France does not like being told higher inflation is good for it

This weekend has seen a further escalation in the Gilet Jaune or yellow jacket protest in France. This has so unsettled Bloomberg that it is running a piece suggesting it could happen in the UK perhaps as a way of mollifying the bankers it has suggested should go to Paris. However, let us dodge the politics as far as we can as there is a much simpler economic focus and it is inflation. From the Financial Times.

Mr Macron introduced the increases in fuel taxes last year, as part of a package intended to attract investment and revitalise economic growth. They were also intended to support his ambition of setting France on course to ban sales of petrol and diesel cars by 2040. The tax is rising more sharply for diesel fuel, to bring it into line with the tax on petrol, as Mr Macron’s government argues that the advantage it has enjoyed is unjustified. Since the Volkswagen emissions scandal, it has become more widely accepted that diesel vehicles do not have the advantage in environmental impact over petrol engines, although manufacturers are still defending the technology.

Let us analyse what we have been told. How do you revitalise economic growth by raising costs via higher taxes? Perhaps if that was your intention via this move you would reduce taxes on petrol instead of at least reduce petrol taxes by the same amount you raise the diesel ones. As to the point about diesel engines I agree as I am the owner of what I was told was a clean diesel but has turned out to be something polluting both my and other Londoners lungs. Not President Macron’s fault of course as that was way before he came into power and of course he is the French President. But no doubt they encouraged purchases of diesel vehicles ( by the lower tax if nothing else) as we note that when the establishment is wrong it “corrects” matters by making the ordinary person pay. This especially hits people in rural France who rely on diesel based transport.

The details of the extra tax are show by Connexions France from October 2017.

Tax on diesel will rise 2.6 cents per litre every year for the next four years, after MPs voted in favour of the government’s draft budget for 2018.

As this from the BBC shows this is as well as higher taxes on petrol.

the Macron government raised its hydrocarbon tax this year by 7.6 cents per litre on diesel and 3.9 cents on petrol, as part of a campaign for cleaner cars and fuel.

The decision to impose a further increase of 6.5 cents on diesel and 2.9 cents on petrol on 1 January 2019 was seen as the final straw.

If we look at the November CPI data for France we see that it is at 1.9% but is being pulled higher by the energy sector which has annual inflation of 11.9%. In a piece of top trolling Insee tells us this.

After seven months of consecutive rise, energy prices should fall back, in the wake of petroleum product prices.

If we look at this via my inflation theme we see that as well as energy inflation being 11.3% that food inflation is 5%. So whilst central bankers may dismiss that as non-core and wonder what is going on? We can see perhaps why the ordinary person might think otherwise. Especially if they like carrots.

 Vegetable prices rose by 15.2% over one year with prices going up for salads (+15.6%), endives (+19.5%), carrots (+76.7%) and leeks (+54.2%). In contrast, tomato prices went down by 12.3% over one year.  ( Insee October agricultural prices)

Manufacturing

This morning saw the monthly series of Markit purchasing manager’s indices on manufacturing published.

November data pointed to the softest improvement in French manufacturing operating conditions for 26 months. The latest results reflected falling new orders and job shedding…….Manufacturing output was unchanged since October. That said, the latest reading represented stabilisation following a drop in production in the previous month.

It used to be the case that Markit was downbeat on France but these days it is very cheery. If we look at the last two months then production is lower as are jobs and new orders yet we are told this is an improvement! In reality the zone 49-51 represents unchanged and 50.8 is in that, although I do note that the 53.1 of the UK is apparently “lacklustre”. Anyway here is the view of the French situation.

However, any negativity towards unchanged output could be misplaced given it represented stabilisation after October’s decline.

Moving to prices they hinted that the protests might not be about to end any time soon.

On the price front, input costs continued to rise in
November. The rate of inflation was the strongest for nine
months, following two successive accelerations. Panellists
overwhelmingly blamed higher cost burdens on increased
raw material prices.
Survey respondents noted that part of the additional cost
burden was passed onto customers, with charges rising
solidly again in November.

Official data

On Friday we saw that September seems to have seen a slow down in the French economy.

In September 2018, the sales volume in overall trade fell back sharply (−2.1%) after an increase in August (+1.8%)…..In September 2018, the turnover turned down sharply in the manufacturing industry (−2.3%) after a strong increase in August (+2.8%). It also went down in industry as a whole (−1.9% after +2.8% in August)……In September 2018, output in services was stable after a strong increase in August (+2.9%).

