Manufacturing and Production help to drive UK GDP growth

Today brings us up to date with the latest monthly data on the UK economy. the problem with this is as I feared that the numbers are in practice rather erratic.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018.

Actually December recorded a -0.4% GDP growth rate so if you take the figures literally there was quite a wild swing. More likely is that some industries do not conform to a regular monthly pattern in the way we have seen the UK pharmaceutical industry grow overall but with a boom and bust pattern on a monthly basis.

There are areas where we see two patterns at once in the UK economy. For example Tesco has produced good figures already this morning.

Tesco has reported a 28.8% rise in full-year pre-tax profits to £1.67bn with revenue at the supermarket rising 11.2% to £63.9bn ( Sky News)

On the other hand this week has already seen this.

Ailing department store chain Debenhams has been rescued by its lenders after falling into administration.

Three years ago, the 166-strong chain was worth £900m, compared with £20m as of this week. ( BBC News)

Sadly the BBC analysis seems to avoid this issue highlighted by the Financial Times.

Debenhams troubles stem partly from a period of private equity ownership at the start of the millennium, when CVC, Merrill Lynch and TPG sold off freehold property, added debts and paid themselves large dividends.

It looks a case of asset-stripping and greed followed by over expansion which was then hit by nimbler retailers and the switch to online sales. Without the asset-stripping it would be still with us. Meanwhile the BBC analysis concentrates on Mike Ashley who put up £150 million and offered an alternative. I am no great fan of his business model with its low wages and pressure on staff but he does at least have one.

Wages

Speaking of wages there are several strands in the news so let us start with the rather aptly named Mr. Conn.

The chief executive of Centrica, the owner of British Gas, received a 44% pay rise for 2018, despite a difficult year in which the company imposed two bill increases, warned on profits and announced thousands of job cuts.

Iain Conn received a total pay package worth £2.4m last year, up from £1.7m in 2017, according to Centrica’s annual report. His 2018 packet was bolstered by two bonuses, each worth £388,000.  ( The Guardian )

Yet on the other side of the ledger we see things like this. From The Guardian.

Waterstones staff told how they have had to back on food in order to afford rent as they travelled across the country to deliver a 9,300-signature petition to the chain’s London headquarters, calling for the introduction of a living wage.

Mind you we seem to be making progress in one area at least.

Golden goodbyes for public sector workers will be capped at £95,000 in a clamp down on excessive exit payments, the government has confirmed. ( City-AM)

Although I note that it is something planned rather than already done, so the modern-day version of Sir Humphrey Appleby will be doing his or her best to thwart this. Here is his description of the 7 point plan to deal with such matters.

This strategy has never failed us yet. Since our colleagues in the Treasury have already persuaded the Chancellor to spin the process out until 2008, we can be sure that, by then, there will be a new chancellor, a new prime minister and, quite possibly, a new government. At that point, the whole squalid business can be swept under the carpet. Until next time.

As for payoffs it is the ones for those at the top who are quite often switching jobs which need to stop as often it is merely a name change of their employer.

Today’s GDP data

This was good in the circumstances.

Monthly GDP growth was 0.2% in February 2019, after contracting by 0.3% in December 2018 and growing by 0.5% in January 2019. January growths for production, manufacturing, and construction have all been upwardly revised due to late survey returns.

As you can see December was revised up as was January although not enough in January to raise it by 0.1%. But it is an erratic series so let us step back for some perspective.

UK gross domestic product (GDP) grew by 0.3% in the three months to February 2019

Whilst we do not yet have the March data regular readers may recall that the first quarter in the UK ( and in the US at times) can be weak so this is better than it may first appear.

As ever services were in the van as we continue to rebalance in exactly the opposite direction to that proclaimed by the former Bank of England Governor Baron King of Lothbury.

The services sector was the largest contributor to rolling three-month growth, expanding by 0.4% in the three months to February 2019. The production sector had a small positive contribution, growing by 0.2%. However, the construction sector contracted by 0.6%, resulting in a small negative contribution to GDP growth.

