UK GDP growth accelerates past France and Italy

Today brings us the latest data on the UK economy or to be more specific the economic growth or Gross Domestic Product number for the second quarter of this year. If you are thinking that this is later than usual you are correct. The system changed this summer such that we now get monthly updates as well as quarterly ones. So a month ago we were told this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

So we knew the position for April and May earlier than normal (~17 days) but missing from that was June. We get the data for June today which completes the second quarter. As it happens extra attention has been attracted by the fact that the UK economy has appeared to be picking-up extra momentum. The monthly GDP numbers showed a rising trend but since then other data has suggested an improved picture too. For example the monetary trends seem to have stabilised a bit after falls and the Markit PMI business survey told us this.

UK points to a 0.4% rise in Q2 tomorrow, but that still makes the Bank of England’s recent rate rise look odd, even with the supposed reduced speed limit for the economy. Prior to the GFC, 56.5 was the all-sector PMI ‘trigger’ for rate hikes. July 2018 PMI was just 53.8 ( @WilliamsonChris _

As you can see they are a bit bemused by the behaviour of the Bank of England as well. If we look ahead then the next issue to face is the weaker level of the UK Pound £ against the US Dollar as we have dipped below US $1.28 today. This time it is dollar strength which has done this as the Euro has gone below 1.15 (1.145) but from the point of view of inflation prospects this does not matter as many commodities are priced in US Dollars. I do not expect the impact to be as strong as last time as some prices did not fall but via the impact of higher inflation on real wages this will be a brake on the UK economy as we head forwards.

Looking Ahead

Yesterday evening the Guardian published this.

Interest rates will stay low for 20 years, says Bank of England expert

Outgoing MPC member Ian McCafferty predicts rates below 5% and wages up 4%

The bubble was rather punctured though by simpleeconomics in the comments section.

Considering the BoE track record on forecasting I think we should take this with a massive pinch of salt. They often get the next quarter wrong so no hope for 20 years time.

The data

As ever we should not place too much importance on each 0.1% but the number was welcome news.

UK GDP grew by 0.4% in Quarter 2 (April to June) 2018.The rate of quarterly GDP growth picked up from growth of 0.2% in Quarter 1 (Jan to Mar) 2018.

As normal if there was any major rebalancing it was towards the services sector.

Services industries had robust growth of 0.5% in Quarter 2 (Apr to June) 2018, which contributed 0.42 percentage points to overall gross domestic product (GDP) growth.

The areas which did particularly low are shown below.

 Retail and wholesale trade were the largest contributors to growth, at 0.11 percentage points and 0.05 percentage points respectively. Computer programming had a growth of 1.9%, contributing 0.05 percentage points to headline gross domestic product (GDP).

There was also some much better news from the construction sector and even some rebalancing towards it.

Growth of 0.9% in construction also contributed positively to GDP growth.

Although of course these numbers have been in disarray demonstrated by the fact that the latest set of “improvements” are replacing the “improvements” of a couple of years or so ago. Perhaps they have switched a business from the services sector to construction again ( sorry that;s now 3 improvements).So Definitely Maybe. Anyway I can tell you that there are now 40 cranes between Battersea Dogs Home and Vauxhall replacing the 25 when I first counted them.

Today’s sort of humour for the weekend comes from the area to which according to Baron King of Lothbury we have been rebalancing towards.

However, contraction of 0.8% in the production industries contributed negatively to headline GDP growth…….

Manufacturing fell by 0.9% although there is more to this as I will come to in a moment.

Monthly GDP

You might have assumed that the June number would be a good one but in fact it was not.

GDP increased by 0.1% in June 2018

If we look into the detail we see that contrary to expectations there was no services growth at all in June. Such growth as there was come from the other sectors and construction had a good month increasing by 1.4%. I did say I would look at manufacturing again and it increased by 0.4% in June which follows a 0.6% increase in May. So we have an apparent pick-up in the monthly data as the quarterly ones show that it is in a recession with two drops in a row. Thus it looks as if the dog days of earlier this year may be over,

This leaves us with the problem of recording zero services growth in June. The sectors responsible for pulling the number lower are shown below.

The professional, scientific and technical activities sector decreased by 1.0% and contributed negative 0.10 percentage points. ……The other notable sector fall was wholesale, retail and motor trades, which decreased by 0.6% and contributed negative 0.08 percentage points.

The decline of the retail trade whilst the football world cup was on seems odd. Also there overall number completely contradicts the PMI survey for June which at 55.1 was strong. So only time will tell except Bank of England Governor Mark Carney may need its barman to mix his Martini early today as he mulls the possibility that he has just raised interest-rates into a service-sector slow down.

One consistent strong point in the numbers in recent times has carried on at least.

There was also a rise in motion pictures, increasing by 5.8% and contributing 0.05 percentage points.

So we should all do our best to be nice to any luvvies we come across.

Comment

We should welcome the improved quarterly numbers as GDP growth of 0.4% is double that of both France and Italy and is double the previous quarter. However whilst the monthly numbers do provide some extra insight into manufacturing as the recessionary quarterly data looks like a dip which is already recovering the services numbers are odd. I fear that one of my warnings about monthly GDP numbers are coming true as it seems inconsistent with other numbers to say we picked up well in May but slowed down in June. If we look at the services sector alone and go back to February 2017 we are told this happened in the subsequent months, -0.1%,0.3%-0.1%,0.3% which I think speaks for itself.

