Sadly a strong UK trade performance (for once) gets overlooked by the GDP release

Late on Friday the credit ratings agency Moodys offered its latest opinion on the state of play on the UK.

Leading ratings agency Moody’s has signalled it is poised to downgrade the credit rating on Britain’s government debt, warning that Brexit has triggered an “erosion in institutional strength” that threatens the UK’s financial credibility.

The ratings agency, which scores debt on the basis of how likely they are to default, changed the outlook on its Aa2 rating on the debt issued by the UK government from “stable” to “negative”.

That implies a cut to the actual rating could be coming imminently. ( Sky News)

Unfortunately for Sky News they went wrong with the first word in two respects. These days there is no such thing as a leading ratings agency and of course their operations are lagging and not leading. Also if it was going to be imminent they would have actually done it.

Indeed the crux of the matter was rather curious.

Moody’s said: “In the current political climate, Moody’s sees no meaningful pressure for debt-reducing fiscal policies.”

That was an odd statement because as I pointed out on social media the falls in bond yields have changed matters on this subject. The UK fifty-year Gilt yield closed the week at 1.23% whereas the Moodys report and some of the reporting seemed to be from an era where it was say 4% or 5% so if you like in one of the forecasts by the Office for Budget Responsibility or OBR.

Moody’s said Britain’s £1.8trn of public debt – more than 80% of annual economic output – risked rising again and the economy could be “more susceptible to shocks than previously assumed”.

Indeed Moodys seemed to be playing politics.

Moody’s said that “Brexit has been the catalyst for [an] erosion in institutional strength” which helped explain the change in outlook.

It said the main rationale for the change of view was firstly that “UK institutions have weakened as they have struggled to cope with the magnitude of policy challenges that they currently face, including those that relate to fiscal policy”.

What we do know is that fiscal policy is set to be looser like er France and well.

At Aa2, Britain is on the same level as France but below Germany’s AAA rating.

GDP Growth

The X-Factor in all of this is how the economy grows which is where today’s news comes in. It was hard not to have a wry smile at the Moodys report arriving just a say after the Bank of England had raised its growth estimate.

Bank staff’s estimate for GDP growth in 2019 Q3 as a whole had been revised up to 0.4%, from 0.2%
at the time of the Committee’s previous meeting. This was largely the result of an upward revision to estimates
of service sector output for June and July.

If we move to the actual numbers released this morning we were told this.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.3% in Quarter 3 (July to Sept) 2019. When compared with the same quarter a year ago, UK GDP increased by 1.0% in Quarter 3 2019; this is the slowest rate of quarter-on-year growth since Quarter 1 (Jan to Mar) 2010.

So some growth but the annual number has been pulled lower by the contraction in the second quarter. Overall we are very similar to the Euro area where annual growth is 1.1% and quarterly 0.2%. The breakdown was familiar for the UK as well.

The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019.

We got more detail here.

Manufacturing was flat in Quarter 3 2019, as was production. Services output increased by 0.4% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Construction output experienced a pickup following a weak Quarter 2, increasing by 0.6%.

Regular readers will know that I have long argued that we have in fact had a “march of the services” rather than a “march of the makers” and that the services sector is probably above 80% of the economy now. On a quarterly basis we saw this.

Information and communication was the largest contributing sector to growth in the latest quarter. It increased by 0.8% and contributed 0.08 percentage points.

On an annual basis we saw this.

In the three months to September 2019, services output increased by 1.4% compared with the three months ending September 2018; public sector dominated industries accounted for one-third of this growth.

Maybe a flicker of Brexit preparations there in the annual numbers. Also if you see a Luvvie today please be nice to them/

Long-term strength within the computer programming and the motion pictures industries are the main reasons for the sectors strong performance from Quarter 1 2015.

On the other side of the coin it was always going to be a difficult spell for manufacturing.

The 0.4% monthly decrease in manufacturing output was widespread with falls in 8 of the 13 subsectors; the largest downward contribution came from a 5.1% fall in basic pharmaceutical products.

The September numbers above do at least have the caveat that pharmaceutical products do not run to a monthly cycle and have wide swings. In fact if you will indulge me for a hundredth of s decimal point the UK fall in industrial production in September was the pharmaceutical industry.

I am afraid that there is no other way of describing this than calling it a depression.

