China’s GDP grows but at what price?

This morning has brought us up to date on the official view on the Chinese economy. They put one over on the western capitalist imperialists by producing their economic output numbers so quickly, or at least they think they do. So here is the National Bureau of Statistics.

According to preliminary estimates, the gross domestic product (GDP) was 101,598.6 billion yuan in 2020, an increase of 2.3 percent over last year at comparable prices. The year-on-year GDP for the first quarter went down by 6.8 percent, up by 3.2 percent for the second quarter, 4.9 percent for the third quarter and 6.5 percent for the fourth quarter.

We see that the pattern for China is different due to the rest of the world initially as a result of the Covid-19 pandemic starting in Wuhan meaning its economy was hit hard this time last year. Also it has not recorded any subsequent dips such as the one in November in the UK which we looked at only on Friday. It has been singing along with Jackie Wilson ever since.

You know your love (your love keeps lifting me)
Keep on lifting (love keeps lifting me)
Higher (lifting me)
Higher and higher (higher)

We are told that this excellent result is due to this.

the strong leadership of the Central Committee of the Communist Party of China with Comrade Xi Jinping as the core………and the main goals and tasks of economic and social development were accomplished better than expectation.

The Detail

It opens with a positive reference to a troubled area.

The Grain Output Reached Another High and Production of Pigs Sustained a Fast Recovery.

Later we get some more detail.

 At the end of 2020, pigs and breeding sows registered in stock were up by 31.0 percent and 35.1 percent respectively over that at the end of 2019.

But I also note this.

and pork, 41.13 million tons, down by 3.3 percent.

There was a surge in demand for US pork which faded a bit in November according to National Hog Farmer.

November exports to China/Hong Kong were 3% below the previous year’s large volume at 83,396 mt and fell 5% in value to $193.8 million. However, through November, exports to the region were still up 72% at 955,008 mt and value was up 85% at $2.18 billion.

Also if we come more up to date the Chinese strategic pork reserve – the existence of which is revealing in itself-  has been deployed this month.

BEIJING, Jan 12 (Reuters) – China will sell 30,000 tonnes of frozen pork from its state reserves on Jan. 15, according to a notice published by the China Merchandise Reserve Management Center on Tuesday.

China has released several batches of pork from its reserves in the past weeks to boost supply ahead of a jump in consumption over the approaching Lunar New Year holiday in February. ( Nasdaq)

The African Swine Fever issue has not gone away and there are more than a few who doubt the Chinese claims. There also seem to be issues across other meats as the demand for protein switches.

Industrial Production

This was solid overall.

The total value added of industrial enterprises above the designated size increased by 2.8 percent over last year.

Also we are guided towards high-tech manufacturing.

manufacturing up by 3.4 percent……….The value added of the high-tech manufacturing and equipment manufacturing went  up by 7.1 percent and 6.6 percent respectively over last year, or 4.3 percentage points and 3.8 percentage points higher than that of the industrial enterprises above the designated size. Specifically, the production of industrial robots, new energy vehicles, integrated circuits and micro computer equipment grew by 19.1 percent, 17.3 percent, 16.2 percent and 12.7 percent year on year respectively.


We start with a familiar pattern of services being the hardest hit area.

In 2020, the Index of Services Production was the same as that of last year.

That is much better than elsewhere presumably because some areas surged.

The value added of the information transmission, software and information technology services and that of financial services grew by 16.9 percent and 7.0 percent year on year respectively, 14.8 percentage points and 4.9 percentage points higher than that of the tertiary industry.

Therefore somewhere must have shrunk, but there is no mention of this in the official release.

Trade Grows Too

As you can see apparently there has been quite a triumph here.

In 2020, the total value of imports and exports of goods was 32,155.7 billion yuan, an increase of 1.9 percent over last year. The total value of exports was 17,932.6 billion yuan, up by 4.0 percent; the total value of imports was 14,223.1 billion yuan, down by 0.7 percent. The trade balance was 3,709.6 billion yuan in surplus.

Indeed as the year progressed things got even better.

In December, the total value of imports and exports of goods was 3,200.5 billion yuan, up by 5.9 percent year on year. Specifically, the total value of exports was 1,858.7 billion yuan, up by 10.9 percent; the total value of imports was 1,341.9 billion yuan, down by 0.2 percent. The trade balance was 516.8 billion yuan in surplus.

The one area that you might have thought would have expanded ( PPE) does not get a mention. So we are left wondering what is being exported and to whom?


I have doubts about what the numbers are really telling us and they are driven mostly by this.

In 2020, the total retail sales of consumer goods reached 39,198.1 billion yuan, down by 3.9 percent over last year.

So in an economy growing by 2.3% we saw retail sales fall by 3.9%? Indeed that sort of pattern continued as 2020 progressed.

In the fourth quarter, the total retail sales of consumer goods grew by 4.6 percent year on year, 3.7 percentage points higher than that in the third quarter. In December, the total retail sales of consumer goods grew by 4.6 percent year on year, or 1.24 percent month on month.

So economic growth of 6.5% exceeded retail sales growth by 1.9% in the fourth quarter and I note that December showed no improvement. At this stage China is the doppelganger of the UK as we have retail sales growth but a shrunken economy. However there is one area where we are alike.

Specifically, the investment in infrastructure was up by 0.9 percent, manufacturing down by 2.2 percent and real estate development up by 7.0 percent. The floor space of commercial buildings sold reached 1,760.86 million square meters, up by 2.6 percent. The total sales of commercial buildings were 17,361.3 billion yuan, up by 8.7 percent.