Inside its structure this has been in the van.

The largest contributor to growth was computer programming, which has performed strongly in recent months.

Production

Thanks to the business live section of the Guardian for reproducing this from my twitter feed.

One possible hint is that production numbers for Italy and France earlier have been strongish, will the UK be the same?

It turned out that this was so.

Production output rose by 0.6% between January 2019 and February 2019; the manufacturing sector provided the largest upward contribution, rising by 0.9%, its second consecutive monthly rise……In February 2019, the monthly increase in manufacturing output was due to rises in 11 of the 13 subsectors and follows a 1.1% rise in January 2019; the largest upward contribution came from basic metals, which rose by 1.6%.

In the detail was something I noted earlier as pharmaceutical production was up by 2.5% in the last 3 months which put it 4.3% higher than a year ago in spite of a 0.1% fall in February.

But whilst this was a welcome development for February the overall picture has not been of cheer in the credit crunch era.

Production and manufacturing output have risen since then but remain 6.1% and 1.9% lower respectively for the three months to February 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Things have been singing along with The Beatles since late 2012.

I have to admit it’s getting better (Better)
It’s getting better

but overall we are left mulling the John Lennon counter at the end of this line.

A little better all the time (It can’t get no worse)

Comment

This morning’s numbers were strong in the circumstances and confirm again my theme that we are growing at around 0.3/4% per quarter. Yet again the prediction in the Sunday Times that there would be no growth turned out to be a reliable reverse indicator. Of course there are fears for March after the Markit PMI business survey so as ever we await more detail.

As to stockpiling this has become an awkward beast because I see it being put as the reason for the growth, although if so why did those claiming this not predict it. Anyway I have done a small online survey of what people have been stockpiling.

Okay inspired by and her stockpiling of Scottish water we have from paracetamol for her dad for scare stories and dog has been burying treats

Meanwhile one area which has been troubled for many years continues to rumble on.

The total trade deficit (goods and services) widened £5.5 billion in the three months to February 2019, as the trade in goods deficit widened £6.5 billion, partially offset by a £0.9 billion widening of the trade in services surplus.

Perhaps there was some stockpiling going on there although as any departure from the European Union seems to be at Northern Rail speed those stockpiling may now be wondering why they did it?

 

 

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How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

Podcast

 

 

 

 

 

Italy looks set for another economic recession sadly

A feature of the last year or so has been something of an economic car crash unfolding in Italy and we have received two further perspectives on that subject this morning. Sadly neither is an April Fool although in these times they have become ever harder to spot. According to Markit times not only remain hard but have deteriorated in the manufacturing sector.

Manufacturing business conditions in Italy continued
to worsen in March as a sharp reduction in new orders
led to a further decline in output. Production fell for the
eighth consecutive month, whilst new orders contracted
at the fastest rate in nearly six years. Meanwhile, business
confidence dipped slightly from February, but was
nonetheless positive.

The reported fall in new orders was led from abroad.

Additionally, new business from abroad fell in March
at a rate just shy of December 2018’s near six-and-a-half year record.

This meant that the reading was as follows.

At 47.4, the reading was down from 47.7 in February
and signalled the sharpest monthly decline in the health of
the sector since May 2013.

Also the optimism reported frankly seems at odds with reality.

Optimism regarding the year ahead outlook for output was
sustained in March, but concerns over further contractions
in customer demand and a continuation of negative market
trends meant sentiment weakened from February.

Markit itself does not seem to hold out much hope for a quick rebound.

All in all, Italian manufacturing output looks set to decline
further in Q2, especially when looking at slowdowns in key
sources of external demand in neighbouring European
markets.

Employment

The situation here posed a question too this morning.

In February 2019, the number of employed people moderately declined compared with January (-0.1%,
-14 thousand); the employment rate decreased to 58.6% (-0.1 percentage points). The fall of employment
involved mainly people aged 35-49 years (-74 thousand), while people aged over 50 continued to go up
(+51 thousand).

