UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.


This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.



We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!


The UK economy continues to motor ahead or if you prefer is on drugs

Today sees us advance on some key data for the UK economy as we receive production, manufacturing and trade data. But before we even get to it there has been a warning from France which has already opened the day with something of a conundrum.

In January 2017, output decreased sharply again in the manufacturing industry (−1.0% as in the previous month).

Whereas the Markit PMI ( Purchasing Managers Index ) told us this.

 The index was down from January’s reading of 53.6

We were told that the french economy was doing well in January. From Reuters.

“The expansion was broad-based with marked increases in output evident in both the manufacturing and service sectors, driven by firm underlying client demand. In turn, this filtered through into the labor market.”

Markit has had trouble before with France ironically for producing numbers which were lower than official estimates. But this is another issue for a series which has proved to be disappointing in its accuracy in more recent times.

UK monetary policy

This remains extremely expansionary with the Bank of England adding to its holdings of UK Gilts ( government bonds ) and corporate bonds this week. Indeed at £434.2 billion the UK Gilts part of the QE (Quantitative Easing) program has only one day left but at £8 billion so far there is more corporate bond QE to come. If we add in the £43.9 billion of the Term Funding Scheme we get an idea of the total scale of Bank of England monetary policy in balance sheet terms and that is before we note a Bank Rate set at 0.25%.

The other factor at play is the lower level of the UK Pound £ which post the EU leave vote in the UK has provided an economic stimulus equivalent to a 2.75% cut in Bank Rate if we use the old Bank of England rule of thumb. It would have created quite a shock would it not if we had somehow had the same exchange rate as before but with a Bank Rate of -2.5%!

Today’s data

Production and Manufacturing

Unlike the numbers for the French I quoted above these start brightly for the UK.

In the 3 months to January 2017, total production was estimated to have increased by 1.9%, with manufacturing providing the largest contribution increasing by 2.1%, its strongest growth since May 2010.

However manufacturing output continues to see-saw each month along with the pharmaceutical industry.

In January 2017, total production decreased by 0.4% compared with December 2016 with manufacturing providing the largest downward contribution, decreasing by 0.9%…………The monthly decrease in manufacturing was largely due to a decrease in pharmaceuticals, falling by 13.5%,………. pharmaceuticals can be highly erratic, with significant monthly changes, often due to the delivery of large contracts.

I am glad to see that our official statisticians have caught up with the view that I have been expressing on here for the best part of a year now as this recent pattern began last spring. However if we look back over the past year there is some call for a smile for spring.

Total production output for January 2017 compared with January 2016, increased by 3.2%, supported by growth in all 4 main sectors, with manufacturing providing the largest contribution, increasing by 2.7%.

The pharmaceutical sector is up some 6.1% on a year ago which is good news. But of course that only regains some of the ground which we lost.

Since then, both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.3% respectively in the 3 months to January 2017.

What about trade?

This is an ongoing worry for the UK economy that stretches back for around 30 years or so. Actually I recall days when these numbers were considered very important and as a young man working in the City it was “all hands on deck” when they were released. These days they do not get much of a mention especially if they are better because the financial twitter community if I may call it that do quite a bit of cherry picking. But the “same as it ever was” theme continued in January.

The trade deficit in goods and services in January 2017 was £2.0 billion, unchanged from December 2016.

It is odd that such an erratic number is the same for two months in a row but let us take a deeper perspective.

Between the 3 months to October 2016 and the 3 months to January 2017, the total trade deficit (goods and services) narrowed by £4.7 billion to £6.4 billion.

We find some cheer here in the improvement so let us probe further.

At the commodity level, the main contributors to the narrowing of the total trade deficit in the 3 months to January 2017, were increased exports of non-monetary gold, oil, machinery and transport equipment (mainly electrical machinery, aircraft and cars) and chemicals.