If we return to the issue of consumption I also note this warning from the trade figures we looked at earlier.

 the total value of imports was 14,223.1 billion yuan, down by 0.7 percent.  (for 2020)……..the total value of imports was 1,341.9 billion yuan, down by 0.2 percent. ( for December)

So the economy grew but imports fell? Putting it another way China has managed to increase recorded GDP but at the cost of apparently making its citizen worse off.

Also one of the credit crunch issues was the trade surplus of China which we have just been told has got even bigger.

The Chinese way
Who knows what they know
The Chinese legend grows ( Level 42)


UK GDP contracts again but there are reasons to be cheerful

2020 was a contrary year and this morning has brought another example. When it began I would not have thought that one might present a decline as being a good thing but November brought an example of it for the UK. This is because the expectations of the November lockdown were for a decline in the UK economy ( between -5% and -6%) much more like the March one than what you can see below.

Following six consecutive monthly increases, including an upwardly revised 0.6% increase in October, real gross domestic product (GDP) fell by 2.6% in November 2020. Restrictions were in place to varying degrees across all four nations of the UK during November.

Actually the decline was from a much better position than you might think. This is because the revision to October is welcome but 0.2% on the monthly numbers is relatively small. But for the sharper-eyed there has been quite a fundamental revision to the initial impact of the pandemic as April has been revised up by 0.7% and May by 0.5% with other smaller monthly revisions. This means that the annual picture was also much better than the expected 12% decline.

November GDP fell back to 8.5% below the levels seen in February 2020 compared with 6.1% below in October 2020. GDP fell by 8.9% in the 12 months to November 2020, compared with an annual decline of 6.8% to October.

There is a further nuance to this which changes the pattern of the decline we have seen. So far this has been reported as mostly being a services driven phase but the upwards revisions I referred to above were essentially a services change. If we add up the monthly increases in GDP we get to 1.7% of which 1.6% was due to the services sector.


Also another of our themes and one I only mentioned yesterday in reference to Germany was in play as well. It relates to the problems experienced in measuring construction output. This has proved to be quite a problem even in normal times and take a look at this.

 it is worth noting that there has been a comparatively larger revision to the construction sector in 2020. Construction output in October is now estimated to be 1.3% below its February 2020 level, compared with the previously published 6.4% below. In addition, October 2020 is open to revision to incorporate latest data.

So a very large revision and they post a warning about October too. Whilst one should make an allowance for the period we have been in a 5% revision does question what use the figures are? On a grander scale ( total GDP) the impact is relatively small but welcome.

Monthly construction output grew by 1.9% in November 2020 compared with October 2020, rising to £14,014 million……..All work construction output in November 2020 recovered above its pre-pandemic level for the first time, at 0.6% (£80 million) above the February 2020 level. While construction output is slightly above the February 2020 level it is still down by 0.3% (£40 million) on the level of output in January 2020 because of February being impacted by adverse weather.


If we start with the November fall we see that it was indeed the lockdown which affected the numbers.

There was a fall of 3.4% in the Index of Services between October 2020 and November 2020; the largest contribution to monthly growth was accommodation and food service activities, falling by 44.0%.

As you can see the hospitality industry was butchered again, although other areas were hit too.

Across services, the monthly fall was widespread but driven by accommodation and food and beverage services, wholesale, retail and motor trades, other service activities, and arts, entertainment and recreation.

Indeed some things really did grind to a halt.

At a more detailed level, there were notable increases in business reporting no turnover with the proportion in hair and beauty (within personal services) growing from 2.5% in October to 24.4% in November. Similar data for pubs showed an increase from 9.0% to 27.4%.

I think more places escaped a 0 simply because the November restrictions started a few days into the month in England at least.

If we take a deeper perspective we see this.

In November 2020, 8 of the 51 lower level services industries surpassed their level of output compared with February 2020, led by postal and courier services. In contrast, six services industries remain below 50% of their February 2020 level, with air transport and travel agents performing the weakest.

It is hardly a surprise that postal and courier services have risen which keys in with the numbers we have had for online sales from the retail sales data. On a personal level it also fits with the delivery van outside right now and the regular sight of workers pulling what looks like large bags on wheels on the streets.

The annual comparison is below.

The services sector is now 9.9% below the level of February 2020.

That is worse than the overall position as we are left mulling whether the decline this time around in November will be revised higher later.

Production and Manufacturing

The November restrictions had much less of an effect on this area.

Production fell marginally by 0.1% in November 2020 as three out of the four sub-sectors fell.

Indeed manufacturing grew driven by a surprising area.

Elsewhere in production, the manufacturing sector grew by 0.7%, with 8 out of its 13 sub-sectors increasing. The largest contribution came from the manufacture of motor vehicles industry, which grew 5.7% in November 2020. This is a result of growth from large businesses to meet increased demand, and this industry is now 1.3% above its February 2020 level.

However there is a catch revealed by looking at the three-monthly data.

Most notably, the manufacture of transport equipment grew by 18.9%, however, it is still 15.3% below its pre-pandemic level. Despite the recovery in manufacture of motor vehicles industry (as noted in the previous paragraph), the manufacture of air and spacecraft in this sub-sector has struggled to regain output and remains 35.5% below the February level.


2020 has brought all sorts of different perspectives so let me start with the positive ones. The UK economy has plainly adapted to the lockdowns and restrictions, for example construction saw heavy falls in the spring restrictions but actually grew in the November ones. One area has been left behind which is economic forecasting which got it wrong again although one of my main themes was confirmed as the first rule of OBR Club hit the ball for six yet again.

That includes the UK, where GDP is set to fall by 11 per cent this year – the largest drop in annual output since the Great Frost of 1709.

