Strong UK GDP growth rather embarrasses the Bank of England

This morning the UK has received some economic news which fits with the recent sunny and warmer weather.

UK gross domestic product (GDP) is estimated to have increased by 0.6% in Quarter 1 (Jan to Mar) 2024, following declines of 0.3% in Quarter 4 (Oct to Dec) and 0.1% in Quarter 3 (July to Sept) 2023.

That is an outright good number and even our national broadcaster is reporting that.

The 0.6% rise in GDP means that the economy grew at the fastest rate for two years, according to the ONS.

It is the best growth since the first three months of 2022 when Russia invaded Ukraine, sparking an energy crisis, soaring food prices and general inflationary chaos.

We have wiped out the recession although to my mind if you recall the wild swings in retail sales ( a collapse in December and a surge in January) I think some of the fall then rise was a statistical anomaly. The adjustments have not kept up with the changes in the times.But returning to the figures our growth was such we have something we have not had for a while.

Real GDP per head is estimated to have increased by 0.4% in Quarter 1 2024, following seven consecutive quarters without positive growth.

We can drill down into the numbers and see that services were the biggest contributor but not the fastest growth area.

In output terms, services grew by 0.7% on the quarter with widespread growth across the sector; elsewhere the production sector grew by 0.8% while the construction sector fell by 0.9%.

Services

In fact we saw growth in each of the individual months and it was pretty broad.

Services increased in all three months of the quarter: January (0.4%), February (0.3%) and March (0.5%), as explained in our monthly GDP release…….There was widespread growth in the services sector, with 11 out of 14 subsectors increasing in Quarter 1 2024,

The leader of the pack is below.

The largest contributor to the growth in service output was a 3.7% increase in the transport and storage subsector. This was largely driven by growth of 6.4% in land transport services via pipelines (excluding rail transport). This industry saw its highest quarterly growth rate since Quarter 3 2020.

Actually whilst there was growth in that sector some of it was via a reshuffling of the statistical cards.

 there was strong growth in February 2024 where Monthly Business Survey (MBS) data showed strength in the land transport services industry. A reclassification of a company into this industry, previously allocated in the wholesale trade excluding motor vehicles and motorcycles industry, also contributed to the strong growth.

Regular readers may recall the way that the construction numbers were distorted by something similar back in the day. It is one of the reasons (large revisions are another) why I lack confidence in them. As to the next area I think most would prefer it to be science rather than legal although of course the concept of science has been devalued by abuse of it.

Professional, scientific and technical activities increased 1.3% in the latest quarter and was the second-largest positive contributor. The growth in this subsector was driven mostly by legal activities, and scientific research and development.

I mentioned the swings in the retail sector earlier which were worse on a monthly basis at the turn of the year.

Overall, consumer-facing services grew by 0.6% in Quarter 1 2024, following a fall of 0.4% in Quarter 4 2023, and this was largely driven by Retail trade, except of motor vehicles and motorcycles.

Not every area grew and there was an interesting quirk which I have highlighted as is this another consequence of working from home?

Elsewhere there were falls in accommodation and food service activities (0.2%), and activities of households as employers; undifferentiated goods and services activities of households for own use (3.4%).

Production

Growth here was negative in January followed by a strong rally.

This reflects a fall of 0.5% in January 2024 followed by growths of 1.0% and 0.2% in February and March, respectively.

It was particularly welcome to see a recovery in manufacturing.

Manufacturing output is estimated to have increased by 1.4% in Quarter 1 2024 following a fall of 1.0% in Quarter 4 2023. The largest positive contributor was a 5.7% increase in the manufacture of transport equipment, which has grown for six consecutive quarters.

The breakdown has an interesting swing as I winder whether the decline in the textiles sector is due to the high inflation we saw in the clothing and footwear numbers?

Manufacture of basic metals and metal products grew 3.1% and manufacture of food products, beverages and tobacco showed growth of 1.5%. However, this was partially offset by a fall of 3.6% in the manufacture of textiles, wearing apparel and leather, which fell for the sixth consecutive quarter.

At the end of the report there are a couple of numbers which deserve more highlighting. With the problems in the water sector and Thames Water in particular the fall should be looked at more. Also in the midst of an energy crisis the fall in mining ( think oil and gas) reflects the disastrous policies our political class has imposed on us.

However, the growth in this sector and manufacturing was partially offset by a fall of 2.4% in water supply; sewerage, waste management and remediation activities, and a fall of 2.2% in mining and quarrying across the quarter.

As it happens their emphasis on renewables had a simply awful night especially for those who have been busy claiming that the wind always blows in the UK.

A proud moment for British ‘Wind Power’ As after 30 years of being papmpered and cossetted and subsidised big time, it can’t even manage to make 1% of our electricity tonight. Not 1/500th of our total energy needs

An absolute disgrace! ( @latimeralder)

Construction

As I stated earlier these numbers are rather unreliable.

Construction output is shown to have fallen by 0.9% in Quarter 1 2024 following a decline of 0.9% in the previous quarter. The level of construction output in Quarter 1 2024 was 0.7% lower than the same quarter a year ago.

Monthly Numbers

Each month showed economic growth and after the upwards revision to February it is pretty consistent for the monthly series.

GDP is estimated to have increased by 0.4% in March, following growth of 0.2% in February (revised up from 0.1% growth), and an unrevised increase of 0.3% in January 2024.

Bank of England

When I said that the numbers were welcome the Bank of England forecasting department may not be quite so keen after telling is this only yesterday.

Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1

Even worse news is that they have used it for another of their theoretical brain farts.

 Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter,

Comment

It is nice to be able to review and analyse some much better economic numbers from the UK. It is hard not to have a wry smile at those who have been tweeting Brexit Disaster this week just in time for our quarterly economic growth to be double the Euro area’s. Buy whilst the number itself is good and hopefully sets the tone for 2024 the annual number shows that 2023 was a troubled one.

Compared with the same quarter a year ago, GDP is estimated to have increased by 0.2% in Quarter 1 2024.

If we move from quarterly to monthly picture improves.

GDP is estimated to have grown by 0.7% in March 2024 compared with the same month last year

We have improved from shrinking ( the last annual number for Q4 was -0.2%) so the direction of travel is good and looks set to pick-up. But it is also true that 0.2% is not very much and within the margin of error.

Also another hopeful sign is that the GDP inflation measure is declining.

The implied price of GDP rose by 0.6% in Quarter 1 2024, where the increase is primarily driven by higher prices in household consumption and gross capital formation. Compared with the same quarter a year ago, the GDP implied deflator further eased to 4.0%

 

UK GDP has started 2024 strongly but per head we have lost around 1% over the past year

This morning has started pretty brightly for the UK economy via the latest monthly GDP release. From the Office for National Statistics.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.1% in February 2024, following growth of 0.3% in January 2024 (revised up from 0.2% growth in our previous publication).

So as you can see we are 0.2% better off than previously when we thought that January had grown by 0.2%. Let us take a look at the detail of what happened in February.
Production output grew by 1.1% in February 2024 and was the largest contributor to the rise in GDP in February. Services output also grew, by 0.1%, while construction partially offset these with a fall of 1.9%.

For once it is the case that services were not the driver here although it did match the GDP rise. Slightly curious as a matter of presentation so if we look deeper we see that growth was in fact 0.13% with production being 0.14% and services 0.11% with construction -0.12%. Please take care with that as it does not mean that I believe the numbers are accurate to a second decimal place, as I do not.

Production

Let is change our usual order as production was number one this time around. As you can see there was quite a swing from January.

On the month, production output is estimated to have grown by 1.1% in February 2024, following a fall of 0.3% in January 2024 (revised down from a 0.2% fall in our previous publication).

Manufacturing had a very food month driven by the motor sector.