So the chemicals numbers are consistent with the reported growth of the pharmaceutical industry which is a relief as they do not always coincide. Also increased production and thence exports of vehicles has helped.

The latest data shows that passenger motor vehicles were the UK’s second highest exported commodity behind mechanical machinery in 2016. The value of cars exported by the UK increased by 14.8% in the year to January 2017 with export growth stronger to non-EU countries (17.9%) compared with the EU (10.0%).

Indeed if you want something hopeful take a look at this.

However one of the problems with these statistics is that they are unreliable and frequently heavily revised. For the UK this is a particular issue as the numbers for the service sector are collected quarterly at best. However this time the revisions were cheerful ones.

The trade in services balance (exports less imports) has been revised upwards by £2.7 billion in Quarter 4 2016, to a trade surplus of £26.6 billion. This reflects an upwards revision of £1.7 billion to exports, and a downwards revision of £1.0 billion to imports.

So a nudge higher for UK GDP (Gross Domestic Product) growth in the last quarter of 2017 although not enough to be especially material.

Another way of looking at this is to note how few countries we do so much of our trading with.

In 2016, nearly 50% of all UK exports of goods went to just 6 countries: the United States, Germany, France, Netherlands, Republic of Ireland and China. The United States are our biggest export partner, receiving 15.7% of all UK exported goods.

The UK’s largest import partner was Germany in 2016, supplying 14.8% of all goods imported to the UK. Similar to exports, over 50% of the UK’s imports of goods come from 6 countries: Germany, China, United States, Netherlands, France and Belgium.


This morning has seen some more relatively good news for the UK economy. The pattern for production and manufacturing has been relatively solid if erratic on a monthly basis and if we add in the noted improvement to services trade there is good news here. The worry ahead is of course the impact of inflation on the economy mostly via its impact on real wages. I note that according to the Bank of England’s latest survey the ordinary person is noticing it.

Asked to give the current rate of inflation, respondents gave a median answer of 2.7%, compared to 2.3% in November………. Median expectations of the rate of inflation over the coming year were 2.9%, compared with 2.8% in November.

They seem much more in touch with reality than the 2.4% for 2017 forecast by the Office for Budget Responsibility on Wednesday.

For those who follow the UK construction sector the numbers are below, but take them with not just a pinch of salt and maybe the whole salt-cellar.

Construction output fell by 0.4% in January 2017, following consecutive rises in November and December 2016 (0.8% and 1.8% respectively).

Good news for the UK economy and GDP

Today we embark on a raft of UK economic data but before we even reach it the Financial Times has returned to the most familiar theme in UK economic life.

There is a very cool-looking apartment on sale across the street from Harrods in London. It has three bedrooms, beautiful high ceilings, striking contemporary art on the walls (not included in the sale) and a roomy kitchen done out in glossy white wood and chrome. It is not cheap at £7.25m, but it is an awful lot cheaper than it was last year.

The flat was first listed on March 1 2016 for £8.25m. In July, about three weeks after the EU referendum, its price was cut; then it was cut again in December. Today it is available for about 12 per cent — or a full £1m — less than the original asking price.

Actually that looks like a PR puff piece or indeed advertising dressed up as journalism. But we do move onto an area where the FT has caught up with us in here which is the fact that house prices have been seeing falls in central London.

A quick glance at the property website Zoopla reveals that reductions of 15 to 20 per cent for London homes priced above £1m are not uncommon. According to its research department, more than a third of homes on sale in Kensington and Chelsea have had their asking prices reduced by an average of 7.97 per cent.

The FT typically tries to blame Brexit but then finds someone who thinks it has provided a boost! That comes from this.

After the result was announced, and the pound fell to its lowest level against the dollar for 31 years, the spending power of those buyers with dollars in their pockets escalated wildly. Up about 11 per cent on the currency play alone.

Which means overall we see this.

However, once you factor in the decline in London house prices over the intervening six months, you are looking at some serious markdowns indeed. Knight Frank calculates an effective dollar discount of 22 per cent, between December 2015 and December 2016.