There is an interesting age shift in the pattern which we are seeing across a wide range of countries. There are two main drivers here which are interrelated. The first is the demographic of an ageing population. The second is the rises in official retirement ages and in Italy perhaps the ongoing economic troubles leading to actual retirements being postponed.

If the manufacturing PMI is any guide the employment falls continued in March too.

As a result of the setbacks in output and new work,
employment in Italy’s manufacturing sector declined in
March.

Also as IPE pointed out last September that the retirement situation in Italy is typically complex.

By comparison, the statutory retirement age in 2019 will be 67. This keeps rising, as planned by law, to keep up with demographic projections. In reality, however, people on average retire at about the age of 62. This is the result of the complicated legislative framework, which effectively means every worker’s personal circumstances can contribute to bringing his retirement age forward.

Also the current government has plans to reduce the official retirement age.

Returning to the employment data we see that the situation is turning as previously there had been rises.

Employment rose by 0.5% (+113 thousand) compared with February 2018. The increase concerned men
and women, involving people aged 25-34 years (+21 thousand) and over 50 (+316 thousand).

Unemployment

There was something of a double whammy in the labour market in February.

In February, the number of unemployed persons rose by 1.2% (+34 thousand); the increase involved men
and women and persons aged over 35. The unemployment rate grow up to 10.7% (+0.1 percentage
points), while the youth rate slight decreased to 32.8% (-0.1 percentage points).

So both unemployment and the unemployment rate rose. There is also something of a swerve familiar to regular readers of my work which is that the unemployment rate in January was reported originally at 10.5%. However it is now reported as being up 0.1% at 10.7%. So the impression is given that it is 0.1% up when in fact it was worse in January and is now worse than that or if you like the rise is 0.2% against the original. The fall in youth unemployment is much more welcome but it is hard not to have a concern about the way that it is still 32.8%. In fact there are two concerns to my mind. Firstly that it too may start to rise as prospects weaken and secondly along the signs of the song from Ace.

How long has this been going on?
How long has this been going on?

There must be more than a few in the youth unemployment numbers who have been unemployed for years and must feel like giving up.

Over the past year the decline in unemployment now looks rather marginal.

On a yearly basis, the growth of employment was accompanied by the fall of unemployed persons (-1.4%,
-39 thousand) and inactive people aged 15-64 (-1.3%, -169 thousand).

Actually I can go further as the three-month average looked like it was heading to 10% and did make 10.25% if I stare hard at the chart. But the reality was that the response to the relative boom was already over and the unemployment rate was turning and then rising.

Two lost decades?

A research paper from Italy’s statisticians suggest two linked and thereby troubling trends especially for the south.

 Both qualifications of the latter manual type show, in the twenty years, a considerable increase in the stock of employees that exceeds the growth of the
employed people who carry out work with higher qualifications. Also on the positive side of the variations, there are clear territorial differences that have a
different impact on the employment balance for Italy and for the South, where the contribution to the medium-high and high qualification employment is less than one third of
the contribution given by this work to the employment of the Country.

This is a version of my “Good Italy: Bad Italy” theme where the south in particular has seen quite a deterioration in the quality of employment and in particular skilled manual work has been replaced by non-skilled.

Official economic surveys

As you can see these bring maybe a little hope as they give opposite results.

In March 2019, the consumer confidence index decreased from 112.4 to 111.2. All of its components worsened: the economic, the personal, the current and the future one (from 126.4 to 123.9, from 108.2 to 106.8, from 109.4 to 107.8 and from 116.9 to 115.9, respectively).

With regard to the business surveys, the business confidence index (IESI, Istat Economic Sentiment Indicator) bettered from 98.2 to 99.2.

The business sentiment gain came mostly from the services sector.

Comment

There was a time around six months ago that the Italian government was talking about economic growth of 2% and in some extreme cases 3% where yesterday we were told this. From Reuters.

