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.

Manufacturing

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.

Trade

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.

 

Production

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.

Construction

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.

Comment

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

 

 

 

 

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Can the economy of Italy awake from its coma?

A pleasant feature of 2017 has been the way that the economy of Italy has at least seen a decent patch.  Although sadly the number this morning has been revised lower.

In the third quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.4 per cent with respect to the second quarter of 2017 and by 1.7 per cent in comparison with the third quarter of 2016

The improved economic outlook for the Euro area has pulled Italy with it although you may note that even with it the numbers are only a little better than the UK so far in annual terms and we of course are in a weaker patch or an economic disaster depending what you read. In fact if you look at annual growth Italy has been improving since the beginning of 2014 but for quite some time it was oh so slow such that the annual rate of growth did not reach 1% until the latter part of 2015 and it is only this year that it has pushed ahead a bit more. Back in 2014 there was a lot of proclaiming an Italian economic recovery whereas in fact the economy simply stopped shrinking.

Girlfriend in a coma

This means that in spite of the better news Italy looks set in 2017 to reach where it was in terms of economic output between 2003 and 2004. This girlfriend in a coma style result has been driven by two factors. First is the fact that the initial impact of the credit crunch was added to by the Euro area crisis such that annual economic output as measured by GDP fell by 8.5% between 2007 and 2014. The second is the weak recovery phase since then which has not boosted it much although of course it is now doing a little better.

If we look ahead a not dissimilar problem seems to emerge. From the Monthly Economic Outlook.

In 2017 GDP is expected to increase by 1.5 percent in real terms.The domestic demand will provide a
contribution of 1.5 percentage points while foreign demand will account for a negative 0.1 percentage
point conterbalaced by the contribution of inventories (0.1 pp). In 2018 GDP is estimated to increase
by 1.4 percent in real terms driven by the contribution of domestic demand (1.5 percentage points)
associated to a negative contribution of the foreign demand (-0.1 percentage points).

When ECB President Mario Draghi made his “everything it takes ( to save the Euro)” speech back in 2012 he might have hoped for a bit more economic zest from his home country.  Even now with the Euro area economy displaying something of a full head of steam Italy does not seem to be doing much better than its long-term average which is to grow at around 1% per annum. That is in the good times and as we noted earlier it gets hit hard in the bad times.

The girlfriend in a come theme builds up if we recall this from the 4th of July.

If we move to a measure which looks at the individual experience which is GDP per capita we see that it has fallen by around 5% over that time frame as the same output is divided by a population which has grown.

There will have been an improvement from the growth in the third quarter but we are still noting a fall in GDP per capita of over 4% in Italy in the Euro era. So more than a lost decade on that measure. As I have pointed out before Italy has seen positive migration which helps with future demographic issues but does not seem to have helped the economy much in the Euro area. For example net immigration was a bit under half a million in 2007 and whilst it has fallen presumably because of the economic difficulties it is still a factor.

During 2016, the international net migration grew by more than 10,000, reaching 144,000 (+8% compared to
2015). The immigration flow was equal to nearly 301,000 (+7% compared to 2015).

Putting it another way the population of Italy was 56.9 million when it joined the Euro and at the opening of 2017 it was 60.6 million. So more people mostly by immigration as the birth rate is falling have produced via little extra output according to the official statistics.

The labour market

If we switch to the labour market we see a reflection of the problem with output and GDP.

In October 2017, 23.082 million persons were employed, unchanged over September 2017. Unemployed
were 2.879 million, -0.1% over the previous month.

So only a small improvement but the pattern below begs more than a few questions.

Employment rate was 58.1%, unemployment rate was 11.1% and inactivity rate was 34.5%, all unchanged
over September 2017.

There are of course issues with a double-digit unemployment which has as part of its make-up an ongoing problem with youth unemployment.

Youth unemployment rate (aged 15-24) was 34.7%, -0.7 percentage points over the previous month

If UB40 did a song for youth unemployment in Italy it would have to be the one in three ( and a bit) not the one in ten

Also the employment rate is internationally low which is mostly reflected in a high inactivity rate. The unemployment rate in Italy is not far from where it was when it joined the Euro.

The banks

It was only last week I looked at the ongoing problems of the Italian banks and whilst they have had many self-inflicted problems it is also true that they have suffered from a weak Italian economy this century. So they have suffered something of a double whammy which means Banca Carige is trying to raise 560 million Euros with the state of play being this according to Ansa.

