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.

 

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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.

 

 

As UK house price growth fades so has the economy

Today has opened with news that is in tune with my expectations for 2017. This is my view that house price growth will slow and that it may also go negative. Such an event would make a change in the UK’s inflation dynamics as that would mean that official consumer inflation would exceed asset or house price inflation and of course would send a chill down the spine of the Bank of England. Here is the Royal Institute of Chartered Surveyors.

The headline price growth gauge slipped from +7% to +1% (suggesting prices were unchanged over the period), representing the softest reading since early 2013.

The date will echo around the walls of the Bank of England as its house price push or Funding for Lending Scheme began in the summer of 2013. Also the immediate prospects look none too bright.

Looking ahead, near term price expectations continue to signal a flat trend over the coming three months at the headline level……..Going forward, respondents are not anticipating activity in the sales market to gain impetus at this point in time, with both three and twelve month expectations series virtually flat.

Actually flat lining on a national scale conceals that there are quite a few regional changes going on.

house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West. By way of contrast, prices continue to fall in London…….. the price balance for the South East of England fell further into negative territory, posting the weakest reading for this part of the country since 2011.

We see that price falls are spreading out from our leading indicator of London and wait to see how they ripple out. Northern Ireland is no doubt being influenced by the house price rises south of the border. A cautionary note is that this survey tends to be weighted towards higher house prices and hence London.

The Real Economy

Let us open with the good news which has come from this morning’s production figures.

In June 2017, total production was estimated to have increased by 0.5% compared with May 2017, due mainly to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production.

It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers! Of the 0.52% increase some 0.51% was due to it and as well as the impact of a lighter maintenance cycle there was some hopeful news.

In addition, use of the re-developed Schiehallion oil field and use of the new Kraken oil field are contributing to the increase in oil production. Both are expected to increase UK Continental Shelf (UKCS) production over the longer-term.

If we move to manufacturing then the position was flat as a pancake.

Manufacturing monthly growth was flat in June 2017.

However this concealed quite a shift in the detail as we already knew that there has been a slow down in car and vehicle production.

Transport equipment provided the largest downward contribution, falling by 3.6% due mainly to a 6.7% fall in the manufacture of motor vehicles, trailers and semi-trailers.

This was mostly offset by increases in the chemical products and pharmaceutical sectors with some seeing quite a boom.

Chemical products provided the largest upward pressure, rising by 6.9% due mainly to an increase of 31.2% within industrial gases, inorganics and fertilisers.

If step back we see that over the past year there has been some growth but frankly not much.

Total production output for June 2017 compared with June 2016 increased by 0.3%, with manufacturing providing the largest upward contribution, increasing by 0.6%

There is an irony here as a good thing suddenly gets presented as a bad one and of course as ever the weather gets some blame.

energy supply partially offset the increase in total production, decreasing by 4.6% due largely to warmer temperatures.

If we look at other data sources we can say this does not really fit with the Markit PMI business surveys which have shown more manufacturing growth. It may be that they have been sent offside by the fact that the slowing has mostly been in one sector ( vehicles). If the CBI is any guide then the main summer months should be stronger.

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

The overall perspective is that the picture of something of a lost decade has been in play.

Since then, both production and manufacturing output have risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (January to March) 2008, by 7.8% and 4.4% respectively in the 3 months to June 2017.

Trade

One of the apparent certainties of life is that the UK will post an overall trade deficit and the beat remains the same.

Between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, the total trade deficit (goods and services) widened by £0.1 billion to £8.9 billion as increases in imports were closely matched by increases in exports.

So essentially the same as there is no way those numbers are accurate to £100 million. Even the UK establishment implicitly accept this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

If the problems were minor this would not be ongoing more than 2 years later would it? But if we go with what we have we see that as we stand the lower level for the UK Pound post the EU Leave vote has not made any significant impact.

In comparison with Quarter 1 and Quarter 2 of 2016, the total trade deficit over Quarter 1 and 2 of 2017 has been relatively stable.

This gets more fascinating when we note that prices and indeed inflation have certainly been on the move.