Manufacturing output rose by 1.2% in February 2024, with widespread growth in 11 of the 13 subsectors. The largest contributor to this growth was the manufacture of transport equipment, which rose by 3.7% in February 2024.

That area has got into high gear.

This is growth supported by the latest data from the Society of Motor Manufacturers and Traders (SMMT), which reports that car manufacturing in February 2024 was 14.6% higher than February 2023 and, year-to-date, car manufacturing is up by 17.8% in February 2024 compared with February 2023.

That brings a hopeful signal for the March numbers as we already know that the registration numbers were strong.

New car registrations rise 10.4% in best March since 2019 and 20th consecutive month of growth. ( SMMT)

Plus February saw good performances in other areas too.

The next largest positive contributions, in February 2024, were from the manufacture of food products, beverages and tobacco, which grew by 1.3% and the manufacture of basic metals and metal products, which grew by 1.9%.

For once the pharmaceutical sector seemed in sync with the monthly series as there was no wild swing ( +0.1%). The main decline is below.

The largest offsetting negative movement was in the manufacture of machinery and equipment not elsewhere classified (n.e.c.), which fell by 3.3% in February 2024.

Services

The detail here shows why it is important to take care over the numbers as we see an unusual area as leader of the pack.

The largest positive contribution at the subsector level in services in February 2024 came from transportation and storage, which rose by 2.6% in the month. This was driven by a 6.5% growth in land transport services and transport services via pipelines, excluding rail transport, its largest growth since June 2020.

In fact it is more a result of how this is measured as reality on the ground.

a reclassification of a company into this industry, from the wholesale trade excluding motor vehicles and motorcycles, also contributed to the growth in February 2024.

I will return to that issue in the construction section.But for now it was taken away here.

The largest negative contribution to services growth in February 2024 came from wholesale and retail trade; repair of motor vehicles and motorcycles, falling by 0.5% in February 2024, mainly attributed to a fall of 1.3% in wholesale trade excluding motor vehicles and motorcycles.

But we also had growth in areas we may well have expected.

Also contributing positively to the month was information and communication, which grew by 1.0% in February 2024, driven by a 1.5% rise in telecommunications, and professional, scientific and technical activities, which grew by 0.5% in February 2024.

On the other side of the coin was something the pandemic has made us nervous about.

Also contributing negatively was human health and social work activities, which fell by 0.6% in February 2024, mainly caused by a fall of 1.0% in human health activities.

But in fact there was no reason to be nervous as it was an area measurement did not change.

This fall in human health activities mainly resulted from a fall in the market sector part of the industry, after it performed well in January 2024

After its travails and troubles I am sorry to say that there was another decline for hospitality.

Accommodation and food service activities fell by 1.2%, with declines in both accommodation (negative 2.1%) and food and beverage service activities (negative 0.8%).

Construction

The official numbers are below.

In February 2024, monthly construction output is estimated to have decreased 1.9% in volume terms. This follows an increase of 1.1% in January 2024 (unrevised from our previous publication). The decrease in monthly output in February 2024 came from decreases in both new work (2.3% fall) and repair and maintenance (1.4% fall).

In essence the explanation has been provided by Supertramp.

It’s raining again
Oh no, my love’s at an end
Oh no, it’s raining again
Too bad I’m losing a friend

I said I would return to the classification issue and this is because I recall the time when a large company was shifted from services to construction. The numbers then looked a lot better but back in the real world what had changed? Even since then they come with that critique in my head. Also we see quite large revisions showing that even if you trust them they are unreliable.

Comment

It looks as though the UK has started 2024 pretty strongly in economic terms and if we had a quarter ending in February we would be out of recession.

Real gross domestic product is estimated to have grown by 0.2% in the three months to February 2024, compared with the three months to November 2023.

Also if we look back we see that 2023 has improved slightly as we see net upwards revisions to GDP totaling 0.2%. But it is also true that the cost of living crisis resulted in a very disappointing 2023 overall.

GDP is estimated to have fallen by 0.2% in February 2024 compared with the same month last year and, looking over the longer term, GDP is estimated to have fallen by 0.1% in the three months to February 2024 compared with the three months to February 2023.

On the present trajectory that looks set to correct next month although a switch to say 0.2% annual growth is hardly much to celebrate. I regularly get asked about the figures per head or per capita so this from former Bank of England policymaker Andrew Sentance is interesting.

We need around 0.3 percent quarterly GDP growth to get positive GDP per capita increases

So even with a solid March we will have lost around 1% over the past year per capita.

 

 

 

UK GDP rebounds by 0.2% in January

We are in the part of the month when we get a sequence of UK economic figures and this morning it was the economic  output series. So we can start with better news on the Gross Domestic Product front.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in January 2024, following a fall of 0.1% in December 2023.

So we can start 2024 with the hope that it will be a better year for the economy than 2023 was as 0.2% GDP growth each month would produce something around 2.5% for the year, which for these times is good. Although care is always needed with the erratic nature of the monthly numbers as last January we started the year with 0.5% GDP growth and look where we ended up ( recession).

However there are other reasons to have some optimism as we look forwards to 2024. For example there will be a cut in domestic energy prices next month. Plus the Purchasing Managers Survey has been optimistic.

“Another solid expansion of business activity across the
service sector in February adds to signs that the UK economy has turned a corner after entering a technical recession during the second half of 2023.
“New business intakes were a particularly bright spot as
service providers reported the fastest order book growth
since May 2023. Survey respondents cited rising business and consumer spending, linked to improved optimism towards the broader economic outlook”

The PMI is not a perfect guide as the 0.1% fall in December showed but we seem to have started this year with some momentum which it feels continued into February.

Breaking it Down

Services

We have what for the UK is normal service as much of this is simply the services sector.

On the month, services output is estimated to have grown by 0.2% in January 2024, following a fall of 0.1% in December 2023, with 9 of the 14 subsectors experiencing growth in January 2024.

As you can see it both drove and matched the GDP moves in this instance. Going further I often find myself pointing out that consumption is much more than retail sales but it was a player this time around.

The largest contribution to the 0.2% growth in services in January 2024 was wholesale and retail trade; repair of motor vehicles and motorcycles, which saw a 1.9% growth on the month, following a 1.9% fall in December 2023. The largest contribution came from retail trade, except of motor vehicles and motorcycles, which grew by 3.4%.

Next up are developments that make me mull again the decision to measure GDP for these sectors via output. Because whilst in theory that is correct in practice it is much harder as we found out during the Covid pandemic.

Human health and social work activities grew by 0.6% in January 2024 following a 0.9% fall in December 2023. Human health activities grew by 0.9%, mainly caused by growth in the market sector, and was the largest contributor to this growth in January 2024. Education also saw growth on the month, up by 0.7%, following three consecutive monthly declines.

The decliners were led by this.

These growths were partially offset by a monthly fall of 0.9% in professional, scientific and technical activities, where five of the eight industries saw falls on the month

However I can offer a little hope for the next sector as there was a fair but of filming in Battersea Park in February.

Information and communication fell by 0.7% in January 2024, mainly attributed to a 9.5% fall in motion picture, video and TV programme production, sound recording and music publishing activities.

Production

Here there was a different picture.

On the month, production output is estimated to have fallen by 0.2% in January 2024, driven by a fall of 2.2% in water supply; sewerage, waste management and remediation activities.

Those outside the UK may be unaware that the water and sewerage sector has been rather a shambles with sewage leaks and proposed price rises. Sadly the regulator Ofwat has been asleep at the wheel as the companies concerned have been allowed to benefit their owners rather than provide a decent service. But that in some ways is minor compared to the next bit as we recall we are in the middle of an energy crisis.

Mining and quarrying output fell by 1.3% in January 2024, after a fall of 1.8% in December 2023. The January 2024 fall was driven by a 11.4% decline in other mining and quarrying.

That looks neutral but the UK does have oil and gas reserves in the North Sea. Look what we have down about this at a time of national priority.

