Trade revisions post a warning for UK GDP

This morning has shown us that the way that the UK government deals with the private-sector has issues. From Reuters.

Interserve Plc’s (L:IRV) shares sank almost 60 percent in value on Monday after the British outsourcing company announced a rescue plan that was likely to see a big part of its debt converted into new equity, potentially handing control of the company to its creditors.

Interserve, which employs 75,000 worldwide and has thousands of UK government contracts to clean hospitals and serve school meals, said on Sunday it would seek to cut its debt to 1.5 times core earnings in a plan it hopes to finalise early next year.

I am not sure that the next bit inspires much confidence either.

Interserve Chief Executive Debbie White reiterated that the company’s fundamentals were strong and that the debt reduction plan, first raised in a refinancing in April, had the support of 10 Downing Street.

This provokes echoes of this from January.

Carillion was liquidated after contract delays and a slump in business left it swamped by debt and pensions liabilities., triggering Britain’s biggest corporate failure in a decade and forced the government to step in to guarantee public services from school meals to road works.

If we switch to the Financial Times what could go wrong with this bit?

 after moving into areas in which it had no expertise, including waste from energy plants and probation services.

It is hard not to feel that this particular company is yet another zombie that will be kept alive as another failure will be too embarrassing for the establishment. The share price is understandably volatile but at the time of typing had halved to a bit over 12 pence. This compares to the around £5 as we moved into 2016.

Also according to the FT there is something of a queue forming behind it.

The crisis at Interserve is the latest to hit Britain’s troubled outsourcing sector, with Kier, Capita and Mitie also seeking to rebuild their balance sheets. Kier, another construction and support services company, launched a £264m emergency rescue rights issue last month as it warned that lenders were seeking to cut their exposure to the sector. Kier, which employs 20,000 in the UK, emphasised that it needed the “proceeds on the group’s balance sheet by December 31 . . . in light of tighter credit markets”. It said its debt had increased from £186m in June to £624m at the end of October.

I do not know about you but debt trebling in a few months is something that is in financial terms terrifying.

Monthly GDP

This morning brought the latest in the UK’s monthly GDP reports and the opening salvo was better than what we have seen recently.

Monthly growth rose to 0.1% in October 2018, following flat growth in August and September 2018.

If we look into the detail we see that yet again this was driven by the service sector which on its own produced 0.2% growth in October. Here is some detail on this.

The professional, scientific and technical activities sector made the largest contribution to the month-on-month growth, contributing 0.11 percentage points.

However as it outperformed total GDP growth there had to be issues elsewhere and we find the main one in the production sector.

In October 2018, total production output fell by 0.6%, compared with September 2018, due to a fall of 0.9% in manufacturing; this was partially offset by a 1.8% increase in mining and quarrying.

Whether that number will prove to be a general standard I do not know but we do know production in Germany fell by 0.5% in October as we looked at that only on Friday. As for more detail there is this.

The monthly decrease in manufacturing output of 0.9% was due mainly to weakness from transport equipment, falling by 3.2% and pharmaceutical products, falling by 5.0%; 5 of the 13 manufacturing subsectors increased.

Anyone who has been following the news will not be surprised to see the transport sector lower as for example there was a move to a 3 day week for at least one of the Jaguar Land Rover factories. Regular readers will be aware that the pharmaceutical sector has regular highs and lows and recently June was a high and October a low as we wait for a more general pattern to emerge.

Maybe there was also some food for thought for Interserve and the like here.

Construction output decreased by 0.2% in October 2018

Quarterly GDP

The performance was more solid than you might have expected from the monthly data.

UK gross domestic product (GDP) grew by 0.4% in the three months to October 2018.

In case you were wondering how this happened? Here is the explanation.

While the three most recent monthly growths were broadly flat, the lower level in the base period gives a comparatively strong rolling three-month growth rate.

If we move forwards to the detail we see something that is rather familiar,

Rolling three-month growth in the services sector was 0.3% in October 2018, contributing 0.23 percentage points to GDP growth.

But this time around it was using the words of Andrew Gold much less of a lonely boy.

The production and construction sectors also had positive contributions, with rolling three-month growths of 0.3% and 1.2%, respectively.

If we start with the construction sector then this time around we start to wonder how some of the outsourcing companies we looked at above seemed to have done so badly at a time of apparent boom? Moving on to production.

Rolling three-month growth in the production industries was 0.3%, while in manufacturing industries growth was flat. Production growth was driven by broad-based increases within the sector.

Peering into the transport sector we get a rather chilling reminder of the past.

Three-months on a year ago growth for manufacture of transport equipment was negative 0.9%, the lowest growth rate since November 2009.