Sterling was 8.7% lower than a year ago, with UK goods export and import prices rising by 8.2% and 7.8% respectively over the period Quarter 2 2016 to Quarter 2 2017.

Construction

This is sadly yet another area where the numbers are “not a National Statistic” and I have written before that I lack confidence in them but for what it is worth they were disappointing.

Construction output fell both month-on-month and 3 month on 3 month, by 0.1% and 1.3% respectively.

This differs from the Markit PMI business survey which has shown growth.

Comment

We are finding that the summer of 2017 is rather a thin period for the UK economy. I do not mean the weaker trajectory for house prices because I feel that it is much more an example of inflation rather than the official view that it is economic growth. Yes existing owners do gain ( but mostly only if they sell) but first time buyers and those “trading up” lose.

Meanwhile our production sector is not far off static. So far the hoped for gains from a lower exchange rate have not arrived as we mull again J-Curve economics. Looking forwards there is some hope from the CBI survey for manufacturing in particular and maybe one day we can get it back to previous peaks. But we find ourselves yet again looking to a sector which appears to be on an inexorable march in terms of importance for the services sector dominates everything now and for the foreseeable future.

Meanwhile there is plainly trouble at the UK Office for National Statistics as the rhetoric of data campuses meets a reality of two of today’s main data sets considered to be sub standard.

Me on Core Finance TV

http://www.corelondon.tv/bank-england-mpc-confusion/

http://www.corelondon.tv/bitcoin-will-5000-next-level/

http://www.corelondon.tv/ecb-hardcore-operators-inflation-targets/

 

 

 

 

 

Remember rebalancing? Is UK manufacturing really picking- up as housing cools?

Today has opened with a reminder of both  a major economic issue of 2017 for the UK and the theme that the UK is an inflation nation. From the BBC.

British Gas will increase electricity prices by 12.5% from 15 September, its owner Centrica has said, in a move that will affect 3.1 million customers.

However, the company’s gas prices will be held at their current level.

The average annual dual-fuel bill for a typical household on a standard tariff will rise by £76 to £1,120, up by 7.3%.

Unless you live in an all electric property it is the last number I guess which is the most relevant. However the reason is not what you might think according to Centrica.

Centrica chief executive Iain Conn told the BBC’s Today programme that wholesale costs had gone down and were not the reason for the price rise.

“We have seen our wholesale costs fall by about £36 on the typical bill since the beginning of 2014 and that is not the driver”

A fascinating viewpoint and he rammed home what were the real causes.

It is transmission and distribution of electricity to the home and government policy costs that are driving our price increase

We are back to the UK being an inflation nation theme as whilst out political class regularly promise energy cost price caps and the like they then sign us all up to policies often but not always green based which will cost us all more money as time passes. The headline feature in this regard was the promise of £92.50 per megawatt hour to EDF for electricity from the proposed Hinkley Point nuclear power station or around double current prices.

Perhaps that is why the Bank of England targets an inflation rate of 2% per annum and claims that is sound money as in fact there is a steady drip feed away from us. These days the impact of even such a rate of inflation is larger due to the weak level of wage rises.

Inflation trends

The good news on this front has been the rally in the UK Pound £ versus the US Dollar which passed US $1.32 yesterday. Of course the US Dollar is weak overall but the price we pay for commodities will be helped by this. Less hopeful has been the rise in the  price of a barrel of Brent Crude Oil has risen above US $52 per barrel. Some other commodity prices have been rising too as the Reserve Bank of Australia reported earlier.

Using spot prices for the bulk commodities, the index increased by 7.4 per cent in July in SDR terms and remains 21.9 per cent higher over the past year.

These things are of course very volatile with The Australian reporting this earlier.

According to Platts’ The Steel Index, benchmark 62 per cent iron ore at Chinese ports rose $US4.10, or 6 per cent, to $US73.10 last night, the highest since early April and up from lows of $US53 hit in mid June.

So there are inflationary pressures around for the rest of this year.

Inflation measurement

This was released yesterday by the UK Office for Statistics Regulation ( OSR ).