Out of the main basket Carige, closed the trading of rights to raise capital, it remains at 0.01 euros.

A share price of one Euro cent speaks rather eloquently for itself. If you go for the third capital increase in four years what do you expect?

National Debt

Italy is not especially fiscally profligate but the consequence of so many years of economic struggles means that the relative size of the national debt has grown. From it statistics office.

The government deficit to GDP ratio decreased from 2.6% in 2015 to 2.5% in 2016. The primary surplus as a percentage of GDP, equal to 1.5% in 2016, remained unchanged compared to 2015.

The government debt to GDP ratio was 132.0% at the end of 2016, up by 0.5 percentage points with respect to the end of 2015.

For those who recall the early days of the crisis in Greece the benchmark of a national debt to GDP ratio was set at 120% so as not to embarrass Italy (and Portugal). As you can see it misfired.

Italy has particular reason to be grateful for the QE bond buying of the ECB which has kept its debt costs low otherwise it would be in real trouble right now.

Although on the other side of the coin Italians are savers on a personal or household level.

The gross saving rate of Consumer households (defined as gross saving divided by gross disposable
income, the latter being adjusted for the change in the net equity of households in pension funds reserves)
was 7.5%, compared with 7.7% in the previous quarter and 9.0% in the second quarter of 2016.

Comment

The issue with the Italian economy is that the current improvement is only a thin veneer on the problems of the past. It may awake from the coma but then doesn’t seem to do that much before it goes back to sleep. The current economic forecasts seem to confirm more of the same as we fear what might happen in the next down turn.

One part of the economy that is doing much better is the manufacturing sector according to this morning’s survey released by Markit.

Italy’s manufacturing industry continued to soar in
November as strong external demand, especially
for capital goods, continued to underpin surging
levels of output in the sector.
“Capacity subsequently came under pressure, as
evidenced by the strongest recorded rise in
backlogs of the series history. Companies again
added to their staffing levels as a result.

Let us hope that this carries as we again wonder how much of the economic malaise suffered by Italy is caused by output switching to the unregistered sector.

Me on CoreTV Finance

http://www.corelondon.tv/unsecured-credit-improving/

http://www.corelondon.tv/bitcoin-cryptocurrency-smashing-10000/

What about QE for manufacturing and construction rather than stock and bond markets?

Let us begin today by looking at something to cheer the cockles of a central bankers heart. Firstly from Alliance News on Tuesday.

The FTSE 100 index closed up 1.93 points at 7,562.28 on Monday, building on its fresh all-time closing high set on Friday.

It has dipped away from that level a little since but never mind as the Bank of England is usually behind the times and no-one will notice it especially if a chart from 2008 showing it around 3800 then is used. What a triumph for the period of lower interest-rates and QE ( Quantitative Easing). Tuesday brought us this from the Halifax..

House prices rose by 0.3% between September and October, following a 0.8% increase in September. The average price of £225,826 is the highest on record and 2.8% higher than in January (£219,741).

So as you can see the ” wealth effects” should be pouring into the economy right now. Sadly unlike the Bank of Japan there are no equity and property holdings to claim a profit on but never mind. If you are a young researcher in Threadneedle Street the way to career advancement is to write about wealth effects boosting the economy especially if you avoid writing about how the major wealth effects are for the few rather than the many.

Wages

There has been some potential good news on this front as well. Yesterday the agents of the Bank of England reported this.

Recruitment difficulties had intensified and were above normal in a range of activities, alongside continued
modest employment growth. As a result, pay growth had edged up and was expected to be somewhat higher in
2018 than this year.

This of course brings them into line with the official Bank of England view from the past 5 years or so that wage growth is rising. Of course the possible catch is that the Bank is not only the witness but the judge and jury here as we mull what somewhat higher means? One group who have managed a solid wage rise are these. From the Evening Standard about Southern Rail.

Members of Aslef, the train drivers’ union backed the deal, which includes a 28.5 per cent pay rise over the next five years, by 731 votes to 193, a majority of 79 per cent.

Industrial action by train drivers leading to pay rises feels like something from the 70s and maybe 80s but long-suffering commuters from the south will be grateful if this puts an end to the problems. As to the pattern of wages growth going forwards we can only wait and see if what used to be called “relativity’s” re-emerge and it leads to wage claims and rises elsewhere. That sort of thing has been missing for some time and is a hint that the UK employment situation may not be as strong as the headline figures imply. Although Governor Carney thinks the opposite.

with unemployment at a 42 year low, more people in work than ever before. This isn’t a false read on
the unemployment rate,

Savers

Here we find that Governor Carney was very bullish for their immediate prospects after his Bank Rate rise.