So there you have it the message from the Financial Times is to sing along with the band Middle of the Road about central London property.

Ooh-We, Chirpy, Chirpy, Cheep, Cheep
Chirpy, Chirpy, Cheep, Cheep, Chirp
Let’s go now

If we move on from what in some cases is the equivalent of specific property pimping there are issues here. One is simply the price as we mull if even if a one bedroom property is in Covent Garden it can be considered cheap. Also we need to compare the recent falls which estate agents emphasis with the previous rises which they do not. Next comes the issue that the flipside of a lower £ is that existing owners have lost money in their own currency. Also looking forwards the real issue for many is what you expect the UK Pound £ to do next as the future of course matters much more than the past in that regard.
There is much for me to mull on my next cycle ride into the City as once I pass Battersea Dogs Home then here I am.

Some units at Nine Elms, a new residential development in Battersea, are being marketed at about £1,300 per sq ft, after already being given sizeable reductions, according to Zoopla. For £1,300 per sq ft, you could buy a historic apartment overlooking the Duomo in Florence, or a glossy new-build apartment in Miami Beach.

Is that cheaply expensive or expensively cheap?

Boom Boom UK

It is nice to end the week with some really good news for the UK economy so let us get straight to it.

In December 2016, total production was estimated to have increased by 1.1% compared with November 2016; the only contribution to the increase came from manufacturing……manufacturing provided all the growth, increasing by 2.1%.

So an upwards push to production from manufacturing which did this.

The increase in total production was due to broad-based increases in manufacturing. Pharmaceuticals (which can be highly erratic) provided the largest contribution to the growth, increasing by 8.3%. Other large contributions to the increase came from basic metals and other manufacturing and repair not elsewhere classified, which increased by 4.5% and 3.7% respectively.

So in an, if I may put it this way Trumpton era we find that we are en vogue by boosting manufacturing? We need to dig a little deeper though as pharmaceuticals have had a good 2016 but via a volatile path.

in December 2016 compared with December 2015, total production output increased by 4.3%. All main sectors increased, with the largest contribution provided by manufacturing

They seem a little shy of telling us that manufacturing rose by 4% so let me help out. That was driven by pharmaceuticals being up by 19.1% which illustrates their volatility. This left us with positive numbers for 2016 for both production (1.2%) and manufacturing (0.7%).

If we continue with the good news theme then we have some hope of a further upwards revision to UK GDP for last year. This is the reply I received from our statisticians in what was an excellent service.

IOP and Construction combined have an impact of 0.04%. This is nearly all from IOP. ( @StatsKate )

For newer readers I have little or no faith in the official construction numbers which in the words of Taylor Swift have seen “trouble, trouble,trouble” but for completeness here they are.

Compared with December 2015, construction output increased by 0.6%, the main contribution to this growth came from new housing work.


Even these had a good news tinge to them this morning.

The UK’s deficit on trade in goods and services was £3.3 billion in December 2016, a narrowing of £0.3 billion, which is contributing to the narrowing in Quarter 4 2016.

So let us look further.

The UK trade deficit on goods and services narrowed to £8.6 billion in Quarter 4 (Oct to Dec) 2016, following a sharp widening of the deficit in Quarter 3 (July to Sept) 2016; this narrowing was predominantly due to an increase in exports of goods to non-EU countries.

Have UK industry and businesses got the new post EU leave vote vibe? I think that it is too pat a conclusion but we did see this.

there was a much higher quarter-on-quarter growth in exports to non-EU countries in Quarter 4 2016, following a fall in Quarter 3…….Exports of goods to non-EU countries rose by 17.3% to £43.8 billion between Quarter 3 2016 and Quarter 4 2016.

So some of it was a simple rebound.