Also it has not been as long as since the Great Frost of 1709 but an annual trade surplus is a rare beast indeed for the UK.

In the 12 months to November 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £40.0 billion to a surplus of £7.8 billion.

Looking ahead there are two other pieces of good news. The vaccine roll out is going well with over 3 million doses now having been injected. Also in spite of the media rhetoric we do have economic strengths.

London has cemented its role as Europe’s leading tech hub in after a near-record year of investment as overseas investors circle in on the capital’s best firms.

Global tech investors are piling into the capital with a total $10.5bn (£7.7bn) investment recorded in 2020, a quarter of Europe’s whole VC investment for the year.  ( City-AM).

So Ian Dury had a point and may not have been a blockhead.

Reasons to be cheerful part three
Reasons to be cheerful part three
Reasons to be cheerful part three
Reasons to be cheerful part three
One, two, three

The dangers are clear which are more lockdowns and the risk of a virus mutation undoing the good work on the vaccine front. Also we have a lot of ground to catch back up.



What are the prospects for the economy of Germany?

One of the issues in economics is that we sometimes do not know what has just happened let alone where we are going. It was once explained to me as like driving a car with the front and side windows blacked out. Well maybe Germany has on this occasion provided a chink of light from one of the rear side windows.

WIESBADEN – According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 5.0% lower in 2020 than in the previous year. After a ten-year growth period, the German economy suffered a deep recession in 2020, the year of the corona, a situation similar to that of the 2008-2009 financial and economic crisis. However, the economic downturn on the whole was less serious in 2020 than in 2009 (-5.7%), according to provisional calculations.

We can look at this in several ways of which the first is that this is likely to be a relatively good performance even though care is needed as this is an average for 2020 rather than where the economy is now. Next comes the issue of whether this is an ongoing depression including the credit crunch? In Germany’s case the answer is no as it is still above the previous peak in output terms. It has been a weak period overall but there was some progress most of it in the initial rebound of 4% in both 2010 and 11. As to the comparison with 2009 the numbers get a lot tighter in calendar adjusted terms as 2009 was -5.6% as opposed to the number below.

In calendar adjusted terms, the GDP declined by 5.3% in 2020, as the number of working days was higher than in 2019.

Breaking it down

I doubt many of you will be surprised to learn which was the worst affected area.

In industry (excluding construction), which accounts for just over one quarter of the total economy, the price adjusted economic performance declined by 9.7% on 2019, in manufacturing even by 10.4%. Industry was affected by the consequences of the corona pandemic especially in the first half of 2020, for instance, due to temporary interruptions in the global supply chains.

That of course came on the back of a 2019 which was influenced by the “trade war”.

The services sector was also hard hit.

The economic slump was particularly strong in the service sector where decreases were partly as severe as never before. Examples include trade, transport, accommodation and food services where the price adjusted economic performance declined by 6.3% compared with 2019.

Although as we have seen in so many places there were large shifts within the services sector.

However, opposite trends were also recorded: online trade increased markedly, while permanent retail trade in part declined substantially. The tight restrictions in accommodation, restaurant and similar services led to an outstanding decline in accommodation and food services.

Maybe they have similar problems to the UK in measuring construction as I am unsure how it could have risen but the official number is below.

A sector that could sustain its position in the crisis was construction: price adjusted gross value added even increased by 1.4% year on year.

Domestic Demand

You will not be surprised to read that private consumption headed south.

 In contrast to the financial and economic crisis, when the economy was supported by all components of consumption expenditure, household final consumption expenditure in 2020 fell a price adjusted 6.0% year on year, which was an unprecedented decrease.

Nor that government spending boosted things.

 Government final consumption expenditure saw a price adjusted 3.4% increase and had a stabilising effect even in the corona pandemic. This was, among other things, based on the acquisition of protective equipment and hospital services.

You may note a quite different treatment to the UK official statistics as Germany measures a much higher input rather than peering into theoretical declines in output in health (and education).


This area highlights one of the problems with Gross Domestic Product numbers as GDP falls to allow for the fact that there are losers on both sides of trade.

The corona pandemic also had a massive impact on foreign trade. Exports and imports of goods and services in 2020 decreased for the first time since 2009, that is, exports by a price adjusted 9.9% and imports by 8.6%. The decline was particularly large for imports of services; this was mainly due to the high proportion of tourism, for which a sharp fall was recorded.

Whilst exporters lose 9.9% and importers 8.6% the GDP numbers only show the subtraction which is calculated as a 1.1% fall. There is another twist as in terms of the nominal numbers the statisticians then found some imported inflation to reduce the import decline to below the exports number. I wonder where that was as we are do often told there is no inflation and the Euro was strong overall in 2020?

Labour Market

There are several ways of looking at this. Even the favourable one shows us this.

On an annual average in 2020, the economic performance was achieved by 44.8 million persons in employment whose place of employment was in Germany. That was a decrease of 477,000, or 1.1%, on 2019. Due to the corona pandemic, the upward trend in employment ended, which had lasted for over 14 years

Fair play to them for pointing out an inequality that has developed.

This affected especially marginally employed people and self-employed, whereas the number of employees subject to social insurance remained stable.

Also the sentence below is doing a lot of heavy-lifting.

Dismissals seem to have been avoided especially by the extended regulations regarding short-time work.

This has also been added to by the furlough scheme in Germany.

Germany`s «Kurzarbeit» Program spent EUR22.1bn last year subsidizing payroll for companies working at reduced levels ( @acenaxx)

Some 1.95 million were still being supported in the final quarter of the year which provides quite an appendix to the employment numbers we looked at above.

