UK GDP is a case of The Good, The Bad and The Ugly

Today is an example of be careful what you wish for. No doubt the UK Office for National Statistics thought it would be clever to produce monthly GDP data. But now in addition to the usual problems they find them not only being scanned beyond their capabilities but for the unwary comparing them to the quarterly and annual ones creates quite a of confusion. Indeed we can go through them in Spaghetti Western style.

The Good

This comes from this part of the release where we how have had three months of economic growth in a row.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020 as lockdown measures continued to ease, following growth of 8.7% in June and 2.4% in May.

In terms of detail we are told this.

“Education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements. Car sales exceeded pre-crisis levels for the first time with showrooms having a particularly busy time.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover.”

The latter component will, of course,please the Bank of England. I have to confess a wry smile at the mention of distillers, have we been driven to drink? As to car sales this was reinforced elsewhere.

wholesale, retail and repair of motor vehicles subsector (in particular, the motor vehicles industry), which recovered to above its February 2020 level after seeing record low levels of output in April and May.

This is an area which was affected by the lockdown as when I took my car in for its MOT in August I was told that in April last year they had done 110 and this year 18. Another area which was similarly affected also boomed in July.

Monthly construction output increased by 17.6% in July 2020 compared with June 2020, rising to £11,922 million, because of growth in all construction sectors.

Then and slightly confusingly not directly linked to the GDP numbers ( which are output not expenditure ones) these will not be included.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £5.9 billion to £6.4 billion in the three months to July 2020, as imports fell by £8.5 billion and exports fell by a lesser £2.7 billion.

I point it out as it is rare for the UK to record a trade surplus which continues as we look for more perspective.

The total trade balance, excluding non-monetary gold and other precious metals, increased by £35.8 billion to a surplus of £3.7 billion in the 12 months to July 2020.

The Bad

Our perspective shifts as we switch to something approaching the more normal quarterly measure for GDP.

Gross domestic product (GDP) fell by 7.6% in the three months to July 2020 following two consecutive quarterly falls, as government restrictions on movement dramatically reduced economic activity.

In case you are wondering how we can grow for 3 individual months but shrink over the total it is because we are comparing the latter with the previous 3 months which include some pre pandemic data.

The Ugly

This comes if we directly compare with where we were or more strictly where we thought we were before the Covid-19 pandemic hit.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020, following growth of 8.7% in June 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020 and was still 11.7% below the levels seen in February 2020,

So we have picked up but the peak is still a fair way ahead. Or if you prefer.

July 2020 GDP is now 18.6% higher than its April 2020 low. However, it remains 11.7% below the levels seen in February 2020,

There is a sub-plot to this which is unusual for the UK.

In July 2020, the Index of Services is 12.6% below February 2020, the last month of “normal” trading conditions prior to measures introduced as a result of the coronavirus (COVID-19) pandemic…..There was a rise of 6.1% in the Index of Services between June 2020 and July 2020.

The area which is normally a strength and pulls the numbers higher has in fact under performed. One feature of this is hardly a surprise although we can expect a pick-up from the “eat out to help out” policy when we get the August numbers.

Total services output decreased by 8.1% for the three months to July 2020, compared with the months to April 2020; this was led by accommodation and food service activities, which fell by 62.7%.

On the other side of the coin production has been helping in relative terms.

In July 2020, the Index of Production (IoP) was 7.0% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic…..Production output rose by 5.2% between June and July 2020, with manufacturing providing the largest upward contribution, rising by 6.3%; there were also rises from electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%).

It was led by this.

The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 subsectors displayed upward contributions.

However it had been in a weak spell anyway and then was hit hard so care is needed.

Comment

There are a lot of contexts and warnings required here many of which are driven by the unreliability of monthly GDP data. The unreliability will be worse right now due to the pandemic as we note something I was pretty much alone in reporting on August 12th.

This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

More was recorded as less which is a UK peculiarity and made our GDP numbers look worse by maybe 5% on the fall. But now we are seeing the other side of some of that as we note this from the July data.

The largest contribution to monthly growth is education, rising by 21.1%.

Now let me look at the mess which is health.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

If course for a spell Covid-19 treatment was booming well if we counted it.