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistic.

I gave evidence to the OSR suggesting that they should not do so. In my opinion they have not demonstrated that they can estimate imputed rents and prices accurately. The situation below is apparently just fine.

 I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS…………. ONS’s lack of assurance over these data in 2014 played a significant role in our decision to remove National Statistics status.

How can you reassure about data you do not know? Anyway the result was no surprise however  the ONS ( Office for National Statistics) will be damaged but what has been a tin eared propaganda campaign in favour of CPIH and I fear the OSR has shown that it looks and sounds good but in reality simply rubber stamps the establishment viewpoint. Even past fans and supporters  of CPIH such as the economics editor of the Financial Time Chris Giles seem to lack any real enthusiasm for it.

House prices

We got an estimate of what has been going on with Nationwide customers today.

The annual pace of house price growth remained broadly stable in July at 2.9%, only a touch lower than the 3.1% recorded in June.

There is an irony here as the effort to exclude house price rises from the inflation data applies just as it is pretty much the same as the official inflation measure. Also the market is looking rather becalmed.

Survey data point to relatively sluggish levels of new buyer enquiries, but at the same time surveyors report that relatively few properties are coming onto the market

UK Manufacturing

The news this morning was good on this front.

The rate of improvement in UK manufacturing operating conditions accelerated for the first time in three months at the start of the third quarter.

A factor in this was very welcome.

foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010. Companies reported improved inflows of new work from clients in North America, Europe, the AsiaPacific region and the Middle-East.

Are we finally seeing that bit of economic theory called the J-Curve applying after the fall in the value of the UK Pound? Perhaps we got that as well as a benefit from the recent higher Pound.

Cost pressures eased in July

This would be rare for the UK as movements in the currency invariably seem bad! Just to be clear these are movements over different periods of time where prices respond more quickly than business. Also there was a further improvement in the UK employment situation.

The ongoing upturns in output and new orders encouraged further job creation in July. Staffing levels rose for the twelfth straight month. The pace of expansion was among the best registered over the past three years.

Comment

Let us briefly bask in the glow of a UK manufacturing renaissance especially if we add in the CBI report of a week or two ago. We have even managed to nudge above the economic boom in France as our PMI ( Purchasing Manager’s Index) reading at 55.1 was slightly above its 54.9. Meanwhile house price growth has notably faded. Much more of this and the “rebalancing” of former Bank of England Governor Mervyn King will be on the menu again or if we add a dose of reality for the first time. Also 0.2 on this measure is simply spurious accuracy. Indeed if you note this piece of research from them the margins are much wider.

In fact, periods of sustained downturns, the extent to which takes the annual rate of growth of manufacturing output into negative territory, have only ever been recorded when the PMI surveys output index has fallen below 52.6 for more than one month.

So is 50 the threshold for growth or 52.6? Also there is the issue that on this measure the UK had manufacturing growth in the second quarter as opposed to this.

The latest ONS data meanwhile estimated that manufacturing output fell 0.5% in the second quarter.

So we are either booming or contracting? That makes the “on the one hand….on the other hand” of economists seem accurate! Here is the conclusion of the Markit analysis.

The relationship between the PMI and ONS data therefore suggest that the current weakness in the ONS data is merely another temporary downturn and that a resumption to growth will be seen in the third quarter, providing PMI data remain above 52.6 in August and September.

Let’s be upbeat and hope for that although the real message here is that all the numbers are unreliable. Indeed as is news from my old employer Deutsche Bank. From the Financial Times.

 

Landsec, the property company, said on Tuesday it had signed an agreement for Deutsche to take at least 469,000 square feet at 21 Moorfields, a site under construction in the City of London.

Only last week it was supposed to be flooding out of London. No doubt some will go to Frankfurt but how many?

 

 

 

UK GDP grinds higher thanks to services and the film industry

Today brings us up to date in terms of official data on the performance of the UK economy in the first half of 2017. Whilst expectations are low rather than stellar the last week or so has brought a little more optimistic tinge to things. This started with the retail sales numbers last week. From last Thursday.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

This contrasted with the fall of a similar amount seen in the first quarter of the year which meant that we got back to levels seen at the end of 2016 or around 2.6% higher than in the second quarter last year.