It will have an impact on borrowers over time, it will have a more immediate positive impact on savers, in terms of deposit rates.

So that is the state of play in his Ivory Tower, meanwhile if we look at the real world the BBC reported this yesterday.

Seven days after the rise in base rates, just 17 out of 150 providers have passed on improved returns to their savers.

The Bank of England raised rates by 0.25% to 0.5% last Thursday, the first rise in a decade.

Many banks are still considering whether to pass on the benefits.

But even if their provider does choose to increase rates in full, some savers will still find themselves worse off than when rates were last at 0.5%.

As to the slower impact on borrowers.

By contrast, lenders have been quick to raise the cost of mortgages.

Most customers with tracker mortgages have seen an immediate rise of 0.25%.

So far 20 banks have announced increases to their Standard Variable Rate (SVR) mortgages, including Barclays, Halifax, Lloyds, Nationwide, Santander and TSB.

Poor old Mark perhaps he might like to play some PM Dawn to help relax.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine

Production

This morning’s numbers brought some good news for the UK economy but mixed news for the Bank of England.

In September 2017, total production was estimated to have increased by 0.7% compared with August 2017……Total production output for September 2017 compared with September 2016 increased by 2.5%.

It might only be 14% of the economy these days but it has improved recently and this improvement has been driven by this.

Manufacturing provided the largest upward contribution, increasing by 0.7%, with 10 of the 13 sub-sectors rising. This is the fifth consecutive monthly rise in this sector and follows growth of 0.4% in August 2017. Machinery and equipment not elsewhere classified provided the largest upward contribution to the growth in manufacturing, rising by 3.2%, following 0.0% in August 2017.

Also North Sea Oil and Gas ended its maintenance period and of course as we go forwards ( these numbers are up to September) will be seeing higher oil prices. Also those who joke we might need to trade with space in future well…..

Within this sub-sector, air and spacecraft and related machinery rose by 10.2%.

Trade

Whilst there was better news from the monthly data for September alone the background picture continued on its usual not very merry way.

Between the three months to June 2017 and the three months to September 2017 (Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017), total trade (goods and services) exports decreased by 0.2% (£0.3 billion), while total trade imports increased by 1.6% (£2.6 billion). This resulted in a widening of the total trade (goods and services) deficit by £3.0 billion to £9.5 billion.

There are some ways in which this fits with the other data we have for example weaker oil exports go with the summer maintenance period and higher exports of vehicles with the manufacturing data. But it is odd that exports are falling with rising production and particularly manufacturing figures. Perhaps we will find over time that exports of services were higher than we thought at the time.

Trade in services exports have been revised up by £0.3 billion for both July and August 2017. This is due to survey data replacing earlier estimates.

Construction

I have been worried about the accuracy of these numbers for some time ( regular readers may recall when a large business was switched from services to construction a couple of years ago which did not inspire confidence). However such as they are the sector has plunged into a recession.

However, construction dropped for the second quarter running, driven by falls in commercial work and housing repairs……Activity in the construction sector continued to weaken in Quarter 3 2017, with total output falling by 0.9%……..consecutive quarterly declines in current estimates of total construction output have not been seen since Quarter 3 2012.

I asked online for thoughts as to why this might be and one group of replies suggested a combination of a lack of demand and uncertainty.Another suggested that the credit crunch wiped out some smaller house builders which have never really been replaced.

Comment

There is a lot to consider here. Let us start with some good news which is that the production sector has improved and it has been driven by manufacturing. That is not showing up yet in the trade figures on any grand scale but there is hope we will see that feed in as 2017 ends and moves into 2018. As to construction it is in a decline and recession and I wonder if Governor Carney will be awake at night thinking that the £10 billion he splashed around in the corporate bond market or the £60 billion giving Gilt holders an early Christmas present might have been better spent helping the real economy?. Should it be the case it is suffering from uncertainty and a lack of demand there may be a case for government spending here. The main flaw in that is of course we might get more expensive projects like HS2 and Hinkley Point.