We also got an update on the trade figures which have a good and a bad component so here is the good.

The total UK trade deficit (goods and services) narrowed £6.2 billion to £25.0 billion in the 12 months to June 2018. The improvement was driven by both exports of goods and services increasing by more than their respective imports.

Next the bad.

The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.

If you want a one word summary of out recorded trade position then it is simply deficit. Although currently we are looking rather like France in terms of patterns as a reminder that some trends are more than domestic.

 

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UK GDP growth continues to rebalance towards services

Today has brought a new adventure in UK economic statistics. This is because we have moved to a new system where we get monthly GDP releases whilst the quarterly ones have been delayed. In terms of detail here is the change in the quarterly schedule.

The new model will see the publication of two quarterly GDP releases rather than three. The new First quarterly GDP estimate will be published approximately 40 days after the end of the quarter to which it refers. The new first estimate will have much higher data content for the output approach than the current preliminary estimate. It will also contain data from the income and expenditure approaches,

In general I welcome this as under the old model the last of the three months in question had rather a shortage of actual data and quite a lot of projections. The UK has in essence produced its numbers too quickly in the past and now they should be more reliable. There is a catch to this in that the Bank of England will have its August policy meeting without the GDP data. This has a consequence in that traditionally it is more likely to act once it has it and another in that will it get a sort of “early wire”? That sort of thing was officially stopped by seems to have unofficially started again. I also welcome the use of income and expenditure numbers as long as it is not an excuse to further increase the role of fantasy numbers such as imputed rent. Back in the day Chancellor Nigel Lawson downgraded the use of the income and expenditure GDP data and I think that was a mistake as for example in the US the income GDP numbers worked better than the normal ( output)ones at times.

The services numbers will be sped up so that this can happen.

Taken together, these releases provide enough information to produce a monthly estimate of GDP, as data on almost the entire economy will now be available.

This has two problems. Firstly the arrival of the services data has been sped up by a fortnight which can only make it less reliable. The second is that these theme days overrun us with data as we will not only be getting 2 GDP numbers we will also be getting production, construction and trade numbers. Frankly it is all too much and some if not much of it will be ignored.

Today’s Numbers

The headline is as follows.

UK GDP grew by 0.2% in the three months to May.Growth in the three months to May was higher than growth in the three months to April, which was flat. The weakness in growth in the three months to April was largely due to a negative drag on GDP from construction.

There was something familiar about this which may make Baron King of Lothbury reach for the key to the sherry cabinet.

Growth of 0.4% in the services industries in the three months to May had the biggest contribution to GDP growth.

Yes we “rebalanced” towards services yet again as we mull whether he was ennobled due to his apparently ability to claim the reverse of reality so often? As it happens the growth was driven by a sector which has seen troubled times.

Growth in consumer-facing industries (for example retail, hotels, restaurants) has been slowing over the past year. However, in the three months to May growth in these industries picked up, particularly in wholesale and retail trade.

This industry grew by 0.9% in the three months to May and contributed 0.1 percentage points to headline GDP.

If we move to the monthly data we note this.

The monthly GDP growth rate was flat in March, followed by a growth of 0.2% in April. Overall GDP growth was 0.3% in May.

This in so far as it is reliable confirms my suggestion that the UK economy is edging forwards at about 0.3% per quarter. Oh and if the output on social media is any guide best of luck with this.

The monthly growth rate for GDP is volatile and therefore it should be used with caution and alongside other measures such as the three-month growth rate when looking for an indicator of the long-term trend of the economy.

Production

It was disappointing to see a drop here although maybe this was something international as France also saw a drop earlier in the day.

In May 2018, total production was estimated to have decreased by 0.4% compared with April 2018, led by falls in energy supply of 3.2% and mining and quarrying of 4.6%.

There were two ameliorating factors at play as we start with mining.

 due to unplanned maintenance on the Sullom Voe oil and gas terminal.

Also the falls in manufacturing seem to have stopped.

Manufacturing output rose by 0.4% and is the first increase in this sector since December 2017……..due mainly to widespread growth across the sector, with 9 of the 13 sub-sectors increasing.

The leading sectors were as follows.

Pharmaceutical products and transport equipment provide the largest contributions to monthly growth, increasing by 2.4% and 1.1% respectively.

It would appear that yet again it is time for ” I am the urban spaceman baby” which younger readers may need to look up!

Within the transport equipment sub-sector, the aircraft, spacecraft and related machinery industry performed strongly, increasing by 3.3%, supported by an increase in nominal export turnover growth of 10.9%.

Those areas are still seeing export growth whereas more generally for manufacturing the boost from the lower Pound £ seems to be over. Or if you prefer the effects of the J-Curve and Reverse J-Curve have come and gone.

Trade

The picture here has been one of improvement and on an annual comparison that remains true.

The total UK trade deficit (goods and services) narrowed £3.9 billion to £26.5 billion in the 12 months to May 2018. An improvement in the trade in services balance was the main factor, as the UK’s trade in services surplus widened £4.1 billion to £111.5 billion.

However the quarterly numbers also suggest that the boost from the lower UK Pound £ has been and gone.

