiring. As you can imagine I heartily approve of it playing Space Oddity on repeat and the way Don’t Panic flashes on the car dashboard in big friendly letters.

Returning to manufacturing we have nearly made our way back to the place we were once before as the Eagles might put it.

 both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 5.2% and 0.5% respectively in the three months to December 2017.


The familiar theme is as ever of yet another deficit but the December numbers were even more difficult to interpret than usual due to the impact of the Forties pipeline closure. This was its impact on the latest quarter.

The 21.6% decrease in export volumes of fuels (mainly oil) had a large impact on the fall in export volumes. When excluding oil export volumes increased by 1.3%……The value increase in fuels imports was due largely to price movements, as fuels import prices increased by 14.2% while fuels import volumes increased by 0.3%.

If we look back 2017 was a better year for UK trade.

UK export volumes up 7.4% between 2016 & 2017, import volumes were up 4.1%

This meant that the trade deficit fell by £7 billion ( not by £70 billion as was initially reported) so the cautionary note is that we still have a long way to go.


Today’s numbers provide their own critique to the rhetoric of Mark Carney and the Bank of England. Let me show you the two. Firstly the data.

The largest upward contribution came from manufacturing, which increased by 3.4%

Yet according to the Bank of England this is the “speed limit”.

the MPC judges that very little spare capacity remains and that supply capacity will grow only modestly over the
forecast, averaging around 1½% a year.

If you think it through logically it is an area where you would expect physical constraints and yet it does not seem to be bothered. Indeed the other area where there are physical constraints has done even better on an annual comparison.

 construction output in Great Britain grew by 5.1% in 2017

So as ever the Bank of England prefers its models to reality and if you listened carefully to the press conference Ben Broadbent confirmed this. What he did not say was that he is persisting with this in spite of a shocking track record.

Just for clarity the construction numbers are correct but had really strong growth followed by the more recent weakness. However as I have pointed out many times care is needed as we regularly get significant revisions..





The UK economy continues to be both lucky and remarkably stable

Today is or if you read this later has been UK GDP day where we find out how the UK economy performed in 2017. For once there is a reasonable amount of debate and uncertainty caused by the outage to the Forties pipeline for much of December as you see in the initial or preliminary estimate the last month in the quarter has very little actual data and is mostly guesstimates. Meanwhile the UK establishment has been on the case and with intriguing timing has looked at GDP or Gross Domestic Product. Here is the Deputy National Statistician on the subject.

GDP measures the market-based economic activity: its primary purpose is to measure an economy’s production, income and expenditure. To calculate GDP, we take all the economic activity and use market prices to weight these different items to estimate the total size of the economy.

Fair enough as it starts but as regular readers will be aware there are more than a few problems with such an approach. Let us start with things that do not have a price or have a very low one.

GDP values goods and services at the price they are sold at, but if the value to me or you is higher than prices we pay we are even better off. Take, for example, free mapping services available on the internet – these are very valuable, but the cost of provision is relatively small. This difference between true benefit and price or cost is not included in GDP;

Next comes things we provide for ourselves.

The non-market activity that GDP excludes is important to well-being. For example, the ‘home production’ of childcare is hugely valuable in terms of child development, and volunteering helps improve the lives of millions of people in the UK;

I have used the example before of everyone suddenly mowing next doors lawn or looking after next doors children. As they would be paid recorded GDP would rise but economic activity would be unchanged. Also there is the issue of use of resources which GDP ignores.

So far so good from our Deputy Statistician but then he reverts to type and the emphasis is mine.

There are a few exceptions to the market-based approach, notably that GDP includes government-provided services and the economic activity imputed for home owners.

This is a big issue because as I pointed out in detail on the 23rd of May 2016 you are using a made-up number in a series that is supposed to be for market prices. It is a clear contradiction and causes all sorts of problems.

For those who have not looked at the numbers then nominal UK GDP has been revised up by at least £50 billion in each of the years 1997 to 2006 due to Imputed Rent and then by a declining amount up to 2011. To give an idea of scale VAT fraud is considered a big deal but changes to it top out at £2.1 billion in 2011.

This was officially declared a “discontinuity” but we carried on regardless in terms of methodology as the numbers changed. The issue of how to treat government services is another problem because it is fair to argue that you have to do something as what government;s do vary but it is also true that prices in that sector and hence GDP are unreliable and in truth are often made up rather than collected. If you want to take a Matrix style blue pill he is the official view on Imputed Rent.