 Italy can’t afford fiscal expansion at a time when its economic growth is heading to close to zero, Treasury Minister Giovanni Tria said on Sunday.

Tria said Italy was in a phase of economic slowdown and could not consider introducing restrictive measures. He was speaking at a conference in Florence, and his remarks were carried on Italian radio stations.

“Certainly we don’t have the room for expansionary measures,” he then added.

Actually the official data has shown it to have been at zero in the year to the last quarter of 2018 and we now fear that it is contracting.. Any decline this quarter will put Italy into yet another recession and the number-crunching is not favourable.

The carry-over annual GDP rate of change for 2019 is equal to -0.1%.

Meanwhile over to the banks National Resolution Fund and its 2018 accounts.

The main results of the annual accounts for the year ended 31 December 2018 are as follows:

  • Assets € 429,869,033;
  • Liabilities € 972,900,609;
  • Endowment fund (excluding the result for the year) € (484,918,684);
  • Net result for the period € (58,112,892);
  • Endowment fund at 31 December 2018 € (543,031,576).

The negative net result for the period is largely attributable to:

  • Interest expense € (31.4 million);
  • Allocations to the provisions for risks € (26.5 million).

How does a negative endowment fund work?

 

 

 

 

 

 

UK GDP growth was strong in January meaning we continue to rebalance towards services

This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.

Very early there was an “I agree with Mark (Carney)” as I note this.

see for example speeches by (Carney, 2019) and (Vlieghe, 2019)

The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.

First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.

The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?

To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.

Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.

Raghuram Rajan

There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.

“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.

The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.

The UK economy

The opening piece of official data today was very strong.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.

Production data has been in the news as it has internationally slowed so let us dip into that report as well.

Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.

We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.

Some Perspective

This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.

Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.

This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.

Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.

This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.

Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.

Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.

Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic  after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.

Returning to the production data this was sadly no surprise.

Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.

Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.

 was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.

Comment

We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.

If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.

The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.

Although we got a clue to a major issue here as we note this too.

Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.

So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.

In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.

Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.

 

 

The Bank of England reads the Guardian as it looks for economic clues

Yesterday brought something of a confession about the forecasting problems of the Bank of England.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth. ( Bank Underground).

As you can see there is a clearly implied view that they new help in predicting GDP growth. Curious though that they go to newspapers which are not only in decline in circulation terms but are under the “Fake News” cloud. Mind you they may well be more reliable than the Spotify playlists so beloved of Chief Economist Andy Haldane.

It is hard not to have a wry smile at the newspaper of choice here.

To find out, we used text from the daily newspaper The Guardian.

At this point the Financial Times otherwise known as the Bank of England’s house journal is likely to be somewhat miffed, although its brighter journalists will no doubt be aware of its own very poor forecasting record. Anyway Bank Underground found a nice reason to exclude it.

We chose this paper on account of it being free and easy to download;

Does the Bank of England have a poor internet connection? As to whether all of this works well they think it does.

First, their importance in forecasting current economic activity is comparable to a range of high-profile indicators, including the Index of Services, retail sales, equity prices and other confidence indicators, which are typically regarded as leading the economic cycle.

The catch is that they are comparing to this.

 the relevance of NI2 is over half the size of the IHS Markit/CIPS PMI indicator, which has come to be considered the single best survey_based predictor of current economic activity followed by many central banks and market participants.

For all their hype we know that the PMIs are not as reliable as we once thought or hoped as we mull whether the Bank of England has “amnesia” over the August 2016 PMI surveys which led to its Sledgehammer QE and Bank Rate cut as well as panicky promises of more of the same. Only for it to have a red face as it discovered it’s compass was upside down.

Upside down
Boy, you turn me
Inside out
And round and round
Upside down
Boy, you turn me
Inside out
And round and round ( Diana Ross)

Of course they could look at the money supply data which we are about to do. It has worked pretty well and it cannot be hard for them to do as they produce it themselves. It is really rather odd that they do not.