This was added to by better news on the tourism front albeit for only some of the latest quarter.

For the period March to May 2017, spend in the UK by overseas residents increased 14% on the previous year to £5.6 billion………During the period March to May 2017, there were 2% more visits abroad by UK residents compared with the corresponding period a year earlier, and they spent 1% more on these visits

So whilst there was still a considerable trade deficit it did shrink a bit compared to last year as we presumably see a beneficial impact of a lower exchange rate for the pound.

Manufacturing

Yesterday came news from the Confederation of British Industry that the manufacturing was in pretty good shape.

Production among UK manufacturers grew at the fastest pace since January 1995 in the three months to July, according to the latest quarterly CBI Industrial Trends Survey……….Output growth is expected to continue to grow strongly in the quarter ahead and manufacturers are upbeat about prospects for overall demand. Domestic orders are expected to continue growing strongly, while expectations for growth in export orders improved to a four-decade high

This was upbeat as you can see and came with positive expectations from all of employment, investment and exports. It also came with some better inflation news.

Meanwhile, input cost pressures cooled in the quarter to July and are expected to soften further in the near-term, while factory gate price inflation is also expected to be more subdued.

This poses a few questions as whilst this is to some extent consistent with the Markit PMI business survey although it was more subdued and had a fading in June. It is much less in line with the official data which has shown only a little growth up to May.

Mini

There was some good news on the production front here as well. From City-AM.

A fully-electric version of the Mini is to be built at BMW’s plant at Cowley, in Oxford, the car firm has announced.

Actually whilst good news it is more accurate to say that it will be assembled there. Also in the light of the announcement that sales of petrol and diesel cars will be banned from 2040 it was interesting to see that BMW is heading down that road to at least some extent.

By 2025, BMW expects electric vehicles to make up between 15 and 25 per cent of sales. It currently produces electric models at 10 plants worldwide.

Today’s GDP Data

Here we go.

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 2 (Apr to June) 2017.

So some but not a lot and it was driven by a very familiar sector.

The growth in Quarter 2 2017 was driven by services, which grew by 0.5% compared with 0.1% growth in Quarter 1 (Jan to Mar) 2017.

As I regularly point out this sector must be 80% of our economy by now as again and again it grows faster than the other sectors.

The services aggregate was the main driver to the growth in GDP, contributing 0.42 percentage points. Production and construction recorded falls in Quarter 2 2017 of 0.4% and 0.9% respectively, each contributing negative 0.06 percentage points to GDP.

This had an interesting corollary though.

Construction and manufacturing were the largest downward pulls on quarterly GDP growth, following 2 consecutive quarters of growth.

As I have noted above this is very different from the “Production among UK manufacturers grew at the fastest pace since January 1995 ” of the CBI and the growth recorded in the Markit business surveys. I note that Chris Williamson of the latter has been on the wires.

ONS say economy grew 0.3% in Q2, but & output fell 0.5% & 0.9% respectively. These likely to be revised higher.

Regular readers will be aware of my particular doubts about the official data on the UK’s construction sector although there was an interesting reply from the Mayor of West Yorkshire who said that elections always cause slow downs as people wait for the result.

The Film industry

There was good news on this front.

The second largest contributor was motion picture activities, which grew by 8.2% and contributed 0.07 percentage points to GDP growth….. Motion picture activities are a subset of the transport, storage and communications sector, which grew by 1.0%.

Actually only a couple of weeks or so ago Albert Bridge was closed for filming at the weekend and yesterday I noted filming taking place in Battersea Park. This is of course purely anecdotal but this sector has been mentioned in GDP despatches before in recent times. For more information we get referred to the BFI website which does not have the numbers until tomorrow but the ones for the first quarter were strong and perhaps provide a guide.

The total UK spend and budget of these films was £747 million and £983 million respectively, a substantial increase from UK spend of £231 million and total budget of £318 million in Q1 2017. UK spend, as a percentage of budget, was the highest since 2013, at 76%.