Fiscal Policy

You could argue that Germany is finally applying some logic. As you can see their statisticians have got quite excited by it.

General government budgets recorded a financial deficit (net borrowing) of 158.2 billion euros at the end of 2020, according to provisional calculations. It was the first deficit since 2011 and the second highest deficit since German reunification and was exceeded only by the record deficit in 1995 when the debt of the Treuhand agency were integrated in the general government budget.

The reason I mention the logic point is that Germany is being paid to borrow, so why not do some? For most of 2020 ( from March) that applied to even the 30-year maturity which fell to nearly -0.5% in the March pandemic panic. There is an irony in Germany’s safe haven status as it moved away from one definition of a safe haven but then that was 2020 in a nutshell.

In terms of ratios we are told this.

Measured as a percentage of nominal GDP, this was a 4.8% deficit ratio of general government for 2020.

In relative terms this is low but does represent quite a shift on the previous surplus policy.


It is interesting that Germany has provided us with an update including the final quarter over a fortnight before it considers sensible to produce them. However as things stand the picture is in the circumstances good. As to the future there are two perspectives and let us start with the business survey or PMI.

Though down on its level between July and
October, the Germany Composite Output Index ticked up from November’s five-month low of 51.7 to 52.0.

If Germany’s Q4 GDP was indeed flat as seems likely from today’s number that has already not gone so well for the PMI. Now there are the lockdowns which seem set to last until the spring and issues with the supply of vaccines.

Angela Merkel admits Germany faces wait for Covid jabs … Germany is facing a Covid-19 vaccine shortage and may not be able to secure sufficient stocks until July, Angela Merkel privately told her MPs ( @TradingFloorAudio)

On that basis expectations that Germany will be back to pre pandemic levels at the end of this year look very optimistic.



Portugal is feeling the economic effects of the pandemic

It has been too long since we took a look at the economic state of play in Portugal, which is a delightful country. For newer readers Portugal was in the bad boys/girls club at the time of the Euro area crisis symbolised by the way that its national debt to economic output ratio ( GDP) went over the 120% level set as a signal by the Euro area. That was a particular irony as that level was set to avoid embarrassing Portugal and indeed Italy. But after that phase Portugal went into favoured child status as its economy improved and it followed Euro area instructions.

But now things are really rather different as the Euro area boom of 2017/18 was in modern language like over before the Covid-19 pandemic arrived. There were even issues for the successful motor sector.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. The automobile sector is responsible for 11% of total exportations. Portuguese technical skills in this field, the highly competitive set up and running costs and our great logistic infrastructures have been a driving force in this sector. ( PortugalIN)

This is because some of the gains came at the expense of France and Spain and also because if you head south for cheaper production you might carry on doing so and end up in Algeria and Tunisia.

What about now?

Yesterday the Portuguese statistics office updated us on the services sector.

Services turnover index, in nominal terms and adjusted for calendar and seasonal effects, presented a year-on-year
change rate of -15.3% in November (-12.1% in October).
The year-on-year change rates of the indices of employment, wages and salaries and number of hours worked adjusted of calendar effects were -8.4%, -4.1% and -11.4%, respectively (-8.3%, -6.2% and -12.7% in October, by the same order).

There are two main contexts here. The first is the scale of the decline in output and next is the way that hours worked looks to be the best measure of the impact on employment. Also we get a hint of the scale of government aid and furlough as we note that wages/salaries are only 4.1% lower.

The peak for this series was the 121 of January last year ad the nadir was the 74 of April. Whereas the 100 of November means that all the gains since 2015 had faded away, hopefully temporarily.

This morning has brought a reminder of the industrial production data as Eurostat catches up. It shows an average across the Euro area of an annual fall of 0.6% so Portugal under performed here.

The Industrial Production Index (IPI) registered a year-on-year rate of change of -3.6% in November (0.4% in the previous month)……Of the Major Industrial Groupings, only Intermediate goods showed a positive year-on-year rate of change: 1.1%. Energy registered the most
negative rate of change (-10.3%), followed by Investment goods (-8.2%) and Consumer goods (-1.9%).

I guess few will be surprised about what has happened to tourism.

In November 2020, the tourist accommodation sector should have registered 416,000 guests and 950,000 overnight stays, corresponding to year-on-year
rates of change of -76.3% and -76.7% respectively (-59.7% and -63.3% in October, in the same order).



Portugal does not feature regularly in the PMI business surveys but this from the statistics office on Monday offered some clues for prospects.

The perspectives of the exporting enterprises of goods point to a nominal increase of 4.9% in exports in 2021 vis-à-vis
the previous year. Although these figures represent an improvement compared to the perspectives indicated by
enterprises for 2020 according to the preceding forecast (-13.0% ), they still not allow a recovery to values close to
those recorded before the pandemic.
In fact, should these perspectives be confirmed, the exports of goods in 2021 will correspond to a level 12.8% lower
than the total exports of goods recorded in 2019.

This survey has proved reliable in the past. So we should take the idea of an improvement but still quite a decline on pre pandemic levels seriously. In the meantime there is the likelihood of at least a one month lockdown.

The transport sector I highlighted earlier has particular problems as it was one of the worst affected areas.

It stood out the categories Transport Equipment and parts and accessories thereof (with the highest decrease expected for 2020, corresponding to -20.3%).

But not much of an expected recovery this year.

Transport equipment and parts and accessories thereof (+4.7%), mainly for Intra-EU markets (+6.8%,
+5.7% and +5.1%, respectively).

Financial Markets and Finances

There is something of a ying and yang here. If we start with the currency then Portugal will have been affected by the stronger Euro which I note has got a mention from the ECB today.