 Likewise, if imputed rents were not included within GDP then an increase in home ownership would have the effect of lowering a country’s GDP.

The other problem created by Imputed Rents is that the logic above means the establishment has now put them in the inflation figures in the CPIH number. So you end up being told that the UK housing sector is a drag on inflation which is why first time buyers are struggling so much, oh hang on…….

Mark Carney

The Governor of the Bank of England has not delivered a defence of GDP he has delivered a defence of his economic forecasts. From Bloomberg.

Asked in a BBC radio interview to quantify the damage from Brexit, he said the economy is now about 1 percentage point smaller than it would have been had the 2016 European Union referendum gone the other way, and that the gap will widen to about 2 percentage points by the end of the year.

“What it works out to is tens of billions of pounds lower economic activity,” he said. “The question then is how do we make that up over time by growing above potential.”

Based on the estimated size of the economy at the end of 2017, the lost output would amount to as much as 40 billion pounds ($57 billion).

Odd timing only a few hours ahead of the GDP release but perhaps the rarefied air in Davos made him forget that. After all these days he does not get the numbers 24 hours early.

Today’s data

The news was in fact pretty good.

UK gross domestic product (GDP) was estimated to have increased by 0.5% in Quarter 4 (Oct to Dec) 2017, compared with 0.4% in Quarter 3 (July to Sept) 2017.

It was driven by something familiar and something less familiar but if anything even more welcome.

The dominant services sector, driven by business services and finance, increased by 0.6% compared with the previous quarter……..boosted by the second consecutive quarter of strong growth in manufacturing……….Manufacturing was the largest contributor to growth within production, at 1.3% and contributing 0.13 percentage points.

We get little detail on the manufacturing numbers but there is an intriguing hint of a further pick-up in the employment numbers in the services breakdown.

The business services and finance sector continued to be the main driver of growth in services in the latest quarter, increasing by 0.8% and contributing 0.28 percentage points. There was broad-based growth within this sector, with the largest contributor to GDP growth being employment activities, which increased by 3.6% and contributed 0.04 percentage points.

Here is a quirk for you which immediately made me think of the “NHS crisis” which is all over the media.

The largest contributor to this sector was human health activities with growth of 0.6% and contributing 0.03 percentage points to GDP growth.

Maybe not such a bad health performance although as discussed earlier the data is both uncertain and unreliable.


The construction problem continues.

Construction output was estimated to have decreased by 1.0% during Quarter 4 2017, following contraction in the previous two quarters. However, annual growth was 5.1% between 2016 and 2017, demonstrating that the most recent contractions are relatively small compared with the large growth throughout 2016 and into the first quarter of 2017.

So it continues on a weak recessionary path. Also I am not a fan of the way that the Statistical Bulletin provides context in the way that it does as it is supposed to be for the data release not news management or opinion. That is for elsewhere as how can you be the judge when you are the main witness?


If we step back for a moment we see that the UK economy has in 2017 exhibited a Napoleonic virtue. The one when he asked if particular generals were “lucky”? It has been shown by how stable things have been when so many were predicting instability post the EU Leave vote.

GDP was estimated to have increased by 1.8% between 2016 and 2017, slightly below the 1.9% growth seen between 2015 and 2016.

The luck part has come from how the favourable world economic position has helped manufacturing exports in particular and offset the impact of higher inflation on real wages and consumption. Unlike say in 2007/08 when a weaker pound helped little because the world economy was in poor shape.

As to the detail there is some hope that the ordinary person may begin to see some benefit as GDP per head rose by 0.4% making it 1.2% higher than a year before. But this is an area where we have struggled in the credit crunch era in the same way as with wages and productivity. Although of course last week brought possible better news on productivity via the telecoms sector.

On the other side of the balance sheet is construction and for all the spinning noted above the problems created by Carillion will not help the early part of 2018. If it helps my Nine Elms crane count is at 25.

As ever we need to note that the numbers are not accurate enough to be analysed to the degree they are and we have received a reminder of this from Japan today. From the Financial Times.

Japanese cryptocurrencies exchange abruptly halts withdrawals

You see by some calculations Bitcoin and the crytocurrencies were expected to provide a 0.3% boost to GDP in Japan.