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Oh and if you are struggling with quarterly numbers please run me by how you can get monthly GDP numbers?

For example, the quarterly activity estimates are only made available with a lag, necessitating a form of activity nowcasts.

That is a bit like the services monthly trade data which come mainly from a quarterly survey.

So we did not contract by as much as we thought and have not rebounded by quite as much either.

Looking ahead there are some further strengths for August as we have noted the potential rise in eating out and the Markit PMI reporting this.

A further surge in service sector business activity in August
adds to signs that the economy is enjoying a mini boom as
business re-opens after the lockdowns,

But the PMIs have been downgraded in importance quite a bit as time has passed. Looking further ahead there is this.

The UK has secured a free trade agreement with Japan, which is the UK’s first major trade deal as an independent trading nation, and will increase trade with Japan by an estimated £15.2 billion ( Sky News)

Oh and these things always promise more trade…..

Back to now whilst it was nice to have a bit of variety and be able to report a UK trade surplus it is also true it came from a bad route which is lower imports due to a weaker economy.

 

 

The UK finds itself with a trade surplus

In many ways that is quite a chocking headline. It has been quite some time since the UK has been in a surplus situation as regarding trade. On a personal level I have got used to pointing out that not only has it been years since we sustained one it has in fact been decades. It was around 1997/98 that we did so as the effect of what turned out to be White Wednesday or the UK’s exit from the ERM ( Exchange-Rate Mechanism). I suppose that raises an initial point as it seems we need quite a economic shock to ever be in surplus. Also as people dip into my blogs over years I would point out that the 1997/98 has been revised in and out over time, less likely now for obvious reasons but you never know. In a way that provides its own critique of trade statistics.

You may be wondering why this was not on the news yesterday? I suppose like the extraordinary inflation numbers it was either not read or dismissed. One area where I do have sympathy though is that the concept of “theme days” that the Office for National Statistics does flood the system with too much data at once. Fans of Yes Prime Minister will know that this is a deliberate tactic to hide bad news, so somewhere Sir Humphrey Appleby and Jim Hacker are having a quiet chuckle.

The UK Surplus

The headline is this.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £8.6 billion to £8.6 billion in Quarter 2 (Apr to June) 2020, as imports fell by £35.2 billion and exports fell by a lesser £26.7 billion; the largest underlying total trade surplus on a three-month basis since records began in 1998.

As Shalamar are wont to put it.

There it is, there it is
What took us so long, ooh, to find each other, baby?
There it is, there it is
This time I’m not wrong

Actually the last line is more than risky as trade numbers at a time like this will see revisions.

Returning to the numbers it is immediately clear that we have not come to the surplus in the best of ways. This is because unless we have suddenly kicked out addiction to imports the fall in imports represents a consequence of the depressionary level fall in economic output we looked at yesterday. Also exports fell as well meaning out own domestic output was lower. One request I would make to the ONS is that they stop implying that ( in this instance) records began in 1998. After all if there were no records in the mid-1960s we would not have devalued in 1967 would we?! Ironically the records were wrong but the ONS statement should add recorded in this manner or something similar.

It is no great surprise to learn that the falls were everywhere.

Falling imports and exports in Quarter 2 2020 were largely seen in trade in goods, excluding non-monetary gold and other precious metals, where imports and exports fell by £21.4 billion and £14.0 billion respectively, while for trade in services they fell by £13.9 billion and £12.7 billion respectively.

A Goods Deficit

One familiar feature persisted in spite of the changes elsewhere.

The trade in goods deficit, excluding precious metals, narrowed by £7.4 billion to £20.7 billion in Quarter 2 2020 (Figure 2). Goods imports fell by £21.4 billion to £87.0 billion, while goods exports fell by £14.0 billion to £66.4 billion. Falling imports and exports were largely seen in machinery and transport equipment, and fuels, with larger falls of each in imports than exports.

So whilst it shrank we still had one and I doubt anyone fell off their chairs whilst noting the areas which were affected the most. Interestingly one major part of this saw a switch in which side of the ledger was worst affected.

The falls in exports and imports of machinery and transport equipment in Quarter 2 2020 were largely seen in road vehicles, where exports and imports fell by £7.8 billion and £4.2 billion respectively.