Today has seen some rather good news for the UK economy as in spite of a drag from the continuing maintenance of the Buzzard oil field production was pushed higher by strong manufacturing data driven by the pharmaceutical industry. Added to this construction at least did not fall and on a quarterly basis the trade figures were better. So there is upwards pressure on the preliminary GDP report although we cannot say exactly how much yet.

There are two main clouds in our silver lining. These are simply  that we have yet another trade deficit in an extremely long series and some perspective on production.

Since then, both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 7.6% and 4.2% respectively.

A Bank of England for the 0.0000000000000000000001%

Yesterday saw the announcement that Charlotte Hogg was to be promoted to Deputy Governor and it raised this issue.

Dear Mark Carney does promoting a daughter of a Viscount and a Baroness come under the Bank of England Diversity banner?

It certainly comes under the minority banner as I am no expect on Debretts but do wonder if she is in to coin a phrase, a class of one? Oh and it appears that Kristin Forbes is singing along to “We gotta get out of this place” by Blue Oyster Cult.

So if you hint at an interest-rate rise your current lifespan at the Bank of England appears to be 48 hours!

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures


These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.


We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.


Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.


So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

The UK economy has rebalanced towards services and away from production

Today gives us an opportunity to look more deeply into the way that the UK economy has been rebalancing in the credit crunch era and indeed before it. The concept was first introduced all the way back in 2002 by the then Governor of the Bank of England Mervyn King.

The strength of consumption and the weakness of net exports have led to an imbalance between manufacturing and services………The need to rebalance the British economy is clear.

He even told us how this could be achieved.

There are four key prices that will determine the extent of the re-balancing that occurs. They are the sterling exchange rate, the oil price, real wages, and interest rates. It is these prices that will provide the incentives for the required shift in resources.

Some perspective is provided by the fact that an oil price of US $26 per barrel was considered high then ( it had risen from US $10) although there was something more familiar which was worries about wages.

For the economy as a whole, average earnings rose by only 0.9% in the year to February – the lowest figure recorded since April 1967.

But the issue here is that in essence that whilst the Bank of England had control over some interest-rates the main player was always likely to be the currency. In spite of this Governor King seemed confident.

This would permit the stabilisation and eventual reduction of the trade deficit, while maintaining low and stable inflation, and high and stable employment, at the same time as resources move from private consumption to the provision of better public services.

The trouble is that much of that could be written today! Over time Governor King became increasingly keen on a lower value for the UK Pound as an aid to his mythical rebalancing a path which his replacement Mark Carney seems to have adopted too.

Rebalancing in reverse

After that speech the UK Pound was stable overall but Mervyn King got his fall in 2008/09 and of course interest-rates are in general much much lower as are bond yields. Not all as I observed yesterday about credit card interest-rates but most. Also post the EU vote the UK Pound has seen a substantial fall. It is too early to fully review the impact of the latter but the latest UK GDP data provided a problem for the philosophy of Mervyn King.

In Quarter 3 2016, the services industries increased by 0.8%. In contrast, output decreased in the other 3 main industrial groups with construction decreasing by 1.4%, agriculture decreasing by 0.7% and production decreasing by 0.4%, within which manufacturing decreased by 1.0%.

As you can see not only did we rebalance towards the service sector in fact it gave an upwards push to GDP of 0.67% when it only rose by 0.5% so everything else shrunk. This is also a feature of the whole phase of economic growth we have seen since 2013.

Over the last 3 years, the services industries have driven GDP growth, growing by 9.7% since Quarter 1 2013.

That means that the service sector has provided around 7.6% of GDP growth through this period which does not leave much else.

The latest quarter marks the 15th consecutive quarter of positive growth since the beginning of 2013 with the level of GDP now 8.2% above its pre-downturn peak (Quarter 1 2008).