The UK manufacturing boom is boosting both GDP and productivity

Today will bring us up to speed or at least up to the end of November on a range of areas of the UK economy. Some of it may well be contrasting as we mull the hoped for manufacturing boom but also not that the construction sector has fallen into a recession. As we do so there are plenty of more up to date influences at play as we note that the UK Pound £ has improved to around US $1.35 versus the US Dollar which means that on annual inflation comparisons it no longer boosts inflation as it is up around 13 cents over that period. So instead it will come to be a brake on our above target inflationary episode although as ever life is not simple as we note that the rise in the oil price I looked at on the has continued with the price of a barrel of Brent Crude Oil pushing above US $69 this morning making a three-year high.


We so rarely see good news in this area so let me bring you this from today’s Sainsburys results.

The 4% pay rise for staff was paid for out of cost savings says Mike Coupe, CEO ….so no impact on pricing or margins…. ( h/t Karen Tso of CNBC)

We see so little sign of wage growth above 2% these days so anything like this is welcome and indeed if we look a little further it is not the only such sign in the retail sector.

 Aldi is increasing pay for store staff after it enjoyed a bumper Christmas with sales up 15% in December…..

Aldi said it was increasing the minimum hourly rate of pay for store assistants to £8.85 nationally, a 3.75% rise, and to £10.20 in London, a 4.6% boost, from 1 February.

The company, which also pays employees for breaks unlike some chains, claimed it was reaffirming its position as the UK’s highest-paying supermarket.

The rates match the independently verified living wage recommended by the Living Wage Foundation, although Aldi is not formally accredited to the scheme as not all its workers are guaranteed the rate as a minimum.

As you were probably already aware the retail sector is not a high payer so the increases are good news in an era of concern over poverty whilst being at work and higher food bank usage.  Or to put it another way an era where we have a need for a Living Wage Foundation.

Mind you not all wage boosts are well received. From yesterday’s Guardian.

The chief executive of housebuilder Persimmon has insisted he deserves his £110m bonus because he has “worked very hard” to reinvigorate the housing market.

Jeff Fairburn collected the first £50m worth of shares on New Year’s Eve from the record-breaking bonus scheme that has been described as “obscene” and “corporate looting”. He will qualify for another £60m of profits from the scheme this year.

That will no doubt be much more than the total effect of the Sainsburys wages rise and in fact we can go further.

The scheme – believed to be Britain’s most generous-ever bonus payout – will hand more than £500m to those 140 senior staff.

The real problem is that this has mostly been fed to them by the UK taxpayer via this.

More than half the homes sold by York-based Persimmon last year went to help-to-buy recipients, meaning government money helped finance the sales.

Noble Francis has kindly helped us out on the subject.

Apropos of nothing, Persimmon‘s share price from the day before Help to Buy (19 March 2013) was announced till 8 January 2018. A 183% rise.

Whilst equity markets have been having a good run the general move is of course nothing like that.

What about consumer credit?

According to the Bank of England worries from people like me are overblown, From the Bank Underground blog.

Credit growth not being disproportionately driven by subprime borrowers is reassuring. As is the lack of evidence that mortgage lending restrictions are pushing mortgagors towards taking on consumer credit.

So that’s alright then. But now that a reassuring line has been taking ( both for unsecured credit and the author’s careers) there is of course the fear that my analysis may be right so we get.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

In the end it is a bit like the Japanese word Hai which we translate as yes but in my time there I learnt that it also covers maybe and can slide therefore into no!

Today’s Data


There is a continuation of what is rapidly becoming a good news area for the UK economy.

Manufacturing output increased ( 0.4%) for the seventh consecutive month, for the first time on record;

If we look for more detail we see this.

Manufacturing has shown similar signs of strength with output rising by 1.4% in the three months to November 2017…….Manufacturing output was 3.9% higher in the three months to November 2017 compared with the same three months in 2016, which is the strongest rate of growth since March 2011; on this basis, growth has now been above 3% for four consecutive three-months-on-a-year periods, which is the first time since June 2011.

We know from the various business surveys ( CBI and Markit PMI) that this is expected to continue. The growth is broad-based although regular readers will not be surprised that one area failed to take part.