UK Money Supply

If we stay with forecasting as a theme it is really rather odd that the Bank of England abandoned the M0 money supply measure back in 2006. If it had kept it then its Chief Economist Andy Haldane may not have needed to be such a nosey parker about what everyone else is listening too on Spotify. Also for such a Europhile organisation it is rather extraordinary that today’s Money and Credit report does not include an M1 measure. After all that has proved to be an excellent economic leading indicator for the Euro area as we looked at only on Wednesday.

What we are left with is the broad money series or M4 which is very erratic on a monthly basis.

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

Not good but that follows a £12,5 billion expansion in December which was out of line the other way. If we move to the rolling three-month average it at 2.4% is better than it was at the end of last year but continues to only suggest weak economic growth.

If we switch to lending that looks stronger and January was a good month for business lending.

The increase is bank lending to businesses was driven by lending to large businesses. This increased £4.3 billion in January, significantly above the recent levels, driven by M&A activity. Bank lending to small and medium-sized enterprises (SMEs) increased by £0.2 billion in January.

It is nice for once to see SME lending rising and if we switch to the detail around a third was for manufacturing. If we look for some perspective then the annual rate of growth for total business lending has risen to 4.2% which may be hopeful although I consider lending to be more of a lagging than a leading indicator.

Unsecured Credit

This has been on something of a tear such that the Bank of England has been able to call circa 7% annual growth rates an improvement. However there was something of a turn the other way in January.

The extra amount borrowed by consumers to buy goods and services increased to £1.1 billion in January , slightly above the £0.9 billion monthly average since July 2018, but below the £1.5 billion average between January 2016 and June 2018. Within this, credit card lending picked up after a weak December and other loans and advances increased slightly on the month.

So the Bank of England is still able to report an improvement as we note the monthly rise.

Annual consumer credit growth continued to slow, reaching 6.5% in January. The monthly flow of consumer credit was marginally higher in January than the recent average.

But even at 6.5% it is far higher than anything else in the UK economy at around double the increase in wages and quadruple the rate of economic growth.

Manufacturing PMI

There is a link between the data above and this as we see this in the report.

Efforts to stockpile inputs were aided by a solid expansion of purchasing activity at UK manufacturers. This was also felt at suppliers, where the increased demand for raw materials led to a further marked lengthening in average lead times (albeit the least marked since January 2017).

So we see that manufacturers have borrowed to build up stocks which seems sensible to me. This meant that overall we did well.

The headline seasonally adjusted IHS Markit/CIPS
Purchasing Managers’ Index® (PMI®) fell to a four-month low of 52.0 in February,

The reason why I think that is good is because if we look at the Euro area for example it had a minor contraction at 49.3 with Germany at 47.6 pulling it lower. Anyway for a different perspective here is how fastFT has covered this.

UK manufacturing outlook dimmest on record, key survey shows

I fear for what they must make of Germany don’t you?

Comment

There is a lot to consider here but let us start with the economic outlook which looks steady as she goes from the monetary data set. Not much growth but some as we bumble along. On a conceptual level this poses a deep question for the Bank of England which has interfered in so many markets yet claims that economic growth now has a “speed limit” of 1.5% conveniently ignoring its own role in this. Also why did it end the narrow money supply data which works well as a leading indicator?

Much may happen at the end of this month as we wait to see what and indeed if any form of Brexit starts at the end of it. But we continue to borrow heavily on an unsecured basis and even with the better number in January be far less enthusiastic about small business borrowing. Just as a reminder the Funding for Lending Scheme of the Bank of England was supposed to provide exactly the opposite result.

 

Oh Italia!

Sometimes events just seem to gather their own momentum in the way that a rolling stone gathers moss so let me take you straight to the Italian Prime Minister this morning.

Italy Dep PM Di Maio: Low Growth Views `Theater Of The Absurd’: Messaggero ( @LiveSquawk )

I have to confess that after the way that the Italian economy has struggled for the last couple of decades this brought the Doobie Brothers to mind.