We can go further back and it provides really bad news for Baron King of Lothbury. At the start of 2002 UK GDP was 86.1 whereas at the start of 2015 it was 106.9 ( 2011 = 100) so the story starts well. A growing economy driven by production, er well no, as it went from 110.3 to 98.5 over the same time period. Some of this will be the decline in North Sea Oil & Gas which more than halved but over the same time period manufacturing shrank by 2% . But services growth has just gone on and on and on to coin a phrase, it was 80.6 back then and was 109 at the start of 2015 so the rebalancing was in reverse.

What about now?

Today’s data release gives us a counterpoint to the strong services performance in the credit crunch era.

In the 3 months to September 2016, production and manufacturing were 7.9% and 5.5% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

I can bring the numbers above up to date which is that since the beginning of 2015 North Sea Oil and Gas has risen, manufacturing has slipped backwards slightly. One sector has performed well pretty much whatever time period and I will let readers add their own jokes to this.

Looking over the entire period (Quarter 2 1997 to Quarter 3 2016), the water supply, sewerage and waste management  sector grew fastest, at a compound average growth rate of 0.5%

Today’s headline numbers

These were something of a mixed bag.

The monthly picture shows a decrease of 0.4% compared with August 2016. Mining and quarrying was the main sector to show a fall of 3.8%, partially offset by an increase in manufacturing of 0.6%.

Okay so maybe maintenance in the North Sea which the seasonality adjustments never seem to get a grip on partly because I am told it runs a 3 year cycle. The quarterly numbers were simply disappointing.

Quarterly estimate for production output decreased by 0.5% in Quarter 3 (July to Sept) 2016. The largest downward pressure came from manufacturing, which fell by 0.9%, partially offset by a rise in mining and quarrying of 4.3%.

That’s a nudge downwards but not by enough to effect the GDP release on its own.

Looking forwards there was optimism in the latest Markit PMI business survey.

The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter.

Not everything is bright in services

Marks and Spencer has shown that within services there are ch-ch-changes going on as we see a rebalancing from actual stores to virtual ones. From the BBC.

Marks and Spencer has announced it will close 30 UK clothing and home shops and convert dozens more into food stores………It also plans to shut 53 international stores, including all 10 in China, half of its stores in France and all its shops in Belgium, Estonia, Hungary, Lithuania, the Netherlands, Poland, Romania and Slovakia.

It seems particularly odd to be departing China. I was always somewhat dubious about the lauding of the now Baron Rose of Monewden although to be fair those in the M&S pension scheme may have cause to be grateful he fought off take-over attempts by Phillip Green.


Another burst of shrinkflation has reached my attention. From the BBC.

Mondelez International, the company behind the product, has increased the gap between the peaks to reduce the weight of what were 400g and 170g bars………The move has resulted in the weight of the 400g bars being reduced to 360g and the 170g bars to 150g, while the size of the packaging has remained the same.

I am pleased to see that the BBC covers shrinkflation so enthusiatically these days although “triangle change” and “the look” are curious ways of expressing it. This leaves chocoholics in particular singing along with Muse.

Can’t you see it’s over?
Because you’re the god of a shrinking universe.


If we look back over the 14 years or so of the rebalancing promised by Baron King we see that in fact it was always in reverse gear. The service sector has continued what appears to be an inexorable march and production and manufacturing have shrunk. Actually the official numbers are out of date but the pull is two ways. If we take their own logic and data then the service sector must now be at least 80% of the UK as opposed to the official 78.8%.

However there is a pull in the other direction as I contacted the UK ONS ( Office for National Statistics) about how industries get classified. My concern was for example that manufacturers now outsource ever more and the same work will have been reclassified whereas reality may be little changed. After looking at the classifications it is clear to me that whilst the statisticians do their best this has clearly happened. On what scale though is hard to measure particularly as some of the official criteria are inconsistent.

The truth is that a lower exchange-rate is no panacea for this.

Meanwhile it is kind of Mark Carney and the Bank of England to help us out today on defining two subjects. Firstly how far away is the long grass? And secondly how far that poor battered can can still be kicked…

Bank of England extends deadline for major banks to meet too big to fail to 2022 (from 2020)

Meanwhile if you have a vote today let me wish you good luck!