However perspective is also needed because if we look at the credit crunch era construction has recovered well. If we use 2010 as our benchmark then in August it at 118.5 was even above services at 117.2 and way ahead of manufacturing at 106 and production at 101.7.

If I return to the title of this piece if only the Bank of England put the same effort into supporting UK manufacturing as it has into propping up the housing market. Of the £90.1 billion of the Term Funding Scheme the only way I see it helping manufacturing is via the car leasing/finance sector and of course that mostly helps overseas manufacturers.

 

 

 

 

 

 

 

UK GDP growth poses a new problem for the “unreliable boyfriend”

Today brings us the latest economic growth or Gross Domestic Product data for the UK and of course the numbers will be pored over way more than they can stand. There are questions over the state of accuracy when all the data is in but at this first preliminary estimate it has only 42% of the total. Thus I support the move to take more time ( and collate more data) in the future.

Office for National Statistics (ONS) proposals to move to a publication schedule of two estimates of quarterly gross domestic product (GDP) using data from all three of the output, income and expenditure approaches around six weeks and 13 weeks after the end of the preceding quarter.

In terms of the main output measure of GDP this will mean that the first estimate will be a couple of weeks or so later but will have just under 60% of the full data set.

The other change I am much more dubious about as I feel this is going in the opposite direction of more timeliness but less accuracy.

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

If you think about it the two moves are contradictory as if we need more time for the quarterly data how can we produce accurate monthly numbers? I have pointed out before that the surveys for the services sector in the trade figures are quarterly ( which yes do pose a question for monthly trade figures) and will not provide much confidence for monthly GDP numbers. Even worse there will be rolling quarterly GDP figures leading to confusion for the unwary and for some to pick and choose between which number they look at.

What is GDP good for?

Many of the problems of GDP come from this simple point explained by Diane Coyle.

GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced and consumed in a country in a given period of time.

This means that work which does not have a price/cost is not included. So if you wished to boost it everyone could pay their neighbour to wash their car or do their housework but reality would be unchanged. Even worse the modern digital era and changes in the way people work have made matters more complex and difficult.

More and more people are self-employed or freelance through digital platforms. Their hours may be flexible, and work can overlap with other activities. In many cases they are using household assets, from computers and smartphones to their homes and cars, for paid work.

Another problem is the estimation of inflation as GDP is measured in monetary terms and you need an inflation measure or deflator to get a real number to run comparisons over time. Here I tend to disagree with Diane as I feel that there has been an effort to inflate GDP numbers via reducing measured inflation. For example the statistician Dr. Mark Courtney has estimated that replacing the Retail Price Index with the Consumer Price Index or CPI has boosted the stated GDP growth of the UK by around 0.5% per annum. Should the new “more comprehensive” CPIH replace CPI in the numbers then it would add a smidgen more.

So we have a push me pull me type of situation where I agree that the digital side of the services economy is probably under measured but where changes to the inflation infrastructure have led to it being over measured.

If you want to know how the services sector has grown over time then this sets the pattern.

Bringing that up to date the latest numbers assume that the services sector is now 79.3% and manufacturing is 10.04%. Personally I think that the former number is still too low.

The Trend

Thus has been for economic growth to slow in 2017 so far as in essence we have gone from an annual economic growth rate of at times ~3% to one of more like half that. There have been two main factors at play here. Firstly the impact of higher inflation coming from a lower UK Pound £ after the EU leave vote and secondly the fact that the boom had become mature. After all factors like house prices and retail sales were unlikely to keep rising at the rates we had seen.

Today’s numbers

They were good albeit of course we need to remember the reservations described above.

UK gross domestic product (GDP) was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2017, a similar rate of growth to the previous two quarters.

Also should this continue then the relative importance of manufacturing may rise as we look forwards.

Manufacturing returned to growth after a weak Quarter 2 2017, increasing by 1.0% in Quarter 3 2017.

As to the trend well there was this.

Following growth of 0.4% in Quarter 3 2017, GDP has grown for 19 consecutive quarters.

But it is also true that the annual rate of growth remained at 1.5% ( or in fact slipped from 1.7% if we recall the revisions). So we needed a better quarter to halt or slow the annual decline.

Maybe also we will seem some benefit individually.

GDP per head was estimated to have increased by 0.3% during Quarter 3 2017.

If we move to the detail then there were various factors at play. Let us start with manufacturing.

due to growth across a number of industries, including the manufacture of transport equipment, other manufacturing and repair and the manufacture of machinery and equipment.

