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

Production

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.

Trade

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.

Construction

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.

Comment

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.

Toblerone

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.

Comment

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.

Analysis

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%.

Comment

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

Germany

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.”

Greece

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.

Comment

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…..

 

 

 

UK GDP is an example of the march of the services and not makers

Today gives us our first full insight into how the UK economy performed in the first three months of 2016. Let me open with a sector which was turbo- charged in that period. From the British Bankers Association or BBA.

Gross mortgage borrowing of £17.1 billion in March was 64% higher than a year ago and the highest borrowing since April 2008 following a reported sharp increase in purchase of buy-to-let and second homes, ahead of the increase in stamp duty on 1 April 2016.

As you can see the pedal had pushed nearer to the metal and if we look to the future we see that we can expect a follow-on effect in the second quarter of this year.

The number of mortgage approvals in March was 20% higher than a year ago, with remortgaging up 25% and house purchase up 14%.

So it was time for the Outhere Brothers in the quarter just gone.

I say, boom boom boom now let me hear you say wayoh
(Wayoh)

The BBA itself summed up the position as shown below.

A surge in buy-to-let and second home buying ahead of the new stamp duty surcharge in April led to a sharp rise in March’s gross mortgage borrowing as people brought transactions forward.

If we look back to yesterday’s article then one of the last things we need is buy-to-let buying driving house prices even lower and I note that even the BBA is unable to avoid pointing that out.

This has fuelled a hike in house price inflation in the first quarter of this year, with the ONS suggesting in its latest report that annualised increases in house prices were 6.1%. Indeed, the ONS House Price Index points to an even larger house price increases of 7.2%.

Unsecured Lending is rising fast too

Regular readers of this website will be aware that other forms of personal lending have been seeing a boom too. For instance we have tried to peer into the data to see if we can find our more about car loans. Here is the BBA view.

However, there is evidence of a stronger pick-up in lending elsewhere; as mortgage affordability rules have worked through the system, lending has shifted to personal loans and overdrafts as well as to credit cards. The difference between credit card lending and repayments shows that consumers are taking advantage of low interest rates and building their net borrowing . The same is the case for overdrafts and personal loans.

There is a clear issue here as pre credit crunch when mortgage lending was likely to be over the rules then borrowers were “helped” by being given personal loans and the like. It seems as though that might be happening all over again and is a powerful critique of macroprudential policies. In other words whilst the sky may be clear at the altitude of an Ivory Tower down at ground level reality is foggy.

We have seen evidence of this impacting on car sales and no doubt this has also been a factor in the UK’s strong period of retail sales growth. But here the boom theme starts to fade away as we note that by the end of the quarter monthly growth had gone negative and annual growth had slowed to 2.7%.

Business lending not so good

The Funding for Lending Scheme was supposed to be for lending to small and medium-sized businesses. But as I have explained so many times that was something of a red herring to allow them to push hard for more mortgage lending. They do not put it like that but even the BBA is in agreement.

This may be because lending to the private sector overall, including businesses, is less buoyant

This reminds us of an area which is much less buoyant itself to coin a phrase.

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013. The largest contribution to the fall came from manufacturing, which decreased by 1.8%.

We are not up to the end of the quarter with the numbers ( and perhaps GDP should wait for a fuller data set) but you can see that the “rebalancing” promised by Baron King of Lothbury and indeed the “march of the makers” by Chancellor Osborne seem to have gone missing.

Construction

This is a very troubled data series and should be taken with a lot more than the proverbial pinch of salt. But it too hints at a slowing.

In February 2016, output in the construction industry was estimated to have decreased by 0.3% compared with January 2016…..Compared with February 2015, output in the construction industry increased by 0.3%. All new work was flat while there was an increase of 0.8% in repair and maintenance.

I think that the position is better than that although I may be suffering from local bias as there are plenty of cranes for me to count as I cycle past Nine Elms.

The banks

You might think that with all the help they have received then bank profits would be surging and helping the recovery. But apparently not seems to be on repeat.

Barclays has reported a 25% drop in profits for the first quarter of the year, mainly due to a weak performance in its investment banking division.