 The downward contribution came from a decrease of 7.1% in motor vehicles, trailers and semi-trailers; the largest fall since August 2014 when it fell by 7.7%.

This of course provides food for thought for the unsecured credit analysis above via car loans.


This too was upbeat mostly as a function of manufacturing which provided 2.77% of the growth recorded below.

Total production increased by 3.3% in the three months to November 2017, compared with the same three months to November 2016.

There was good news from the past tucked away in this as October’s numbers were revised higher.


For once we had some better news here.

The total UK trade (goods and services) deficit narrowed by £2.1 billion to £6.2 billion in the three months to November 2017; excluding erratic commodities, the total deficit narrowed by £1.2 billion to £6.1 billion.

As ever we have a deficit but maybe we are beginning to see the impact of better manufacturing data and more of this would help/

a £0.9 billion widening of the trade in services surplus due to increases in exports.

Actually the general export position is looking the best it has been for some time.

The UK total trade deficit (goods and services) narrowed by £4.3 billion between the three months to November 2016 and the three months to November 2017; this was due primarily to a 10.6% (£8.4 billion) increase in goods exports, which was higher than the increase in goods imports.

Is that the lower overall level of the UK Pound £ in play? Or to be more specific the reverse J curve ending and the more formal J Curve beginning.


There was a glimmer of good news here.

Construction output rose by 0.4% in November 2017 as growth in private new housing increased by 4.1%,

However that is not yet enough to end the recessionary winds blowing across this sector.

Construction output fell by 2.0% in the three months to November 2017, which is the largest three-month fall since August 2012


The news is good for manufacturing and must be received rather wryly by the former Governor of the Bank of England Baron King of Lothbury. He of course talked often about a rebalancing towards manufacturing but the fall in the Pound £ on his watch (2007/08) did not help much, whereas the post June 2016 fall is doing better. The difference in my opinion is that the world economic situation is much better. Also we may see more of this which hopefully will help wage growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.9% from Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017; this is the largest increase in productivity since Quarter 2 2011.

The manufacturing boom has lifted production and finally seems to be impacting on trade which might have Baron King putting a splash of cognac in his morning coffee! Mind you the current incumbent of that role may have some food for thought also from the trade improvement as Rebecca Harding points out.

Has anyone told the how closely correlated with financial fraud trade in works of art is?

Isn’t Mark Carney a keen art buyer? Anyway I am sure there is nothing to see there and we should move on.

The cloud in the silver lining is construction which is beginning to benefit from some extra house building but has yet to break the recessionary winds blowing. On a personal level it is hard to believe with all the building at Nine Elms so near which must be that elsewhere there must be quite a desert.



The Euro rally has ignored the monetary policy of the ECB

Firstly let me welcome your all to 2018 and wish you a Happy New Year. Although those getting ready for the new Mifid ( ii ) rules still feel a little hungover. This bit looks good.

Brokers will be driven to move transactions in a wide range of securities onto open, regulated platforms, limiting unreported broker-to-broker deals that have been the traditional way to trade things such as commodities, bonds and energy.

This bit however begs more than a few questions.

Europe’s new rules require research to be sold and billed separately. This is very disruptive — as banks and brokers struggle to comply, fund managers rethink how they operate and analysts find themselves forced to prove their worth.

Am I alone in thinking that for more than a few this will prove to be a struggle?

The Euro

If we move to news then in financial markets our attention is attracted to thresholds and we are seeing a period of Euro strength as it rallies above 1.20 versus the US Dollar.

Of course this phase also involves a period of US Dollar weakness on the other side of the coin. This combination does pose a question for what we might call economics 101 as we saw only last month the US Federal Reserve do this.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent.

So on an interest-rate comparison basis there would be an argument for a higher US Dollar as not only is the ECB ( European Central Bank) deposit rate at -0.4% it has no  current plans to raise it and its President Mario Draghi has hinted several times that there may be no rise in his term. Also there is a difference in terms of QE ( Quantitative Easing) as the US Federal Reserve is beginning to reduce its holdings albeit very slowly whereas the ECB will continue to purchase a further 30 billion Euros a month until at least September. Thus whilst the ECB has reduced the size of its monthly purchases it remains a buyer as the Federal Reserve sells. Back in the day one of the “truths” so to speak of QE was considered to be that it would weaken a currency and yet it is hard not to have a wry smile as we observe exactly the reverse.