What do we learn about the UK economy by comparing GDP and real wages?

Today sees the publication of the economic output and growth figures for the UK for the second quarter of 2016 and thus will let us know how we did in the first quarter of 2016. We may even get a brief glimpse of post Brexit referendum UK but it will be barely a glimpse because a lot of the data for the third month in the GDP (Gross Domestic Product) preliminary report is estimated. That is a function of the UK being relatively quick in its production of GDP numbers and no doubt many of you will be thinking that especially this time around it might have been wise to take a little longer for a more complete picture.

Real Wages in the UK

One of the main themes of my work has received some new data and something of an airing in the media this morning. For newer readers it is that real wages in the UK have fallen considerably in the credit crunch era and this followed a period of slowing growth for them. This contrasted to strong growth in the past. These ch-ch-changes were of course missed by the economic models up in their Ivory Towers who continued to forecast real wage growth of around 2% per annum which may have been true for their writers and authors but not for the rest of the economy. If you want to know why they (Bank of England, OBR etc ) have been so consistently wrong that is perhaps the best place to start.

The Trades Union Congress or TUC has looked at OECD ( Organisation for Economic Cooperation and Development) data and concluded this.

The decline in UK real wages since the pre-crisis peak is the most severe in the OECD, equal only to Greece. Both countries saw declines of 10.4% per cent between 2007 Q4 and 2015 Q4. Apart from Portugal, all other OECD countries saw real wage increases, albeit mostly modest ones.

There is an interesting counterpoint to this which makes one think of old theories about a Phillips Curve style relationship between (real) wages and employment.

At the time their UK release contrasted a strong employment performance with weak earnings growth. The employment rate is at a record level, some 5 percentage points above the OECD average. On the other hand real wages “fell by more than 10% after 2007”

Sarah O’Connor in the Financial Times puts it another way.

The figures expose another side of Britain’s so-called “jobs miracle”its record employment rate of 74.4 per cent has come at the cost of lower real pay.

Productivity problems

If you look at the OECD report on the UK it tells us this.

The disappointing growth in real wages partly reflects weak labour productivity growth of only 2% from 2010 to 2015, the smallest increase in the OECD after Hungary, Italy and Greece.

Also they give a potential reason.

This may be linked to the growth in jobs with low-hours and intermittent work.


The UK real wages data presented by the OECD is different to the official data which the FT has kindly reproduced for us.

the UK’s real-wage data; the latter suggest wages fell by a more modest 4.5 per cent between 2007 and 2015.

Okay and the differences between the calculations are? From the TUC.

Note that the OECD derive real wages from national accounts information, dividing total wages by hours worked and putting into real terms with the household consumption deflator. These can differ from those based on average weekly earnings and CPI inflation that tend to be used in the UK.

Well not can as they have differed here by quite a bit.

If we look at the overall picture I would take a lot of convincing that UK real wages have fallen by the same amount as in Greece as when I recall looking at the latter they had fallen by around a quarter. But we have been reminded that rather than a miracle the UK seems to have traded real wage growth for jobs growth. If we look back this is something economists wanted but of course they will have all forgotten/redacted that now.

As to the jobs created then there has been an element of them being lower skilled ones which has likely also affected productivity growth as well.  This leads to a very awkward question which is the jobs growth has probably driven the measures of real wages and productivity lower. So as well as averages we need to see how different groups have done/performed. Otherwise we would be in danger of saying that we did not want the new jobs. That of course may be true in a few cases but would we rather have much higher unemployment.

Also we may have got a glimpse into the state of play in self-employment pay from the OECD numbers although the thorny question of calculating hours worked is likely to still be a problem.

Today’s UK GDP report

This was welcome news and to give them credit bang in line with the monthly report from the NIESR.