Pre-tax profit for the first three months of the year was £793m, down from £1.1bn for the same period last year.

Although I am reliably informed that if you take out all the losses then the numbers are superb! Speaking of spinning, the BBC and GDP I am troubled by this from its economics editor.

It is likely – in fact probable I would say after speaking to those close to Mr Osborne – that the Chancellor will claim “referendum uncertainty” as one of the reasons for the stuttering economy.

You see this was published in the 24 hour purdah period when those who are close to the Chancellor may well be aware of the numbers as he certainly will have known them.

Services

In the end it all comes down to what in gang terms is the Master G of UK GDP numbers these days. The official weights remain back in 2012 at 78.6% for this sector but it must be much more like 80% now. Anyway this morning’s update gives signs of a slowing here too.

The Index of Services is estimated to have increased by 2.5% in February 2016 compared with February 2015……The latest Index of Services estimates show that output increased by 0.1% between January 2016 and February 2016. This follows growth of 0.1% between December 2015 and January 2016, which is revised down 0.1 percentage points from the previous estimate.

If we continue at around 0.1% a month then the annual growth rate will halve. Also business services and finance only rose by 2% in the year to February but of course the latest mortgage numbers are not in there yet.

The Overall Numbers

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP is estimated to have increased by 0.4% in Quarter 1 (Jan to Mar) 2016 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2015.

In annual terms this translates to.

GDP was 2.1% higher in Quarter 1 (Jan to Mar) 2016 compared with the same quarter a year ago.

Comment

It is good news that our economy continues to grow and in annual terms our performance will be solid relative to Europe. However the ying to that yang is of course the fear that the slowing of the growth will continue. Care is needed as the numbers are not in themselves accurate enough for us to be absolutely sure but of course other numbers have been consistent with a slower beating of the economic drums.

Also if we ignore the official hype then the “march of the services” goes on.

Services increased by 0.6%, contributing 0.50 percentage points to Quarter 1 (Jan to Mar) 2016 GDP growth

Yes you do read that correctly and yes other sectors did in fact shrink.

There was a downward contribution (0.05 percentage points) from the production industries; (mostly mining and quarrying but manufacturing fell 0.4% as well)……There was a downward contribution (0.05 percentage points) from construction;

Make what you will of the construction numbers as it is very unlikely that they are correct but you never know and indeed the ONS doesn’t either!

All of my past critiques of the use of GDP numbers apply here so as ever caution is the watchword and here is another thought. How do we define services? Has the definition somehow spread? I am reminded of the large exchange between it and construction around a year ago which of course was a much bigger deal for construction due to their relative sizes.

 

 

Is the UK just another victim of Industrial Disease?

It was only yesterday that I pointed out that the latest business surveys for the UK were suggesting a slowing of the rate of economic growth. Tucked away on the website of the UK Office for National Statistics there was also this.

UK labour productivity as measured by output per hour fell by 1.2% from the third to the fourth calendar quarter of 2015 and was some 14% below an extrapolation based on its pre-downturn trend.

This should not have been a complete shock as hours worked were up 1.7% in the labour market report whereas GDP had risen by only 0.6% but it was very disappointing. After all we were hoping that productivity would improve as the boom continues.

There are differing ways of measuring productivity and the full set is shown below.

By contrast, output per worker and output per job were both broadly unchanged between the third and fourth quarters. On all 3 measures, labour productivity was about half a per cent higher in Quarter 4 2015 than in the same quarter of 2014.

As you can see they disagree over the latest quarter but if we look at the previous year we then get another disappointing result as productivity growth of 0.5% compares with GDP growth of 1.9% and is even below the GDP growth per head of 1.1%. Indeed if we move to the wages figures we see this in the period to the end of December.

Between October to December 2014 and October to December 2015, in nominal terms, total pay increased by 1.9%

So wage growth exceeded productivity growth too as we wonder what is really going on. If we look back we see that the productivity issue has been one which has bedevilled the credit crunch era.

Output per hour across the service sector has grown in each year since 2009 (albeit only marginally so in 2010 and 2012). By contrast, manufacturing output per hour has fallen in 3 of the 6 years since 2009 and was lower in 2015 than in 2010.