Trade Weighted

Actually the pattern here is very similar to that of the chart above showing the US Dollar. The recent rally started in the spring from just below 93 and now is above 99. Whilst there will be individual moves it is time for another wry smile as we note that for all the panics and shocks the Euro is very close to the 100 at which it was first measured in 1999.

As we have looked at several times before this reduces the inflation  trajectory and according to the Draghi Rule from March 2014 will have this impact.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

This leaves us with something of a conundrum as the ECB is below its inflation target so will now presumably have to run a more easy monetary policy than expected which ordinarily should weaken the Euro, but so far we have seen the reverse.

Why is the Euro in a stronger phase?

A major strategic strength for the Euro is provided by this.

The current account of the euro area recorded a surplus of €30.8 billion in October 2017 (see Table 1). This reflected surpluses for goods (€26.2 billion), primary income(€9.8 billion) and services (€7.3 billion), which were partly offset by a deficit for secondary income (€12.5 billion). ( ECB data).

This continued a pattern which if we look further back is a song with a powerful and consistent beat.

The 12-month cumulated current account for the period ending in October 2017 recorded a surplus of €349.6 billion (3.2% of euro area GDP), compared with one of €363.4 billion (3.4% of euro area GDP) for the 12 months to October 2016.

Whilst balance of payments data remain unreliable as for example we see examples of countries who both think they have a surplus with each other! The Euro area has mostly via Germany run consistent current account surpluses providing support for the currency value.

If economic life was that simple then the Euro would only rise and of course it is not but another factor weighed in during 2017 which was the better economic performance of the Euro area.

We don’t see it as a recovery anymore, but as an expansion. The annual growth rate in the euro area is the strongest for ten years. We expect a GDP growth rate of 2.4% for 2017which by European standards is quite high. Business and consumer confidence are at their highest levels for over 17 years, according to the November reading of the European Commission’s Economic Sentiment Indicator. Seven million jobs have been created in the euro area since mid-2013. ( Benoit Coeure in Caixin General on Saturday).

Indeed he went so far as to imply this is the best period since the Euro began.

The breadth of the expansion in terms of countries and sectors is greater than at any point over the last 20 years.

The better news has been reinforced by the private sector PMI surveys published earlier this morning. From Markiteconomics.

The eurozone manufacturing sector ended 2017 on
a high note. Strong rates of expansion in output, new
orders and employment pushed the final IHS Markit
Eurozone Manufacturing PMI® to 60.6 in December,
its best level since the survey began in mid-1997.

Or as the Black-Eyed Peas would put it.

I got that boom, boom, boom
That future boom, boom, boom
Let me get it now

The outlook looks bright as well/

Forwardlooking indicators bode well for the New Year: new orders rose at a near-record pace, while purchasing
growth hit a new peak as firms readied themselves
for higher production. Meanwhile, job creation was
maintained at November’s record pace.

There was particular optimism for Germany which means the official data series will have to do quite a bit of catching up to play the same song. Also it was nice to see Greece simply recording an expansion as that has been so so rare there.


There is a fair bit to consider here but we are seeing a phase where the better economic performance of the Euro area is outweighing relative interest-rates for currency investors. The economic good news is problematic at a time of lower inflation as the ECB continues with both a negative interest-rate and monthly QE at a time of this.

The annual growth rate in the euro area is the strongest for ten years.

There have of course been better decades but even so the ECB is out on something of a limb here. They may yet regret not putting asset prices into the inflation measures and more than a few policymakers may be grateful that the higher Euro is putting a bit of a brake on things.

Meanwhile a stronger Euro is as I pointed out a little while back releasing a little of the pressure on the Swiss Franc as the exchange rate between the two at 1.17 edges its way back to the 1.20 floor of three years ago.

Does every silver lining need a cloud? Well a dark cloud is certainly provided by this from the Financial Times.

Now it says the “restatement of the financial statements of Steinhoff Investment Holdings Limited for years prior to 2015 is likely to be required and investors in Steinhoff are advised to exercise caution in relation to such statements”

The cake trolley at the Bank of Finland will no longer be arriving at the desk of whoever decided that Steinhoff was a good investment for the corporate bond QE programme.