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP was estimated to have increased by 0.6% in Quarter 2 (Apr to June) 2016 compared with growth of 0.4% in Quarter 1 (Jan to Mar) 2016.

There was something both welcome and sadly rare in recent times in the numbers.

Growth in the production industries in Quarter 2 2016 increased by 2.1%, contributing 0.30 percentage points to quarterly GDP growth….

Indeed it was back by this which from memory saw a boost from the pharmaceutical industry.

manufacturing increasing by 1.8% in Quarter 2 2016 following a decrease of 0.2% in Quarter 1 2016

I have nothing against the UK service-sector but it is nice for once for it not to be the main player as our economy was getting ever more unbalanced.

Let us also look for some perspective as to where we stand.

GDP was 2.2% higher in Quarter 2 2016 compared with the same quarter a year ago……In Quarter 2 2016, GDP was estimated to have been 7.7% higher than the pre-economic downturn peak of Quarter 1 2008.

Of course the performance in GDP per capita has been nothing like as rosy and only recently struggled into positive territory. We learned little on that today as that comes in the later reports.

Whilst it is the main area which may have been genuinely affected by the wet weather this was not so good.

agriculture decreased by 1.0%.


There is a fair bit to consider here. If we start with the GDP numbers then we saw a welcome boost to production a fair bit of which was due to manufacturing especially of pharmaceuticals in the spring. Rather than an accelerating picture for 2016 so far it seems likely to turn out that we saw sustained consistent growth I think. Of course we all want to know what happens next!

We however get a somewhat different picture from the data for real wages for the UK. Inflation measurement matters a lot here and whilst I think that the position is worse than the official UK data mostly because they use CPI which under reports inflation via the way it ignores owner occupied housing costs. If we go back to the UK GDP post credit crunch growth figure of 7.7% well real wages have fallen by a similar amount which as ever leaves us singing along with Johnny Nash.

There are more questions than answers
Pictures in my mind that will not show
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know

Also today has seen examples of L.I.F.E.G.O.E.S.O.N from City-AM.

London City Airport, probably my favourite airport, is expanding in a £344m investment deal…….GSK invests £275m in three UK manufacturing sites






Goodness me, could this be industrial disease ?’

This morning has seen some developments in a theme which has been building up over the past year or so. It is the issue of how production and particularly manufacturing is struggling in quite a few parts of the first world. Back on the 2nd of December last year I put it like this.

Some of this is no doubt a shift to countries with cheaper labour forces but there seems to be a bit of a tectonic plate shift as well. Or as my Dire Straits musical reference of October 7th put it.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease

I pointed out back then that this may be the beginnings of something of a post industrial society as economies move towards the service sector. In the UK this  “rebalancing” has been particularly pronounced in the credit crunch era albeit that it has moved in exactly the opposite direction to that promised by the former Bank of England Governor Baron King of Lothbury.

Production output fell between 2011 and 2013 to below levels seen at the height of the downturn in 2009……..Although there has generally been growth across all major components of GDP since the start of 2013, the services industries remain the largest and steadiest contributor to economic growth.

If we take the first quarter of 2008 as our benchmark then services are at 112.6 whilst production is at 90 and manufacturing at 93.2. The numbers speak for themselves and there is a particular irony in production actually falling as Baron King was trumpeting exactly the reverse as a result of the fall in the UK Pound £ ( circa 25% in around 2008) he was so keen on. As we assimilate this then we are left with the thought that by now services must be 4/5 ths of our economy as the 78.6% official estimate is from 2012. Oh and speaking of assimilation is the service sector like this?

We… are Borg. You will be assimilated. Resistance is futile.

For the UK the latest official data for manufacturing is for February and it told us this in annual terms.

The largest contribution to the fall came from manufacturing, which decreased by 1.8%. This was the largest fall since July 2013, when it fell by an equal amount.

The mood music or business surveys are sadly hammering out the same beat as we see below.