ECB’s Villeroy: We Will Keep Favourable Monetary Conditions As Long As Necessary -We Are Closely Following The Negative Effects Of The Euro Exchange Rate ( @LiveSquawk)

Although I guess it does help with the international position in one area.

At the end of the third quarter of 2020, the Portuguese economy had a net financial position vis-à-vis the rest of the world of -101.9 per cent of GDP (Chart 2), compared to -101.3 per cent of GDP at the end of the same quarter of 2019. ( Bank of Portugal)

If we switch to debt metrics then the Portuguese government is in relative terms running a tight fiscal ship.

This result reflects the net borrowing of general government and non-financial corporations (4.0 and 2.3 per cent of GDP respectively)

The latest national debt figures are running to the same tune.

In November 2020 public debt stood at €267.1 billion , a €1.1 billion decrease from the end of October. This was mainly driven by a decrease in debt securities (€1.2 billion)

General government deposits decreased by €2.0 billion, with public debt net of deposits increasing by €0.9 billion from the previous month, to a total of €244.7 billion.

These days the public debt burden is less of a debated issue because of the way that Portugal can borrow so cheaply.In fact it can borrow for ten years for effectively nothing (0.01%). As this feeds in the Bank of Portugal projects this.

The implicit interest rate on public debt is expected to fall over the projection horizon, from 2.6% in 2019 to 1.8% in 2023, which reflects the assumption that interest rates on new issues will remain low.


There are two main themes here. The first is that the Euro area crisis seems now like it is from a place “far,far away.” Back then solvency fears sent the benchmark bond yield into the teens for a while and if I remember correctly briefly as high as 21% as opposed to the present 0%. Although there does seem to be a hangover from those days as Portugal is being relatively rather restrained in its use of fiscal policy.

The next theme is that the December projections of the Bank of Portugal look rather optimistic now.

Accordingly, an 8.1% decline in GDP is projected in 2020, followed by growth of 3.9% in 2021, 4.5% in
2022 and 2.4% in 2023 . Activity will return to pre-pandemic levels at the end of 2022.

The V-shapers have proved to be rather panglossian and even that only had Portugal back to pre pandemic levels at the end of 2022. One curiosity I find is that those concerned with “output gaps” and the like seem to have disappeared. Anyway the first half of 2021 will be grim again and will follow on from a decline at the end of last year.

Let me finish with a metric that will be announced to cheers from the Frankfurt towers of the ECB.

In the 3rd quarter of 2020, the House Price Index (HPI) grew by 7.1% when compared with the same period of 2019……On a quarter-to-quarter basis, the HPI increased by 0.5% (0.8% in the 2nd quarter of 2020). By category, the existing dwellings prices increased by 0.6%, above that observed for new dwellings (0.1%).

First-time buyers will need a process of re-education before they understand how good this is for them…….




Production replaces Services as the leader of the UK GDP pack

The impact of the Covid-19 pandemic has been to give GDP ( Gross Domestic Product) numbers quite a shake. This has happened in several areas, the first of which has been the falls of economic depression size. The next is that it has posed questions for the whole concept as the weights used this year apply to a 2018 and 19 economic structure that has changed quite a bit.The system relies on things changing only marginally rather than shifting on an axis as we have seen in 2020. All of that comes on top of the problems highlighted by the credit crunch of which one was recording inflation in the banking and housing sectors as growth.


Added to the fun and games above has been the decision to produce monthly GDP statistics in the UK. This posed challenges in ordinary times and right now has the issues noted above added to it. But here they are.

With a backdrop of further national measures being introduced in response to the coronavirus pandemic, monthly GDP grew by 0.4% in October 2020. This is the sixth consecutive monthly increase following a record fall of 19.5% in April 2020.

If we now switch to longer perspective we see this.

October 2020 GDP is now 23.4% higher than its April 2020 low. However, it remains 7.9% below the levels seen in February 2020, before the full impact of the coronavirus pandemic.

As you can see there has been a lot of growth but not when compared to the initial fall. Another way of looking at things is to compare with the start of the year at 100 and compared to that GDP is 91.9. But we see a different structure for the UK economy because it is the usually strong services sector pulling the number lower with its 91.1 with even the construction sector doing better at 92.4. The reversal of past trend continues with production being the leader of the pack at 96.

Breaking It Down


This was also the leader of the pack in October.

Production grew by 1.3% in October 2020, with manufacturing growing by 1.7%. The manufacturing sector saw 11 out of its 13 sub-sectors increasing following large falls across March and April 2020. The largest contribution was from the manufacture of transport equipment, which grew by 5.4% in October 2020. This is a result of growth from large businesses to meet increased demand, however, it is still 18.2% below its February 2020 level.

We got some more detail on the manufacturing growth here.

Within manufacturing there was widespread growth, led by a rise of 6.8% in motor vehicle production.

If we look for a trend there is this.

Looking at rolling three-month growth, output in the production sector grew by 7.6% in October 2020. This was driven by increases in three out of four sub-sectors:

Which can be broken down as follows.

manufacturing, which grew by 10.0% as a result of 12 out of the 13 sub-sectors increasing; most notably, the manufacture of transport equipment grew by 30.5%, however, it is still 21.4% below its pre-pandemic level…….electricity, gas, steam and air conditioning supply, which increased by 5.3% as a result of increased demand as more factories and premises reopened……water supply, which grew by 3.0% as a result of a general increase in commercial, industrial and construction waste activity/

Looking at the other side of the coin the weakest part of the UK manufacturing sector has been the repair and maintenance of aircraft and spacecraft which has fallen by 36.3% since February. The spacecraft sector has previously been one of strong growth although I do not think the UK had a lot of input to last night’s Space-X SN8 flight which was remarkable before it blew up whilst trying to land.

