UK GDP growth was strong in January meaning we continue to rebalance towards services

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.

Raghuram Rajan

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.

Some Perspective

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%.

Comment

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.

 

 

Trade revisions post a warning for UK GDP

This morning has shown us that the way that the UK government deals with the private-sector has issues. From Reuters.

Interserve Plc’s (L:IRV) shares sank almost 60 percent in value on Monday after the British outsourcing company announced a rescue plan that was likely to see a big part of its debt converted into new equity, potentially handing control of the company to its creditors.

Interserve, which employs 75,000 worldwide and has thousands of UK government contracts to clean hospitals and serve school meals, said on Sunday it would seek to cut its debt to 1.5 times core earnings in a plan it hopes to finalise early next year.

I am not sure that the next bit inspires much confidence either.

Interserve Chief Executive Debbie White reiterated that the company’s fundamentals were strong and that the debt reduction plan, first raised in a refinancing in April, had the support of 10 Downing Street.

This provokes echoes of this from January.

Carillion was liquidated after contract delays and a slump in business left it swamped by debt and pensions liabilities., triggering Britain’s biggest corporate failure in a decade and forced the government to step in to guarantee public services from school meals to road works.

If we switch to the Financial Times what could go wrong with this bit?

 after moving into areas in which it had no expertise, including waste from energy plants and probation services.

It is hard not to feel that this particular company is yet another zombie that will be kept alive as another failure will be too embarrassing for the establishment. The share price is understandably volatile but at the time of typing had halved to a bit over 12 pence. This compares to the around £5 as we moved into 2016.

Also according to the FT there is something of a queue forming behind it.

The crisis at Interserve is the latest to hit Britain’s troubled outsourcing sector, with Kier, Capita and Mitie also seeking to rebuild their balance sheets. Kier, another construction and support services company, launched a £264m emergency rescue rights issue last month as it warned that lenders were seeking to cut their exposure to the sector. Kier, which employs 20,000 in the UK, emphasised that it needed the “proceeds on the group’s balance sheet by December 31 . . . in light of tighter credit markets”. It said its debt had increased from £186m in June to £624m at the end of October.

I do not know about you but debt trebling in a few months is something that is in financial terms terrifying.

Monthly GDP

This morning brought the latest in the UK’s monthly GDP reports and the opening salvo was better than what we have seen recently.

Monthly growth rose to 0.1% in October 2018, following flat growth in August and September 2018.

If we look into the detail we see that yet again this was driven by the service sector which on its own produced 0.2% growth in October. Here is some detail on this.

The professional, scientific and technical activities sector made the largest contribution to the month-on-month growth, contributing 0.11 percentage points.

However as it outperformed total GDP growth there had to be issues elsewhere and we find the main one in the production sector.

In October 2018, total production output fell by 0.6%, compared with September 2018, due to a fall of 0.9% in manufacturing; this was partially offset by a 1.8% increase in mining and quarrying.

Whether that number will prove to be a general standard I do not know but we do know production in Germany fell by 0.5% in October as we looked at that only on Friday. As for more detail there is this.

The monthly decrease in manufacturing output of 0.9% was due mainly to weakness from transport equipment, falling by 3.2% and pharmaceutical products, falling by 5.0%; 5 of the 13 manufacturing subsectors increased.

Anyone who has been following the news will not be surprised to see the transport sector lower as for example there was a move to a 3 day week for at least one of the Jaguar Land Rover factories. Regular readers will be aware that the pharmaceutical sector has regular highs and lows and recently June was a high and October a low as we wait for a more general pattern to emerge.

Maybe there was also some food for thought for Interserve and the like here.

Construction output decreased by 0.2% in October 2018

Quarterly GDP

The performance was more solid than you might have expected from the monthly data.

UK gross domestic product (GDP) grew by 0.4% in the three months to October 2018.

In case you were wondering how this happened? Here is the explanation.

While the three most recent monthly growths were broadly flat, the lower level in the base period gives a comparatively strong rolling three-month growth rate.

If we move forwards to the detail we see something that is rather familiar,

Rolling three-month growth in the services sector was 0.3% in October 2018, contributing 0.23 percentage points to GDP growth.

But this time around it was using the words of Andrew Gold much less of a lonely boy.

The production and construction sectors also had positive contributions, with rolling three-month growths of 0.3% and 1.2%, respectively.

If we start with the construction sector then this time around we start to wonder how some of the outsourcing companies we looked at above seemed to have done so badly at a time of apparent boom? Moving on to production.

Rolling three-month growth in the production industries was 0.3%, while in manufacturing industries growth was flat. Production growth was driven by broad-based increases within the sector.

Peering into the transport sector we get a rather chilling reminder of the past.

Three-months on a year ago growth for manufacture of transport equipment was negative 0.9%, the lowest growth rate since November 2009.

Returning to services we get a reminder that the transport sector can pop up here too.

 with a softening in services sector growth mainly due to a fall in car sales.

On the other side of the coin there were these areas.

Accounting contributed 0.08 percentage points to headline GDP growth, while computer programming contributed 0.07 percentage points.

Comment

We see that considering the international outlook the data so far shows the UK to be doing relatively well. An example of a comparison was the Bank of France reducing its estimate for quarterly GDP growth to 0.2% this morning. Sticking with the official mantra we have slowed overall but saw a small rebound in October. So far so good.

Less reassuring is the simply woeful state of the outsourcing sector which looks a shambles. Also there was something troubling in the revisions and updates to the trade figures which included this.

Removing the effect of inflation, the total trade deficit widened £3.0 billion in the three months to October 2018.

So we did well to show any growth at all in October but there was more.

The total trade deficit widened £5.4 billion in the 12 months to October 2018 due mainly to a £5.1 billion narrowing in the trade in services surplus.

It is nice of our official statisticians to confirm my long-running theme that we have at best a patchy knowledge of what is going on in terms of services trade, but not in a good way in terms of direction. This especially impacted in the quarter just gone.

In Quarter 3 2018, the total trade balance was revised downwards by £6.9 billion, due mainly to exports, which were revised down £5.9 billion; imports were revised up by £1.0 billion.

The goods deficit was revised downwards by £3.1 billion in Quarter 3 2018 as exports of goods were revised downwards by £2.0 billion and imports revised upwards by £1.1 billion.

This would be a rather large factor pushing us from growth to contraction but for two factors. One may wash out to some extent in other parts of the national accounts.

A large component of the revision to trade in goods in the most recent quarter was revisions to unspecified goods (including non-monetary gold).

You would think that movements in gold would be easy to account for. Silly me! Also we now get into the geek section which is that trade is in the expenditure version of the national accounts and it is the output version which is officially assumed to be the correct one. So numbers which suggest the UK may have contracted in Q3 are likely to perhaps drag growth slightly lower to 0.5% or 0.4% on the grounds that you cannot ignore them entirely as we sing along to Genesis one more time.

Too many men, there’s too many people
Making too many problems
And not much love to go round
Can’t you see this is a land of confusion ?