The UK Manufacturing PMI fell below its critical 50.0 mark for the first time in over three years in April…….On this evidence manufacturing production is now falling at a quarterly pace of around 1%.

This Morning


This was a particularly interesting addition to the list as the official data was as follows.

In March 2016,production in industry was down by 1.3% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In February 2016, the corrected figure shows a decreased of 0.7% (primary –0.5%) from January 2016.

If we look to the underlying index we see that rather than the expected growth it at 109 in March is only just above the 108.8 of March 2015 showing that on current trends there is a danger of year on year falls. This is significant because as you can see from the 9% growth since 2010 until now German manufacturing had been rumbling forwards.

As to the business surveys well they are downbeat too.

the German manufacturing sector remains stuck in a low gear at the start of the second quarter. (Markit)

La Belle France

The statistics office was up early to tell us this.

In March 2016, output decreased sharply again in the manufacturing industry (-0.9% after -1.4% in February)…..Over the first quarter of 2016, output diminished in the manufacturing industry (-0.7% q-o-q)

This is becoming a familiar state of play although there are individual differences as for example annual growth in France remains more positive at 0.9%. Although over the credit crunch era it has not done as well as Germany as growth since 2010 has been a mere 1.2%. If we move to the Markit business surveys we get more gloom.

“The French manufacturing sector slipped further into contraction during April, precipitated by a steeper reduction in new order intakes.”


The bad news just keeps on coming here as you can see from this morning’s official communique.

Manufacturing production decreased by 2.5% (working day adjusted)

This adds to the disappointing survey data I looked at only yesterday and opens the door to a further decline in something which had previously seen some flickerings of hope.

The United States

If German manufacturing is an engine for Euro area growth then manufacturing in the United States has a similar role for the world economy. I pointed out last December that revisions had meant the past was no longer as good as it had been reported and now we see this.

Manufacturing output decreased 0.3 percent in March…..For the first quarter, manufacturing output moved up at an annual rate of 0.6 percent, roughly reversing its small decrease in the fourth quarter of last year.

So the sector is treading water overall maybe as we note on a monthly basis 2016 has gone 0.4%,-0.1% and now -0.3%. Oh and this year’s annual revision again told us that the past was not as good as we had been told.

The revised, smaller increases for manufacturing for 2014 and 2015 resulted from rates of change for many durable and nondurable goods industries that are lower than reported earlier.

Looking forwards the JP Morgan business survey was not optimistic.

April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth…….Output volumes were close to stagnation in April, with the latest survey pointing to the weakest rise since the current period of expansion began in October 2009.


There is much to consider here and there is an element of the world changing. What I mean by this is the inexorable rise of the service sector which can be illustrated by the music industry. Last week the Financial Times reported this about Warner Music.

Warner Music Group has become the first major record company to report that streaming has become its largest source of revenue, surpassing sales of physical formats such as CDs and vinyl……..Overall digital revenue increased 20 per cent to $328m, offsetting declines in physical formats.

Thus a service replaces something which is physically produced. The online stream or cloud replaces the physical production and possession of an acetate ( reads better I think than LP…) or a CD or if we stretch our memories a cassette or cartridge. If I may divert for a moment this illustrates another theme where we rent rather than own things (which in itself is a reversion to say the 1970s intriguingly when we were poorer…) which is of consequence for those who have read the recent Apple I-Tunes stole my music blog. There are gains  in not having to physically store things and use up scarce resources in production but also losses often in terms of the music’s quality ( I mean bits per second here) and matters like album sleeve art such as the prism on the cover of Dark Side of the Moon. Oh and has actual music quality fallen too and is that a coincidence?

But as well as that above there is a  secular or tectonic plate shift to cheaper emerging economies. Also if we are to pursue the Holy Grail of annual economic growth combined with finite resources then until we can mine asteroids,comets and planets then manufacturing has to see a relative decline.

Perhaps also we need to double-check how we define manufacturing…..