North Sea Oil and Gas has always run to its own timetable.

Mining and quarrying fell by 2.3% in the three months to October 2020 as a result of declines in August because of planned maintenance shutdowns.


This has like the production sector above not been far off a V-Shaped recovery.

Output in construction grew by 1.0% compared with the previous month following a record fall of 41.2% in April 2020. This is the sixth consecutive month of growth; it is important to note that since the record monthly growth of 21.8% in June, growth in construction output has slowed.

Looking at the sectors here then the Bank of England will at first have been pleased.

On a rolling three-month basis, the construction sector grew by 24.9% in October 2020. The main contributor to this increase was new housing, in particular private new housing, which recovered after record low output in April 2020.

But then disappointed.

Private new housing acted as a drag on growth in October, falling by 1.9%.


Here we see something of an inversion as the Covid-19 pandemic has hit the sector which usually provides so much of the UK’s economic growth.

In October 2020, the services sector grew by 0.2%, following growth of 1.0% in September. The services sector saw growth in 11 out of the 14 sub-sectors, however the accommodation and food service activities sub-sector acted as a drag on growth in October, falling by 14.4% as tightening coronavirus (COVID-19) measures had an adverse impact on activity and a subsequent lack of demand.

One of the newer measures that the ONS has been trialing reinforced the decline in the hospitality sector.

Within services, the decline in the accommodation and food and beverage services sector was supported by the data from our Business Impact of Coronavirus (COVID-19) Survey (BICS), which showed that during Wave 15 (21 September to 4 October 2020) 67.5% of businesses reported a decrease in their expected turnover for that time of year compared with 79.2% in Wave 17 (19 October to 1 November).

We can see that things turned south under the regional restrictions. If we switch to the pandemic period overall it is no great surprise to see the sector in last place.

In October 2020, 6 of the 51 services industries surpassed their level of output compared with February 2020, led by postal and courier services. In contrast, four services industries remain below 50% of their February 2020 level, with travel agents performing the weakest.

I would imagine it is no great surprise either to learn that the postal and courier sector has seen a 10.3% rise to be the strongest sector. Retail trade is next at 6.9% and all the working from home has seen the repair of computers rise by 6.3%.

Oh and for any of you worried about any disturbances in the force Star Wars style then worry no more as Imputed Rent rose by 0.3%. There will be no Ghostbusters crossing of the streams allowed there.


The context is that monthly GDP growth has been slowing ever since the 9.1% seen in June. There is something of an irony about what happens next because we have been worried about November GDP for a while but as it turns out mostly for the wrong reason. As the furlough scheme was supposed to stop it was logical to expect a turn down in November except it was extended to March. I expect there to be a small braking effect remaining from past planning and expectations but the equivalent of the handbrake was pulled by the advent of lockdown 2.0.

Looking ahead some environments are still unclear like Brexit but later today the ECB will update us on its latest plans to subsidise both Euro area governments and banks. One area which has progressed as I thought has been what is noted below.

education, which contributed 1.02 percentage points as schools made further advances in returning to a pre-lockdown level of teaching, primarily through increased attendance.

That is its impact on rolling three-month services growth and regular readers wilk have guessed the sector coming up next.

Growth of 3.1% in human health was the main driver during October 2020, as patient services continued to increase, particularly because of general practice volumes.

The UK took a different path on measuring these sectors which made our GDP look worse to the order of 5% compared to our peers.

Meanwhile if you are wondering how we would have done without the new restrictions here you go.

However, accommodation and food and beverage services fell significantly. If these industries were excluded, services would have grown by 1.7% between September 2020 and October 2020 while gross domestic product (GDP) would have grown by 1.3% over the same period.






China reports year on year economic growth

This has been a year where China has been especially in focus. Even before it began there were plenty of eyes on its economic performance but the Coronavirus pandemic that looks to have emerged from the Huhan Province upped the ante. Today gives us the opportunity to note the official view on economic developments since then.

The economic growth of the first three quarters shifted from negative to positive, the relations between supply and demand gradually improved, the vitality and dynamic of market were enhanced, and the employment and people’s livelihood were well guaranteed. The national economy continued the steady recovery and the overall social stability was maintained.

So quite an apparent triumph with the pattern for the year show below.

Specifically, the GDP for the first quarter declined by 6.8 percent year on year, increased by 3.2 percent for the second quarter, and up by by 4.9 percent for the third quarter.

They use numbers that are compared to the previous year for that quarter so let us now switch to looking at quarterly and annual growth.

The GDP for the third quarter grew by 2.7 percent quarter on quarter……..According to the preliminary estimates, the gross domestic product (GDP) of China was 72,278.6 billion yuan in the first three quarters, a year-on-year growth of 0.7 percent at comparable prices.

So the overall picture we are left with her is of an economy which has weathered the pandemic and in fact grown albeit very slightly. If you want the pattern which has brought us here it is shown below.

The quarter-on-quarter growth of quarterly GDP since 2019 were 1.9 percent, 1.3 percent, 1.0 percent, 1.6 percent, -10.0 percent, 11.7 percent and 2.7 percent respectively.

The Breakdown

In terms of industry China is emphasising that there has been plenty of high-tech growth.

 In the first three quarters, the value added of high-tech manufacturing and equipment manufacturing grew by 5.9 percent and 4.7 percent year on year. In terms of the output of products, in the first three quarters, the production of trucks, excavators and shoveling machinery, industrial robots, and integrated circuits grew by 23.4 percent, 20.2 percent, 18.2 percent and 14.7 percent year on year respectively.

