UK GDP bounces back

Today will or depending when you read this has seen the return of something which if not an old friend is at least something familiar. From the Bank of England.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

Just as a reminder it will buy short-dated Gilts today, longs tomorrow and mediums on Wednesday, with just under £1.3 billion being reinvested each time. The large Gilt redemption may have an effect on the UK Public Finances because the £2 billion discrepancy in July that the Office for National Statistics is still unable to explain to me will be over £7 billion if we pro rata Gilt maturity size.

As to the wider QE issue the Resolution Foundation has been on the case. I have to say they start with what looks a load of rubbish to me.

First, QE works by signalling that the policy rate isn’t going to rise anytime soon, affecting longer-term interest rates which move with expectations of future movements in policy rates. Put simply, QE convinces people that policy rates are going to stay low for a long time;

That view can only come from an Ivory Tower. After all nobody seriously thinks interest-rates are going to rise anyway. They are on better ground with the portfolio rebalancing effect as we have seen rises in asset prices.

Overall they conclude this and the emphasis is mone.

There is also evidence linking QE to improvements in the economic outlook. Many of the studies listed in Table 1, as well as others, find that QE has led to falls in a broad range of interest rates, rises in other asset prices, and falls in exchange rates. In turn, economic models of different types imply that these effects boost economic growth. For example, for the UK, Churm, Joyce, Kapetanios and Theodoridis estimate that QE had a cumulative macroeconomic effect equivalent to a short-term interest rate cut of 1.5 to 3 percentage points (or around 1 per cent of GDP).

Only an imply?! Also 1% is not much frankly for all that effort and the distortions it created. To be fair they admit this issue with wealth effects for the already wealthy.

Around 40 per cent of the aggregate
boost to wealth from changes in financial asset prices, property prices, and inflation went to families in the highest wealth decile, while only 12 per cent of the benefit went
to the bottom half of the distribution.

They claim that the income distribution improved but this is essentially based on the rise in employment we have observed. It is true that we have seen that but we simply do not know what would have happened without QE so it is a Definitely Maybe.

The impact of QE on employment and wages provided a 4.3
per cent income boost to those in the bottom half of the income distribution, compared to a 3.2 per cent boost across the top half.

Also those are relative numbers so care is needed as 4.3% of not much is, well I am sure readers can figure that out for themselves.

Still some employment prospects have genuinely improved because if the authors of this report ever want to work at the Bank of England it will love this on their CV.

Monthly GDP

I have to admit that I had a wry smile when I saw the number as at the end of last week there were more than a few on social media telling us that the UK was in recession and one told me my argument that we may not be was “idiotic”.

GDP grew by 0.3% in July 2019, with all components apart from agriculture showing growth.

If we go to the breakdown we see this.

Production output rose by 0.1% between June 2019 and July 2019; manufacturing provided the largest upward contribution (0.3%),

The latter development was welcome in these times especially after what we have seen in Germany and was caused by this.

pharmaceutical products (3.8%); following two strong monthly growths……the weapons and ammunition industry, which rose by 12.1%, owing to the completion of high-value contracts.

We know that the pharmaceuticals sector has been an overall strength albeit an erratic one. We have noted this from the ammo sector before and I suspect the flow is more regular and is missmeasured. of course some will think it is not a good idea anyway.

The main player as ever was this.

The Index of Services (IoS) increased by 0.3% between June 2019 and July 2019……The administrative and support services sector made the largest contribution to this growth, contributing 0.09 percentage points.

Actually this number suggests it is running just about everything as that is pretty much our annual rate of growth.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018.

Tucked away in the detail was something of a critique though as to my mind it may explain at least some of the problems with the construction data as this was in services.

services to buildings and landscape activities, which increased by 4.0%, contributing 0.03 percentage points

More GDP Perspective

Here the news was good too as we recall where we started from.

Rolling three-month growth was flat in July 2019, following growth of negative 0.2% in Quarter 2 (Apr to June) 2019.

This time around it was all services though.

The services sector continued to show subdued growth in the three months to July 2019, growing by 0.2%.

However our official statisticians then get themselves into something of a mess by saying this.

This longer-term weakening has been most notable in “other services”, which has declined from the start of 2019.

As we saw a strong July after a weaker phase.

However, this relatively large growth for services in July follows four consecutive months of flat growth in the sector.

Whilst the numbers below are true we may just have seen a change in trend.

In the three months to July 2019, services output increased by 1.4% compared with the three months ending July 2018. This continues a weakening from the three months to April 2019 (2.1%). The growth in the three months to July 2019 was last lower in the three months to October 2013 which grew by 1.3% (was equal in April 2018).