Switching to fuel and oil I am not sure I have seen numbers like this before.

Demand down by a record 31 per cent as a result of the COVID-19 lockdown. Demand in the three months to May 2020 was just 11.3 million tonnes, a record low in the series and 2.7 million tonnes under the previous low seen in the three months to April 2020.

Aviation fuel demand fell by 75% in the three months to May.

Services

Here is all we get.

The trade in services surplus widened by £1.2 billion to £29.3 billion in Quarter 2 2020. Services imports fell by £13.9 billion to £35.3 billion, while services exports fell by £12.7 billion to £64.6 billion.

Good job it is not around 80% of our economy…..Oh wait.

Allowing for Inflation

After the extraordinary GDP Deflator number of yesterday it is perhaps for best that in fact this does not seem that large a player here.

In volume terms, the total trade surplus (goods and services), excluding unspecified goods (which includes non-monetary gold), widened £7.2 billion to £7.8 billion in Quarter 2 (Apr to June) 2020, as imports fell by £31.1 billion and exports fell by £23.8 billion.

Although this deserves an investigation as which prices rose?

Total trade import prices fell 0.8% in Quarter 2 2020, while export prices fell 0.4%. Fuels were the largest drivers of the fall in both import and export prices, by 35.7% and 36.7% respectively.

We should at least be told.

An Annual Surplus

The party continues here.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £37.6 billion to a surplus of £3.7 billion in the 12 months to June 2020, as imports fell by £67.6 billion and exports fell by a lesser £29.9 billion.

The detailed breakdown is below.

The increase of the underlying total trade balance in the 12 months to June 2020 was largely because of a £39.5 billion narrowing of the trade in goods deficit to £104.6 billion. Imports decreased by £61.7 billion, while exports decreased by £22.1 billion. The fall in both imports and exports of goods was largely seen with machinery and transport equipment, and fuels.

As usual we get no detail on the services position.

The trade in services surplus narrowed by £1.9 billion to £108.3 billion in the 12 months to June 2020, as exports fell by £7.8 billion and imports fell by a lesser £5.9 billion.

Comment

The warm glow provided by a UK trade surplus soon starts to fade. Whilst there may well have been a shift towards producing more domestically it will hardly have been at play on this scale. In reality it is the fall in demand affecting the demand for imports which has somewhat artificially created a trade surplus. One area where this is clearly in play is fuel and energy as production of oil and gas in the North Sea only fell by 2.6% in the three months to June as opposed to the much larger demand falls noted earlier.

What we are also reminded of is how little detail is provided on the sector which provides around four-fifths of out economy. Even the annual figures which allow for some actual surveys to be done – for newer readers the main services trade survey is quarterly leading to the reverse of Meatloaf’s two out of three aint bad – tell us nothing more than the bare numbers which hardly inspires confidence. I have long suspected the numbers for services are better than those recorded but doubt they fully offset the trade deficit. Of course trying to track this down is a complex business, but then it is also true that the gains in information technology have been exytaordinary.

 

Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP

Sweden sees its GDP plunge but also outperforms its peers

Sweden has been a regular topic on here due to the way its central bank conducted a type of economic test tube experiment, of which more later. That theme is also in play as we look to see the economic consequences of it avoiding the lockdowns which were prevalent in much of the rest of Europe. So if you like another form of test tube experiment which was potentially much more deadly. This morning Sweden Statistics began to bring us up to date.

Sweden’s GDP declined by 8.6 percent in the second quarter of 2020, seasonally adjusted and compared with the first quarter. This according to the preliminary compilation of the quarterly national accounts. Calendar adjusted and compared with the second quarter of 2019, GDP decreased by 8.2 percent.

The initial implication is that Sweden has indeed done better than the nearby Euro area but not by as much as some claimed along the way. However it is still very significant as we note an annual decline of 15% there. None the less we are still told this.

 The decrease in GDP is the largest single quarter drop in the directly comparable time series starting 1980.

We do not get a lot of detail but within it there is a glimmer of optimism.

Seasonally adjusted and compared to the preceding quarter the decrease is in large parts driven by falling exports and household consumption expenditure.