I am not quite sure why they needed so many extra trucks, excavators and shovelling machinery. Unless of course they were dealing with the swine flu problems of pork production.

Specifically, the output of poultry grew by 6.5 percent, and output of beef, mutton and pork dropped by 1.7 percent, 1.8 percent and 10.8 percent respectively, a decline narrowed by 1.7 percentage points, 0.7 percentage points and 8.3 percentage points compared with that of the first half of this year. The pig production capacity gradually recovered. By the end of the third quarter, 370.39 million pigs were registered in stock, up by 20.7 percent year on year, among which, 38.22 million were breeding sows, up by 28.0 percent.

Overall industry was an outperformer.

Specifically, that of the third quarter grew by 5.8 percent year on year, 1.4 percentage points faster than that of the second quarter.


Again the picture here is of a modern thriving economy.

In the first three quarters, of modern service industries, the value added of the information transmission, software and information technology services, and financial services grew by 15.9 percent and 7.0 percent respectively, or 1.4 percentage points and 0.4 percentage points higher than that of the first half of this year.

However the overall position like elsewhere is of a services sector in decline.

The Index of Services Production dropped by 2.6 percent year on year, a decline narrowed by 3.5 percentage point compared with that of the first half of the year; specifically, that of September grew by 5.4 percent, 1.4 percentage points faster than that of August.

We see that retail sales have had their struggles by the way we are guided towards September rather than the whole third quarter.

In September, the total retail sales of consumer goods reached 3,529.5 billion yuan, up by 3.3 percent year on year, 2.8 percentage points faster than that of August, maintaining the growth for two consecutive months.


This has managed to just become positive.

In the first three quarters, the investment in fixed assets (excluding rural households) reached 43,653.0 billion yuan, up by 0.8 percent year on year, shifting from negative to positive for the first time in 2020, while that of the first half of this year was down by 3.1 percent.

Looking into the detail we see that one definition of investment ( manufacturing) fell but construction carried on growing.

the investment in manufacturing dropped by 6.5 percent, a decline narrowed by 5.2 percentage points compared with that of the first half of 2020; the investment in real estate development grew by 5.6 percent, 3.7 percentage points faster than that of the first half of 2020.

The latter is very different to what we have seen elsewhere.


This of course was a contributor to the imbalances that led to the credit crunch. As you can see it has got worse rather than better this year.

In the first three quarters…….The value of exports was 12,710.3 billion yuan, up by 1.8 percent, and the value of imports was 10,404.8 billion yuan, down by 0.6 percent.

I note that they use value rather than volume but suspect this may just be a translation issue. The imbalance situation did improve in September but as ever we need to be cautious about trade figures for a single month.

The Exchange-Rate

This merits a mention as it has not behaved as people continue to expect.There have been plenty of reports published about a weaker Renminbi but in fact in the second half of this year it has been strengthening. The nadir was on the 28th of May at 7.17 versus the US Dollar compared to 6.7 this morning.

What this means beyond the obvious is complex because the Renminbi is neither fixed nor floating and is a managed currency.


There are several layers in an analysis of this. So let me start from the beginning which is that GDP is calculated differently in China to elsewhere.

While GDP growth in most countries is a measured output that depends on volatile real economic activity, Chinese GDP is an input into the economic process in which local governments are required to add whatever additional economic activity is needed to achieve the targeted GDP growth rate, whether or not this activity adds to welfare or productive capacity ( Michael Pettis )

So a version of “tractor production is always rising” if you like. The debate has gone on for years and a new view on it is around inflation measurement which if you look at the thrust of my work raises a wry smile. Essentially it is not the basic numbers used but it is the inflation measure or deflator that has “smoothed” things since 2012. Taking that view Capital Economics in China suggest GDP has been overstated by around 12%. They back up their view in this way.

For example, the formerly tight link between construction activity and cement output stops working. (See the chart.) Industrial value-added (and monthly IP) become eerily stable, but direct measures of output from industry don’t.

It’s harder to find proxies for services (partly because much of it is lumped together as “other” services, which have apparently been growing very fast). But we see the same abrupt drop in volatility as in industry.

This fits with what we have noted in the past as for example the phase whereby electricity production did not fit what we were told. However, this is a movable feat as once the Chinese noticed this they became “smoothed” too.

So China looks as though it is doing better than us western capitalist imperialists in 2020 which I guess is no great surprise.After all they have much more experience of running a centrally planned economy.We keep stopping ours. However they have been to coin a phrase “somewhat economical with the figures” since around 2012.

There is a subplot to that too as back on the 12th of August I pointed out a really odd move in the UK Deflator.

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.

We failed to follow what Level 42 would call The Chinese Way however as we reduced our GDP by around 5%.



UK GDP shows that we are experiencing a depression rather than a recession

Today gives us an opportunity to find out what the UK economy was up to in August so let me start with the good news which is that it grew. Indeed in ordinary times this would be considered stellar growth. Although of course these times are quite some distance from ordinary.

Monthly gross domestic product (GDP) grew by 2.1% in August 2020 following growth of 6.4% in July, 9.1% in June and 2.7% in May.

As you can see we have had four months of very strong growth but the pattern has been very erratic. Although as I will come to later there is a worrying trend if you just look at the last three months.

The Services Sector

As we are looking at August I doubt many will be surprised where much of the growth came from.

In August 2020, the services sector grew by 2.4%, following growth of 5.9% in July. The accommodation and food services sub-sector was the largest contributor to the increase in August, in particular, the food and beverage service activities industry, which grew 69.7% as the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants.