What a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
And nothing at all

Then the Italian statistics office produced something of a tour de force.

In December 2018 the seasonally adjusted industrial production index decreased by 0.8% compared with
the previous month. The percentage change of the average of the last three months with respect to the
previous three months was -1.1.

As you can see these numbers are in fact worse than being just weak as they show a monthly and a quarterly fall. But they are in fact much better than the next one which is really rather shocking.

The calendar adjusted industrial production index decreased by 5.5% compared with December 2017
(calendar working days being 19 versus 18 days in December 2017); for the whole year 2018 the
percentage change was +0.8 compared with 2017.
The unadjusted industrial production index decreased by 2.5% compared with December 2017.

Just for clarity output was 2.5% lower but as there was an extra working day this year then on a like for like basis it was some 5.5% lower. I would say that was a depressionary type number except of course Italy has been in a long-standing depression.

Digging deeper into the numbers we see that on a seasonally adjusted basis there was a rally in industrial production as the 100 of 2015 nearly made 110 in November 2017, but now it has fallen back to 103.9. But even that pales compared to the calendar adjusted index which is now at 93.3. So whilst the different indices can cause some confusion the overall picture is clear. We do not get a lot of detail on manufacturing except that on a seasonally adjusted basis output was 5.5% lower in December than a year ago.

The drop is such that we could see a downwards revision to the Italian GDP data for the fourth quarter of last year which was -0.2% as it is. Actually the annual number at 0.1% looks vulnerable and might make more impact if the annual rate of growth falls back to 0%. Production in a modern economy does not have the impact it once did and Italy’s statisticians were expecting a fall but not one on this scale.

Monthly Economic Report

After the above we advance on this with trepidation.

World economic deceleration has spilled over into Q4, particularly in the industrial sector, which has
experienced a broad-based loss of momentum in many economies and a further slowing in global trade growth.
In November, according to CPB data the merchandise World trade in volume decreased 1.6%.

So it is everyone else’s fault in a familiar refrain, what is Italian for Johnny Foreigner? This is rather amusingly immediately contradicted by the data.

In Italy, real GDP fell by 0.2% in Q4 2018, following a 0.1% drop in the previous quarter. The negative result is
mainly attributable to domestic demand while the contribution of net export was positive.

So in fact it was the domestic economy causing the slow down. This thought is added to by the trade data where the fall in exports is dwarfed by the fall in imports at least in November as we only have partial data for December.

As for foreign trade, in November 2018 seasonally-adjusted data, compared to October 2018, decreased both
for exports (-0.4%) and for imports (-2.2%). Exports drop for EU countries (-1.3%) and rose for non EU
countries (+0.6%). However, according to preliminary estimates in December also exports to non-EU
countries decreased by 5.0%.

Now let me give an example of how economics can be the dismal science. Because whilst in isolation the numbers below are welcome with falling output they suggest falling productivity.

In the same month, the labour market, employment stabilized and the unemployment rate decreased only
marginally.

The future looks none too bright either,

In January 2019, the consumer confidence improved while the composite business climate
indicator decreased further. The leading indicator experienced a sharp fall suggesting a
worsening of the Italian cyclical position in the coming months.

Indeed and thank you for @liukzilla for pointing this out the Italian version does hint at some possible downgrades, Via Google Translate.

The data of industrial production amplify the tendency to reduce the rhythms of
activity started in the first few months of 2018 (-1.1% the economic variation in T4).

Also a none too bright future.

Data on industry orders also showed a negative trend, with a decrease for both markets in the September-November quarter (-1.3% and -1.0% respectively on the market).
internal and foreign).

The Consumer

Yesterday’s data provided no cheer either.

In December 2018, both value and volume of retail trade contracted by 0.7% when compared with the previous month. Year-on-year growth rate fell by 0.6% in value terms, while the quantity sold decreased by 0.5%.