The services sector

There is a real problem here measuring output and hence even worse problems with one of its derivatives productivity. This is highlighted by the debate over the sharing or collaborative economy which the ONS defines thus.

While there is no agreed definition of the sharing economy, it is generally regarded as being activity that is facilitated by digital platforms which enable people or businesses to share property, resources, time, or skills, allowing them to ‘unlock’ previously unused or under-used assets.

The problem for measurement is that money is not always exchanged which is a clear issue for GDP which is based on market prices but nonetheless there does seem to be economic activity there.

The sharing economy is a growing market within the UK; in 2014 it was estimated to be worth £0.5 billion and is forecasted to grow to over £9 billion by 2025.

I guess AirBnB,Uber and ZipCar are the most well-known examples of this and other estimates of the economic impact are even larger.

In 2014, Nesta3 estimated that 25% of the UK adult population are sharing online in some way and Professor Diane Coyle4 estimated that 3% of the UK workforce is already providing a service through the sharing economy.

There are various issues with this but my point is ( and this is one that I made to the Bean Review of UK Economic Statistics) is that we know much less than we should about services activity. There is an obvious flaw in it being some 80% by now of our economic activity and it means that derivatives such as productivity as even less reliable. Of course when the products are intangible as most services are there are problems to begin with.

Let me remind everyone that the UK trade figures are based on quarterly and annual surveys for services. So how do they produce monthly trade and hence output figures? Well exactly…..

Manufacturing problems

This morning’s output data is not exactly in line with the season and is not especially cheerful either.

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

 

This was driven by a monthly fall as shown below.

manufacturing (the largest component of production) having the largest contribution to the decrease, falling by 1.1%.

If we look back for a greater perspective we see this.

In the 3 months to February 2016, production and manufacturing were 10.6% and 6.8% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

Back in October last year I expressed my fears about UK manufacturing as shown in the link below.

https://notayesmanseconomics.wordpress.com/2015/10/07/the-bank-of-england-will-be-worried-about-the-uk-suffering-from-industrial-disease/

What about manufacturing productivity?

There is an issue here and we should be better at measuring it than in the service sector for the obvious reason that something and hopefully lots of products are physically produced. But yesterday’s productivity update was particularly troubling in this area.

Output per hour in manufacturing fell by 2.0% on the previous quarter and was 3.4% lower than a year earlier.

A long way from the “march of the makers” isn’t it? Well it gets worse.

By contrast, manufacturing output per hour has fallen in 3 of the 6 years since 2009 and was lower in 2015 than in 2010.

Or as the ONS summarises it.

The weakness of manufacturing productivity since 2011 has been a defining feature of the UK productivity puzzle, notwithstanding a ‘false dawn’ in 2014.

We seem to have stopped trying to increase productivity and have instead employed more people to increase output. This is good for employment levels but does help explain why there has been so little wage growth and in fact why real wages are still lower now than pre credit crunch.

Production

It has not been a good phase for UK Production either.

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013.

We already know from the numbers above that it is some 10.6% below the pre-credit crunch peak. In essence there were two factors driving the most recent fall. I have already covered manufacturing and the other was the consequence of a mild winter for electricity and gas output. You may be surprised to learn that mining and quarrying was up by 4.7% and thereby was a 0.6% upwards influence in the last year.

It is hard to see how productivity here could be rising.

The trade problem

There is an element of same as it ever was here in today’s release.

Between the 3 months to November 2015 and the 3 months to February 2016, the total trade deficit (goods and services) widened by £3.8 billion to £13.7 billion. This is the largest 3 monthly deficit since the 3 months to March 2008, when the deficit was £14.4 billion.

On and on we go month after month,year after year,decade after decade and my friend Frances Coppola has referred to this in the Financial Times. She makes a fair point here.

There is a structural trade deficit of around 2 per cent of GDP, mostly with the EU. This widened slightly in Q4 of 2015, but only back to the 2014 position.

The rest of the current account problem is mostly investment flows and returns. But I do not agree about this bit. It shpuld be true but in practice rarely is.