GDP numbers struggle with trade via their use of net trade and if imports held up that is a subtraction from the numbers when in this sort of situation it is a sign that the economy is doing better than elsewhere. So as (hopefully) exports recover as other economies do Sweden may also out perform in that phase.

Some caution with the accuracy of the numbers is provided by this and for those unfamiliar with the issue, there are in fact three different ways of calculating GDP.

Before balancing actual GDP growth from the expenditure approach was -9.0, with the corresponding figure for the production approach at -6.6 percent. Both these are growth rates compared to the corresponding quarter the previous year. Averaging the two give the final actual GDP growth of -7.8 percent.

Si we have a 2.4% difference which highlights an issue I raise from time to time. Not quite as bad as the one I observed in Portugal at one point in the Euro area crisis which approached 4%. At this time we could use them as a sort of confidence interval as in the GDP fall was between 6.6% and 9%. Of course that is far too sensible to become widely accepted.

In general it is the output version which is used and in my home country the UK for example the other two measures are adjusted to it. That has its flaws as it means trade flows which you pick up from expenditure numbers can be “adjusted”. But using the expenditure method has its issue as for example Japan has found itself producing unusually erratic numbers. For completeness there is also the income version. It is not a surprise for it to be missing initially as for example tax figures which take time are useful to give a full picture, and it is a shame Sweden looks like it ignores them.

Looking Ahead

In the circumstances any improvement is welcome.

In seasonally adjusted figures, private sector production increased by 0.7 percent compared with May 2020.

One might have hoped for more than that although a post lockdown bounce would have to reply on exports. Thus the annual picture is similar to the GDP one above.

Production in the industry sector decreased by 9.1 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures

As to the detail this is no great surprise.

The largest downward contribution to total private sector development came from the motor vehicle industry, which decreased by 16.7 percent in fixed prices and contributed -0.6 percentage points.

Nor I guess is this.

The largest upward contribution to total private sector development came from the chemical and pharmaceutical industry, which increased by 33.9 percent in fixed prices and contributed 0.8 percentage points.

Id we switch to the service sector we see a similar pattern.

Production in the services sector decreased by 8.4 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

However there was some news which will have the Riksbank popping a few champagne corks.

The largest upward contribution to total private sector development came from real estate services, which increased by 2.2 percent in fixed prices and contributed 0.3 percentage points.

Indeed with construction falling less than the other sectors the Riksbank will be able to stand proud at any central banker get togethers.

Production in the construction sector decreased by 4.3 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

Monetary Policy

Regular readers will understand why this is so.

At the same time, the repo rate is held unchanged at zero per cent.

But there are other areas which can be pumped up.

The framework for the asset purchases made by the Riksbank since the crisis began is being extended from SEK 300 billion to SEK 500 billion up to the end of June 2021. In September, the Riksbank will also begin purchasing corporate bonds.

You may enjoy this bit on the planned corporate bond purchases.

They shall be designed in a way that ensures a
broad and market-neutral impact on the Swedish corporate bond market and thereby on companies’ credit supply.

Market-neutral is the exact opposite of what will happen. Still I am sure the Riksbank has its reasons for supporting this area.

The real estate sector has been a driving force in the growth, representing around 45 percent of the primary volume.

Oh and as ever there are some tit bits for The Precious!

The Executive Board has further decided to cut interest rates and extend maturities on lending to banks.

The only surprise concerning money supply growth is that they have got broad money growing at pretty much the same rate as narrow money.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 16.5 percent in June, a decrease of 0.3 percentage points compared with May. M1 amounted to SEK 3 564 billion in June.

The growth rate of the broad monetary aggregate, M3, amounted to 15.4 percent in June, an increase of 0.8 percentage points compared with May. M3 amounted to SEK 4 170 billion in total in June.

Comment

There are two major contexts here. The first is the way that Sweden arrived at the pandemic in terms of monetary policy. The Riksbank panicked after being called “sado monetarists” bu Paul Krugman of the New York Times. Accordingly they cut interest-rates to -0.5% in a boom and then raised them to 0% as the economy slowed. Things got more awkward as we discovered that Sweden Statistics was not entirely sure about its unemployment measure. It found a flaw and reduced the unemployment rate from 7% to 6% and then the new measure rose to 7.3%.