Although on a quarterly basis there was a little bit assuming you think the numbers are that accurate,

In the three months to December (Quarter 4), the value of retail trade rose by 0.1%, showing a slowdown
to growth in comparison with the previous quarter (+0.4%), while the volume remained unchanged at
+0.3%.

Actually there was never much of a recovery here as the index only briefing rose to 102 if we take 2015 as 100 and now is at 101.5 according to the chart provided. Odd because you might reasonably have expected all the monetary stimulus to have impacted on consumer spending.

Population

This is now declining in spite of a fair bit of immigration.

On 1 st January 2019, the population was estimated to be 60,391,000 and the decrease on the previous year was
around 90,000 units (-1.5 per thousand)………The net international migration amounted to +190 thousand, recording a slight increase on the previous year (+188
thousand). Both immigration (349 thousand) and emigration (160 thousand) increased (+1.7% and +3.1%
respecitvely).

Bond Markets

I have pointed out many times that Italian bond yields have risen for Italy in both absolute and relative terms. Let me present another perspective on this from the thirty-year bond it issued earlier this week.

Today Italy issued 8bln 30yr BTPs. Had it issued the same bond last April, it would have received around 1.3 bilion more cash from the market. ( @gusbaratta ).

Comment

This is quite a mess in a lovely country. Also the ironies abound as for example expanding fiscal policy into an economic decline was only recently rejected by the Euro area authorities. They also have just ended some of the monetary stimulus by ending monthly QE at what appears to be exactly the wrong time. So whilst the Italian government deserves some criticism so do the Euro area authorities. For example if the ECB has the powers it claims why is it not using them?

Of course I don’t want to speculate about what contingency would call for a specific instrument but if you look at the number of instruments we have in place now, we can conclude that it’s not true that the ECB has run out of fuel or has run out of instruments. We have all our toolbox still available. ( Mario Draghi )

But just when you might have thought it cannot get any worse it has.

Me on The Investing Channel

UK production falls but GDP is doing relatively well

Today brings us the latest official data on the UK economy as the monthly GDP number for November is announced. It comes from a weak international backdrop as we have been observing as Germany and France have already released weak numbers for that time period.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis ( Germany). In November 2018, output slipped back sharply in the manufacturing industry (−1.4% after +1.4% in October) as well as in the
whole industry (−1.3% after +1.3%)….Manufacturing output went down over the last three months (−1.0%), as well as in the whole industry (−0.9%).  ( France )

Just to add to the party this has just been released.

Italian Industrial Production (M/M) Nov: -1.60% (est -0.30% ; prev -0.10%) Italian Industrial Production WDA (Y/Y) Nov: -2.60% (est 0.40% ; prev 1.00%) (@LiveSquawk )

So the background is rather grim as the pattern for 2018 had been for a nudge higher in industrial production which is now replaced by a 2.6% year on year fall. Even a country which has been doing well like Spain has also reported a 1.5% monthly fall.

UK Production

In the circumstances described above the first response to the UK data was one of relief.

In November 2018, total production output fell by 0.4%, compared with October 2018, due to a fall of 0.3% in manufacturing, supported by falls of 1.1% electricity and gas and 1.3% in mining and quarrying. The monthly decrease in manufacturing output of 0.3% was due to 8 of the 13 sub-sectors falling; the largest downward contribution came from basic metals and metal products, falling by 3.6%.

Obviously one does not welcome falls but in relative terms those were good numbers. I have no idea how the consensus forecast was for a rise as you would need to be locked in a dark internet free cellar to think that in my opinion. However if we look for some perspective we have not escaped the global trend in this area.

In the three months to November 2018, total production output decreased by 0.9% compared with the same three months to November 2017; this is the weakest growth in total production output since November 2012 and the first time since October 2012 there has been widespread weakness across all four sectors.

If we go back to yesterday these numbers take us back to a period when the UK establishment changed tack in terms of economic policy. For example the Bank of England produced some credit easing via the Term Funding Scheme which reduced mortgage rates quite quickly by 1% and the government loosened the fiscal purse strings. Yet we are supposed to believe that the Bank of England currently plans to increase interest-rates.