Ireland puts another nail in the coffin of GDP statistics

Friday brought news on a subject that is genuinely troubling so let me hand you over to Bloomberg.

Ireland’s economy surged in the third quarter, boosted by rising exports and falling imports.

On the face of it this is good news for Ireland but you barely need to touch the surface to see that there is as Taylor Swift would put it “trouble,trouble,trouble”. Let us go to the Central Statistics office release.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 4.2 percent for the third quarter of 2017. Real GNP increased by 11.9 per cent over the same period.

There are some obvious initial issues as we note that these are not annual numbers or even annualised ones but quarterly data. Those who doubt a first world economy can grow by 4.2% in a quarter then find themselves facing a mind-boggling 11.9% from the GNP measure. So let us steel ourselves and look at the annual data.

Initial estimates for the third quarter of 2017 indicate that there was an increase of 10.5 per cent in GDP in real terms in Q3 2017 compared with Q3 2016………Factor income outflows were 7.7 per cent higher than in the same quarter of 2016 resulting in an increase in GNP of 11.2 per cent year-on-year.

So we have double-digit growth on both measures but even more bizarrely pretty much all the GNP growth came in the latest quarter! So the economy did just about nothing for 9 months and then in the next quarter flew out of the water like the most athletic Irish salmon you have ever seen?

Detailed problems

The Irish Ivory Towers will be having a party as they observe a sea of export-led growth.

Exports increased by 4.4 per cent in Q3 2017 compared with Q2 2017 which when combined with an import decrease of 10.9 per cent meant overall net exports for the quarter increased by 63.1 per cent.

This meant that even countries like Germany or China would be jealous of the trade position.

The Balance of Payments current account, a measure of Ireland’s economic flows with the rest of the world, had a surplus of €14,488m (18.7% of GDP) in the third quarter of 2017.

However in the previous quarter there has been a deficit of 872 million Euros so what really drove the change which exceeded 15 billion Euros?

Service imports at €38,842m were down €8,625m over the same period in 2016.

As we look further we sign a sign of a particularly Irish issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

Let me hand you over to the official view on this.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

The numbers are a combination of mind-boggling and bizarre as we see that the R& D sector which is essentially intellectual property saw import growth from 19 billion Euros in 2015 to 47 billion Euros in 2016 but now has seen a quarter of only 3.6 billion. So slower than 2015 when the economy is apparently booming?

The issue of plummeting imports in an economic boom is a fundamental one and frankly on its own would have the Starship Enterprise on red alert.

A space oddity

A perhaps curious consequence of this provokes a wry smile. You see Ireland has moved into a current account surplus with the UK just as the UK Pound £ has fallen and made its exports more competitive. I will leave the Ivory Towers to explain that one.

A manufacturing boom

We have got used to seeing manufacturing declines in the western world and Ireland was in that camp with output falling from 45.2 billion Euros ( 2015 prices) in 2011 to 43 billion in 2013. But there was quite a boom to follow as we note that output was 92.4 billion Euros in 2016.  Actually the boom came in one-quarter because as the clocks recorded a New Year as 2014 ended then quarterly manufacturing was on its way from 10.7 billion Euros to 23.5 billion. Another way of putting the surge was that it was 101.4% higher than a year before.

Since then it has done very little having risen gently. The issue at hand is what is called contract manufacturing where the products may never have been within Ireland’s borders. Finfacts has reported this.

However, we reported in 2012 that Dell Products Ireland which closed its PC plant in Limerick in 2009 remained one of Ireland’s biggest exporters and manufacturers as it booked the output of its Polish plant in Ireland.

And this.

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes.

We will have to see going forwards but the investment figures were not especially hopeful.

Capital formation declined by 36.0 per cent in Q3 2017 compared with the previous quarter.

This is an especially serious area because manufacturing produces actual things which we should ( especially in an information technology revolution) be able to count increasingly accurately. Instead we seem unable to count it at all. This affects many economic figures as there is something of a gap between monthly goods exports in the mid to high 20 billion Euros counted in the trade figures and the 40 billion plus in the national accounts.


On the face of it the Fitch Ratings report was good news.

 On the basis of data up to 2Q, we estimate real GDP growth for this year of 5%. Early estimates for 3Q point to stronger GDP growth……..Fitch forecasts the general government debt-to-GDP ratio to fall to 65.8% by 2019, from 72.8% at end-2016 (1.1 percentage points of which is due to the sale of part of the state’s stake in AIB).