It’s growth suggests good news for the trade figures although so far they have not shown it. Also we had growth from services driven by this.

The main contributor to growth was the business services and finance sector, which increased by 0.6%, contributing 0.19 percentage points to quarter-on-quarter GDP growth. Growth in this sector was broad-based, with employment activities being the largest contributor (Figure 3), recording growth of 3.5% after a fall of 2.4% in Quarter 2 2017 and contributing 0.04 percentage points to GDP growth.

There was also this.

The largest individual contributor to growth in services was computer programming activities, which grew by 1.9% and contributed 0.05 percentage points to GDP growth……

If we move to August for services we see this.

motion pictures, which increased by 7.1%, contributing 0.06 percentage points; this growth follows a large fall in the industry in July 2017 and further information on the films in August 2017 can be found on the British Film Institute (BFI) website

Any analogies for Dunkirk?

Comment

The theme of the UK economy having stable but below trend growth in 2017 continues as 0.4% compares with say 0.6% as a trend. Of course that assumes the central bankers have indeed ended recession and speaking of central bankers imagine yourself as an “unreliable boyfriend” right now having given Forward Guidance that there will be an interest-rate rise if the economy does better! In the past the Bank of England has tended to respond to GDP data although of course we have to look back a very long time to see any evidence around an interest-rate rise.

Meanwhile we see that services are bumbling along manufacturing is doing rather well but construction is in a recession. An odd mixture as we are supposed to be building so many houses…….

 

 

A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

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 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

How are UK manufacturing, trade and construction doing?

Let me commence today with some Friday humour provided by the British Chamber of Commerce. At this time of hurricanes and now an earthquake off Mexico we could do with it.

UK GDP growth forecast for 2017 is upgraded to 1.6% from 1.5%, and is expected to slow to 1.2% in 2018 (downgraded from 1.3%), before rising to 1.4% in 2019 (downgraded from 1.5%)

Yes they think they can forecast UK GDP to 0.1%! Also whilst it has caught some headlines it is pretty much what it was before. But there is a difference to what we have been hearing from the CBI ( Confederation of British Industry) and the Markit business surveys ( PMIs).

The contribution of net trade to UK GDP growth is not expected to be as strong as we previously predicted, as we see little evidence that the depreciation of the pound is materially boosting the UK’s external position.

Of course only time will tell as to whether our manufacturing industry will see a boost but it would appear that the BCC has a strong sense of humour.

Our new forecast is that the first increase in UK official interest rates, to 0.5%, will occur in Q3 2018. This is two quarters later than predicted in our Q2 forecast.

UK Manufacturing

The official data this morning brought some positive news on this front.

In July 2017, total production was estimated to have increased by 0.2% compared with June 2017, due mainly to a rise of 0.5% in manufacturing; the largest contribution to the rise came from transport equipment, which rose by 7.6%.

The good news from the motor industry was not a surprise as the industry had reported good numbers for July.

The monthly increase within transport equipment was due to motor vehicles, trailers and semi-trailers, which rose by 13.7%, the strongest growth since March 2009; evidence suggested that the production of new models contributed to the growth.

The industry which had been pushing the numbers around has been the pharmaceutical one but by its standards a 7% monthly fall had a mild impact as it was up 2% on a year ago. You get an idea of what it has been doing by the way a 7% monthly change seems mild. On the subject of pharmaceuticals there was some chilling news from a research project in the US yesterday from which I spotted this . From Alan Krueger of Princeton University and NLF is not in the US labour force.

Nearly half of prime age NLF men take pain medication on a daily basis, and in nearly two-thirds of these cases they take prescription pain medication

This of course needs further investigation as indeed does the mushrooming opium problem.

Back to UK production and the only slightly smaller gap between surveys and the official data there is this from Markit.

ONS say having best month this year in July. Further rebound expected in August according to PMI. ONS data very volatile…  ( Chris Williamson ).

There is a bit of a cheek calling the official data volatile if you look at the PMI series but also some truth.

 

Construction

There were promises of more house building from Bovis earlier this week however this bit caught my eye.

Special dividends totalling £180m equivalent to c.134 pence per share to be paid over three years to 2020…….Group will continue to be strongly cash generative and the Board is committed to reviewing further capacity for returns to shareholders over time.