Mining and quarrying output is estimated to be 19.3% below its level in January 2022. The decline since January 2022 can be mainly attributed to the extraction of crude petroleum and natural gas. The Department for Energy Security and Net Zero (DESNZ) energy trends publication reports reduced investment in the mature North Sea basin as a reason for the recent downward trend in this industry.

This is an important point and shows how incompetent both this government and our political class ( as there has been consensus on “Green” energy policies) have been in this area. The chart below shows this and I do not mean the overall decline as there was always going to be a decline. I mean the last bit when the present government was stopping new drilling and actively discouraging new investment. We could have maintained output if we had tried.

The position is highlighted by the announcement yesterday that we will need new gas fired plants to maintain our electricity supply. Surely it would be sensible to use as much of our domestically produced gas as possible.

Manufacturing  flat-lined bur there was a little hope.

Manufacturing showed no growth in January 2024, with growth in 7 of the 13 subsectors offset by falls in the other 6 subsectors, after growth of 0.8% in December 2023.

What I mean by that is we saw one of those months when pharmaceuticals swing lower so when it swings higher in its usual pattern we should see some growth.

The largest negative contributor came from manufacture of basic pharmaceutical products and pharmaceutical preparations (down 5.1%).

Construction

This had the strongest monthly growth of the main sectors.

In January 2024, monthly construction output is estimated to have increased 1.1% in volume terms……The increase in monthly output in January 2024 came from increases in both new work (1.1%) and repair and maintenance (1.2%).

Perhaps the weather was at play here as whilst we have had plenty of rain it has overall been a mild winter.

Comment

The return to economic growth is welcome especially as there were brakes on the numbers.I have already mentioned the disastrous energy policy the UK has followed and there was also this.

Like recent months, industrial action was again cited as a reason this month, which may have negatively impacted output. In January 2024, there were six days of industrial action by junior doctors and hospital dental trainees after three days of industrial action took place in December 2023.

Actually even international strikes.

while the industrial action had ceased, the Screen Actors Guild strikes in America were cited as a factor which may have reduced film and TV production this month.

Plus there was this.

Comments provided to the MBS for January 2024 suggested some industries saw supply chains impacted by disruption in the Red Sea.

If we look back we see that a quarterly number would still show a recession.

Real gross domestic product (GDP) is estimated to have fallen by 0.1% in the three months to January 2024, compared with the three months to October 2023.

Plus the burst of growth in January last year leaves us with this.

GDP is estimated to have fallen by 0.3% in January 2024 compared with the same month last year and, looking over the longer term, GDP is estimated to have fallen by 0.2% in the three months to January 2024 compared with the three months to January 2023.

Oh and take care if you watched BBC Breakfast TV as the business present Ben seemed unaware that 0.2% monthly growth if repeated would be pretty strong growth as opposed to his “slowly and slightly”.

 

 

The Bank of England has driven UK GDP into a recession

After a couple of days of pretty good economic news for the UK we have stumbled this morning, because this is rather disappointing.

UK gross domestic product (GDP) is estimated to have fallen by 0.3% in Quarter 4 (Oct to Dec) 2023, following an unrevised fall of 0.1% in the previous quarter.

So we have fallen into a recession as it turned out that the whole quarter was worse than we had been previously told.

Monthly GDP is estimated to have fallen by 0.1% in December 2023, following a growth of 0.2% in November (revised down from 0.3% growth) and a fall of 0.5% in October (revised down from a 0.3% fall).

As you can see the driving force of the contraction came in October which according to the monthly data saw a sharp decline of 0.5%. Looking into the detail of the revisions it was Services at -0.2% worse than we thought which mostly did it, although all the main sectors were revised lower.

Quarterly Details

As you can see all the main sectors fell in the latest quarter.

In Quarter 4 2023 services, production, and construction contributed negatively to growth. Across Quarter 4, 12 out of 20 of the sub-sectors experienced a contraction, up from 10 sub-sectors in the previous quarter.

Usually it is the Service sector which is the main influence on the numbers but this time around it was the large falls in production and construction that made this quarter under perform its predecessor.

The services sector is estimated to have fallen by 0.2% in the fourth quarter of 2023, following a fall of 0.2% in Quarter 3 2023. The production sector is estimated to have fallen by 1.0%, following growth of 0.1% in the previous quarter. Construction output fell 1.3% in Quarter 4 2023, following growth of 0.1% in Quarter 3 2023.

Looking deeper into the Service sector we see that it was in decline for most of last year.

We now estimate that services output decreased for three consecutive quarters, with a fall of 0.2% in the latest quarter

The weak retail sales numbers particularly for December were an influence.

The largest contributor to the fall in total services was a 0.6% fall in the wholesale and retail trade; repair of motor vehicles and motorcycles sub-sector. This was largely because of a 1.3% fall in wholesale trade, except of motor vehicles and motorcycles and a 0.9% fall in retail trade, except of motor vehicles and motorcycles.

Although the largest percentage decline was here.

The fall in Quarter 4 2023 was mainly driven by a 3.4% fall in other personal services, where we have seen particular weakness in hairdressing and other beauty treatment over the Christmas period compared with usual.

In addition we seem unable to escape the consequences of measuring education output in the way we do.

Education also contributed negatively to the fall in services in Quarter 4 2023, with a decline of 0.8% partially attributed to a drop in school attendance.

The Consumer sector was weak as well.

Overall, consumer-facing services fell by 0.7% in Quarter 4 2023 and this was largely driven by falls in food and beverage service activities and retail trade, except of motor vehicles and motorcycles.

Not everything fell and there is an intriguing  hint about the housing sector below.

The largest positive contribution to services growth was from administrative and support service activities, which increased by 0.6%, driven by growth of 6.9% in rental and leasing activities.

Production

This had a really rough quarter which essentially was an October plunge.

The production sector is estimated to have decreased by 1.0% in the latest quarter after growth of 0.1% in Quarter 3 2023 (unrevised from our previous publication). This reflects a 1.4% fall in October, despite growth in November (0.5%) and December (0.6%).

My first thought is of higher energy costs hitting as winter approaches which does coincide with higher wholesale Has prices back then. I am afraid that manufacturing was a bit of a tale of woe.

Manufacturing output is estimated to have fallen by 0.9% in Quarter 4 2023 after four consecutive quarters of growth. The largest negative contributors are a 7.0% decline in the manufacture of machinery and equipment n.e.c and a 4.7% fall in the manufacture of rubber and plastics products, and other non-metallic mineral products. However, there were some positive movements in manufacturing, as shown in Figure 5. In particular, the manufacture of transport equipment grew by 1.8%.

Furthermore the numbers below show how incompetent our energy policy has been. Just at the time we need every scrap of energy production we can get our hands on.

Elsewhere in the production sector, there was a 3.0% fall in mining and quarrying, which fell for the sixth consecutive quarter and a 2.6% fall in electricity, gas, steam and air conditioning supply.

The government has been doing something of a U-Turn in this area but the lead times are rather long for any new production.

Construction

Regular readers will know that these numbers are very unreliable due to the size of frequency of revisions here. But for those interested here they are.

Construction output is shown to have fallen by 1.3% in Quarter 4 2023 following growth of 0.1% (previously estimated to be 0.4%).

With the detail here.

The fall reflects a fall in new work of 5.0%, though there was growth of 4.0% in repair and maintenance. Within new work, private housing sees its fifth consecutive quarterly decline, falling 8.0% in the latest quarter.

So much for the official claims of more new house building.

Bank of England

This is a simply awful GDP report for the Bank of England which has ignored the warning signals being provided by the money supply data. This is what it told us earlier this month.

UK GDP is expected to have been flat in 2023 Q4.