Returning to services we get a reminder that the transport sector can pop up here too.

 with a softening in services sector growth mainly due to a fall in car sales.

On the other side of the coin there were these areas.

Accounting contributed 0.08 percentage points to headline GDP growth, while computer programming contributed 0.07 percentage points.

Comment

We see that considering the international outlook the data so far shows the UK to be doing relatively well. An example of a comparison was the Bank of France reducing its estimate for quarterly GDP growth to 0.2% this morning. Sticking with the official mantra we have slowed overall but saw a small rebound in October. So far so good.

Less reassuring is the simply woeful state of the outsourcing sector which looks a shambles. Also there was something troubling in the revisions and updates to the trade figures which included this.

Removing the effect of inflation, the total trade deficit widened £3.0 billion in the three months to October 2018.

So we did well to show any growth at all in October but there was more.

The total trade deficit widened £5.4 billion in the 12 months to October 2018 due mainly to a £5.1 billion narrowing in the trade in services surplus.

It is nice of our official statisticians to confirm my long-running theme that we have at best a patchy knowledge of what is going on in terms of services trade, but not in a good way in terms of direction. This especially impacted in the quarter just gone.

In Quarter 3 2018, the total trade balance was revised downwards by £6.9 billion, due mainly to exports, which were revised down £5.9 billion; imports were revised up by £1.0 billion.

The goods deficit was revised downwards by £3.1 billion in Quarter 3 2018 as exports of goods were revised downwards by £2.0 billion and imports revised upwards by £1.1 billion.

This would be a rather large factor pushing us from growth to contraction but for two factors. One may wash out to some extent in other parts of the national accounts.

A large component of the revision to trade in goods in the most recent quarter was revisions to unspecified goods (including non-monetary gold).

You would think that movements in gold would be easy to account for. Silly me! Also we now get into the geek section which is that trade is in the expenditure version of the national accounts and it is the output version which is officially assumed to be the correct one. So numbers which suggest the UK may have contracted in Q3 are likely to perhaps drag growth slightly lower to 0.5% or 0.4% on the grounds that you cannot ignore them entirely as we sing along to Genesis one more time.

Too many men, there’s too many people
Making too many problems
And not much love to go round
Can’t you see this is a land of confusion ?

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UK GDP growth accelerates past France and Italy

Today brings us the latest data on the UK economy or to be more specific the economic growth or Gross Domestic Product number for the second quarter of this year. If you are thinking that this is later than usual you are correct. The system changed this summer such that we now get monthly updates as well as quarterly ones. So a month ago we were told this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

So we knew the position for April and May earlier than normal (~17 days) but missing from that was June. We get the data for June today which completes the second quarter. As it happens extra attention has been attracted by the fact that the UK economy has appeared to be picking-up extra momentum. The monthly GDP numbers showed a rising trend but since then other data has suggested an improved picture too. For example the monetary trends seem to have stabilised a bit after falls and the Markit PMI business survey told us this.

UK points to a 0.4% rise in Q2 tomorrow, but that still makes the Bank of England’s recent rate rise look odd, even with the supposed reduced speed limit for the economy. Prior to the GFC, 56.5 was the all-sector PMI ‘trigger’ for rate hikes. July 2018 PMI was just 53.8 ( @WilliamsonChris _

As you can see they are a bit bemused by the behaviour of the Bank of England as well. If we look ahead then the next issue to face is the weaker level of the UK Pound £ against the US Dollar as we have dipped below US $1.28 today. This time it is dollar strength which has done this as the Euro has gone below 1.15 (1.145) but from the point of view of inflation prospects this does not matter as many commodities are priced in US Dollars. I do not expect the impact to be as strong as last time as some prices did not fall but via the impact of higher inflation on real wages this will be a brake on the UK economy as we head forwards.

Looking Ahead

Yesterday evening the Guardian published this.

Interest rates will stay low for 20 years, says Bank of England expert

Outgoing MPC member Ian McCafferty predicts rates below 5% and wages up 4%

The bubble was rather punctured though by simpleeconomics in the comments section.

Considering the BoE track record on forecasting I think we should take this with a massive pinch of salt. They often get the next quarter wrong so no hope for 20 years time.

The data

As ever we should not place too much importance on each 0.1% but the number was welcome news.

UK GDP grew by 0.4% in Quarter 2 (April to June) 2018.The rate of quarterly GDP growth picked up from growth of 0.2% in Quarter 1 (Jan to Mar) 2018.

As normal if there was any major rebalancing it was towards the services sector.

Services industries had robust growth of 0.5% in Quarter 2 (Apr to June) 2018, which contributed 0.42 percentage points to overall gross domestic product (GDP) growth.

The areas which did particularly low are shown below.