The only cloud in this silver lining is that we may have to start being more tolerant of some of the extraordinary statements made by luvvies, excuse me I mean economic miracle workers.

Comment

So the UK economy is grinding on in a slow way as we see the annual rate of growth fall to 1.7%. Also the news from looking at the data on a more personal level shows the minimum rate of growth possible.

GDP per head was estimated to have increased by 0.1% during Quarter 2 2017.

We also learn that the first quarter may not have been the type of statistical quirk we see regularly from the US but of course much more data will be needed for us to be sure of that.

On the more positive side this was always going to be the awkward period after the EU leave vote as higher inflation from the Pound’s fall causes not only lower real wage growth but actual falls.

Real earnings declined despite historically low unemployment. Adjusted for inflation, average weekly earnings fell by 0.7% including bonuses and by 0.5% excluding bonuses, over the year ( to May). For total real pay (including bonuses) this is the largest 3-month average year-on-year decrease since the 3 months to August 2014.

Also the film industry numbers make me wonder about the UK football premiership where the numbers are ballooning but the latest update I can find is this from E&Y.

The Premier League and its Clubs together generated over £6.2 billion in economic output that contributed approximately £3.4 billion to national GDP in 2013/14.

Surely there has been a fair bit of growth? Although of course the flow of money in then sees a flow of money out in transfer fees. Some are claiming that so far this year the defence budget of Manchester City exceeds that of around 25 countries.

 

 

 

The UK sees falling house prices and production data

Today is one of the data days for the UK economy so let us get straight to one of the priorities of the Bank of England. From the Halifax.

House prices have flattened over the past three months. Overall, prices in the three months to June were marginally lower than in the preceding three months. The annual rate of growth has fallen, to 2.6%; the lowest rate since May 2013.

The timing is significant as the Funding for (Mortgage) Lending Scheme of the Bank of England began in the summer of 2013. This kicked off the rises in UK house prices we have seen. However Governor Carney’s morning espresso will have a taste analogous to corked wine as he notes these numbers and looks at the £75.5 billion of cheap funding he has given the banks since last August via the Term Funding Scheme. Can’t a central banker even bribe the banks to do things anymore?

There was in the report some grist to my mill if you recall that I warned that house prices looked like they would slip slide away in 2017.

House prices fell by 1.0% between May and June. This was the first monthly decline since January (1.1%)……House prices in the last three months (April-June) were 0.1% lower than in the previous three months (January March). This was the third successive quarterly fall; the first time this has happened since November 2012.

As you can see we are now looking back nearly five years to a different time when we had just emerged from worrying about a possible “triple dip” in the UK economy. However if we look for perspective the overall picture is as shown below.

Nationally, house prices in June 2017 were 9% above their August 2007 peak. The average house price of £218,390 is £63,727 (41%) higher than its low point of £154,663 in April 2009.

Of course this hides a large amount of regional variations as some places have struggled whilst London has soared. Also tucked away there was something rather unexpected unless the bank of mum and dad is at play.

The number of first-time buyers (FTBs) reached an estimated 162,704 in the first half of 2017, only 15% below the peak in 2006 (190,900), according to the latest Halifax First Time Buyer Review. The number of new buyers is up from 154,200 in the same period in 2016 and more than double the market low in the first half of 2009 (72,700).

The Real Economy

This morning has not been a good day for the underlying UK economy as we note the production figures.

In the 3 months to May 2017 compared with the 3 months to February 2017, the Index of Production was estimated to have decreased by 1.2%, due mainly to falls of 1.1% in manufacturing and 3.5% in energy supply.

As we have a wry smile one more time about the ( good in this instance) poor old weather taking the blame we see some poor figures. If we look at the month in isolation we continue to be disappointed.

In May 2017, total production was estimated to have decreased by 0.1% compared with April 2017, due to falls of 0.2% in manufacturing and 0.8% in energy supply; transport equipment provided the largest contribution to the manufacturing decrease, followed by food products, beverages and tobacco.