Them being wrong is quite common although not usually by this much but there is a much deeper issue here. I pointed out yesterday that inflation has undershot their expectations and now economic growth has too. So the overall picture confirms what the money supply data has been telling us, which is that interest-rates are too high. Furthermore a couple of them seem to be smoking something very strong.

Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.

Returning to Governor Bailey this from only yesterday looks even more out of touch now.

The Bank of England’s governor has said UK inflation remaining unchanged is “encouraging”, but he hinted it would not mean earlier interest rate cuts.

Andrew Bailey said inflation, which measures how prices rise over time, staying at 4% last month “pretty much leaves us where we were” ( BBC)

My issue with the policy is back to a regular point of mine which is the timing of all of this. The dithering calling inflation Transitory combined with mostly penny-packet rises means that the impact of the rises is arriving well after the inflation peak rather than with it or even better ahead of it. As an example the first interest-rate rise was of 0.15%. How miniscule does that seem now?

Plus there have been the QT bond sales driving UK bond yields higher in another clear mistake.

Comment

It has not been a good day for GDP releases as we woke up to news that Japan had also fallen into recession and in fact a deeper one than us ( totaling -0.9%). But the UK one is a consequence of establishment policy as in addition to the interest-rate rises as the Bank of England raised interest-rates to deal with past failures we also saw tax increases from Chancellor Jeremy Hunt.

Now we see that our fiscal policy looks set to tighten into a slowing economy as well which compounds the problem.

I wrote that on the 17th of November 2022 and I was pointing out the policy errors of the Bank of England back then too.

Those who follow my work will know that I have argued for some time that the Bank of England is in the process of making quite a mistake. It is that by delaying raising interest-rates for a year with its “Transitory” rhetoric it is now making the slow down worse.

Or as Bananarama and the Fun Boy Three put it.

It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
And that’s what gets results

The number for 2023 as a whole rather sums it up.

 Real GDP is estimated to have increased by 0.1% in 2023

 

Germany sees GDP per person employed fall by 1% in 2023

Today is a Eurogroup meeting at which they should be discussing rather a change in the economic performance of their main economy. Although I doubt that they will except on the sidelines with perhaps some sniggering from the likes of Greece. We have learnt some more about the state of play from this release that is just out.

According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 0.3% lower in 2023 than in the previous year.

There was a time that such a number, showing a fall in Germany’s economic output over a year would be pretty much unthinkable. Although they did find a way of trimming a bit off the decline.

After adjustment for calendar effects, the decline in economic performance amounted to 0.1%.

The official explanation is below.

“Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises”, said Ruth Brand at the Berlin press conference on Germany’s 2023 gross domestic product. “Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth. Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll.

There is quite an implied criticism of the ECB ( and by implication the German Bundesbank) as we note the framing of the price increases being a major issue as it assured us they would be Transitory and then the later interest-rate increases are added to the mix as well.

The one piece of relief for the German establishment  was that a recession was avoided via an upwards revision to the third quarter.

GDP had stagnated in the 3^rd quarter.

Breaking it down

We can start with a nod to our deindustrialisation via higher energy prices theme.

By contrast, production and value added fell again in energy-intensive industrial branches, such as the chemical and metal industry, after economic performance in these sectors had already reacted very strongly to rising energy prices in 2022.

Also the energy sector declined.

Overall, economic performance in industry (excluding construction) declined considerably, contracting by 2.0%. This was primarily attributable to much lower production in the energy supply sector. Manufacturing, which accounts for almost 85% of industry (excluding construction), was also in negative territory in 2023 (‑0.4%), after adjustment for price effects.

As we know that China has big plans for car production via EVs I would be rather uncertain about this continuing. At a minimum something of a clash looks to be on its way.

Positive contributions in this sector mainly came from the automotive industry and the manufacture of other transport equipment.

Returning to the deindustrialisation theme this is happen in spite of quite an effort to weaken it. From the Financial Times in November.

The German government has agreed a “massive” new package of tax subsidies for industry worth up to €28bn by 2028 as it seeks to further shield beleaguered manufacturers from high energy costs.

That is looking ahead but there were other packages in play in the numbers we are examining today.

It follows a €7bn tax subsidy for German business agreed in August and the “protective shield” announced last September for homes and businesses to protect them from spiralling energy costs.

There is also rather an irony in the Financial Times reporting on this as it lauded the energy policy that got Germany into this.

Good Morning from #Germany, where a creeping deindustrialization is taking place. Industrial production has recently continued to fall and is now at the same level as in 2006. ( @Schuldensuehner)

Services

These provided some relief from the problems above. Or if you prefer Germany became more like the British.

Most service branches were again able to expand their economic activities compared with the previous year and helped the economy in 2023.

One area in particular was strong.

The information and communication branch reported the largest price adjusted increase (+2.6%). It therefore continued on its long-term growth path, which was only hampered by a slowdown in 2020, the first year of the pandemic.

The German state also helped the numbers  to some extent.

Public services, education, health (+1.0%) and business services (+0.3%) also registered a slight increase.

Consumption

If you have high inflation then this is always likely to be under pressure.

Household consumption in 2023 was down a price adjusted 0.8% on the previous year, edging away again from the pre-crisis level of 2019 (-1.5%). High consumer prices are likely to be the main reason for this development.

The impact was most keenly felt in the areas where inflation was more persistent.

Price adjusted expenditure on durable goods, such as furnishings and household appliances, registered a particularly sharp decline (-6.2%).

The end of Covid policies meant that government activity in this area fell too.

General government also reduced its price adjusted consumption expenditure in 2023 (-1.7%) for the first time in almost 20 years.

Trade

This is, of course, a traditional German strength and it boosted GDP.

The subdued pace of growth of the global economy and weak domestic demand in 2023 also impacted foreign trade, which declined despite falling prices, with imports experiencing a greater contraction (-3.0%, priced adjusted) than exports (-1.8%, price adjusted).

There is a rub here though as the weaker German economy pulled import growth below export growth.This is an awkward part of the GDP calculations where they are boosted by something which suggests the situation is weaker rather than stronger.The impact here was 0.6% of GDP. That is before we get to the fact that the German trade surplus is an ongoing issue in world imbalances and has just got worse.

Germany was fiscally prudent

We have got used to countries deploying the fiscal weapon but Germany is using it less than many.

Measured as a percentage of GDP at current prices, the deficit ratio of general government was 2.0% in 2023 and therefore substantially lower than in the three preceding years.

There was an interesting framing here as usually we are assured that immigration brings large economic benefits.

 The ongoing financial burden as a result of the high number of refugees was reflected especially by the increased expenditure of local government, which recorded a deficit at the end of 2023, as did central and state government.

Comment

The annual decline poses more than a few questions for the economy of Germany and let me look further by noting a claimed strength which then turns into a weakness.

In 2023, the economic performance was achieved by an average of 45.9 million persons in employment whose place of employment was in Germany. This was an increase of 0.7%, or 333,000 persons, on a year earlier – more than ever before in Germany.

So far so good. But if you have more people employed and you produce less than a measure I often get asked about which is GDP per capita must have been weaker. Calculatiing it via the number of people in employment gives a fall of 1% in 2023.

The situation in the final quarter of the year showed things deteriorating further.

 According to the information available so far, GDP in the 4^th quarter of 2023 fell by 0.3% on the previous quarter after adjustment for price, seasonal and calendar variations;

Whilst we do not have explicit numbers for agriculture in this release.The protest bu German farmers in Bonn today suggests problems there too.

Podcast

 

 

Strong UK GDP numbers for November raise hopes of avoiding a recession

This morning has brought some better economic news for the UK from the Office for National Statistics.

Monthly GDP is estimated to have grown by 0.3% in November 2023,

So on an initial level we had some growth and that does fit with the surveys that we received.