In that sense both bodies were grateful for the pandemic but then Sweden which is often considered a leader took its own road on lockdown. We see that this meant the economy shrank by less but then did not recover much in production or services terms in June. However of course it was still relatively better off and this will be helped by the retail sales numbers released on Monday.

The retail trade sales volume increased by 3.9 percent in June 2020 compared with the same month a year ago. Retail sales in durables increased by 5.0 percent, while retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.2 percent. These figures are working-day adjusted and in fixed prices.

Although they now seem to have some problems with the retail sales numbers too.

Meanwhile I guess the Riksbank is scanning the report of every house sale.

She says, “hello, you fool, I love you
C’mon join the joyride”
Join the joyride ( Roxette )

 

 

UK monthly GDP is a poor guide to where the economy stands

Today has opened with the media having a bit of a party over the economic news from the UK and they have been in such a rush they have ignored points one and two and dashed to point 3.

Monthly gross domestic product (GDP) fell by 20.4% in April 2020, the biggest monthly fall since the series began in 1997. ( Office for National Statistics)

Actually our official statisticians seem to have got themselves in a spin here which is highlighted by this bit.

Record falls were also seen across all sectors:

    • services – largest monthly fall since series began in 1997
    • production – largest monthly fall since series began in 1968
    • manufacturing – largest monthly fall since series began in 1968
    • construction – largest monthly fall since series began in 2010

As you can see they have jumped into a quagmire as suddenly we have numbers back to 1968 rather than 1997! What they originally meant was the largest number since we began monthly GDP about 18 months ago. The rest is back calculated which did not go that well when they tried it with inflation. Oh and let me put you at rest if you are worried we did not measure construction before 2010 as we did. Actually we probably measured it better than we do now as frankly the new system has been rather poor as regular readers will be aware.

Now I can post my usual warning that the monthly GDP series in the UK has been very unreliable and at times misleading even in more normal scenarios. Or as it is put officially.

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

So let us move on noting that the reality with data in both March and April hard to collect due to the virus pandemic is more like -15% to -25%. The 0.4% in the headline is beyond even spurious accuracy and let me remind you that I have consistently argued that the production of monthly GDP is a mistake.

Mind you it did produce quite an eye-catching chart.

Context

As we switch to a more normal quarterly perspective we are told this.

>GDP fell by 10.4% in the three months to April, as government restrictions on movement dramatically reduced economic activity

This in itself was something of a story of two halves as we went from weakness to a plunge as restrictions on movement began on the 23rd of March. There is also something of a curiosity in the detail.

The services sector fell by 9.9%, production by 9.5% and construction by 18.2%.

The one sector that did carry on to some extent in my area was construction as work on the Royal School of Art and the Curzon cinema in the King’s Road in Chelsea continued. So let us delve deeper.

Services

If we look at the lockdown effect we can see that it crippled some industries.

The dominant negative driver to monthly growth, wholesale and retail trade and repair of motor vehicles and motorcycles, contributed negative 3.5 percentage points, though falls were large and widespread throughout the services industries; notable falls occurred in air transport, which fell 92.8%, and travel and tourism, which fell 89.2%.

The annual comparison is below.

Services output decreased by 9.1% between the three months to April 2019 and the three months to April 2020, the largest contraction in three months compared with the same three months of the previous year since records began in January 1997.

Actually we get very little extra data here.

Wholesale and retail trade and repair of motor vehicles and motorcycles was the main driver of three-monthly growth, contributing negative 1.95 percentage points.

This brings me to a theme I have been pursuing for some years now. That is the fact that our knowledge about the area which represents some four-fifths of our economy is basic and limited. I did make this point to the official review led by Sir Charles Bean. But all that seems to have done is boosted his already very large retirement income, based on his RPI linked pension from the Bank of England.

Production

We follow manufacturing production carefully and it is one area where the numbers should be pretty accurate as you either produce a car or not for example.

The monthly decrease of 24.3% in manufacturing output was led by transport equipment, which fell by a record 50.2%, with motor vehicles, trailers and semi-trailers falling by a record 90.3%; of the 13 subsectors, 12 displayed downward contributions.

The annual comparison is grim especially when we note that there were already problems for manufacturing due to the ongoing trade war.