The total UK trade deficit widened £5.0 billion to £8.3 billion in the three months to May 2018, mainly due to falling goods exports and rising goods imports. Falling exports of cars and rising imports of unspecified goods were mostly responsible for the £5.0 billion widening of the total trade deficit in the three months to May 2018.

Tucked away in this was a rare event for the UK.

There was a small overall trade surplus on the month to February 2018, mainly due to falling goods imports;

Comment

We find that today’s data confirms our thoughts that after a soft patch the UK economy has picked up a bit. There are reasons to suspect this continued in June. For example the monetary data picked up in May so may no longer be as strong a break and the PMI business surveys for June were stronger.

The survey data indicate that the economy likely
grew by 0.4% in the second quarter, up from 0.2%
in the opening quarter of 2018.

That poses a question for the Bank of England and its Governor. That rate of growth is above the “speed limit” that its Ivory Tower has calculated although the model used has been a consistent failure. Should the boyfriend prove to be unreliable yet again then subsequent votes will be without one of the policymakers keen to raise interest-rates. I remain to be convinced they will take the plunge.

Moving onto a past Bank of England staple which is rebalancing we see us moving towards a strength which we do not seem to like. As services seemed to be left out of the Chequers Brexit plan which seemed really odd to me. Especially if we note that other areas are in relative and sometimes absolute decline.

Production and manufacturing output have risen but remain 6.2% and 2.5% lower, respectively, in the three months to May 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

I have left out the construction numbers for May as we wait for any sort of reliability from them.

 

 

 

 

 

Individual measures of GDP and household income show weak UK growth since 2008

Today has opened with not so good news for a sector of the UK economy that has been troubling us for the last year or so. From the SMMT or Society of Motor Manufacturers and Traders.

The UK new car market declined in March, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT), with registrations falling -15.7% compared with the same month last year. March 2017 was the biggest month ever for new car registrations, as buyers seized the chance to purchase cars before new Vehicle Excise Duty (VED) rates came into force in April last year. However registrations are still running at a historically high level and last month’s market was the fourth biggest March on record.

As you can see they are in a rush with explanations but we do get some more perspective from this.

New car registrations have fallen for the 12th consecutive month, with year-to-date performance down -12.4%.

The domestic car market has been contracting for a while now and sadly we have to review a scenario that involves government meddling as we note this.

Continuing the recent trend, diesel registrations declined in March, down -37.2%

So far this year diesel sales are down a third from 361,000 in 2017 to 241,000 this year as people wait to see what government policy will be in this area. After the Volkswagen scandal people are much less likely to believe the industry that the new diesels are clean and of course that adds to people like me who were pushed into clean diesels by government company car tax policy back in the previous decade only to discover that by clean they meant poisoning myself and other Londoners.

Whilst sales of hybrid cars are doing better I wonder if more and more buyers are wondering how green they really are?

 In the first quarter of this year 146,614 of these vehicles hit British roads, an increase of 2.7%, as the inclement weather appeared to lead to a boost in registrations.

There are two issues with the green agenda here in my view. Firstly the resources cost of a new car regularly gets ignored and secondly the technology uses some relatively rare elements.

Returning to diesels this is also a problem much wider than for the UK. From Reuters.

Volkswagen AG (VOWG_p.DE) has paid more than $7.4 billion to buy back about 350,000 U.S. diesel vehicles through mid-February, a recent court filing shows. The German automaker has been storing hundreds of thousands of vehicles around the United States for months.

Volkswagen has 37 secure storage facilities around the United States housing nearly 300,000 vehicles, the filing from the program’s independent administrator said.

Should these now be subtracted from German exports, production and GDP figures?

Economic impact

The SMMT tells us this.

 Some 200,000 people are employed in new car retail alone, while UK-based car finance firms employ over 45,000 more, with an annual £12.5 billion economic contribution. On the road, the vehicle fuel industry supports 40,000 jobs, and a further 347,000 are employed in vehicle servicing and repair.

The fall in sales will impact on production but not as much as you might think as we mostly export what we make and some of these numbers are good as this from the 29th of March highlights.

More than a quarter of a million engines produced by British factories in February.Exports jump 16.1% in the month as 157,880 units head overseas – 62.0% of all output. Engine manufacturing up 10.3% so far this year as strong start to 2018 continues.

The future

There was some positive news from Vauxhall yesterday.

PSA, which last year acquired Opel/Vauxhall from General Motors (GM.N), will build Peugeot and Citroen models as well as the next Vauxhall Vivaro van in Luton, north of London. Production will rise to 100,000 vehicles from 60,000 in 2017. ( Reuters).

The banks

There is an interrelation here in addition to the obvious as we note that via the growth of car financing the car companies now effectively have banking subsidiaries. From Bloomberg.

Moody’s cut Barclays’ long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. The bond grader assigned a stable outlook to the ratings for Barclays. Rival Deutsche Bank AG is currently rated one notch higher.

However, the ratings agency gave the British lender a stable outlook and highlighted its “strong franchises in U.K. retail, business banking and global credit cards.”

Things are not so hot when you are a notch below my old employer Deutsche Bank. But I note that the credit agencies suggest times are good in domestic credit as when have they told us that before?

Purchasing Managers Indices

This morning Markit have completed their sequence of surveys and have told us this.

March data signalled a slowdown in business
activity growth across the UK service sector, with
the latest expansion the weakest for over one-and a-half
years. However, survey respondents noted
that snow disruption and unusually bad weather
conditions in March had been a key factor holding
back business activity growth.