If we look for causes one has become rather familiar and seems set to stay for a bit.

Providing the largest downward contribution was transport equipment, which fell by 1.1% due to a fall of 2.4% in motor vehicles, trailers and semi-trailers. The weakness was driven by the impact of shutdowns within this industry in October 2018 in addition to reduced production in November 2018.

Another factor has been the mild winter which has reduced electricity and gas output. In many ways this is a good thing as lower demand means that restrictions are unlikely but it reduces the output numbers. This also is something which has continued up until now.

There remains a chilling kicker to all of this, however. If this is another cyclical downturn then it will be from a level well below the previous peak or we are in the lost decade zone.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

UK GDP

The headline was good.

Monthly gross domestic product (GDP) growth was 0.2% in November 2018, following flat growth in September 2018 and growth of 0.1% in October 2018.

Actually I doubt anyone really believes that UK economic growth has been picking up over this period as we get a real life demonstration of why the numbers are a bad idea. They are simply too erratic. If we look deeper we get a better idea of the trajectory from this.

UK gross domestic product (GDP) grew by 0.3% in the three months to November 2018.

This gives us two themes of which the first is that in international terms with many of the main European economies flirting with recession that is a good performance. It is also true that we have not escaped the chill winds as growth has slowed since the summer. I spotted an interesting perspective the other day which suggested that the boom in areas like cars had the UK at a relative disadvantage to places like Germany and we may now be in a phase where the UK is stronger but that remains to be seen.

As so often the growth mostly came from the services sector.

The services sector rolling three-month growth to November 2018 was 0.3%. Professional and scientific activities was the largest contributor, with a contribution of 0.14 percentage points to gross domestic product (GDP) growth. Other notable contributors were information and communication, and human health activities.

Tucked away in there may be another good effort by the UK film industry so whilst “luvvies” may be annoying please be nice to them as they have been playing a blinder in economic terms recently.

Construction

There was also some good news from this sector.

Construction output recorded an all-time level high in November 2018 in the chained volume measure seasonally adjusted series; the month-on-month series grew by 0.6%, resulting in the total value of construction output exceeding £14 billion for the first time since monthly records began in 2010.

So it is now in line with my Nine Elms crane count which is now 40. But this series has been unreliable after problems with the deflator and the switching of companies between it and services. So make of it what you will.

Trade

The problem with these so-called theme days for UK statistics is that we get too much information and some bits like the trade figures get ignored. Of course that may be the plan as they continue to be in deficit!

The total trade deficit (goods and services) narrowed £0.2 billion to £7.9 billion in the three months to November 2018 as both goods and services exports each increased £0.1 billion more than their respective imports.

There is something else troubling about the data which emphasises my theme that we know much less than we should about services trade.

The total UK trade deficit (goods and services) widened £4.1 billion to £28.6 billion in the 12 months to November 2018. The widening of the trade deficit was due mainly to a £4.4 billion narrowing in the trade in services surplus; the goods deficit narrowed by a lesser £0.3 billion.

We were told that our trade position in services had improved but that has then been more quietly revised away. For newer readers I made the point to the Sir Charlie Bean review of economic statistics that our data in this area was woeful. But nothing seems to have changed.

Comment

We find ourselves at something off a turning point but not the one that the media and chattering classes have obsessed about. In terms of today’s data Brexit is still in the distance but the world economic slow down is happening and seems set to impact more over the winter and into the spring. We should be grateful I think that we have retained at least some economic growth momentum as others look like they have lost it but these sort of slow downs tend to sing along with Muse.

Into the supermassive
Supermassive black hole
Supermassive black hole
Supermassive black hole
Supermassive black hole

So let us cross our fingers.

Andy Murray

Sad news about his injuries today so let me wish him well for the future as he has been a great champion and it may be a very long time before we see his like again.

Podcast

This week provides some answers to questions I have been asked.