The S&P Global/CIPS Flash Composite Purchasing Managers’ Index (PMI) came in at 50.1 in November, up from October’s 48.7. As such, the index rose above the 50.0 no-change threshold, signaling an improvement in private sector operating conditions from the previous month. ( Focus Economics)

Looking ahead that is hopeful because the UK Composite PMI improved to 52.1 in December. The numbers do not correlate exactly so I am thinking of the broad sweep of reported improvement.

Services

If we now switch to the breakdown we see a familiar pattern

On the month, services output is estimated to have grown by 0.4% in November 2023

The numbers are usually driven by the services sector. In particular there was this.

The main contributor to the 0.4% monthly growth in services in November 2023 was information and communication, which saw growth of 1.5% on the month…. Five of the six industries within information and communication grew in November 2023, with the largest contributions for November coming from publishing activities (mainly attributed to the publishing of computer games) and telecommunications.

The next sector was a little unusual for these times as retail trade picked up.

Wholesale and retail trade; repair of motor vehicles and motorcycles grew by 0.5% in November 2023 following 0.2% growth in October 2023. This was mainly attributed to 1.3% growth in retail trade, excluding motor vehicles and motor cycles.

The professional sector also grew overall although there was a mixed pattern within it.

Professional, scientific, and technical activities grew by 0.6% in November 2023 following a fall of 0.7% in October 2023. The growth in November was mainly attributed to legal activities and advertising and market research growing by 1.7% and 2.4%, respectively.

These growths were partially offset by a monthly fall of 0.2% in financial and insurance activities and a fall of 0.2% in education in November 2023.

We also got a further breakdown for the consumer sector.

Output in consumer-facing services grew by 0.6% in November 2023,

We have already looked at the growth in retail trade, but apparently holidays and the like were off the list.

The largest negative contribution to consumer-facing services in November 2023 came from travel agency, tour operator and other reservation service and related activities, which fell by 3.6% in November 2023.

Production

This came to the party in November too.

On the month, production output is estimated to have grown by 0.3% in November 2023, attributed to growth in manufacturing output.

As you can see the manufacturing growth was particularly welcome after a period of decline.

Monthly manufacturing output rose by 0.4% in November 2023 following four consecutive monthly falls; there were increases in 9 of its 13 sub-sectors during November 2023.

Although some of it was the erratic nature of the pharmaceutical sector which as we have looked at many times does not fit a monthly schedule.

The largest contributing manufacturing sub-sectors to the monthly rise in November 2023 were “manufacture of basic pharmaceutical products and pharmaceutical preparations” and “manufacture of food products, beverages and tobacco”, which increased by 4.8% and 1.4%, respectively.

For completeness the construction numbers are below although it is an especially erratic series and care is needed.

In November 2023, monthly construction output is estimated to have decreased 0.2% in volume terms.

A Deeper Perspective

Some November growth was welcome because it meant that the economy was larger than a year before.

Monthly GDP grew by 0.2% in November 2023 compared with the same month last year. For comparison, monthly GDP fell by 0.1% in between October 2022 and October 2023 (revised down from a 0.3% growth in our previous publication).

There were some downwards revisions with the quarterly release so the annual growth we though we had disappeared. They combined with the weak October number mean that the rolling quarterly figure was poor.

Real gross domestic product (GDP) is estimated to have fallen by 0.2% in the three months to November 2023, compared with the three months to August 2023.

Looking Ahead

The situation for December looks positive. I have already pointed out the improvement in the December PMI and to that we can add these.

All to play for regarding output growth in Q4 given decent signs of activity in retail, hospitality & manufacturing sector. ( Simon French)

Looking further ahead to this year we have seen falls in mortgage rates with more arriving this week according to the Financial Times.

Barclays and Santander have announced cuts to their mortgage rates, adding to momentum for cheaper UK home loan deals after HSBC and Halifax reduced rates last week.  Santander led its announcement with a sub-4 per cent deal available to new and existing customers with a deposit of at least 40 per cent on a five-year fixed rate mortgage. It said its residential fixed rates would fall by up to 0.82 percentage points from Wednesday. Barclays will from Wednesday offer a two-year fix at 4.17 per cent, down from 4.62 per cent, for borrowers with a 40 per cent deposit. Its rates will fall by up to 0.5 percentage points across its residential range,

The situation with regard to energy prices is also positive but with a nuance. Even the military action last night against the Houthis has not affected gas prices much ( 1.5%). The overall picture for the continuous futures contract is of large falls since the peak in late October and the price has halved since then. The nuance is the structure of UK domestic energy pricing where we will not see the effect of that until April with January seeing a 5% rise. Sometimes you really couldn’t make it up….

Comment

Whilst the economic picture looks like it is improving the reality is that we have not seen much economic growth in recent times. That is something that seems to be a theme of the these days. What I want to look at now is do the monthly GDP numbers help or hinder us in trying to figure out what is going on in the UK economy. In some ways it is a nice to have but the graph below shows a clear problem.

If you look at the GDP line we were supposedly great in January and June but awful in March and July.That makes very little sense which is added to by us going -0.3% in October and then 0.3% in November. If we look deeper into the last 2 months there are various numbers which look curious.

November 2023 was information and communication, which saw growth of 1.5% on the month, following a 0.9% fall in October 2023. Five of the six industries within information and communication grew in November 2023, after all falling in October 2023,

As you can see there is a wild swing which makes little sense in terms of its size. Another way of looking at this is via one of the main ( services) surveys.

In November 2023, the turnover response rate for the MBS element of the services sector was 82.1%. …….For context, the average turnover response rate for the service sector in 2022 now stands at 97.0%.

That extra 15% may tell a different story to what is originally reported.

UK GDP continues to flat line but prospects start to improve

This morning has brought news for the UK which Homer Simpson would describe as M’eh.

Monthly real gross domestic product (GDP) is estimated to have shown no growth in the three months to October 2023, compared with the three months to July 2023.

So we have continued the same pattern as in the third quarter of no economic growth. In a sense that is stability but not in any sort of good way and is a decline on the opening two quarters of the year where we saw GDP growth of 0.3% and then 0.2%.

The monthly detail provides a bit of a problem though.

Monthly GDP is estimated to have fallen by 0.3% in October 2023, following growth of 0.2% in September 2023.

I will come to the detail of the reported fall in a moment but the context here as I have pointed out many times is of an erratic series.

That is the monthly growth rates for the past year and the worst part of the erratic nature of this is shown by GDP growth of 0.7% in June followed by a 0.6% decline in July. Does anybody believe that? As you have to think we were fantastic in June followed by awful in July which makes little sense. The pattern suggests that some parts of the economy do not work to s monthly pattern. One example of this we have looked at in the past is the pharmaceutical sector which ebbs and flows each month in the monthly production numbers.

What happened in October?

As so often the main player was the service sector, but the others fell as well.

Output in the services sector fell by 0.2% in October 2023 and was the largest contributing sector to the contraction in monthly GDP. Production and construction output both fell on the month, by 0.8% and 0.5%, respectively.

A driver of the services fall was this.

The main driver to the 0.3% fall in the services output was information and communication, which fell by 1.7% in October 2023, following growth of 0.4% in September.

It seems to have unsettled the Office for National Statistics into putting 0.3% by mistake rather than 0.2%. There is a further breakdown below.

Five of the six industries in the information and communication subsection fell in October 2023, with the largest contributions coming from computer programming, consultancy and related activities, as well as motion picture, video and TV production.

Professional, scientific and technical activities fell by 0.7%, with falls in five out of the eight industries. Legal activities was the largest contributing industry, falling by 2.8% in October 2023.

There has been filming in Battersea Park so we are doing a bit for the TV and film section. The one part which grew is below.

These falls were partially offset by growth in administrative and support service activities, which grew by 0.7% in October 2023. This was driven by growth of 1.4% in rental and leasing activities.

There was some reinforcement of the reduction in strikes in the labour market report yesterday from this.