The poor old weather always gets the blame for bad news! Some areas will have benefited ( energy suppliers ) but they are invariably silent. I am sure there was some impact via not being able to get to work but more deeply I wonder if this reflects the fact that some output for construction comes under services. We have noted this before when a large company was shifted from services to construction a few years back. Records and statistics seem to be rather malleable.

Moving onto the wider impact we were told this.

“The UK economy iced up in March……..The PMI surveys collectively
signal a quarterly GDP growth rate of just under
0.3%, down from 0.4% in the fourth quarter, albeit
with the rate of growth sliding to just 0.15% in
March alone.”

We will have to see as the last time they told us the UK economy had lurched lower post the EU leave vote Markit ended up with a lot of egg on its face. If we look back to weather related issues it reversed quickly back in 2010.

Encouragingly, in January 2010 and
December 2010, the PMI fell sharply due to heavy
snow but in both cases the decline was more than
reversed in the following month.

Comment

There is a fair bit to consider here. UK manufacturing seems to be still doing okay in spite of the woes of the domestic car market ( partly because we import so many cars) and engine production is strong perhaps because of petrol engine shortages in Europe. Construction was hit by the weather and whilst this seemed to miss manufacturing it did hit services. So we seem likely to see lower first quarter GDP numbers which after a panic will probably then bounce back.

However if we look at some official statistics also released today at the individual level economic growth has been less than the aggregate.

Gross domestic product (GDP) per head grew by 0.8% in real terms in Quarter 4 (Oct to Dec) 2017 compared with the same quarter a year ago.

On this metric we have only grown by 3% since 2008 and if we continue and shift to income we see this.

Real household disposable income (RHDI) per head increased by 1.0%;  ( on a year before)

Slightly odd if we look at wages and inflation until we note it was this.

Furthermore, net property income (in nominal terms) contributed 1.0 percentage point to RHDI per head, leading to an overall positive position. Property income is not (as might be suggested by the name) the income generated by the ownership of buildings (rental). It is in fact, made up of interest, the distributed income of corporations (dividends, repatriated profits and so on) and rent on land.

Overall it is up 4.1% since 2008. So now we shift from wondering about a slow down to mulling how little we have grown at all.

Me on Core Finance TV

http://www.corelondon.tv/financial-asset-valuations-stretched-shaun-richards-notayesmaneconomics/

 

 

The UK economy continues to be both lucky and remarkably stable

Today is or if you read this later has been UK GDP day where we find out how the UK economy performed in 2017. For once there is a reasonable amount of debate and uncertainty caused by the outage to the Forties pipeline for much of December as you see in the initial or preliminary estimate the last month in the quarter has very little actual data and is mostly guesstimates. Meanwhile the UK establishment has been on the case and with intriguing timing has looked at GDP or Gross Domestic Product. Here is the Deputy National Statistician on the subject.

GDP measures the market-based economic activity: its primary purpose is to measure an economy’s production, income and expenditure. To calculate GDP, we take all the economic activity and use market prices to weight these different items to estimate the total size of the economy.

Fair enough as it starts but as regular readers will be aware there are more than a few problems with such an approach. Let us start with things that do not have a price or have a very low one.

GDP values goods and services at the price they are sold at, but if the value to me or you is higher than prices we pay we are even better off. Take, for example, free mapping services available on the internet – these are very valuable, but the cost of provision is relatively small. This difference between true benefit and price or cost is not included in GDP;

Next comes things we provide for ourselves.

The non-market activity that GDP excludes is important to well-being. For example, the ‘home production’ of childcare is hugely valuable in terms of child development, and volunteering helps improve the lives of millions of people in the UK;

I have used the example before of everyone suddenly mowing next doors lawn or looking after next doors children. As they would be paid recorded GDP would rise but economic activity would be unchanged. Also there is the issue of use of resources which GDP ignores.

So far so good from our Deputy Statistician but then he reverts to type and the emphasis is mine.

There are a few exceptions to the market-based approach, notably that GDP includes government-provided services and the economic activity imputed for home owners.

This is a big issue because as I pointed out in detail on the 23rd of May 2016 you are using a made-up number in a series that is supposed to be for market prices. It is a clear contradiction and causes all sorts of problems.

For those who have not looked at the numbers then nominal UK GDP has been revised up by at least £50 billion in each of the years 1997 to 2006 due to Imputed Rent and then by a declining amount up to 2011. To give an idea of scale VAT fraud is considered a big deal but changes to it top out at £2.1 billion in 2011.

This was officially declared a “discontinuity” but we carried on regardless in terms of methodology as the numbers changed. The issue of how to treat government services is another problem because it is fair to argue that you have to do something as what government;s do vary but it is also true that prices in that sector and hence GDP are unreliable and in truth are often made up rather than collected. If you want to take a Matrix style blue pill he is the official view on Imputed Rent.

 Likewise, if imputed rents were not included within GDP then an increase in home ownership would have the effect of lowering a country’s GDP.

The other problem created by Imputed Rents is that the logic above means the establishment has now put them in the inflation figures in the CPIH number. So you end up being told that the UK housing sector is a drag on inflation which is why first time buyers are struggling so much, oh hang on…….

Mark Carney

The Governor of the Bank of England has not delivered a defence of GDP he has delivered a defence of his economic forecasts. From Bloomberg.