There are two issues here. Firstly the main beneficiaries of the Help To Buy programme seem to have been construction company shareholders. But a more subtle point was made to me, if the outlook is as bright as we are told why are they returning money to shareholders? After all ordinary dividends are rising anyway.

Board to recommend 5% increase in ordinary dividend in 2017 to 47.5p with a further 20% increase in 2018 to c.57p, demonstrating its confidence in the business and the strong outlook.

Yet all this largesse for building company shareholders of which Bovis is just an example does not seem to have had much of a lasting impact on UK construction if today’s figures are any guide.

Construction output contracted by 1.2% in the 3 month on 3 month series in July 2017 but remains at relatively high levels……Construction output also fell month-on-month, falling by 0.9% in July 2017, predominantly driven by a 1.4% fall in all new work.

Also the outlook was none too bright either.

New orders fell 7.8% in Quarter 2 (Apr to June) 2017 compared with the previous quarter, dropping to its lowest level since Quarter 1 (Jan to Mar) 2014.

I have written before that I do not have much confidence in the official construction data. For newer readers they had a lot of trouble with the deflator ( inflation measure) and shifted a large business from services to construction which meant it was hard to keep the faith. Also the numbers tend to be revised higher over time. However they have presented a declining trend in 2017 which has persisted, perhaps the election was an influence on infrastructure projects but that of course will fade over time.

Trade

There is an element of repetition here as we note the ongoing deficit and the fact that it seems unusually stable.

Between the 3 months to April 2017 and the 3 months to July 2017, the total UK trade (goods and services) deficit widened by £0.4 billion to £8.6 billion.

But these numbers are very unreliable as the revisions below show.

A downward revision to both imports of goods and services (negative £0.6 billion and negative £0.8 billion respectively) and an upward revision of £0.3 billion to total trade exports resulted in a narrowing of the trade deficit by £1.7 billion in June 2017 compared with the previous UK trade release.

Comment

Overall today’s data brought a possible hint of good news for the UK economy as manufacturing had a better month. In terms of the detail however the boost from the car industry seems unlikely to persist so we will still wait for a clear impact ( J-Curve) from the lower level of the UK Pound £. Construction continues to struggle.

Meanwhile there was troubling news for the Bank of England from its own inflation survey. Firstly the respondents do not seem to have much faith in it hitting its target.

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, compared to 3.3% in May.

It is particularly interesting that the ordinary person seems to have a completely different view of inflation trends to central bankers. Maybe they have caught on that the central bankers are usually wrong! Or perhaps they consider  a “non-core” factor as well say vital for life.

Price inflation for food and drink rose sharply between July 2016 and July 2017, going from minus 2.6% to +2.6%.

The 3 economists who started their Underground report at the Bank of England with this are probably wondering where the tea and cake trolley has gone? If we return to the survey there was a further problem for central bankers who want higher inflation.

By a margin of 53% to 7%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster.

Oh and this on Twitter provided some food for thought.

USD has stopped out everyone this morning and hence has no other place to go but up. ( h/t @FemaleTrader_A ).

@boomsbustsshow has expressed the same view and these attracted my attention because the media is now full of reports of a weak US Dollar.

Steely Dan

As a fan let me mourn the death of Walter Becker this week and leave you with this from Aja. RIP Walter.

Up on the hill
They’ve got time to burn
There’s no return
Double helix in the sky tonight
Throw out the hardware
Let’s do it right
Aja
When all my dime dancin’ is through
I run to you

Me on Core Finance TV

http://www.corelondon.tv/uk-economy-official-figures-yet-confirm-j-curve-effect-not-yes-man-economics/

 

The brightest sector in the UK economy appears to be manufacturing

Today has seen a raft of news on the state of play in the UK economy and let us start with what the consumer has been up to. The British Retail Consortium has told us this.

August provided a welcome pick-up in retail sales across channels, with Non-Food returning to growth as shoppers’ attentions turned to homewares, autumn clothing ranges and the new school term.

The BBC gives us a breakdown of the data.

The British Retail Consortium, working with consultancy KPMG, said like-for-like sales rose 1.3% in August, against a 0.9% fall for the same month in 2016.

Actually total sales rose by 2.4% which suggests that there was an opening of retail stores in some form which seems strange with the switch to online ( “from strength to strength”) that is happening. Also there was a dichotomy between the views of consumers about the future and the BRC. Here is the consumer view.

Shopper confidence has been building. 23 per cent expect to be financially better off over the next 12 months, compared with 20 per cent in the election month of June.