Manufacturing output in the UK remained 3.2% lower in Quarter 3 (July to Sept) 2019 than the pre-downturn peak for Quarter 1 (Jan to Mar) 2008.

Comment

In terms of the Goldilocks the UK GDP story is of lukewarm porridge. We have some growth but not much as we edge forwards. The pattern is erratic on a quarterly basis ( 0.6%,-0.2%,0.3%) providing yet more evidence that the introduction of monthly GDP numbers was a mistake. If we switch to Moodys well we continue to be able to inflate our debt away.

Nominal GDP increased by 0.5% in Quarter 3 2019, down from 0.7% in Quarter 2 (Apr to June) 2019.

But as ever there are caveats and here is one from an area that did really rather well.

In Quarter 3 2019, the UK trade deficit narrowed to 1.2% of nominal GDP……..The narrowing of the trade deficit largely reflects strong export volume growth of 5.2% in Quarter 3 2019. Trade in goods exports grew 5.0%, reflecting increases in machinery and transport equipment and chemicals, while trade in services exports grew 5.3%; this was a result of “other business services”.

But this does not count as it goes in the expenditure and not the output version of GDP so we need to cross our fingers that it will be picked up there. When the numbers are tallied the income and expenditure versions are usually aligned with the output one which kind of begs the question of why have them?

Also there is this.

education, 68.9% public sector and 31.1% market sector

human health activities, 85.4% public sector and 14.6% market sector

residential care activities, 51.1% public sector and 48.9% market sector

social work activities without accommodation, 49.6% public sector and 50.4% market sector

Best of luck with really knowing what has gone on in those areas as government collides with the private-sector. There are plenty of issues here.

Finally there was this highlighted by the Bank of England.

The Committee discussed the recent Blue Book revisions to estimates of the household saving ratio. The
level of the saving ratio since the start of 2017 had been revised up by 1.4 percentage points on average to
reach just under 7% in 2019 Q2, primarily reflecting new HMRC data on self-employment income.

The truth is that we need a touch of humility as we know a fair bit less than we often think we do.

Podcast

 

 

 

 

 

 

 

Of Bond Yields and Productivity without forgetting Brexit day songs

Hello and welcome to the day the UK finally votes on European Union membership or Brexit. In London the weather was on the case as we have had what Freddie Mercury called “thunder and lightning, very very frightening” overnight and more of the same is expected later. Please do not be put off by what has been a nasty campaign – the kinder campaign promised last week seemed to have a shorter life than a Mayfly – and vote whatever your leaning as it is a right people have fought and died for.  The currency markets with the UK Pound £ at US $1.48 and Euro 1.30 have placed some one-way bets but of course if markets were always right life would be a lot easier than it is! Anyway let us move onto today’s subject except as you might expect there will be a song list for Brexit referendum day.

Bond yields and productivity

This is an issue raised by the former IMF Chief Economist Olivier Blanchard at the Pieterson Institute. But first we are reminded of something important which is that the rules that apply to us plebs do not apply to the establishment. Monsieur Blanchard was responsible for the policies applied to Greece on his watch as I note this from his Ten Commandments in June 2010.

Fiscal adjustment is key to high private investment and long-term growth.

Of course the fantasies about a Greek economic recovery were produced on his watch too. Then there is this.

You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.

As well as Greece which also needed a default ( PSI ) in 2012 we have Portugal to consider here. Of course Olivier had a mea culpa later on which is welcome but if an airplane designer had seen the results of his work crash and burn like what happened to Greece who would fly on his/her next plane? Anyway Olivier has carried on pretty much regardless.

The Economics

Olivier opens with something of a strawman argument.

Long-run productivity growth appears likely to be low, and productivity growth and interest rates move largely together, so one should expect long rates to be low as well.

We have very little idea of where interest-rates as in bond yields would be without all the intervention as I note that today we have learned that the Bank of Japan now owns 34% of the Japanese Government Bond Market. Olivier is not keen on that argument for different reasons though.

Yes, measured productivity growth has decreased, and seemingly not due to measurement error (Byrne et al. 2016, Syverson 2016).

I have highlighted the bit with which I can only disagree completely. As I look ever more deeply into the UK data on the subject I realise that we know much less than we think and that we could and probably are making large mistakes. Actually Olivier behaves like a stereotypical economist here.