Human health and social activities work grew by 0.4% in October 2023, driven by a growth of 0.5% in human health activities. There were three days of coordinated industrial action by junior and senior doctors in October 2023, where NHS England news reported that 118,026 appointments were rescheduled. This is less than the four days of strikes in September 2023.

Reinforcing the downwards trend was a sector which has been having a rough time of it for quite a while now.

Output in consumer-facing services fell by 0.1% in October 2023, and remains 5.0% below pre-coronavirus pandemic levels (February 2020), while all other services were 7.2% above . The largest negative contributions in October 2023 came from other personal service activities, which fell by 2.3%.

I am sure that some of what is essentially the same activity has simply moved category but even so one cannot avoid the fact that this is a depression for this sector.

Production

As you can see below the news in October continued a pretty grim trend.

On the month, production output is estimated to have fallen by 0.8% in October 2023, driven by widespread declines in manufacturing output, following no growth in September and a fall of 0.5% in August.

A deeper picture is provided by this.

Production output is estimated to have fallen by 0.7% in the three months to October 2023 compared with the three months to July, driven by a fall of 0.9% in manufacturing. Electricity, gas, steam and air conditioning supply fell by 0.5%, mining and quarrying grew by 1.2% and water supply, sewerage, waste management and remediation activities grew by 0.1% over the same period.

Firstly let me welcome the better mining and quarrying figures because hopefully much of that is oil and gas. That issue is on my mind because the Euro area has this morning shown how high energy prices can cause deindustrialisation as production was 6.6% lower in October than a year before. We have our own problems  with recent figures but have avoided the annual plunge so far as our production has not done much rising 0.3% over the past year but we have avoided that. But maybe it is beginning to hit us as well.

Manufacturing fell by 1.1% in October 2023 with widespread falls in 10 of the 13 subsectors. The largest negative contributions in October came from a 2.5% fall in manufacturing of computer, electronic and optical products, and a 3.0% fall in manufacture of machinery and equipment not elsewhere classified (N.E.C.) in the month

Construction

This is possibly the worst series to try to measure monthly if you look at the large revisions that are experienced. But for what it is worth here are the numbers.

In October 2023, monthly construction output is estimated to have decreased 0.5% in volume terms. This follows a 0.4% increase in September 2023.

Comment

The reality is that we have seen a period of no economic growth at all. That is having an impact in that financial markets are responding to this as we have seen the UK ten-year yield fall below 4% this morning. From the peaks of October we have seen a fall of the order of three-quarters of a point. The overall position provides three problems for the Bank of England when it votes on interest-rates later. The simplest is that “Higher for Longer” has not lasted very long in bond markets. Next up is that whilst we have not done that well over the past year we have had some growth which is very different to the 2% decline they forecast.

The third issue is positive for economic growth via lower prices or disinflation. This comes from natural gas prices. There is a continuous futures contract which pealed at 146 pence per therm in October but is now 90 pence representing quite a fall. The price in terms of precise numbers is volatile but there has been a welcome shift lower. Sadly it will take a while for domestic consumers to see the benefit because of the price cap, but the outlook now looks quite a bit better. I would expect this to be much of the reasoning behind this.

November data highlighted a modest rebound in business
activity across the UK service sector, which ended a three month period of decline. ( S&P Global PMI )

 

What are the economics of energy and wind power these days?

This morning has provided some food for thought on the issue of renewable power. Each morning I post the UK Wind Power figures and we have gone from yesterday’s 15.3 GW to 2.8 GW. Along the way it fell to 1.06 GW overnight according to the iamkate website So we have a clear unreliability issue as we note the promises of plentiful renewable power in the past. That is reinforced by the fact that in this particular instance wind power hit a nadir when solar was providing nothing. Indeed solar power has its issues at this time of year as at 9 am this morning it was producing a mere 0.11 GW. It did better yesterday rising to 3.8 GW but there is a clear issue in varying from day to day before we get to the fact that it produces the least ( gone around 3.30 pm each day) when we need power the most.

Next up is the issue of cost as after all we were promised it would be singing along with the band Middle of the Road.

Ooh we, chirpy, chirpy, cheep, cheep
Chirpy, chirpy, cheep, cheep chirp

Here I can stay in my usual territory as a Bank of England policymaker has given us her thoughts on the situation.

In these stylized examples, in the short-run, before any demand response reduces emissions, carbon abatement strategies lead to an increase in prices and a reduction in output, reflecting a combination of higher marginal costs of firms and behavioral signals to consumers.

In some ways this is one of the most extraordinary statements I have read from a central banker and I can assure you I have read a lot of nonsense from them over the years. Her job is to control inflation and yet she is admitting that she supports a policy to raise prices or if you prefer completely unfit for the role.

Earlier in her speech she showed how prices have been raised.

Market-based incentives include putting a price on carbon^footnote[5] via carbon taxes, via an emissions trading system (ETS), or via a border carbon adjustment (BCA); subsidies can promote ‘green’ investment (reducing the price of lower-emissions products) relative to emissions-intensive investment or incentivise consumption of lower-carbon-footprint products (e.g. electric vehicles). There are also non-market-based climate policies and regulation that range from bans on fossil fuels to limits on emissions, as well as direct government investment, for instance into green R&D.

As a general rule “market-based incentives” are quite a can of worms. After all you either have a free market or you do not. What they do is try to avoid a proper market.  But the real point here is the number of measures involved in raising the price of energy so that renewables look economic. Anyway this all started around 2007 with Ed Milliband as Secretary of State and has been continued by whatever party has been in power since. But the basic issue is that whilst we were told it would be cheap they were simultaneously setting policies meaning that it would not be and even worse they did their best to conceal the truth and hide this.

What about now?

One might reasonably think that the present time would be a dream scenario for wind power. After all even this week I have seen some on social media claim that it is free. If only that was remotely true. Meanwhile there has been news this week. From the UK government.

Boost for offshore wind as government raises maximum prices in renewable energy auction

Maximum price that other renewables projects can receive in the next Contracts for Difference (CfD) auction has also been raised.

Which leads to the question of how much?

The maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh ahead of Allocation Round 6 (AR6) next year.

That is an extraordinary level for floating offshore wind! I would imagine it has all sorts of challenges which explains the price. Just for reference purposes the price over the past 24 hours in the UK has averaged £118 MWh so even on a troubled day with little wind we have a much cheaper price than what is now being offered for it.

Anyway at least someone there has a sense of humour.

First established nearly a decade ago, the CfD has helped reduce the cost of renewables.

Along the lines of the way George Orwell described the chocolate ration being increased from 4 ounces to 2.

Whilst looking at the government statement there is another issue with is the weasel word capacity.

These have so far awarded contracts totalling around 30GW of new renewable capacity across all technologies since 2014………..This will ensure healthy competition among a strong pipeline of projects, helping the UK deliver on its ambition of up to 50GW of offshore wind by 2030, including up to 5GW of floating offshore wind.

According to them the UK had a capacity just under 30 GWh as of the end of the second quarter of this year, so as there has been new turbines since probably over 30 now. But when I was checking the numbers in the recent storms we only nudged over 20 GWh. This is to say the least not a little awkward for the claims because in weather that was presented in apocalyptic terms by our national broadcaster the BBC we only produced around 70% of claimed capacity. In other arenas there would be a barrage of miss selling cases.

There does seem to be a similar situation for solar power because in checking the figures I note the claimed capacity was 15.3 GWh However when monitoring the numbers over the summer we only seemed to reach more like 10.5 GWh As I am not always watching lets raise that to 11 GWh, but even so that is a fair way short of the claims as well.

Producers are struggling

There is enough irony even for Alannis Morrissette in the fact that higher energy prices have exploded like a bomb across the energy sector.