Asked in a BBC radio interview to quantify the damage from Brexit, he said the economy is now about 1 percentage point smaller than it would have been had the 2016 European Union referendum gone the other way, and that the gap will widen to about 2 percentage points by the end of the year.

“What it works out to is tens of billions of pounds lower economic activity,” he said. “The question then is how do we make that up over time by growing above potential.”

Based on the estimated size of the economy at the end of 2017, the lost output would amount to as much as 40 billion pounds ($57 billion).

Odd timing only a few hours ahead of the GDP release but perhaps the rarefied air in Davos made him forget that. After all these days he does not get the numbers 24 hours early.

Today’s data

The news was in fact pretty good.

UK gross domestic product (GDP) was estimated to have increased by 0.5% in Quarter 4 (Oct to Dec) 2017, compared with 0.4% in Quarter 3 (July to Sept) 2017.

It was driven by something familiar and something less familiar but if anything even more welcome.

The dominant services sector, driven by business services and finance, increased by 0.6% compared with the previous quarter……..boosted by the second consecutive quarter of strong growth in manufacturing……….Manufacturing was the largest contributor to growth within production, at 1.3% and contributing 0.13 percentage points.

We get little detail on the manufacturing numbers but there is an intriguing hint of a further pick-up in the employment numbers in the services breakdown.

The business services and finance sector continued to be the main driver of growth in services in the latest quarter, increasing by 0.8% and contributing 0.28 percentage points. There was broad-based growth within this sector, with the largest contributor to GDP growth being employment activities, which increased by 3.6% and contributed 0.04 percentage points.

Here is a quirk for you which immediately made me think of the “NHS crisis” which is all over the media.

The largest contributor to this sector was human health activities with growth of 0.6% and contributing 0.03 percentage points to GDP growth.

Maybe not such a bad health performance although as discussed earlier the data is both uncertain and unreliable.

Recession

The construction problem continues.

Construction output was estimated to have decreased by 1.0% during Quarter 4 2017, following contraction in the previous two quarters. However, annual growth was 5.1% between 2016 and 2017, demonstrating that the most recent contractions are relatively small compared with the large growth throughout 2016 and into the first quarter of 2017.

So it continues on a weak recessionary path. Also I am not a fan of the way that the Statistical Bulletin provides context in the way that it does as it is supposed to be for the data release not news management or opinion. That is for elsewhere as how can you be the judge when you are the main witness?

Comment

If we step back for a moment we see that the UK economy has in 2017 exhibited a Napoleonic virtue. The one when he asked if particular generals were “lucky”? It has been shown by how stable things have been when so many were predicting instability post the EU Leave vote.

GDP was estimated to have increased by 1.8% between 2016 and 2017, slightly below the 1.9% growth seen between 2015 and 2016.

The luck part has come from how the favourable world economic position has helped manufacturing exports in particular and offset the impact of higher inflation on real wages and consumption. Unlike say in 2007/08 when a weaker pound helped little because the world economy was in poor shape.

As to the detail there is some hope that the ordinary person may begin to see some benefit as GDP per head rose by 0.4% making it 1.2% higher than a year before. But this is an area where we have struggled in the credit crunch era in the same way as with wages and productivity. Although of course last week brought possible better news on productivity via the telecoms sector.

On the other side of the balance sheet is construction and for all the spinning noted above the problems created by Carillion will not help the early part of 2018. If it helps my Nine Elms crane count is at 25.

As ever we need to note that the numbers are not accurate enough to be analysed to the degree they are and we have received a reminder of this from Japan today. From the Financial Times.

Japanese cryptocurrencies exchange abruptly halts withdrawals

You see by some calculations Bitcoin and the crytocurrencies were expected to provide a 0.3% boost to GDP in Japan.

 

 

 

 

Ironically falling UK car registrations are impacting on French manufacturers

Yesterday afternoon saw some good news for my topic of the day. It came from a sector of the UK economy which over the past decade has seen an extraordinary boom which is premiership football. From the BBC.

Crystal Palace’s chairman has unveiled plans to increase Selhurst Park’s capacity to more than 34,000.

Steve Parish said the expansion, expected to cost between £75m-£100m, would be an “icon” for south London.

The full revamp is expected to take three years to complete, and work could begin “within 12 months”.

KSS, the architects behind the project, have previously redeveloped sporting venues including Anfield, Twickenham and Wimbledon.

If you travel past the ground then without wishing to upset Eagles fans it is to put it politely in sore need of redevelopment. But as well as a boost and if you make the usually safe assumption that it ends up costing the higher end of the estimate we see that each extra seat costs something of the order of £12,500. Is that another sign of inflation in the UK or good value.?

If we continue on the inflation beat then this morning has bought grim news for railway commuters as the BBC points out.

Train fares in Britain will go up by an average of 3.4% from 2 January.

The increase, the biggest since 2013, covers regulated fares, which includes season tickets, and unregulated fares, such as off-peak leisure tickets.

The Rail Delivery Group admitted it was a “significant” rise, but said that more than 97% of fare income went back into improving and running the railway.

A passenger group said the rise was “a chill wind” and the RMT union called it a “kick in the teeth” for travellers.

The rise in regulated fares had already been capped at July’s Retail Prices Index inflation rate of 3.6%.