The bit that stands out there is the reference to transport equipment as that is consistent with other data showing a slowing in this area. Whilst engine production was up car production was down. Also these numbers fit very badly with the Markit PMI reading of 56.3 for May which indicated a good rate of growth as opposed to the fall reported by the official data.

Looking deeper I see that the wild and erratic ride of the pharmaceutical sector continues.

The decrease in manufacturing is due mainly to the highly volatile pharmaceutical industry, which fell by 7.8%, following a decrease of 12.0% in the 3 months to April 2017.

It rose by 1.1% in May and if we look at its pattern it should do better and help out in July so fingers crossed.

Trade

Here the news was much more normal although in this area that means bad.

Between April and May 2017, the total trade (goods and services) deficit widened to £3.1 billion, reflecting an increase in imports on the month (2.7%). The main contributor to this was an increase in imports of trade in goods….. There was a larger increase in goods imported from non-EU countries, mainly due to increases in mechanical machinery, followed by material manufactures (non-ferrous metals and silver) and oil.

If we look for some more perspective the same general pattern is to be seen.

Between the 3 months to February 2017 and the 3 months to May 2017, the total UK trade (goods and services) deficit widened from £6.9 billion to £8.9 billion.

A driver of this again appears to be a weaker phase for the UK automotive industry.

driven predominantly by increased imports of goods from non-EU countries; transport equipment (cars, aircraft and ships), oil and electrical machinery were the main contributors to this increase.

These numbers are of course just more in a decades long series of deficits. Also I note that the figures have yet to regain “national statistics” status so they are more unreliable than usual.

Some better news came on the inflation front as we had another data set which indicated that the inflationary pressure is easing.

Between April 2017 and May 2017, goods export and import prices decreased by 1% and 0.8% respectively……. the sterling price of crude oil decreasing by 6.2% in the 3 months to May 2017

Construction

The same beat was hammered out by these numbers today.

Construction output fell in May 2017 by 1.2%, in both the month-on-month and 3 month on 3 month time series…….The 3 month on 3 month decrease represents the largest 3 month on 3 month fall in output since September 2012, driven by falls in both repair and maintenance, and all new work.

This was particularly unexpected because for a start the warm weather which took some of the blame for the industrial production fall is usually a boost to construction. Also all the talk of higher infrastructure spending seems to have met a somewhat different reality.

most notably from infrastructure, which fell 4.0% following strong growth in April 2017.

Oh and yet again we have rather a mis-match with the business survey from Markit.

Comment

There were two bits of good economic news today. These were that the inflationary burst looks like it is fading and that house prices have stopped rising and may be falling. Of course the Bank of England will no doubt consider this as bad news. On the other side of the coin we are now in the phase where post the EU Leave vote the economic water was always likely to be colder and more choppy. We are in a phase where production and manufacturing are struggling with little sign that trade is providing much of a boost. Care is needed with the numbers as ever ( especially construction and trade) but our economy is now only grinding ahead and won’t be helped by this news from yesterday and the emphasis is mine.

Despite improvements in both GDP per head and NNDI per head, real household disposable income (RHDI) per head declined by 2.0% in Quarter 1 2017 compared with the same quarter a year ago

Please spare a thought for Bank of England Chief Economist Andy Haldane at this difficult time. For newer readers this “sage” pushed for a “Sledgehammer” expansion of policy when the economy was doing okay and has now switched to talking about rate rises as it slows fulfilling the policy making nightmare of being pro cyclical.

Some Friday Humour

I bring you this from the Wall Street Journal last night.

Japan shows Europe how to dial back stimulus without spooking investors

Only a few hours later Business Insider was reporting this.

the Bank of Japan (BoJ) went all-in earlier today, pledging to buy an unlimited amount of 10-year bonds at a yield

Up is the new down yet again.

British and Irish Lions

I hope that our Kiwi contingent will not be too offended if I wish the Lions all the best for their historic opportunity tomorrow. Victories in New Zealand are rarer than Hen’s teeth can they manage 2 in a row? Here’s wishing and hoping…….