As you can see all measures saw weakening in September and eyes will be on the services sector. This is because whilst the national accounts do not present it like this the 1% growth for the sector was what made it a better quarter. So let us also dig into the situation further.

According to business managers surveyed in November 2018, the business climate in services is stable. At 103, it remains above its long-term average (100).

Otherwise, the indicator of October 2018 has been revised downward by two points because of late businesses’ answers that have been taken into account.

Considering this revision, the turning point indicator stands henceforth in the area indicating an unfavourable short-term economic situation.

The Bank of France remains optimistic however.

According to the monthly index of business activity (MIBA),
GDP is expected to increase by 0.4% in the fourth
quarter of 2018 (first estimate).

Comment

We often discuss the similarities between France and the UK but the ECB has this morning given us another insight, as according to its capital key France is virtually unchanged in relative terms over the past five years if we look at GDP and population combined. I will leave readers to decide for themselves if the Euro area average is good or bad as you mull the official view.

 

Switching back to France it has not been a great year economy wise even if the Bank of France is correct about this quarter. But its establishment seems to be up to the games of those elsewhere whilst is to push its policies via punishment ( higher taxes ) rather than encouragement. These days though more have seen through this and hence the current troubles.

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The UK economy puts on an economic growth spurt

Today brings us to a pretty full data set on the UK economy with the headline no doubt the monthly GDP ( Gross Domestic Product) number. This week has brought news on a sector which is often quite near to me and has been a strength we have been regularly noting. From the Financial Times.

Tax relief for UK-made movies, television series and video games is fuelling a production boom that has transformed Britain into a global hub of filmed entertainment, according to a report by the creative industries. The tax incentives have sparked a rush of inward investment as Hollywood studios and other international production companies cash in on British talent — the latest Star Wars movie was made in the UK, alongside top television series such as The Crown and Poldark.

So we should try to be nice to any luvvies that we meet as whilst they are prone to ridiculous statements they are providing a much-needed economic boost. Here is some more detail on the numbers.

The new report commissioned by the British Film Institute found that an estimated £632m in UK tax relief for the creative industries in 2016 led to £3.16bn in production spending on films, TV programmes, animation and video games — a 17 per cent increase on 2015. The industries’ “overall economic contribution” to Britain came to £7.9bn in 2016, which included £2bn in tax revenues.

Since 2016 the numbers have boomed further and the local reference is due to the fact that Battersea Park in particular is regularly used by the film industry. Much of this is a gain as I recall one cold Sunday night when the filming must have disturbed very few. However it is not all gravy as there is also a tendency to use it as a lorry and caravan park for work going on elsewhere.

Bank of England and Number Crunching

There was some numerical bingo from the Financial Policy Committee yesterday. The headline was that the UK has some £69 trillion of financial contracts with European Union counterparties which need some sort of deal for next March.Or if you prefer a derivatives book of the size of Deutsche Bank.

Also we for the assertion that debt has fallen since 2008 which looked better on their chart via comparing it ( a stock) with annual GDP (a flow). They seem to have forgotten public debt which has risen and more latterly even their data poses a question.

Borrowing by UK companies from UK banks has also been subdued, rising by just 2.7% in the past year……. household mortgage borrowing increased by only 3.1% in the year to August, broadly in line with household disposable income growth.

Both are growing a fair bit faster than the economy and of course much faster than real wages.Mind you someone has probably got promoted for finding an income number which has grown as fast, or a lifetime free pass to the cake and tea trolley.Would it be rude to point out they seem to have forgotten unsecured credit is rising at an annual rate of 8%+ as they seem to have missed it out?

UK economic growth

The number released today backed up quite a multitude of my themes. There was the evidence of a growth spurt for the UK economy, various examples of monthly GDP data being so unreliable that you have to question its introduction, and finally even evidence that the monetary slow down has hit the economy! Let us open with the latter.

The month-on-month growth rate was flat in August 2018. (UK GDP)

That looked rather grim until it was combined with something that was much better news.

Rolling three-month growth increased by 0.7% in August 2018, the same rate of growth as in July 2018. These were the highest growth rates since February 2017. The growth continued to pick up from the negative growth in April 2018,

Suddenly the picture looked very different as we got confirmation that it was a long hot summer for the UK in economic as well as weather terms. Some of that was literal as the utility industry saw rises in electricity consumption which looks to have been driven by the use of air conditioning in the unusual heat. If we look at the breakdown we see something familiar in that the major part was the services sector (0.42%), we got some production growth (0.1%) and the construction sector was on a bit of a tear (0.18%),

If we return to the travails and troubles of the monthly series we see this.

Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

That opens a can of worms. Because whilst you can argue compared to the total number for GDP the changes are minor the catch is that these numbers are presented not as totals but first and second derivatives or speed and acceleration. At these levels the situation becomes a mess and let me illustrate by switching to the American style of presentation. UK GDP rose at an annualised rate of 4.8% in July followed by annualised rate of growth of 0% in August, does anybody outside the Office for National Statistics actually believe that?

Putting it another way we can see a clear issue in the main player which is services I think.

The Index of Services was flat between July 2018 and August 2018…………The 0.7% increase in the three months to July 2018 is the strongest services growth since the three months to December 2016.

So it went from full steam ahead to nothing? The recent strength has been driven by computer programming so let us hope that has been at the banks especially TSB.

Production

This had some welcome snippets.

The rise of 0.7% in total production output for the three months to August 2018, compared with the three months to May 2018, is due primarily to a rise of 0.8% in manufacturing, which displays widespread strength throughout the sector with 10 of the 13 sub-sectors increasing.

As so often we find that the ebbs and flows are driven by the chemicals and pharmaceuticals sector which had a good quarter followed by a decline in August.

Construction

The official data seems to have caught up with crane-ometer ( 40 between Battersea Dogs Home and Vauxhall) although it too supposedly hit trouble in August.

Construction output increased by 2.9% in the three months to August 2018, as the industry continues to recover following a weak start to the year………Construction output declined by 0.7% between July and August 2018, driven by falls in both repair and maintenance and all new work which decreased by 0.6% and 0.8% respectively.

Comment

We see that the UK economy had a remarkably good summer. Actually it seems sensible to smooth it out a bit and shift some of it into August but if we were to see quarterly growth of 0.5% or so that is pretty solid in the circumstances. We are managing that in spite of weak monetary data and disappointing growth from some of our neighbours, although if the recent IMF forecasts are any guide France is in a surge.

Speaking of surges Andy Haldane of the Bank of England has given a speech today and yet again pay growth is just around the corner. Pretty much like it has been since he became Bank of England Chief Economist . You might have thought his consistent record of failure would have meant he was a bad choice as the new UK productivity czar but of course in Yes Prime Minister terms he is the perfect choice.

Sir Humphrey Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.

Meanwhile his own words.

That is quite sobering if, like me, you have never moved job

The Bank of England Governor should always be appointed for a set term

Yesterday not only brought us news on a long running farce at the Bank of England, it showed us what a difference a week can make. To illustrate the latter point here is @RANSquawk from the 28th of August which as you might imagine immediately set off my official denial klaxon.

UK Treasury denies Carney report

The report was that he would be extending his term as Bank of England Governor for another year. This was a case of potential deja vu because back in October 2016 he wrote this to the Chancellor Phillip Hammond.

I would be honoured to extend my time of service as Governor for an additional year to the end of June 2019. By taking my term in office beyond the expected period of the Article 50 process, this should help contribute to securing an orderly transition to the UK’s new relationship with Europe.

In case you were wondering how his could happen? It all came from the original appointment by George Osborne when he was so desperate to get his man he drove a bus through the formal arrangements.

As you will recall,I was appointed as the next Governor in November 2012 for the statutory eight-year
period of office as set out in the Bank of England Act. At that time,I  clearly signalled my intention to
serve for five years.

So it was possible to extend the term as in fact he had been appointed for eight years,  but had been allowed to say he would only serve five which turned out to be six. News emerged yesterday from the Bank of England in-house magazine otherwise known as the Financial Times that seven is the new six.

Mark Carney is expected to extend his stay as governor of the Bank of England until 2020, after Theresa May backed a plan to maintain stability at the central bank through the turbulence of Brexit. Mr Carney told MPs on Tuesday that he would be willing to stay as governor of the BoE beyond his planned exit at the end of June 2019 to help the Brexit process as well as the transition to a new governor. Mrs May has endorsed the plan, with senior government figures saying Mr Carney would now remain in post until the second half of 2020. The precise departure date is expected to be announced by Philip Hammond, the chancellor, within the next week.