We see a clear example of my theme that the UK is prone to institutionalised inflation in the way that the rises are capped at the highest inflation measure they could find. Suddenly the “not a national statistic” Retail Prices Index or RPI is useful when it can be used for something the ordinary person is paying in the same way it applies to student loans. Whereas when it is something that we receive or the government pays then the lower ( ~1% per annum) Consumer Prices Index or CPI is used.

The rail industry is an unusual one where booming business is a problem.

Here’s some examples. Passenger numbers on routes into King’s Cross have rocketed by 70% in the past 14 years. On Southern trains, passenger numbers coming into London have doubled in 12 years…….There is a push to bring in new trains, stations and better lines, but it’s difficult to upgrade things while keeping them open and it’s seriously expensive.

Ah inflation again! Of course railways suffer from fixed costs due to their nature but we never seem to get to the stage where maximising use reduces costs do we?

The economic outlook

If we look at the business surveys from Markit ( PMIs) we see that the UK economy continues to grow at a steady pace with according to the surveys construction and particularly manufacturing doing well.

On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion…….

This morning has brought the services data which you might think would be good following them but of course things are often contrary.

November data pointed to a setback for the UK
service sector, with business activity growth easing
from the six-month peak seen in October. Volumes
of new work also increased at a slower pace, while
the rate of staff hiring was the joint-slowest since
March.

So growth continued but at a slower rate as the reading fell to 53.8 in November from 55.6 in October. Also there were inflation concerns being reported.

Sharp and accelerated rise in prices charged by
service providers.

This is very different to the official data although it only covers the period to September.

The annual inflation rate in the latest quarter was above the average for the period, at 1.3%.

The average is for the credit crunch era.

This means that according to the business surveys the UK economy is doing this.

The survey data are so far consistent with the economy growing at a quarterly rate of 0.45% in the closing months of 2017.

I did challenge the spurious accuracy here and got this in response from their chief economist Chris Williamson.

Hi Shaun – October UK PMI was consistent with +0.5% GDP while November signalled +0.4%. Seemed sensible to split the difference!

Car Trouble

Regular readers will be aware that the boom in this sector has faded and perhaps turned to dust in 2017. This morning the Society of Motor Manufacturers and Traders has reported this.

The UK new car market declined for an eighth consecutive month in November, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,541 vehicles were registered, down -11.2% year-on-year, driven by a significant fall in diesel demand.

The fall was led by businesses.

Business, fleet and private registrations all fell in the month, down -33.6%, -14.4% and -5.1% respectively. Registrations fell across all body types except specialist sports, which grew 6.7%. The biggest declines were seen in the executive and mini segments, which decreased -22.2% and -19.8% respectively, while demand in the supermini segment contracted by -15.4%.

This means that the state of play for the year so far is this.

Overall, registrations have declined -5.0% in the eleven months in 2017, with 2,388,144 cars hitting British roads so far this year.

Hitting the roads? Well hopefully not but the economic consequences are ironically being felt abroad as much as in the UK. From the UK point of view there is a fall in consumption and to the extent of some business use a fall in investment. But we mostly import our cars so in terms of a production impact it will mostly be felt abroad. As it turns out the major impact will be felt in France as so far this year we see registrations have fallen by 18% for Citroen, 16% for Peugeot and 17% for Renault totalling around 38,000 cars for the sector. Individually the worst hit of the main manufacturers seems to be Vauxhall which is down 22% this year.

As to the type of car that has been worst hit then I am sure you have already guessed it.

heavy losses for diesel, falling -30.6%.

On that subject the SMMT seems lost in its own land of confusion.

Diesel remains the right choice for many drivers, not least because of its fuel economy and lower CO2 emissions.

That ( and the tax advantages) persuaded me to get what I thought was a new green and clean diesel only to discover that instead I have been poisoning the air for myself and other Londoners. So I guess more than a few are singing along to the Who these days.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

We await to see how this impacts on all the car loans and note that the UK is not alone in this if the Irish Motor Industry is any guide.

New car sales year to date (2017)131,200 (2016) 146,215 -10%

Comment

There is a fair bit to consider so let us start with the car market. Whilst there is an impact on consumption and perhaps a small impact on production ironically the impact on our trade and current account position will be beneficial as explained by this from HM Parliament.

The value of exports totalled £31.5 billion in 2016, but imports totalled £40.3 billion, so a trade deficit of £8.8 billion was recorded.

So the impact on UK GDP is not as clear as you might think especially if we continue to export well.

UK car manufacturing rises 3.5% in October with 157,056 cars rolling off production lines.Exports up 5.0% – but domestic demand falls -2.9% as lower consumer confidence continues to impact market.

The main problem for the UK would be if the current inflation surge continues so let us cross our fingers that it is fading. Otherwise 2017 has been remarkably stable in terms of economic growth driven by two factors which are the lower Pound £ and the fact that the world economy is having a better year.

Meanwhile I will leave the central bankers and their acolytes to explain why a development like this is bad news. From Bloomberg.

Among the coconut plantations and beaches of South India, a factory the size of 35 football fields is preparing to churn out billions of generic pills for HIV patients and flood the U.S. market with the low-cost copycat medicines.

 

 

 

 

 

 

 

UK GDP growth poses a new problem for the “unreliable boyfriend”

Today brings us the latest economic growth or Gross Domestic Product data for the UK and of course the numbers will be pored over way more than they can stand. There are questions over the state of accuracy when all the data is in but at this first preliminary estimate it has only 42% of the total. Thus I support the move to take more time ( and collate more data) in the future.