So the Eat Out to Help Out Scheme was successful in its initial aim although with local lockdowns spreading it seems likely that the boost will fade. In fact the whole sector was on a bit of a tear in August.

The accommodation industry also grew by 76% as international travel restrictions boosted domestic “staycations”. These industries contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020.

Even with this growth we have a fair distance still to travel.

In August 2020, the Index of Services was 9.6% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic.

Some sectors have further to go than others.

There were four industries that failed to reach 50% of their pre-February 2020 level; these were travel agencies, air transport, rail transport, and creative, arts and entertainment.

Also I note significant growth being recorded for education ( worth 0.35% of GDP) and health ( 0.13%) of GDP as we begin to correct the extraordinary inflation recorded by out statisticians in these areas in the second quarter.


This also played its part in August.

Production output rose by 0.3% between July 2020 and August 2020, with manufacturing providing the largest upward contribution, rising by 0.7%; electricity and gas also rose (1.6%), partially offset by a fall in mining and quarrying (4.1%).

But as you can see on a much smaller scale especially as mining and quarrying was a brake. However over the pandemic period as a whole it has done better than services.

production output is 6.0% lower than the level in February 2020, with manufacturing 8.5% lower.


Regular readers will know that even in much calmer times these numbers had what Taylor Swift would call “trouble,trouble,trouble” which will be even worse now. But with that caveat here they are.

Monthly construction output growth slowed to 3.0% in August 2020, following record monthly growth of 21.8% in June 2020 and growth of 17.2% in July 2020.

So the surge has slowed substantially and even so this is where we think we are.

The level of construction output in August 2020 remains 10.8% below the February 2020 level.

More Perspective

We find out a little more from this.

Gross domestic product (GDP) grew by 8.0% in the three months to August 2020 as restrictions on movement eased across June, July and August.

An extraordinary burst of growth but it is much smaller than the fall. The pattern is rather different from what we have become used to.

All the headline sectors provided a positive contribution to GDP growth in the three months to August 2020. The services sector grew by 7.1%, production by 9.3% and construction by 18.5%.

So the usual leader of the pack which is services have been an under performer. This is in spite of the fact that we have surge a surge in accommodation and hospitality of 85.5% and 16.4% in education.

So a very different structure from normal as we see that this is a services driven depression.

Back to Normal?

Er no.

August 2020 GDP is now 21.7% higher than its April 2020 low. However, it remains 9.2% below the levels seen in February 2020, before the full impact of the coronavirus (COVID-19) pandemic.

In terms of structure we have this.

The production sector remains 6.0% lower than the level in February 2020, before the main impacts of the coronavirus were seen…….The services sector remains 9.6% lower than the level in February 2020……The construction sector remains 10.8% lower than the level in February 2020.

Seasonal Adjustment

GDP numbers rely quite a bit on this and as you will see tucked away in it is some hope for September.

In normal times this works well: education outputis smoothed through the year, effectively ‘looking through’ the school holidays as they come and go.

We are back to education so let’s have some Alice Cooper who was on the ball this year.

School’s out for summer
School’s out forever
School’s been blown to pieces

How have our statisticians dealt with this?

Observing a steady increase in school attendance in June and July, and with early evidence that classroom numbers were much closer to normal in September, we will instead smooth the path of education output over the holidays. That means education output will be higher in August than July, but lower than our September estimate……As schools have returned, attendance levels have been much higher than before the school holidays. Everything else being equal, this points to a much stronger September estimate.

The whole issue of seasonal adjustment this year is quite a minefield.

A Trade Surplus

I have been pointing out that we now have a trade surplus for several months now and we have another one.

The UK total trade surplus, excluding non-monetary gold and other precious metals, increased £3.8 billion to £7.7 billion in the three months to August 2020, as exports grew by £21.4 billion and imports grew by a lesser £17.5 billion.

Unlike in the GDP arena this seems to be a services thing.

The widening of the total trade surplus in the three months to August 2020, excluding non-monetary gold and other precious metals, was driven by an £11.9 billion increase in services exports, compared with a lesser £8.9 billion increase in services imports.

Even on an annual basis we now have a surplus.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £33.9 billion to a £4.9 billion surplus in the 12 months to August 2020,

Whilst a surplus for the UK is welcome after decades of deficits the smile changes Cheshire Cat style as we note this.

 Imports of goods decreased by £76.9 billion, while exports decreased by a lesser £39.4 billion.


This morning’s release is both welcome and sobering. The welcome bit is that we have growth but the sobering bit is that we have a long way to go still. It has been a very poor day for those claiming we are in the middle of a “V-Shaped” recovery. Let me illustrate with this from Bank of England chief economist Andy Haldane.

Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third
quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having
fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in
the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising,
on average, by around 1.5% per week.

The man I have described as a “loose cannon on the decks” has been free wheeling again. Of course we might grow by 5-6% in September but in August we grew in a month by what he thought would take not much more than a week. Still I am pleased he has been doing some reading albeit of a book I read as a child.

Now is not the time for the economics of Chicken Licken.

For those of you who have never read this Chicken Licken was worried about the sky falling down. Well it looks like it has on Andy’s forecasts and on Andy himself who is now a figure of fun even amongst those that previously cheered him.

Central bankers aren’t known as innovators or thought leaders, but Andrew Haldane, a senior official at the Bank of England, is an exception. ( Time 100)

Oh how Time magazine must wish they could redact that! But the more important point is something I have been making all along. This is a depression much more than a recession and it looks as though it is going to last much longer than some claimed. Yes we have seem bounce backs in some areas but others are plainly in a mess.

As it would have been John Lennon’s 80th birthday let me finish with this.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed



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.


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.


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.


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.


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.


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