For the three months to April 2020, production output decreased by 11.9%, compared with the three months to April 2019; this was led by a fall in manufacturing of 14.0% where 12 of the 13 subsectors displayed downward contributions.

Construction

According to the official series my local experience is not a good guide.

Construction output fell by 40.1% in the month-on-month all work series in April 2020; this was driven by a 41.2% decrease in new work and a 38.1% decrease in repair and maintenance; all of these decreases were the largest monthly falls on record since the monthly records began in January 2010.

This gives us an even more dramatic chart so for those who like that sort of thing here it is.

The problem is that this series has been especially troubled as we have noted over the years. For newer readers they tried to fix it bu switching a large business from services to construction but that mostly only raised questions about how they define the difference? There was also trouble with the measure of inflation.

Anyway here is a different perspective.

Construction output fell by record 18.2% in the three months to April 2020, compared with the previous three-month period; this was driven by a 19.4% fall in new work and a 15.8% fall in repair and maintenance.

Comment

As we break down the numbers we find that they are a lot more uncertain than the headlines proclaiming a 20.4% decline or if you prefer a £30 billion fall suggest. Let me add another factor which is the inflation measure or deflator which will not only be wrong but very wrong too. The issue of using annual fixed weights to calculate an impact will be wrong and in the case of say air transport for example it would be hard for it to be more wrong in April. On the other side of the coin production of hand sanitiser and face masks would be travelling in the opposite direction.

We can switch to trying to look ahead with measures like this.

There was an average of 319 daily ship visits during the period 1 June to 7 June 2020, a slight fall compared with the previous week.

The nadir for this series was 215 on the 13th of April so we have picked up but are still below the previous 400+. . There was also a pick-up using VAT returns in May but again well below what we had come to regard as normal.

 There has been a small increase in the number of new VAT reporters between April 2020 and May 2020 from 15,250 to 16,460.

But I think the Office for National Statistics deserves credit for looking to innovate and for trying new methods here.

Meanwhile I think the Bank of England may be trying some pre weekend humour.

 

UK GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.

 

 

What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

UK GDP growth is as flat as a pancake

Today brings us the last major set of UK economic data before the General Election on Thursday at least for those who vote in person. It is quite a set as we get trade, production, manufacturing and construction data but the headliners will be monthly and quarterly GDP. As the latter seem set to be close to and maybe below zero no doubt politicians will be throwing them around later. Let’s face it they have thrown all sorts of numbers around already in the campaign.

The UK Pound

This has been the economic factor which has changed the most recently although it has not got the attention it deserves in my opinion. At the time of writing the UK Pound £ is above US $1.31, 1.18 to the Euro and nearing 143 Yen. This means that the effective or trade-weighted index calculated by the Bank of England is at 81.1 which is about as good as it has been since the post EU leave vote fall ( there were similar levels in April of last year). This particular rally started on the 9th of August from just below 74 so it has been strong or if you prefer for perspective we opened the year at 76.4.

Thus using the old Bank of England rule of thumb we have seen the equivalent of more than a 1% rise in official interest-rates or Bank Rate in 2019 so far. This has produced two economic developments or at least contributed to them. The first is that inflation prospects look good and I mean by my definition not the Bank of England one. The CPI versions could head below 1% in the months to come and RPI towards 1.5%. The other is that it may have put a small brake on the UK economy and contributed to our weak growth trajectory although many producers are probably used to swings in the UK Pound by now.

Some good news

The trade figures will be helped by this from UK wind.

GB National Grid: #Wind is currently generating 13.01GW (33.08%) out of a total of 39.34GW

The catch is that of course we are reliant on the wind blowing for a reliable supply. Also that it is expensive especially in its offshore guise, as it it both outright expensive to add to the costs of a back-up.

GDP

As to growth well our official statisticians could not find any.

UK GDP was flat in the three months to October 2019.

If we look at the different sectors we see what has become a familiar pattern.

The services sector was the only positive contributor to gross domestic product (GDP) growth in the three months to October 2019, growing by 0.2%. Output in both the production and construction sectors contracted, by 0.7% and 0.3%, respectively. The weakness seen in construction was predominantly driven by a fall of 2.3% in October.