Embattled wind-and-electricity generation giant Siemens Energy gets €15 billion in loan guarantees to shore up its balance sheet, of which half of them will come directly from the German government. ( @JavierBlas )

How does that work? After all any other industry with higher demand and higher prices would be thinking it is Christmas every day. But of course it is worse than that.

So the govt doubles the price of competition (gas/coal) through carbon taxes or bans it completely (nuclear) then provides a guaranteed price, shielding the wind industry from its own intermittency, and wind still has to be bailed out by the government because it makes insufficient profit? How is this sustainable ? ( @ArgonautCapital )

It has also led to this.

In other words, Germany collects with its left hand CO2 emissions money and with its right hand send it back to some of the country’s most energy-intensive companies. So the left (hand) and the right (hand) are both happy. ( @JavierBlas)

What about another green darling hydrogen?

Plug Power, the hydrogen firm which once was a darling of the ESG crowd, warns a lack of funding creates “substantial doubt about the company’s ability to continue as a going concern” Shares down ~25% in after-market trading. At its peak in 2021, it was worth ~$35 billion. ( @JavierBlas )

Comment

As you can see there are a litany of problems here. In itself that is not necessarily a problem because in anything new there are failures. Look at the examples of the railways or more recently technology companies. The issue is the involvement of the state where we have another “Too Big To Fail” situation. Politicians will be happy to keep spending our money to avoid the consequences of their own failures. But there is a simple basic question which is that how can something sold as being “cheap” apparently be so uneconomic when prices are so high?

Next up is the way that this new religion has infested the establishment. Catherine Mann at the Bank of England is an unelected bureaucrat who has probably succeeded because of her commitment to the new religion. I would say that she is a technocrat but in her supposed area of expertise she is at a body which has just been party to an enormous failure as inflation was claimed to be “Transitory” as it went through the roof. One might reasonably think that the day job is enough for now, whereas she is actively campaigning to make it worse.

UK GDP recovered in August and September after the July fall

This morning has brought some good economic news for the UK. Below is the official release.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in September 2023, following growth of 0.1% in August 2023, revised down from growth of 0.2% in our previous publication.

As you can see there was disappointing news in the downwards revision to August. But the overall picture is that the economy returned to growth after the downwards lurch in July.  As so often it was essentially services growth as you can see below.

Output in the services sector rose by 0.2% in September 2023 and was the largest positive contributing sector to the growth in monthly GDP. Production output showed no growth and construction output grew by 0.4%.

The leader of the pack in growth terms was the area below which has been in a good run of form recently.

The 0.8% growth in professional, scientific and technical activities in September 2023 follows growth of 0.8% in August and 0.4% in July 2023. Looking at the three months to September 2023, compared with the three months to June 2023, professional, scientific and technical activities saw growth of 0.6%. Six of the eight industries in this subsector grew in September 2023, with the largest contributions coming from architectural and engineering activities, technical testing and analysis, and other professional, scientific and technical activities.

If you thought we had finally escaped the Covid/health combo I am afraid not, with an addition measure of industrial action.

Human health and social work activities saw growth in all three industries, with human health activities being the largest contributing industry, growing by 1.1% in September boosted by the latest COVID-19 vaccination campaign. Industrial action continued in the human health industry in September 2023, with four days of industrial action taking place, compared with six days in August.

Actually I should be more upbeat about the vaccinations as I know one of my aunt’s was pleased to have hers. especially as she was able to go to her GPs and have the flu vaccination at the same time. Actually we can’t get away from education either although it is the strikes this time around.

Education grew by 0.6% in September, after growth of 2.0% in August 2023. The August growth follows a fall in July where there were two days of industrial action by teachers in England.

On the other side of the coin was something which shows I think the combined impact of the cost of living crisis and some of the interest-rate increases.

Output in consumer-facing services fell by 0.2% in September 2023, and remains 4.9% below pre-coronavirus (COVID-19) levels (February 2020), while all other services were 7.4% above. The largest negative contributions in September 2023 came from retail trade, excluding motor vehicles and motorcycles (down 0.9%), and travel agency, tour operator and other reservation activities (down 5.8%).

That part of the consumption numbers is being squeezed.

We can note that production improved a fair bit although when that is to no growth it shows times are hard.

Production output showed no growth in September 2023, following falls of 1.1% and 0.5% in July and August, respectively.

One area I would like to pick out is one which should be part of a maximum national effort due to the ongoing energy crisis. But as you can see it does not seem to be a government priority.

Mining and quarrying output fell by 2.2% in September 2023, after growth of 3.1% in August 2023. The fall in September was driven by a 2.5% decline in the extraction of crude petroleum and natural gas.

I am afraid those numbers come under the category of you really couldn’t make it up.

Construction

This caught my eye as it gives a different picture to what we have been told by the PMI business surveys.

Monthly construction output is estimated to have increased 0.4% in volume terms in September 2023; this came from an increase in repair and maintenance of 2.1%, whereas new work fell by 0.8%. This increase follows two consecutive falls in monthly construction output.

Whereas the September PMI told us this.

“Output levels declined across the UK construction
sector for the first time in three months during September
and the latest downturn marked the worst overall
performance since the early stages of the pandemic.”

Thus they could not have been much more different as the official numbers rose by 0.4% but a PMI of 45 showed a sharp fall. Looking at the detail there was a fall in new work in the official series so does the PMI omit maintenance? For those who are regular followers of my work this is the reverse of the Irish pharmaceutical “cliff” when the PMI series missed a large drop, whereas this time they have reported a drop that did not happen.

The irony here is that the official series is particularly prone to revisions itself.

A Deeper Perspective

Whilst the news was good this morning some of that was relative because the quarterly number flat-lined.

Looking at the broader picture, GDP showed no growth in the three months to September 2023.

The relative issue comes in two parts. The lurch down (-0.7%) in July meant that the quarter got off to an awful start and hence there is a considerable risk of a fall. Next was that our peers did worse as Euro area GDP fell by 0.1%, although ex-Ireland they were closer to zero.

The BBC seems obsessed with doom and gloom as economics editor Faisal Islam shows.

GDP did actually officially fall a tiny amount – see bottom right two numbers – from £571043 to £570880… tho only to 2 decimal places, at one decimal place (the official numbers) it rounds to 0.0… cue debate about “negative zeros” and “positive zeros”. Bottom line = stagnation

He is either unaware that the numbers are in truth nothing like that accurate or is ignoring it. Plus the only debate about “negative zeros” and “positive zeros” is in his head as I do not recall it ever being mentioned. Unfortunately all this has left him too busy to report the 0.2% GDP growth in September.

Also if we stay with the relative theme we see this.

Monthly GDP grew by 1.3% in September 2023 compared with the same month last year. For comparison, monthly GDP grew by 0.5% between August 2022 and August 2023.

I have given both numbers because the State Funeral Bank Holiday distorted the numbers so the true picture is maybe 1%. The relative comparison has to be quarterly and is below.

GDP is estimated to have increased by 0.6% in Quarter 3 2023 compared with the same quarter a year ago.

Whereas the Euro area did this.

Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 0.1% both in the
euro area and in the EU in the third quarter of 2023, ( Eurostat)

Comment

Whilst today’s numbers are welcome as we have dodged a decline and over the past year have outperformed our peers there is a grimmer reality. This is that until we have a more realistic energy policy economic growth is likely to remain not much. The one country which has just seen a surge in economic growth the US is doing so via a fiscal surge and a by-product of that echoed around bond markets yesterday.

Today’s 30y duration dump is pretty much the Super Bowl of UST auctions. It’s a new issue, it’s super-sized and it’s a refunding month. I won’t hazard a guess on how it goes but it will be fun ( @Fullcarry)

Fair play to Ed who was ahead of the game on this as the US $24 billion issue needed considerably higher yields to find buyers.

I thought I would end with a look at some numbers which reinforce my view that the monthly GDP numbers are unreliable.

