This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.
Very early there was an “I agree with Mark (Carney)” as I note this.
see for example speeches by (Carney, 2019) and (Vlieghe, 2019)
The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.
First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.
The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?
To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.
Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.
There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.
“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.
The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.
The UK economy
The opening piece of official data today was very strong.
Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.
Production data has been in the news as it has internationally slowed so let us dip into that report as well.
Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.
We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.
This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.
Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.
This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.
Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.
This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.
Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.
Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.
Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.
Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.
Returning to the production data this was sadly no surprise.
Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.
Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.
was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.
We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.
If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.
The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.
Although we got a clue to a major issue here as we note this too.
Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.
So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.
In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.
Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.