Since we don’t have freely floating exchange rates, the world has persistent trade imbalances. But that’s also fine, as long as capital can move freely.

Also the latest productivity figures are rather eloquent in response to this.

There is zero evidence that the economy is undergoing a terminal decline in competitiveness.

Oh and if Frances will forgive me articles in the Financial Times telling us everything is okay are one of my warning signals.

Comment

There is here an eloquent explanation of why the UK Pound £ has been falling in 2016 and we no doubt need the boost that a move equivalent yo a 1.75% cut in Bank Rate will provide. The catch is that the 2007/08 devaluation and depreciation disappointed in terms of economic impact and the poor productivity figures are unlikely to help in that so we find ourselves singing along to and in Dire Straits.

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’

The counterpoint is that the productivity figures are almost certainly wrong as indeed are the trade figures. The catch to this is that both series and the trade figures in particular have a long time series of problems and that is much harder to argue away. Oh and whilst I am on statistical issues things like this keep happening in a world where the official numbers says that there is no inflation. From Joe Sarling.

I feel the need to vent about England rugby tickets. Cheapest tickets available for Eng v Arg on general sale? £82 per person

 

 

 

 

It is a long and winding road to a UK interest-rate rise

Today sees the UK production numbers released and they will be poured over on two counts. Firstly they have shown signs of weakness and more recently decline. A fall of 0.4% for production in December reduced the annual rate of growth to a mere 1% whilst manufacturing fell by 1.7% on a year before. This was quite a setback to the claimed “march of the makers” and indeed the “rebalancing” of former Bank of England Governor Mervyn King. Instead we continue the shift towards the service sector which will only be exacerbated by the outright decline in manufacturing.

Also if the business surveys are any guide then January was a good month for manufacturing as shown below.

UK Manufacturing PMI at three-month high of 52.9 in January……Moreover, the rate of expansion in output accelerated to a 19-month high.

Now the picture on the Purchasing Managers Indices has changed as we now see 49-51 as stability but there was some growth recorded and it was backed up by the second statement. This is made more significant by the fact that if February was any guide this was as good as it gets.

February saw the rate of expansion in the UK manufacturing sector slow back towards the stagnation mark. Output growth eased sharply………..The slowdown was also reflected in the labour market, with job losses registered for the second straight month.

The reading of 50.8 is back in the stagnation zone and this time around also had a worrying tinge for the UK economy as it was accompanied by reports of slowing growth in both the construction and services sectors.

The Bank of England

I have pointed out that there has been something of a bipolar response to recent economic news by the Bank of England and this was perfectly illustrated by the speech given by the hapless Martin Weale yesterday evening.

As we said in our most recent set of minutes, we collectively believe it more likely than not that the next move in rates will be up. I certainly consider this to be the most likely direction for policy.

So likely in fact that he has stopped voting for it! That makes it two seperate sequences now where Dr.Weale has searched for the interest-rate increase button and then retreated after giving-up. Awkward to say the least. Anyway Dr. Weale wanted to talk about the Doppelganger of interest-rate rises which is policy easing.

However, I want to discuss unconventional policy options today because the Committee does not want to be a monetary equivalent of King Æthelred the Unready

Like in 2007/08 Martin? And many will be wondering “Unready” for what? With the Bank of England’s appalling forecasting record calling something “unlikely” means that it in fact has quite a good chance of actually happening.

What does Dr.Weale suggest?

He is quite a fan of Quantitative Easing as shown below.

I do now think that the policy was highly effective, and indeed that it may have contributed more than previously thought to the rate of inflation in 2010-2012.

Ah the same burst of inflation that so depressed real wages back then as both CPI ( Consumer Price Index) and RPI (Retail Price Index) peaked at annual rates of over 5%? Odd to claim success via reducing real wages and it is something for the “desperate business” cartoons of Private Eye. This attempt to blow his own trumpet has produced a dirge for the UK economy rather than the hoped for celebration.

Still Dr. Weale threatens more of it may come.

Furthermore, it seems to me that the second and third rounds of asset purchases were as effective as the first round. That is not to say that any new purchases would remain as stimulative to the economy, but it does give grounds for optimism.

So stimulative in fact the Bank of England had to introduce the Funding for Lending Scheme to kick the housing market into action! Also Martin seems untroubled by this feature.

Theoretical analysis has had some difficulty in identifying the channels through which asset purchases work……. the Bank of Japan has been doing so since 2001.

Since 2001 but apparently still not working!

Negative Interest-Rates

We do get something of a warm-up on this subject.

At home, banks’ balance sheets have improved since the early part of this decade and we now take the view that there is room to reduce Bank Rate below ½ per cent should that become appropriate.

Of course the sequence of bad banking results released in 2016 provide a disturbing back drop to the hype here but Dr.Weale is plainly preparing us whilst hurriedly skipping by the issue of if now why not back then?

Forward Guidance

There are obvious problems here as we advance of UK Forward Guidance Mark 15.

In these circumstances, it turns out that a commitment to keep interest rates low in the future has a powerful immediate effect on both output and inflation

Really? Even in the world of Dr.Weale there is a problem.

Of course, one reason why the promise might not be effective is that it would not be believed.

Well that might be because there is confusion here as to whether they were promising to keep interest-rates lower for longer or as it quickly changed to promises of an increase. Of course the former was true although there were credibility casualties on the way.

In fact, as you know, unemployment has fallen well below our threshold of seven per cent

I thought 7% was not a threshold? Mark that bit for the next time we are told it was not one.

Helicopter Money

Dr.Weale does not call it this I guess because if your natural environment is high up in an Ivory Tower who needs a helicopter? You just open the window and shower people with notes. Just as a tip for him and the many other Ivory Tower proponents of Helicopter Money no coins please as they may hurt someone falling from that height. Still look who pops up.

Turner is very aware of this problem and he suggests that, to make the policy work, bank reserves, or at least the major part of them, should not receive interest.

Ah Adair Turner who has proposed every form of monetary easing under the sun in recent times. You may note we are being warned about lower not higher interest-rates under the plan from the man who was gloriously described in the comments section on here as having a “talentless ascent”.

Today’s data

The good news is that January did see the predicted uptick in manufacturing with the monthly comparison doing this.

manufacturing (the largest component of production), having the largest positive contribution, increasing by 0.7%.

However the annual comparison whilst better still tells its own story.

Manufacturing output is estimated to have decreased by 0.1% in January 2016 compared with January 2015. Output decreased in 7 of the 13 manufacturing sub-sectors compared with a year ago.

If we move to the wider production numbers we see this.

Total production is estimated to have increased by 0.3% between December 2015 and January 2016…….Total production output is estimated to have increased by 0.2% in January 2016 compared with the same month a year ago. The only main sector to rise was water supply, sewerage & waste management, which increased by 9.3%.

As you can see the annual comparison is disappointing and not far off the “sewerage” mentioned as we continue to shift the emphasis of our economy towards the service sector.

There is an awkward element as North Sea Oil and Gas output contracted as it has ebbed and flowed recently as past maintenance periods have boosted the annual comparisons. Still one thing remains consistent.

Anecdotal evidence suggested that stormy weather was a contributing factor to the decrease in output observed in the oil and gas production facilities in the North Sea.

Comment

It is good news that the production figures improved somewhat in January because the surveys for February are not good. Meanwhile the Bank of England continues to mark our card about monetary policy easing and interest-rate cuts whilst its Forward Guidance promises an interest-rate rise. Should the economy slow further how long will they wait?

Meanwhile we find out some more about Zero Hours Contracts.

The latest estimate of the number of people who are employed on “zero-hours contracts” in their main employment, from the LFS, a survey of individuals in households, is 801,000 for October to December 2015,

Up by 104,000 on a year before but another measure shrank.

there were around 1.7 million contracts that did not guarantee a minimum number of hours, measured with regard to work carried out during the fortnight beginning 9 November 2015. For the May 2015 reference period (the fortnight beginning 11 May), the equivalent estimate was 2.1 million.

It seems that getting to the bottom of that is a long and winding road to say the least. RIP George Martin and thanks for all the music.