Office for National Statistics (ONS) proposals to move to a publication schedule of two estimates of quarterly gross domestic product (GDP) using data from all three of the output, income and expenditure approaches around six weeks and 13 weeks after the end of the preceding quarter.

In terms of the main output measure of GDP this will mean that the first estimate will be a couple of weeks or so later but will have just under 60% of the full data set.

The other change I am much more dubious about as I feel this is going in the opposite direction of more timeliness but less accuracy.

ONS will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

If you think about it the two moves are contradictory as if we need more time for the quarterly data how can we produce accurate monthly numbers? I have pointed out before that the surveys for the services sector in the trade figures are quarterly ( which yes do pose a question for monthly trade figures) and will not provide much confidence for monthly GDP numbers. Even worse there will be rolling quarterly GDP figures leading to confusion for the unwary and for some to pick and choose between which number they look at.

What is GDP good for?

Many of the problems of GDP come from this simple point explained by Diane Coyle.

GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced and consumed in a country in a given period of time.

This means that work which does not have a price/cost is not included. So if you wished to boost it everyone could pay their neighbour to wash their car or do their housework but reality would be unchanged. Even worse the modern digital era and changes in the way people work have made matters more complex and difficult.

More and more people are self-employed or freelance through digital platforms. Their hours may be flexible, and work can overlap with other activities. In many cases they are using household assets, from computers and smartphones to their homes and cars, for paid work.

Another problem is the estimation of inflation as GDP is measured in monetary terms and you need an inflation measure or deflator to get a real number to run comparisons over time. Here I tend to disagree with Diane as I feel that there has been an effort to inflate GDP numbers via reducing measured inflation. For example the statistician Dr. Mark Courtney has estimated that replacing the Retail Price Index with the Consumer Price Index or CPI has boosted the stated GDP growth of the UK by around 0.5% per annum. Should the new “more comprehensive” CPIH replace CPI in the numbers then it would add a smidgen more.

So we have a push me pull me type of situation where I agree that the digital side of the services economy is probably under measured but where changes to the inflation infrastructure have led to it being over measured.

If you want to know how the services sector has grown over time then this sets the pattern.

Bringing that up to date the latest numbers assume that the services sector is now 79.3% and manufacturing is 10.04%. Personally I think that the former number is still too low.

The Trend

Thus has been for economic growth to slow in 2017 so far as in essence we have gone from an annual economic growth rate of at times ~3% to one of more like half that. There have been two main factors at play here. Firstly the impact of higher inflation coming from a lower UK Pound £ after the EU leave vote and secondly the fact that the boom had become mature. After all factors like house prices and retail sales were unlikely to keep rising at the rates we had seen.

Today’s numbers

They were good albeit of course we need to remember the reservations described above.

UK gross domestic product (GDP) was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2017, a similar rate of growth to the previous two quarters.

Also should this continue then the relative importance of manufacturing may rise as we look forwards.

Manufacturing returned to growth after a weak Quarter 2 2017, increasing by 1.0% in Quarter 3 2017.

As to the trend well there was this.

Following growth of 0.4% in Quarter 3 2017, GDP has grown for 19 consecutive quarters.

But it is also true that the annual rate of growth remained at 1.5% ( or in fact slipped from 1.7% if we recall the revisions). So we needed a better quarter to halt or slow the annual decline.

Maybe also we will seem some benefit individually.

GDP per head was estimated to have increased by 0.3% during Quarter 3 2017.

If we move to the detail then there were various factors at play. Let us start with manufacturing.

due to growth across a number of industries, including the manufacture of transport equipment, other manufacturing and repair and the manufacture of machinery and equipment.

It’s growth suggests good news for the trade figures although so far they have not shown it. Also we had growth from services driven by this.

The main contributor to growth was the business services and finance sector, which increased by 0.6%, contributing 0.19 percentage points to quarter-on-quarter GDP growth. Growth in this sector was broad-based, with employment activities being the largest contributor (Figure 3), recording growth of 3.5% after a fall of 2.4% in Quarter 2 2017 and contributing 0.04 percentage points to GDP growth.

There was also this.

The largest individual contributor to growth in services was computer programming activities, which grew by 1.9% and contributed 0.05 percentage points to GDP growth……

If we move to August for services we see this.

motion pictures, which increased by 7.1%, contributing 0.06 percentage points; this growth follows a large fall in the industry in July 2017 and further information on the films in August 2017 can be found on the British Film Institute (BFI) website

Any analogies for Dunkirk?

Comment

The theme of the UK economy having stable but below trend growth in 2017 continues as 0.4% compares with say 0.6% as a trend. Of course that assumes the central bankers have indeed ended recession and speaking of central bankers imagine yourself as an “unreliable boyfriend” right now having given Forward Guidance that there will be an interest-rate rise if the economy does better! In the past the Bank of England has tended to respond to GDP data although of course we have to look back a very long time to see any evidence around an interest-rate rise.

Meanwhile we see that services are bumbling along manufacturing is doing rather well but construction is in a recession. An odd mixture as we are supposed to be building so many houses…….

 

 

The brightest sector in the UK economy appears to be manufacturing

Today has seen a raft of news on the state of play in the UK economy and let us start with what the consumer has been up to. The British Retail Consortium has told us this.