Arts entertainment and recreation grew by 3.0% in September 2023 after a fall of 7.5% in August.

That is a pretty wild swing to say the least. Also can somebody run me by how we recorded education output growth in August when virtually no-one would be at school or university?

Education grew by 0.6% in September, after growth of 2.0% in August 2023. The August growth follows a fall in July where there were two days of industrial action by teachers in England. Please note that education attendance is considered to be constant over the school year, so summer holidays do not reduce the estimate of education output in August 2023.

 

China faces problems from its reliance on property and manufacturing rather than “deflation”

Today the economic agenda has been set by China which has wrong footed the mainstream view again. Whereas we have been for some time now observing an economy affected by an ongoing property crisis, the mainstream view switched to one of recovery. Whereas this morning they seem somewhat rattled by this.

In October 2023 , the national consumer price dropped by 0.2% year-on – year . Among them, urban prices dropped by 0.1% and rural prices dropped by 0.5% ; food prices dropped by 4.0% and non-food prices increased by 0.7% ; consumer goods prices dropped by 1.1% and service prices increased by 1.2% . On average from January to October , the national consumer price increased by 0.4% compared with the same period last year .

I rather suspect that Chinese workers and consumers will welcome some lower prices especially for food and that many in the West facing higher food prices, would be happy to change places with them. Apparently not the journalists at the Financial Times.

China’s economy tumbles back into deflation in blow to recovery

This leaves the FT in quite a mess because they seem to think both higher and lower food prices are bad for us! Anyway if we look at the monthly figures we see a similar pattern.

In October , the national consumer price dropped by 0.1% month-on-month . Among them, urban prices dropped by 0.1% and rural prices dropped by 0.1% ; food prices dropped by 0.8% and non-food prices remained unchanged; consumer goods prices dropped by 0.1% and service prices dropped by 0.1% .

So Chinese food prices have fallen and we are supposed to be in a deflation scare. Actually falling prices are disinflation unless they think the economy is shrinking which is rather awkward for the recovery theme. It is all a but silly for moves which are within the margin of error.

To my mind that gets worse when we look at the cause which is a familiar one for China.

In October , the prices of food, tobacco and alcohol fell by 2.1% year-on-year , affecting the CPI (Consumer Price Index) to fall by about 0.61 percentage points. Among food, the price of livestock and meat fell by 17.9% , affecting the CPI to fall by about 0.66 percentage points, of which the price of pork fell by 30.1% , affecting the CPI to fall by about 0.55 percentage points;

So you could argue that pork farmers are seeing both disinflation and deflation but the other side of the coin is that consumers are clearly winning. Also the main impact did not happen in this month ( October for this purpose)

livestock meat The price dropped by 1.0% , affecting the CPI to fall by about 0.03 percentage points, of which the pork price fell by 2.0% , affecting the CPI to fall by about 0.03 percentage points;

Staying with the theme if you like you pork with some egg and vegetables you have had a pretty good year so far.

the price of eggs fell by 5.0% , affecting the CPI to fall by about 0.04 percentage points; fresh vegetables Prices fell by 3.8% , affecting the CPI to fall by about 0.08 percentage points;

Again many in the West would happily change places with this.

Producer Prices

Here the situation looks a little more clear cut at least initially.

In October 2023 , the national industrial producer price dropped by 2.6% year-on -year and remained unchanged month-on-month; the industrial producer purchasing price fell by 3.7% year- on -year and increased by 0.2% month -on-month . On average from January to October , the ex-factory price of industrial producers fell by 3.1% compared with the same period last year , and the purchasing price of industrial producers fell by 3.6% .

The unchanged and small rise in October we see again rather challenges the deflation headlines the media are full of today.  That is reinforced by the overall pattern where the fall in 2023 so far has been around 3% in general. If we look around we see that a price for a barrel of Brent Crude Oil being around US $80 seems to reinforce that move.

I do not know about you but these numbers from the Euro area scream disinflation to me.

Industrial producer prices in the Euro Area fell by 12.4% year-on-year in September 2023, following an 11.5% decline in the previous month and compared to the market consensus of a 12.5% decrease. This marked the steepest decline in producer prices on record,

Also deflation if we take the word of former ECB President and Italian Prime Minister Mario Draghi.

DRAGHI: ‘ALMOST SURE’ EUROZONE WILL BE IN RECESSION BY YEAR-END ( @DeltaOne )

Trade

On Tuesday Reuters updated us with the latest figures.

Exports shrank 6.4% from a year earlier in October, customs data showed on Tuesday, faster than a 6.2% decline in September and worse than a 3.3% fall expected in a Reuters poll. Imports rose 3.0%, dashing forecasts for a 4.8% contraction and swinging from a 6.2% fall in September. Imports snapped 11 straight months of decline.

Actually here we have a possible sign of a boost for the economy from higher imports. But in terms of GDP there is an issue as lower exports and higher imports reduce it. However we can take this further via looking at an old theme on here which was when the former Bank of England Governor Baron King off Lothbury spoke of rebalancing.

Rebalancing China

The irony here is that China is a mirror image of the UK as much is in reverse. This from Michael Pettis highlights that.

Investment accounts for roughly 24 per cent of global gross domestic product, and consumption the remaining 76 per cent. Even in the highest investing economies, the actual investment share of GDP rarely exceeds 32-34 per cent, except for short periods of time. China, however, is an extreme outlier. Investment last year accounted for around 43 per cent of its GDP, and has averaged well over 40 per cent for the past 30 years. Consumption, on the other hand, accounts for roughly 54 per cent of China’s GDP (with its trade surplus making up the balance).

The present Chinese objective is to increase manufacturing but can it?

If its economy were to grow over the next decade at 4-5 per cent a year even without a further increase in the manufacturing share of the country’s GDP, China’s share of global manufacturing would rise from its current 30 per cent to 37 per cent. Can the rest of the world absorb such an increase?

If China manages this then Level 42 will have been correct.

The Chinese way
Who knows what they know
The Chinese legend grows

But manufacturing elsewhere will take quite a pasting and as the present push seems to be in EVs ( Electric Vehicles) it seems a collision with Germany looks inevitable.

Property

The situation here will have been exacerbated by the rise in interest-rates in the United States with them being of the order of 5%. If we factor in the issues with commercial real estate over there then any Chinese borrowing would be over 10% now and maybe a fair bit more. So that option is between much lower and closed which is probably why we are seeing things like this.

Nov 8 (Reuters) – Chinese authorities have asked Ping An Insurance Group to take a controlling stake in embattled Country Garden (2007.HK), the nation’s biggest private property developer, four people familiar with the plan said.

Whilst there has been an official denial some seem to believe it.

Ping An’s Hong Kong-listed shares finished 5.4% lower in heavy trade, wiping about $2.1 billion off its market value. Country Garden shares surged 12.2%, valuing the company at about $3 billion, and stocks of other Chinese developers also jumped.

This is all very reminiscent of what another country did leading to a touch of the Vapors and a balance sheet depression.

I’m turning Japanese, I think I’m turning Japanese
I really think so
Turning Japanese, I think I’m turning Japanese
I really think so

Comment

As you can see there are more than a few challenges for the Chinese economy but what the media are obsessing over or “deflation” is not one of them. Many in China will welcome lower food prices. On the other side of the coin there are real challenges in two of its economic mainstays. The first is property where the bubble had burst and has been replaced by an enormous effort to deny reality. It was supposed to be replaced by even more manufacturing but will other countries let China wipe out whole swathes of their manufacturing sector? Actually initially they have a chance via the obsession with renewable energy making some manufacturing now longer viable in Europe. But even some of the obsessives are being forced to face some form of reality.

GERMAN GOVERNMENT REACHES AGREEMENT ON ELECTRICITY PRICE SUPPORT FOR INDUSTRY – HANDLESBLATT ( @financialjuice)