 Retail and wholesale trade were the largest contributors to growth, at 0.11 percentage points and 0.05 percentage points respectively. Computer programming had a growth of 1.9%, contributing 0.05 percentage points to headline gross domestic product (GDP).

There was also some much better news from the construction sector and even some rebalancing towards it.

Growth of 0.9% in construction also contributed positively to GDP growth.

Although of course these numbers have been in disarray demonstrated by the fact that the latest set of “improvements” are replacing the “improvements” of a couple of years or so ago. Perhaps they have switched a business from the services sector to construction again ( sorry that;s now 3 improvements).So Definitely Maybe. Anyway I can tell you that there are now 40 cranes between Battersea Dogs Home and Vauxhall replacing the 25 when I first counted them.

Today’s sort of humour for the weekend comes from the area to which according to Baron King of Lothbury we have been rebalancing towards.

However, contraction of 0.8% in the production industries contributed negatively to headline GDP growth…….

Manufacturing fell by 0.9% although there is more to this as I will come to in a moment.

Monthly GDP

You might have assumed that the June number would be a good one but in fact it was not.

GDP increased by 0.1% in June 2018

If we look into the detail we see that contrary to expectations there was no services growth at all in June. Such growth as there was come from the other sectors and construction had a good month increasing by 1.4%. I did say I would look at manufacturing again and it increased by 0.4% in June which follows a 0.6% increase in May. So we have an apparent pick-up in the monthly data as the quarterly ones show that it is in a recession with two drops in a row. Thus it looks as if the dog days of earlier this year may be over,

This leaves us with the problem of recording zero services growth in June. The sectors responsible for pulling the number lower are shown below.

The professional, scientific and technical activities sector decreased by 1.0% and contributed negative 0.10 percentage points. ……The other notable sector fall was wholesale, retail and motor trades, which decreased by 0.6% and contributed negative 0.08 percentage points.

The decline of the retail trade whilst the football world cup was on seems odd. Also there overall number completely contradicts the PMI survey for June which at 55.1 was strong. So only time will tell except Bank of England Governor Mark Carney may need its barman to mix his Martini early today as he mulls the possibility that he has just raised interest-rates into a service-sector slow down.

One consistent strong point in the numbers in recent times has carried on at least.

There was also a rise in motion pictures, increasing by 5.8% and contributing 0.05 percentage points.

So we should all do our best to be nice to any luvvies we come across.

Comment

We should welcome the improved quarterly numbers as GDP growth of 0.4% is double that of both France and Italy and is double the previous quarter. However whilst the monthly numbers do provide some extra insight into manufacturing as the recessionary quarterly data looks like a dip which is already recovering the services numbers are odd. I fear that one of my warnings about monthly GDP numbers are coming true as it seems inconsistent with other numbers to say we picked up well in May but slowed down in June. If we look at the services sector alone and go back to February 2017 we are told this happened in the subsequent months, -0.1%,0.3%-0.1%,0.3% which I think speaks for itself.

We also got an update on the trade figures which have a good and a bad component so here is the good.

The total UK trade deficit (goods and services) narrowed £6.2 billion to £25.0 billion in the 12 months to June 2018. The improvement was driven by both exports of goods and services increasing by more than their respective imports.

Next the bad.

The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.

If you want a one word summary of out recorded trade position then it is simply deficit. Although currently we are looking rather like France in terms of patterns as a reminder that some trends are more than domestic.

 

UK GDP growth continues to rebalance towards services

Today has brought a new adventure in UK economic statistics. This is because we have moved to a new system where we get monthly GDP releases whilst the quarterly ones have been delayed. In terms of detail here is the change in the quarterly schedule.

The new model will see the publication of two quarterly GDP releases rather than three. The new First quarterly GDP estimate will be published approximately 40 days after the end of the quarter to which it refers. The new first estimate will have much higher data content for the output approach than the current preliminary estimate. It will also contain data from the income and expenditure approaches,

In general I welcome this as under the old model the last of the three months in question had rather a shortage of actual data and quite a lot of projections. The UK has in essence produced its numbers too quickly in the past and now they should be more reliable. There is a catch to this in that the Bank of England will have its August policy meeting without the GDP data. This has a consequence in that traditionally it is more likely to act once it has it and another in that will it get a sort of “early wire”? That sort of thing was officially stopped by seems to have unofficially started again. I also welcome the use of income and expenditure numbers as long as it is not an excuse to further increase the role of fantasy numbers such as imputed rent. Back in the day Chancellor Nigel Lawson downgraded the use of the income and expenditure GDP data and I think that was a mistake as for example in the US the income GDP numbers worked better than the normal ( output)ones at times.

The services numbers will be sped up so that this can happen.

Taken together, these releases provide enough information to produce a monthly estimate of GDP, as data on almost the entire economy will now be available.