You would have thought that the departure date would have been figured out at the beginning, after all how hard can it be to add one year? But I suppose after doling out an extra year maybe you might dole out an extra month or even week as well! Added to all of this is the begged question if the “personal family considerations” were in fact career plans such as Canadian politics ( blocked by the advance of Trudeau), or moving to the IMF ( blocked by the reappointment of Christine Lagarde)? Should the Governor end up serving until June 2021 that would be perfect timing for the IMF job.

Meanwhile I am grateful to the world of physics for informing us that there are an infinite number of other universes which means that there must be one somewhere where this is true.

One senior government figure: “The PM thinks he has done a good job in difficult circumstances; he is well-respected and has a good international standing.”

It seems the disastrous Bank Rate cut of Sledgehammer QE of August 2016 and the promises of more in November 2016 have been magicked away. The Governor did perform well on the morning after the EU Leave vote when the UK government was absent but  the other side of the ledger is larger. He acquired the moniker of being an unreliable boyfriend when in the early days of his broken promises to raise interest-rates and now he is unreliable about how long he will stay as well.

Perhaps though we are looking at the wrong official measure for “good job in difficult circumstances”, as after all house prices have continued to rise.

The UK economic situation

There was some good news this morning from the Markit business survey or PMI.

At 54.3 in August, up from 53.5 in July, the
seasonally adjusted IHS Markit/CIPS UK Services
PMI® Business Activity Index reached its secondhighest
level since February…….UK service providers experienced a stronger increase in business activity and incoming new
work during August. Improving business conditions
helped to underpin a rebound in employment
growth to its fastest for six months.

So the weaker news from the manufacturing and construction surveys from earlier this week was offset leading to this conclusion.

The survey data indicate that the economy is
on course to expand by 0.4% in the third quarter, a
relatively robust and resilient rate of expansion that
will no doubt draw some sighs of relief at the Bank of
England after the rate hike earlier in the month.

So we continue to bumble along but it is hardly robust. If the Bank of England is relieved then it is because at least someone there realises that there have been better times to raise interest-rates than this August.

Also there was better news this morning from an area which has struggled so far in 2018.

The UK new car market enjoyed a boost in August, as year-on-year demand rose 23.1%, according to the latest figures published today by the Society of Motor Manufacturers and Traders (SMMT). 94,094 new cars were registered in the month

We should not get out the bunting quite yet as the number below indicates but it is nice to have a better month.

In the year to date, the overall market remains down by -4.2%

The driver of the improvement is as follows.

Meanwhile, the UK’s growing range of hybrid, plug-in hybrid and pure electric cars continued to attract buyers, with a record one in 12 people choosing one. Demand surged by a substantial 88.7%, with the sector accounting for 8.0% of the market – its highest ever level.

I find that intriguing as in my locale there is quite a bit of electric car charging infrastructure with 9 points around Battersea Park, and a couple more on Battersea Park Road. But oddly they are so rarely used! So much so that I check each time I go past now. I guess I will have to see when or perhaps if that changes.

Forward Guidance

You might think after his many failures in this area that the Bank of England Chief Economist might avoid such matters, but apparently not.

Also speaking before the MPs, Andy Haldane, the BoE’s chief economist, said it was unlikely the central bank would be able to cut interest rates as it did after the Brexit vote if there was no deal with the EU.  ( Financial Times)

Odd for a man who in July and August 2016 was in a panic-stricken rush to cut interest-rates ignoring the previous warnings from the Bank of England that they would rise in such a scenario.

Comment

The good news is that the UK economy is continuing to grow albeit at no great pace. The not so good news is that whilst I am a big fan of the Clash the Governor of the Bank of England should not be allowed to sing along with one of their biggest hits.

Well, come on and let me know
Should I stay or should I go?

Should I stay or should I go now?
Should I stay or should I go now?

Apart from the organisational shambles and lack of forward planning there is the issue that the Governor could at least appear to be free of political control. Although it is also true that even the most Stepford Wives style supporters of claims that the Bank of England is independent must now surely give up the ghost. Meanwhile the Clash continue to critique the unreliable boyfriend.

If I go, there will be trouble
And if I stay it will be double
So come on and let me know

Meanwhile the point of external members is for them to provide thoughts that could be classified as “outside the box” so that there is an alternative to the Bank of England version of the Stepford Wives style consensus. Sadly the evidence provided by Professor Silvana Tenreyro to Parliament yesterday was not only a failure in this respect it merely reinforced a consensus that continues to deny economic reality.

I therefore supported our collective MPC decision in February to lower our forecast estimate of U* from 4½% to
4¼%………….. I expect the output gap to close over
the next year or so.

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.

 

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.