UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

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.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.

Production

We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.

Comment

The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Weekly Podcast

 

 

 

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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.

The outlook for the economy of Germany has plenty of dark clouds

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

 

 

 

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 ?

The UK economy puts on an economic growth spurt

Today brings us to a pretty full data set on the UK economy with the headline no doubt the monthly GDP ( Gross Domestic Product) number. This week has brought news on a sector which is often quite near to me and has been a strength we have been regularly noting. From the Financial Times.

Tax relief for UK-made movies, television series and video games is fuelling a production boom that has transformed Britain into a global hub of filmed entertainment, according to a report by the creative industries. The tax incentives have sparked a rush of inward investment as Hollywood studios and other international production companies cash in on British talent — the latest Star Wars movie was made in the UK, alongside top television series such as The Crown and Poldark.

So we should try to be nice to any luvvies that we meet as whilst they are prone to ridiculous statements they are providing a much-needed economic boost. Here is some more detail on the numbers.

The new report commissioned by the British Film Institute found that an estimated £632m in UK tax relief for the creative industries in 2016 led to £3.16bn in production spending on films, TV programmes, animation and video games — a 17 per cent increase on 2015. The industries’ “overall economic contribution” to Britain came to £7.9bn in 2016, which included £2bn in tax revenues.

Since 2016 the numbers have boomed further and the local reference is due to the fact that Battersea Park in particular is regularly used by the film industry. Much of this is a gain as I recall one cold Sunday night when the filming must have disturbed very few. However it is not all gravy as there is also a tendency to use it as a lorry and caravan park for work going on elsewhere.

Bank of England and Number Crunching

There was some numerical bingo from the Financial Policy Committee yesterday. The headline was that the UK has some £69 trillion of financial contracts with European Union counterparties which need some sort of deal for next March.Or if you prefer a derivatives book of the size of Deutsche Bank.

Also we for the assertion that debt has fallen since 2008 which looked better on their chart via comparing it ( a stock) with annual GDP (a flow). They seem to have forgotten public debt which has risen and more latterly even their data poses a question.

Borrowing by UK companies from UK banks has also been subdued, rising by just 2.7% in the past year……. household mortgage borrowing increased by only 3.1% in the year to August, broadly in line with household disposable income growth.

Both are growing a fair bit faster than the economy and of course much faster than real wages.Mind you someone has probably got promoted for finding an income number which has grown as fast, or a lifetime free pass to the cake and tea trolley.Would it be rude to point out they seem to have forgotten unsecured credit is rising at an annual rate of 8%+ as they seem to have missed it out?

UK economic growth

The number released today backed up quite a multitude of my themes. There was the evidence of a growth spurt for the UK economy, various examples of monthly GDP data being so unreliable that you have to question its introduction, and finally even evidence that the monetary slow down has hit the economy! Let us open with the latter.

The month-on-month growth rate was flat in August 2018. (UK GDP)

That looked rather grim until it was combined with something that was much better news.

Rolling three-month growth increased by 0.7% in August 2018, the same rate of growth as in July 2018. These were the highest growth rates since February 2017. The growth continued to pick up from the negative growth in April 2018,

Suddenly the picture looked very different as we got confirmation that it was a long hot summer for the UK in economic as well as weather terms. Some of that was literal as the utility industry saw rises in electricity consumption which looks to have been driven by the use of air conditioning in the unusual heat. If we look at the breakdown we see something familiar in that the major part was the services sector (0.42%), we got some production growth (0.1%) and the construction sector was on a bit of a tear (0.18%),

If we return to the travails and troubles of the monthly series we see this.

Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

That opens a can of worms. Because whilst you can argue compared to the total number for GDP the changes are minor the catch is that these numbers are presented not as totals but first and second derivatives or speed and acceleration. At these levels the situation becomes a mess and let me illustrate by switching to the American style of presentation. UK GDP rose at an annualised rate of 4.8% in July followed by annualised rate of growth of 0% in August, does anybody outside the Office for National Statistics actually believe that?

Putting it another way we can see a clear issue in the main player which is services I think.

The Index of Services was flat between July 2018 and August 2018…………The 0.7% increase in the three months to July 2018 is the strongest services growth since the three months to December 2016.

So it went from full steam ahead to nothing? The recent strength has been driven by computer programming so let us hope that has been at the banks especially TSB.

Production

This had some welcome snippets.

The rise of 0.7% in total production output for the three months to August 2018, compared with the three months to May 2018, is due primarily to a rise of 0.8% in manufacturing, which displays widespread strength throughout the sector with 10 of the 13 sub-sectors increasing.

As so often we find that the ebbs and flows are driven by the chemicals and pharmaceuticals sector which had a good quarter followed by a decline in August.

Construction

The official data seems to have caught up with crane-ometer ( 40 between Battersea Dogs Home and Vauxhall) although it too supposedly hit trouble in August.

Construction output increased by 2.9% in the three months to August 2018, as the industry continues to recover following a weak start to the year………Construction output declined by 0.7% between July and August 2018, driven by falls in both repair and maintenance and all new work which decreased by 0.6% and 0.8% respectively.

Comment

We see that the UK economy had a remarkably good summer. Actually it seems sensible to smooth it out a bit and shift some of it into August but if we were to see quarterly growth of 0.5% or so that is pretty solid in the circumstances. We are managing that in spite of weak monetary data and disappointing growth from some of our neighbours, although if the recent IMF forecasts are any guide France is in a surge.

Speaking of surges Andy Haldane of the Bank of England has given a speech today and yet again pay growth is just around the corner. Pretty much like it has been since he became Bank of England Chief Economist . You might have thought his consistent record of failure would have meant he was a bad choice as the new UK productivity czar but of course in Yes Prime Minister terms he is the perfect choice.

Sir Humphrey Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.

Meanwhile his own words.

That is quite sobering if, like me, you have never moved job

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.

 

 

 

 

 

The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.

Trade

We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.

Construction

This was yet again a wild card if consistency can be that.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April

Comment

There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.