Even they had to admit though that the numbers are doubtful and it is hard to forget their catastrophic efforts in 2007 of pronouncing the Irish banking sector to be in good shape as you read this.

Fitch believes the health of the banking sector is improving, reducing risks to the Irish sovereign and economy. The ratio of non-performing loans (NPL) has fallen to 11.9% in 2Q17 from a peak of 25.7% in 2Q13.


Back in time I used to visit clients in Dublin at this time of year and would be looking forwards to the restaurants around St.Stephens Green and some Guinness. However back then building and development work was increasing this described below by the Tax Justice Network.

 The second big development has been the Dublin-based International Financial Services Centre (IFSC), a Wild-West, deregulated financial zone set up in 1987 under the “voraciously corrupt” Irish politician Charles Haughey:

The issue of tax is hard to avoid as money crosses Ireland’s borders in all directions but in particular seems to slip past the tax collectors. From Fortune.

The European Commission ruled last year that a tax deal that Ireland gave Apple was illegal, and that it owed the country $14.5 billion in back taxes. Ireland has been dragging their feet a little bit when it comes to collecting on that debt,

Unusual isn’t it for a country to not actually want tax? After all there are plenty of things it could be spent on. From the Irish Times.

In October 2014, when The Irish Times first interviewed some of Dublin’s homeless children, they numbered 680 in 307 families. Although Enda Kenny, then taoiseach, said no child should be homeless, their numbers have increased 256 per cent.

So how much economic activity is happening? The Central Bank of Ireland helps us out a bit.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Please do not misunderstand me as there are signs of economic improvement in Ireland as for example tax revenues have risen and unemployment fallen. Yet in spite of the apparent economic boom the unemployment rate at 6.1% is above the pre crisis rate of 5% and that is in spite of those on government schemes. Thus the picture is complicated as we see enormous sums wash in and out of the Irish economy relegating the national accounts to a picture of tax avoidance more than economic activity in general.





Car production for export is boosting the UK economy

This morning has brought us a barrage of news on the UK economy and no I do not mean the apparent progress on the negotiations with the European Union. Though even if we dodge the politics it is nice to see a better phase for the UK Pound £ with it rising to above US $1.34 and 1.14 to the Euro as well as above 153 Yen. The barrage came as it is one of the theme days at the Office for National Statistics giving us an outpouring of data on the UK economy.

Let us start with a nod to my subject of Wednesday which was the automotive or car sector.

In October 2017, car production grew by 4.6% compared with September 2017 to match the record index level reached in July 2017.

If we look into the detail we see this.

Motor vehicles, trailers and semi-trailers provided a similar contribution and rose by 6.3%. An increase in export turnover of 20.7% was reported by this sub-industry compared with October 2016;

This further reinforces the view that UK car production is mostly for export as otherwise the rise in production of 4.6% in October would look very odd with the fall in registrations of 11.2% on a year on year basis. Here is the data in chart form.

A little care is needed as this is a value or turnover index and not volume so it is a little inflated but not I would suspect a lot. With the same caveat it is in fact a record.

 Within the MBS production industries dataset, the value of exports for the motor vehicle, trailers and semi-trailers were at a record level in October 2017, exceeding £4 billion for the first time.

Of course single monthly data can be misleading but the news remains good if we look further back for more perspective.

Within this sector, transport equipment provided the largest contribution, rising by 2.5%, due mainly to an increase of 3.2% in motor vehicles, trailers and semi-trailers following an increase of 4.2% in the three months to September 2017. The index level for motor vehicles, trailers and semi-trailers averaged 107.1 in the three months to October 2017 due to a strong increase in exports during October 2017, compared with 103.8 in the three months to July 2017, due mainly to a weak June 2017.

If we look further back we see that vehicle production was blitzed by the credit crunch falling from 95.1 in August 2007 where  2015 = 100 to a chilling 45.6 in February 2009. It is no coincidence that the Bank of England introduced QE then when you look at that icy cold plummet. We did not reach the levels of the summer of 2007 until the spring of 2014 which makes one think. Over that period there was scope for plenty of what might come under the category of “tractor production is increasing” but it is also true that there were nearly seven lost years. Since then we have done well with both exports and home sales rising but the latter has been a smaller influence which is fortunate as it is now over!