This has two problems. Firstly the arrival of the services data has been sped up by a fortnight which can only make it less reliable. The second is that these theme days overrun us with data as we will not only be getting 2 GDP numbers we will also be getting production, construction and trade numbers. Frankly it is all too much and some if not much of it will be ignored.

Today’s Numbers

The headline is as follows.

UK GDP grew by 0.2% in the three months to May.Growth in the three months to May was higher than growth in the three months to April, which was flat. The weakness in growth in the three months to April was largely due to a negative drag on GDP from construction.

There was something familiar about this which may make Baron King of Lothbury reach for the key to the sherry cabinet.

Growth of 0.4% in the services industries in the three months to May had the biggest contribution to GDP growth.

Yes we “rebalanced” towards services yet again as we mull whether he was ennobled due to his apparently ability to claim the reverse of reality so often? As it happens the growth was driven by a sector which has seen troubled times.

Growth in consumer-facing industries (for example retail, hotels, restaurants) has been slowing over the past year. However, in the three months to May growth in these industries picked up, particularly in wholesale and retail trade.

This industry grew by 0.9% in the three months to May and contributed 0.1 percentage points to headline GDP.

If we move to the monthly data we note this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

This in so far as it is reliable confirms my suggestion that the UK economy is edging forwards at about 0.3% per quarter. Oh and if the output on social media is any guide best of luck with this.

The monthly growth rate for GDP is volatile and therefore it should be used with caution and alongside other measures such as the three-month growth rate when looking for an indicator of the long-term trend of the economy.

Production

It was disappointing to see a drop here although maybe this was something international as France also saw a drop earlier in the day.

In May 2018, total production was estimated to have decreased by 0.4% compared with April 2018, led by falls in energy supply of 3.2% and mining and quarrying of 4.6%.

There were two ameliorating factors at play as we start with mining.

 due to unplanned maintenance on the Sullom Voe oil and gas terminal.

Also the falls in manufacturing seem to have stopped.

Manufacturing output rose by 0.4% and is the first increase in this sector since December 2017……..due mainly to widespread growth across the sector, with 9 of the 13 sub-sectors increasing.

The leading sectors were as follows.

Pharmaceutical products and transport equipment provide the largest contributions to monthly growth, increasing by 2.4% and 1.1% respectively.

It would appear that yet again it is time for ” I am the urban spaceman baby” which younger readers may need to look up!

Within the transport equipment sub-sector, the aircraft, spacecraft and related machinery industry performed strongly, increasing by 3.3%, supported by an increase in nominal export turnover growth of 10.9%.

Those areas are still seeing export growth whereas more generally for manufacturing the boost from the lower Pound £ seems to be over. Or if you prefer the effects of the J-Curve and Reverse J-Curve have come and gone.

Trade

The picture here has been one of improvement and on an annual comparison that remains true.

The total UK trade deficit (goods and services) narrowed £3.9 billion to £26.5 billion in the 12 months to May 2018. An improvement in the trade in services balance was the main factor, as the UK’s trade in services surplus widened £4.1 billion to £111.5 billion.

However the quarterly numbers also suggest that the boost from the lower UK Pound £ has been and gone.

The total UK trade deficit widened £5.0 billion to £8.3 billion in the three months to May 2018, mainly due to falling goods exports and rising goods imports. Falling exports of cars and rising imports of unspecified goods were mostly responsible for the £5.0 billion widening of the total trade deficit in the three months to May 2018.

Tucked away in this was a rare event for the UK.

There was a small overall trade surplus on the month to February 2018, mainly due to falling goods imports;

Comment

We find that today’s data confirms our thoughts that after a soft patch the UK economy has picked up a bit. There are reasons to suspect this continued in June. For example the monetary data picked up in May so may no longer be as strong a break and the PMI business surveys for June were stronger.

The survey data indicate that the economy likely
grew by 0.4% in the second quarter, up from 0.2%
in the opening quarter of 2018.

That poses a question for the Bank of England and its Governor. That rate of growth is above the “speed limit” that its Ivory Tower has calculated although the model used has been a consistent failure. Should the boyfriend prove to be unreliable yet again then subsequent votes will be without one of the policymakers keen to raise interest-rates. I remain to be convinced they will take the plunge.

Moving onto a past Bank of England staple which is rebalancing we see us moving towards a strength which we do not seem to like. As services seemed to be left out of the Chequers Brexit plan which seemed really odd to me. Especially if we note that other areas are in relative and sometimes absolute decline.

Production and manufacturing output have risen but remain 6.2% and 2.5% lower, respectively, in the three months to May 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

I have left out the construction numbers for May as we wait for any sort of reliability from them.