So an improvement albeit a small one whereas the BRC itself is much more downbeat.

Purchasing decisions are very much dictated by a shrinking pool of discretionary consumer spend, with the amount of money in people’s pockets set to be dented by inflation and statutory rises in employee pension contributions in a few months’ time.

Data from Barclaycard which claims to cover nearly half of UK credit and debit card transactions put a different spin on things.

Consumer spending growth slowed to 2.9 per cent in August, compared to a 2017 average of 3.8 per cent, as consumers rowed back across the board.

So they have seen growth but maybe not much if we allow for inflation and in the detail I noted that we seem to feel we need a drink!

Pub growth fell to single digits for only the second time this year (9.2 per cent), and spend on cinemas and event tickets flatlined (0.4 per cent) after the 24.3 per cent boost seen in July.

Also I saw this earlier and of course with a lag we tend to follow the United States in such things.

US box office -35 per cent in August, worst in 20 yrs raises Q’s about the future of cinema in the age of digital streaming!?  ( h/t @CompoundIncome )

Car Sales

This have hit a decidedly rough patch however which we have noted by the proliferation of scrappage schemes which add to the definition of “price cuts” in my financial lexicon for these times. From the SMMT.

New car registrations fall -6.4% in August to 76,433……Year-to-date market holds steady, down -2.4%, with 1.64 million cars joining British roads in 2017.

So bad news for sales however not so much for manufacturing as we mostly import the cars we lease. Europe’s trade body gave us an idea of how much last September.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion

So a small drain for UK manufacturers and a larger one for foreign manufacturers so ironically if we continue to export as usual a possible improvement in the trade figures.

UK business surveys

The Markit PMI for services this morning had some odd combinations in it as shown below.

new order volumes increased at the second slowest rate since September 2016….. fragile business confidence

So a slowing but one which caused backlogs and increased employment?

This was highlighted by the steepest rise in backlogs of work since July 2015. Service providers responded to rising workloads and pressures on operating capacity by recruiting additional staff in August.

We have found employment to be a reasonably reliable forward indicator over the last few years or so meaning that the down reported could be an “unexpected” up.

If we move to manufacturing nearly everyone except the official figures are telling us that things are on the up.

All five of the PMI components – output, new orders, employment, suppliers’ delivery times and stocks of purchases – were consistent with a stronger performance for the manufacturing industry during August.

There was also this from another source earlier.

Britain’s manufacturers are enjoying buoyant conditions on the back of export markets going from strength to strength according to a major survey published today by EEF , the manufacturers’ organisation and accountancy and business advisory firm BDO LLP……  Output and orders bounce back to historic highs.

The picture is completed by a weak period for construction and particularly infrastructure spending from the PMI there. Maybe the election was an influence on the public-sector but we cannot say that for ever! However the overall picture suggested is of steady as she goes.

the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter

What about flows of money?

This morning has brought news that suggests at least one company sees UK businesses attractive at current exchange rates. From the Financial Times.

 

Schneider Electric will contribute its own software division to Aveva in exchange for new shares in the UK company. Schneider will own 60 per cent of the enlarged company’s stock, valued at approximately £1.7bn. Existing Aveva shareholders will own the remaining 40 per cent.

However this morning we got official data saying that in the second quarter foreign acquisitions of UK companies had fallen! One area where there may be a change if ( as often happens) similar investors fall into line was this announced by the Norwegian sovereign wealth fund.

 In future, the benchmark index for the bond portfolio should consist of nominal government bonds issued in dollars, euros and pounds……….The benchmark index for bonds currently consists of 23 currencies. Our recommendation is that the number of currencies in the bond index is reduced.

These things take a long time to happen usually and some emerging bond markets will be hit but it seems that there will be a purchase of UK bonds ( as well as Euro and US Treasuries) which will be mostly a currency play.

Comment

On the surface we see that there is an element of “same as it ever was” as  the UK economy continues to grow but slowly. However underneath a fair bit seems to be changing as we see more and more reports of UK manufacturing doing well albeit that we wait to see that reflected in the official data. I have to confess I am unclear why services output is falling as backlogs and employment both rise!

The danger remains of a lower UK Pound £ pushing inflation higher but the main burst of that is fading now and if other sovereign wealth funds match Norway it may see some investing flows. On the other side of the coin even Markit seems to be trolling the Bank of England these days.

the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks.