What is the state of play in the UK economy?

Today has opened with some good news for the UK economy and it comes from the car production sector. From the Society of Motor Manufacturers and Traders.

British car manufacturing rose 7.8% in July, with 136,397 new units rolling off UK production lines, according to figures released today by SMMT. Major carmakers ramped up production for new and existing models in the month ahead of summer factory shutdowns, which provide an essential period for plant maintenance, upgrades and re-tooling.
Production for the UK bounced back in July, in readiness for the important September market, following seven successive months of decline, rising 17.7% – an increase of 4,490 units – while exports also grew by 5.3%. Cars made for overseas buyers represented nearly 80% of output in the month with 106,525 units shipped abroad, compared with 29,872 which stayed at home.

Once the better news washes through there are a few things to note. We mostly export the cars we make and mostly buy foreign ones ourselves. As it happened we built more cars for both in July. However it was not enough to offset earlier declines meaning overall production was down 1.6% for the seven months of 2017 in the numbers. The fall has essentially been for domestic sales which of course matches what we have seen there. Production for export is almost unchanged in 2017 so far ( -0.2%) which poses a question for the impact of the lower UK Pound £ and of course economics 101 which would predict more exports. It may be that these things ( J-Curve theory) take longer than often assumed.

The Confederation of British Industry or CBI was upbeat on the J-Curve impact on Tuesday however.

The survey of 432 manufacturers found that total order books and export order books were strong in August. The firming in export orders relative to the previous month reflected rising orders in 10 of the 17 manufacturing sub-sectors, led by mechanical engineering and aerospace….

22% of firms said their export order books were above normal, and 10% said they were below normal, giving a rounded balance of +11% – well above the long-run average of -19%.

We will have to see how all this plays out as we hope that the optimism will come to fruition.

Company problems

The ying to the hopeful yang above has come from some of the company reports this week. I looked at the woes of the subprime lender Provident Financial on Tuesday and the role of the easy money policies of the Bank of England in its rise. Yesterday saw this from WPP which is a large advertising company. From the BBC.

Shares in WPP fell almost 11% after the advertising giant reported slowing sales and warned about future growth.

The company said that group performance had been “much tougher” for the first seven months of its financial year.

It blamed growing economic uncertainty, reflecting a “rise of populism” in the UK and the US, and “bumpy” growth in Brazil, Russia and China.

As you can see from the quote its business is far wider than just the UK but as a general point it does not fit well with what has been reported for the world economy. Then this morning there was this. From Bloomberg.

LATEST: Dixons Carphone falls 20% in London after forecasting an unexpected drop in profit.

Firstly I responded like this.

Have you noticed how these drops in profit are so often “unexpected”! What do equity analysts actually do please?

If we return to the economy we see that we seem to be getting a flow of profit warnings as we try to figure out whether they represent what has already happened or are a leading indicator?

Gross Domestic Product

The headline numbers were unchanged at 0.3% for quarterly growth and 1.7% for annual growth. However tucked away were some interesting details. It was only a few days ago I pointed out that the public finances data hinted at some sort of fiscal stimulus and today we see this.

In the expenditure measure of GDP there was relatively strong growth in government spending and investment.

Also there was something that was not new but would cheer the cockles of Bank of England Governor Mark Carney.

UK GDP in current prices increased by 0.8% between Quarter 1 and Quarter 2 2017.

Nominal GDP growth in theory helps with debt burdens. I say in theory because in practice for the ordinary person there is also the issue of wage growth.

The contribution to nominal GDP growth from wage income (compensation of employees) slowed to 1.7 percentage points in Quarter 2 2017 compared with the same quarter a year ago; this is lower than the 2.1 percentage points recorded in each of the previous 3 quarters.

Also we continue our transformation to a services based economy.

contributing 0.4 percentage points to quarterly GDP growth in Quarter 2 (Apr to June) 2017 and 1.9 percentage points to the 1.7% growth seen over the past year.

What about the housing market?

This seems to be gently rumbling on according to the British Bankers Association data.

Housing market activity has been flat since the start of the year with lending and transactions both in line with 12 month averages.

But with an intriguing kicker.

First-time buyers and remortgage activity on the part of homeowners has supported lending for some time, but we anticipate the pace of growth to slow slightly.

Perhaps first-time buyers are feeling the passage of time or the Bank of Mum and Dad is at play or more simply this is just all the “Help To Buys” washing through the system. Meanwhile I am grateful to Henry Pryor for spotting this from Telegraph Property.

Steep increase in house prices slashed in London’s commuter belt

The surge in UK unsecured borrowing seems to have passed the high street banks by and I do hope it did not all go to Provident Financial.

Annual growth in credit card borrowing was 5.3%, while personal loans and overdrafts saw the recent contraction rate slow, from -1.3% to -0.9%*. Annual growth in overall consumer credit has increased from 1.9% to 2.0%.

Meanwhile I note that the UK BBA is now rebadged as part of UKFinance in a sort of leaky Windscale nuclear reprocessing plant to leak-free Sellafield sort of way.

Bank of England

This has given us the Funding for Lending Scheme and the Term Funding Scheme which it has told us will boost lending to business particularly smaller ones. Today’s numbers tell us this though.

Non-financial companies’ deposits are growing annually by 7.5%, as firms hold cashflow and reserves as a hedge against uncertainty in their trading conditions and as an alternative to making long-term funding commitments.

Is saving the new counterfactual of borrowing and lending?

Comment

The UK economy continues to bumble along with the occasional flicker of growth to be seen. If we move to the monetary situation then the stimulus level has risen as the UK Pound £ has fallen against what has been a powerful performance from the Euro in particular and 1.08 will not be welcomed by holidaymakers, especially as of course it is often expensive to change your money up. If we use the old Bank of England rule of thumb we see that the fall in the effective exchange rate since the EU Leave vote has been equivalent to a 3.3% reduction in the official Bank Rate. It makes the 0.25% reduction of the Bank of England look like a pea shooter to a bazooka doesn’t it? It also points out how bad an idea the cut was.

We are seeing what used to be called stagflation where we get a little growth with inflation. Of course the inflation is much lower than back then but you see so is pretty much everything else so it hits harder. Also the continuing rise in employment provides a boost as whilst wages per head are struggling and often failing to match inflation the aggregate number is rising. As Morpheus points out in The Matrix Reloaded.

There are some things in this world, captain Niobe, that will never change………….Some things do change.

Number Crunching

Thank you to Johannes Borgen for drawing my attention to this.

Bitcoin uses nearly 5% of total UK electricity consumption. This is ridiculous!

Just for clarity this is worldwide bitcoin use looked at in UK electricity terms.

Me on Core Finance

http://www.corelondon.tv/provident-financials-fall-grace-not-yes-man-economics/

 

 

 

Has the Bank of England fed yet more subprime lending troubles?

One of the main drivers of the UK public finance data which arrives later is the state of the UK economy. There we find that the solid GDP ( Gross Domestic Product) growth of recent years has been replaced by slower more marginal growth in 2017 so far. Also the attempts of the Bank of England to boost the economy via its extra monetary easing of last August are hitting the problems described by former HM Treasury Permanent Secretary Nick Macpherson like this yesterday.

QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on.

It raises a wry smile to see a latter-day Sir Humphrey agree with me although Nick did in fact move higher in establishment terms as he is now a Lord. Also it is easy to say  it now after the damage has been done it would have been much braver to say it against the establishment consensus at the time.

Car Loans

One of the areas where stresses in the UK economy are being seen are in the car and car loan markets. As I wrote only on Friday these were fed by the way that the finance subsidiaries of the car manufacturers have been able to step into the market via what are rental deals dressed up as purchases. This will have been oiled by the Bank of England £435 billion of QE and £80.3 billion of its Term Funding Scheme. Whilst the latter specifically helped banks and building societies the aim was ” to support additional lending to the real economy,” Was it a further push for the car market?

The problem after the boom for the car market is that you pump it up so much that you then get a bust. On Friday I pointed out that incentive schemes and subsidies being provided by the manufacturers are a sign of trouble ahead and today the BBC is reporting this. From the BBC.

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

All of the part-exchanged vehicles will be scrapped, Ford said, which would have an “immediate positive effect on air quality”.

Old cars, from any manufacturer, can be exchanged until the end of December.

There is of course an addition for my financial lexicon for these times as we discover a price cut is in fact a “positive effect on air quality”.

Provident Financial

I have regularly pointed out the dangers of the surge in unsecured lending in the UK that was also fed by the Bank of England “Sledgehammer” QE and Bank Rate cut of last August. One of the places you would look for trouble is in the area of subprime lending where Provident Financial has released quite a tale of woe this morning. Let us go back only a month.

The group has continued to exercise strong discipline around credit and not observed changes in customer behaviour in relation to either demand for credit or credit performance.

And this morning.

Collections performance is currently running at 57% versus 90% in 2016 and sales at some £9m per week lower than the comparative weeks in 2016. ………….The pre-exceptional loss of the business is now likely to be in a range of between £80m and £120m.

That is a bit different to a pre exceptional profit of £60 million. How much can you lose in a month? This is the sort of Forward Guidance we associate with central banks. Yet again we see a banking organisation which chooses to be “economical with the truth” to coin a phrase and try to drip feed or manage bad news. It has not gone well today with the Chief Executive gone, the dividend scrapped, and a FSA investigation into one of the subsidiaries. The share price is not for the faint hearted because as I type this it is £6.78 or down some £10.67 on the day.

I do hope that someone will ask Bank of England Chief Economist Andy Haldane about this as he undertakes his UK tour which if the FT coverage is any guide seems to be part of an effort to make him the next Governor. After all it was entirely predictable ( please look at my past updates on here) that unsecured lending would boom and lead to trouble just like it has in the past. Andy’s “Sledgehammer” QE lit the blue touch-paper.

A Fiscal Stimulus?

I ask this on several fronts. Let me open with this from former Chancellor George Osborne on BBC Radio 4 Today earlier. From the BBC.

Former Chancellor George Osborne has urged the government to build high-speed rail lines across the north of England, from Liverpool to Hull.

Mr Osborne, who launched the “Northern Powerhouse” initiative when in government,

The so-called HS3 railway project seems a much better idea than HS2 but then almost anything is. A weak minority government is always likely to succumb to such ideas and I was thinking of that as I noted this in this morning’s public finance release.

Over the same period, central government spent £245.9 billion; around 5% more than in the same period in the previous financial year.

Actually some £4.1 billion of this is extra debt interest. An awkward number when you consider we have such low yields as we mull a fiscal stimulus to holders of UK Gilts! What is happening here is the consequence of the rise in inflation as index-linked Gilts use the Retail Price Index which rose in July at an annual rate of 3.6%.

Revenue is not bad

Whilst it was eclipsed by the spending growth revenues did beat the official inflation data comfortably.

In the current financial year-to-date, central government received £226.6 billion in income; including £168.1 billion in taxes. This was around 4% more than in the same period in the previous financial year.

Indeed if we look at July specifically there was some hopeful news from the self-assessment numbers.

This month, receipts from self-assessed Income Tax increased by £0.8 billion to £8.0 billion, compared with July 2016. This is the highest level of July self-assessed Income Tax receipts on record (records began in 1999).

This meant we had a small surplus in July but that the fiscal year so far saw an extra £1.9 billion of borrowing compared to last year.

Comment

There are two ironies today. The first is that on a day when I was thinking about public sector debt we get a reminder of the troubles in private debt via the unsecured sector and subprime in particular. Next is a timing irony as this from Ann Pettifor hints at.

Former chairman of Northern Rock given a platform by @thetimes to opine about “principles” shows how corrupt is the British establishment.

So a former chairman of a past subprime lender gets a media soapbox on a day new subprime fears see signs of a coming to fruition? The phrase credit crunch has many meanings but a flicker of it seems likely to be added to by the fact that official restrictions on outward investment from China seem to be biting. From City-AM.

Chinese conglomerate Dalian Wanda has ditched plans to buy London’s Nine Elms Square, it was announced this morning.

Meanwhile the Bank of England and its Governor Mark Carney are “Vigilant.”