Expect lower productivity growth, but be ready to be surprised.

The bit that I note is like my “something wonderful” ( 2001 A Space Odyssey ) thought.

But when one listens to Silicon Valley, one cannot help but expect a substantial probability of a much larger role for robots and artificial intelligence in general, and by implication, much higher productivity gains.

That seems a likely future but missed by Olivier is the implication of that. Will it be a science fiction Star Trek style world where the benefits of capitalism are shared around? A  time of leisure and ease for all. Or will it be a type of Marxist world where capitalists overlords amass great wealth paid for by their robots whilst the ordinary person sees harder times. In science fiction terms that makes me think of the Harkonnen’s in the novel Dune. It makes me shudder a bit.

We move onto an area where Olivier appears for a while to be influenced by the early work of Oasis.

that people live forever, or act as if they lived forever, and that people are willing to defer consumption if the interest rate is higher.

The latter part of that has seemed to be true in the past but we know in our new world of negative interest-rates that people are willing to defer consumption as well if the interest-rate is not only lower but pretty much zero. I have written recently about the Swedish propensity to save continuing well the Germans seem rather keen on it as well.

I am not so sure that the Germans are that peculiar as I note that the Euro area without them has not seen that much of a fall in savings once we allow for the fact that some of it has hard a very hard credit crunch. Only yesterday the Swedes took some time off from the football and cheering the last international for the Zlatan to let us know this.

Households’ net deposits were at a record level of SEK 35 billion, mainly in regular savings accounts in banks and at the Swedish Tax Agency during the first quarter of 2016.

What is the conclusion?

Well we are told this.

Forecasts of long-term growth, and the general commentary in newspapers, are gloomy. I believe that this bad news about the future largely explains the relative weakness of demand today. Put in more academic terms, bad news about the future supply side is leading to a Keynesian slowdown, or at least a weaker recovery today.

Olivier skirts over the disaster that has been official “Forward Guidance” so his first factor is an ever weakening influence as people listen less and less to people like him. However he misses important points which explain why we are where we are and again sometimes he is simply wrong.

Banks are no longer deleveraging, and credit supply is abundant and cheap.

As to banks no longer deleveraging that is not what I have been hearing and seeing. We see a regular flow of job losses on the news wires and occasional large retrenchments such as Barclays announcing plans to pull out of Africa. That is before we get to the share prices of banks around the world. If we move to credit supply it is abundant and cheap in many places for consumer borrowing but if the UK is any guide much less so for companies and businesses.

Comment

There are things to consider here and deeper issues that Olivier’s it might stay depressed or it might improve analysis. Let me remind you again of another issue he has dodged which is that one of his variables interest-rates ( I am including bond yields here) has been driven by what he might call “people like us”. This has changed the world as the idea of a market driven interest-rate seems an anachronism from a distant past and investors spend their time trying to front-run central banks. What could go wrong? Tucked in there might be an explanation of why people are saving for no apparent return at these levels of interest-rates.

Also our world has seen apparent expansionary policy have contractionary influences. The impact of QE in the UK helped reduce real wages in 2011/12 for example from which they have yet to fully recover. Also there is the issue of long-term saving and pensions how does that work in our supposedly brave new world? People may think they need to save more whilst around the world we see businesses being told they need to put more into pension funds which is another contractionary effect of our QE world. Oh and all the can-kicking has left people afraid not unreasonably in my view that it could all happen again. In fact it seems more likely and not less in more than a few places.

Songs for Brexit Day

Should I Stay or Should I Go Now by The Clash

The Final Countdown by Europe

Making Your Mind Up by Bucks Fizz

For Remain

Stay by Jackson Browne

Stay by Eternal

Don’t Leave Me This Way by The Communards

Please Don’t Go by KC and the Sunshine Band

It’s The End Of The World As We Know It by REM

Come Together by The Beatles

For Leave

D-I-V-O-R-C-E by Tammy Winette

Fifty Ways To Leave Your Lover by Paul Simon

Go Now by The Moody Blues

Another Brick In The Wall by Pink Floyd

Burning Down The House by Talking Heads

I Want To Break Free by Queen

Go Your Own Way by Fleetwood Mac

Should we get another vote

Coming Around Again by Carly Simon

Europe Endless by Kraftwerk

Complete Control by The Clash

 

Thanks for the suggestions I have already received.