So services grew and production shrank with construction erratic but also overall lower. If you wish to go to another decimal place you can find a small smidgeon of growth as services pushed GDP up by 0.17%, production cost 0.1% and construction cost 0.02% leaving a net 0.05%. But that is spurious accuracy as that puts the numbers under too much pressure.

Services

There was something of note in the monthly series ( October).

Services also grew by 0.2% in October, with widespread growth in several industries. The most notable of these were real estate activities and professional, scientific and technical activities, which both contributed 0.06 percentage points to gross domestic product (GDP) growth. The latter was driven by strength in both architectural and engineering activities, and research and development.

Two things stand out from this. Firstly the quarterly growth was essentially October  and next that much of it was from real estate and architecture. Is Nine Elms booming again? But more seriously something is perhaps going on here that has not been picked up elsewhere.

Production

Here the news has been pretty gloomy all round although the energy part is good news in terms of better weather and less expense for consumers.

Total production output decreased by 0.7% for the three months to October 2019, compared with the three months to July 2019; this was led by manufacturing output, which fell by 0.7%, followed by falls in mining and quarrying (2.6%) and electricity and gas (1.0%).

This reminds us that these areas have been seeing a depression in the credit crunch era.

Production output in the UK remained 6.2% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008……..Manufacturing output in the UK remained 3.5% lower for the three months to October 2019 than the pre-downturn peak for the three months to March 2008.

It was not so long ago that it looked like manufacturing was about to escape this but then the trade war happened.

There was a flicker in October alone but the impact of the swings in the pharmaceutical industry are usually much stronger than that.

The growth of 0.1% in total manufacturing output in October 2019, compared with September 2019, was mainly because of widespread strength, with 8 of the 13 subsectors displaying upward contributions. The largest of these came from the volatile pharmaceutical products subsector, which rose by 2.1%, following two consecutive periods of significant monthly weakness during August and September 2019.

Trade

The issue here is the uncertainty of the data which today has illustrated,

The total UK trade deficit (goods and services) widened £2.3 billion to £7.2 billion in the three months to October 2019, as imports grew faster than exports

That seems clear but then again maybe not.

Excluding unspecified goods (which includes non-monetary gold), the total trade deficit narrowed £4.3 billion to £2.9 billion in the three months to October 2019.

The oversea travel and tourism problems have still not be solved.

For earlier monthly releases of UK Trade
Statistics that have also been affected by this error, the versions on the website should be amended
to make clear to users that the errors led the Authority to suspend the National Statistics
designation on 14 November 2014.

Moving on there is also this.

In current prices, the trade in goods deficit widened £6.8 billion to £35.6 billion, largely driven by rising imports; the trade in services surplus widened £4.4 billion to £28.4 billion, largely driven by rising exports.

So there is hope for the UK services exports which seem to be doing well and I have long suspected have been under recorded. For example smaller businesses are likely to be missed out. The scale of this is simply unknown and as we have issues here this must feed into the wider GDP numbers which are so services driven.

So our trade problem is a case of definitely maybe.

Comment

We perhaps get the best perspective from the annual rate of GDP growth which is now 0.8% using the quarterly methodology. If we take out the spring blip that has been declining since the 2% of August 2018. There are some ying and yangs in the detail because of we start with the positive which is services growth ( 1.3%) it has been pulled higher by the information and communication category which is up by 5.4% and education which is up by 3%. But on the other side of the coin the depression in production and manufacturing has worsened as both have fallen by 1.5%. I have little faith in the construction numbers for reasons explained in the past but growth there has fallen to 0%.

There are lots of permutations for the General Election but yet another interest-rate cut by the Bank of England just got more likely. It meets next week. Also political spending plans are getting harder to afford in terms of economic growth,

 

 

 

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

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

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

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

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

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

Indeed the crux of the matter was rather curious.

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

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

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

Indeed Moodys seemed to be playing politics.

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

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

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

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

GDP Growth

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

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

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

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

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

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

We got more detail here.

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

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

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

On an annual basis we saw this.

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

Also there is this.

education, 68.9% public sector and 31.1% market sector

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

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

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

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

Finally there was this highlighted by the Bank of England.

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

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

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