August provided a welcome pick-up in retail sales across channels, with Non-Food returning to growth as shoppers’ attentions turned to homewares, autumn clothing ranges and the new school term.

The BBC gives us a breakdown of the data.

The British Retail Consortium, working with consultancy KPMG, said like-for-like sales rose 1.3% in August, against a 0.9% fall for the same month in 2016.

Actually total sales rose by 2.4% which suggests that there was an opening of retail stores in some form which seems strange with the switch to online ( “from strength to strength”) that is happening. Also there was a dichotomy between the views of consumers about the future and the BRC. Here is the consumer view.

Shopper confidence has been building. 23 per cent expect to be financially better off over the next 12 months, compared with 20 per cent in the election month of June.

So an improvement albeit a small one whereas the BRC itself is much more downbeat.

Purchasing decisions are very much dictated by a shrinking pool of discretionary consumer spend, with the amount of money in people’s pockets set to be dented by inflation and statutory rises in employee pension contributions in a few months’ time.

Data from Barclaycard which claims to cover nearly half of UK credit and debit card transactions put a different spin on things.

Consumer spending growth slowed to 2.9 per cent in August, compared to a 2017 average of 3.8 per cent, as consumers rowed back across the board.

So they have seen growth but maybe not much if we allow for inflation and in the detail I noted that we seem to feel we need a drink!

Pub growth fell to single digits for only the second time this year (9.2 per cent), and spend on cinemas and event tickets flatlined (0.4 per cent) after the 24.3 per cent boost seen in July.

Also I saw this earlier and of course with a lag we tend to follow the United States in such things.

US box office -35 per cent in August, worst in 20 yrs raises Q’s about the future of cinema in the age of digital streaming!?  ( h/t @CompoundIncome )

Car Sales

This have hit a decidedly rough patch however which we have noted by the proliferation of scrappage schemes which add to the definition of “price cuts” in my financial lexicon for these times. From the SMMT.

New car registrations fall -6.4% in August to 76,433……Year-to-date market holds steady, down -2.4%, with 1.64 million cars joining British roads in 2017.

So bad news for sales however not so much for manufacturing as we mostly import the cars we lease. Europe’s trade body gave us an idea of how much last September.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion

So a small drain for UK manufacturers and a larger one for foreign manufacturers so ironically if we continue to export as usual a possible improvement in the trade figures.

UK business surveys

The Markit PMI for services this morning had some odd combinations in it as shown below.

new order volumes increased at the second slowest rate since September 2016….. fragile business confidence

So a slowing but one which caused backlogs and increased employment?

This was highlighted by the steepest rise in backlogs of work since July 2015. Service providers responded to rising workloads and pressures on operating capacity by recruiting additional staff in August.

We have found employment to be a reasonably reliable forward indicator over the last few years or so meaning that the down reported could be an “unexpected” up.

If we move to manufacturing nearly everyone except the official figures are telling us that things are on the up.

All five of the PMI components – output, new orders, employment, suppliers’ delivery times and stocks of purchases – were consistent with a stronger performance for the manufacturing industry during August.

There was also this from another source earlier.

Britain’s manufacturers are enjoying buoyant conditions on the back of export markets going from strength to strength according to a major survey published today by EEF , the manufacturers’ organisation and accountancy and business advisory firm BDO LLP……  Output and orders bounce back to historic highs.

The picture is completed by a weak period for construction and particularly infrastructure spending from the PMI there. Maybe the election was an influence on the public-sector but we cannot say that for ever! However the overall picture suggested is of steady as she goes.

the latest two months’ data put the economy on course for another 0.3% expansion in the third quarter

What about flows of money?

This morning has brought news that suggests at least one company sees UK businesses attractive at current exchange rates. From the Financial Times.

 

Schneider Electric will contribute its own software division to Aveva in exchange for new shares in the UK company. Schneider will own 60 per cent of the enlarged company’s stock, valued at approximately £1.7bn. Existing Aveva shareholders will own the remaining 40 per cent.

However this morning we got official data saying that in the second quarter foreign acquisitions of UK companies had fallen! One area where there may be a change if ( as often happens) similar investors fall into line was this announced by the Norwegian sovereign wealth fund.

 In future, the benchmark index for the bond portfolio should consist of nominal government bonds issued in dollars, euros and pounds……….The benchmark index for bonds currently consists of 23 currencies. Our recommendation is that the number of currencies in the bond index is reduced.

These things take a long time to happen usually and some emerging bond markets will be hit but it seems that there will be a purchase of UK bonds ( as well as Euro and US Treasuries) which will be mostly a currency play.

Comment

On the surface we see that there is an element of “same as it ever was” as  the UK economy continues to grow but slowly. However underneath a fair bit seems to be changing as we see more and more reports of UK manufacturing doing well albeit that we wait to see that reflected in the official data. I have to confess I am unclear why services output is falling as backlogs and employment both rise!

The danger remains of a lower UK Pound £ pushing inflation higher but the main burst of that is fading now and if other sovereign wealth funds match Norway it may see some investing flows. On the other side of the coin even Markit seems to be trolling the Bank of England these days.

the overall level of the PMI remains more consistent with policymakers erring towards stimulus rather than hiking interest rates, suggesting the doves will continue to outnumber the hawks.