Over the years and decades I have followed the UK economy it is not that often one can say or type that the economy is being helped by strong car production and exports.


This is also having a good phase.

The largest upward contribution came from manufacturing, which increased by 3.9%. There was broad-based strength throughout the sector, with 11 of the 13 sub-sectors increasing.

So there was a strong increase on a year ago and as well as the car sector we have already looked at we seem to have ambitions for what in the end will be the largest market of all.

Within this sub-sector, air and spacecraft and related machinery increased by 11.5%, continuing the prolonged month-on-same-month a year ago strength for this sub-industry since November 2014.

Not quite the “space aliens” that Paul Krugman once opined we needed but we seem to be doing well in the more mundane business of satellites and the like.

Just for clarity the pharmaceutical industry seems to be growing modestly as opposed to the yo-yo movements we did see and the overall picture still could do with some improvement.

manufacturing output has risen but remain below its level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 2.1% respectively in the three months to October 2017.

At least we are getting there.


Some might say that the better vehicle export data might take us from our desert of deficits in this area into an oasis. But maybe we will have to live forever to see that.

When erratic commodities are excluded, the value of the total UK trade deficit widened by £0.8 billion to £6.9 billion in the three months to October 2017.


We did export more but in a familiar pattern we imported at an even faster rate.

The widening excluding erratic commodities was due primarily to trade in goods imports increasing 2.9% (£3.3 billion) to £116.5 billion, which was offset slightly by a 0.5% (£0.2 billion) decrease in trade in services imports. Although trade in goods exports increased 1.7% (£1.4 billion) to £81.7 billion, the increase in imports was larger, therefore the total trade deficit excluding erratic commodities widened.


However if we switch to volumes maybe there is a little by little improvement.

Total goods export volumes increased 3.2% in the three months to October 2017, which was the fourth consecutive and largest increase since January 2017. Import volumes increased 0.5% over the same period.



This was driven higher by the manufacturing data.

In the three months to October 2017, the Index of Production was estimated to have increased by 1.2% compared with the three months to July 2017…….Total production output for October 2017 compared with October 2016 increased by 3.6%

The other factor pushing it up was North Sea Oil and Gas where not only less maintenance but some new oilfields opened in the summer. Thus for once we seem to have higher output with higher prices ( Brent Crude is ~ US $63 as I type this).

We also got an example of why economics is called the dismal science as most people would be pleased to have better weather and not to have to turn the heating on!

 energy supply provided the largest downward contribution, decreasing by 3.3%, mainly because of unseasonably warm temperatures in October 2017,

Its effect was to subtract 0.39% from production in October meaning the monthly change was 0%.

The overall picture here lags the manufacturing one partly due to the decline of North Sea Oil.

production output has risen but remains below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.1% in the three months to October 2017.


These did fit with the view I expressed on Monday. The present seems recessionary.

Construction output contracted for the sixth consecutive period in the three-month on three-month time series, falling by 1.4% in October 2017.

The future looks brighter.

New orders saw record growth in Quarter 3 (July to September) 2017, growing by 37.4% compared with the previous quarter.The record growth was driven predominantly by growth in the infrastructure sector, caused by the awarding of several high-value new orders relating to High Speed 2 (HS2).

So a definitely maybe then especially as we note that it is for HS2 which seems so set in stone such that we will have to roll with it I guess.


In terms of official data and business surveys the UK is seeing a good period for manufacturing particularly in the vehicle sector which is pulling overall production higher. Whilst it is only 14% of our economy these days the improvement is welcome. The rise in vehicle exports has not yet been picked up by the trade figures as I note the use of the phrase “to be exported” in the production data so hopefully we will see this in the trade figures for November and December.

The trade figures have a problem as you see there is plenty of detail on the goods sector but virtually nothing on services! I have scanned it again and can only seem a mention of services imports. This is pretty woeful if you consider it is the largest sector of our economy and frankly no wonder these numbers are “not a national statistic”. It is frightening that they then go into the GDP numbers and even more frightening that we will get monthly GDP data soon.

The construction series is “not a national statistic” meaning that in this instance I have to disagree with Meatloaf about the three main series analysed today.

Now don’t be sad (Cause)
‘Cause two out of three ain’t bad