In the end it was all services as the numbers below highlight.

For the three months to July 2019, production output decreased by 0.3%, compared with the same three months to July 2018; this was because of a fall in manufacturing of 0.7%, which was partially offset by rises from mining and quarrying (1.7%) and water and waste (0.7%).


Whilst we should welcome today’s news it does come with various perspectives. The first is that monthly GDP data needs refining and is subject to particular revision. However as it stands July was not a good month for the Markit PMI business survey which at 50.3 showed no growth at all rather than the 0.3% recorded. Also security needs to be tightened as there was a noticeable rally in the exchange rate of the UK Pound £ about 15 minutes before the official release.

Next up comes the sudden flood of research telling us that economic policy needs to be more active, for that is the gist of the Resolution Foundation report. As to monetary policy that deserves a good laugh as whilst at 1% rise in GDP is welcome it is not a lot when you consider all the efforts gone to. Frankly it makes me worry that once you throw in the side-effects such as zombie companies we may be worse off.

Lloyds Banking Group is facing an extra bill of up to £1.8bn to cover a late rush of claims for the mis-selling of Payment Protection Insurance (PPI)……..

Last week, RBS said it expected to take an additional charge of between £600m and £900m, while shares in CYBG fell sharply after it warned it could take a hit of up to £450m

Estimates suggest that the last-minute rush of claims means that banks will ultimately have set aside well over £50bn in total to pay for the PPI scandal.

Was that the 1% of GDP boost? Some of this is simply a transfer but with such large sums only a small discrepancy can be a big factor.

There is some scope for fiscal policy but everyone seems to have forgotten the long lags involved. I guess we will have to learn them all over again.







UK GDP continues to grow albeit not by much

Today brings us to what is called a theme day for the UK economy as we receive a raft of data. Too much data in fact for one day as we mull whether a latter day Sir Humphrey Appleby took the decision, especially as it is the usually poor trade data which tends to get ignored. Speaking of being ignored then one set of eyes at least seem to be elsewhere at the moment. From Euronews.

Germany and France agreed some time ago to support Bank of England Governor Mark Carney to be the new head of the International Monetary Fund, the Frankfurter Allgemeine Zeitung reported on Tuesday.


Without citing a source, the daily said Berlin and Paris had originally agreed to support Carney with a view to him taking over at the IMF in 2021, but this had been moved forward due to incumbent IMF chief Christine Lagarde’s forthcoming move to the European Central Bank and Carney was available from January.


A French official said at the weekend that, while France was aware support was growing for the Canadian-British-Irish citizen, there was concern that appointing “basically a Canadian” would set a precedent for a job that has traditionally been held by a European.

Regular readers will be aware that I have long argued that this has been Governor Carney’s plan all along. The Bank of England job was a mere stepping stone on the way to greater things, from his point of view. I also note that he is now being described as a Canadian-British-Irish which makes me think that either he could find no French ancestry or that it has gone out of fashion at the IMF. Oh and the story has been officially denied this morning which pretty much nails it as true.

Meanwhile fans of the science fiction series The Outer Limits will enjoy the new economics version that Nomura seem to be running.

Nomura pushes back next BoE rate hike forecast to May 2020 from Nov 2019… ( @BruceReuters )

The UK Pound £

This has been depreciating since the 3rd of May when the effective or trade-weighted index was 79.8 as opposed to the latest 75.9. So the UK economy has been seeing something of a boost which is equivalent according to the old Bank of England rule of thumb to just under a 0.75% cut in Bank Rate.

So if Governor Carney believed his own Forward Guidance he could raise interest-rates in response to 1% and still have an economic boost from the currency decline.


The news was good if we allow for the fact that we are in troubled times.

Monthly gross domestic product (GDP) growth was 0.3% in May 2019, following negative growth in April 2019……UK GDP grew by 0.3% in the three months to May 2019.

Actually the 0.3% theme continued as both UK Production and Services grew by that in the three months to May. Construction was the odd one out as it did not grow at all which does coincide to some extent with my Battersea Dogs Home to Vauxhall crane count which after peaking at 49 from a start of 25 has dipped back to 47.

There were a couple of points of detail in the numbers so let me start with the month of May.

Within manufacturing over half of the subsectors fell, so overall growth is due to transport equipment, which rose by 12.4%; this is the strongest rise since April 2005 and is a partial bounceback from the fall of 13.8% during April 2019.

Thus on a monthly basis we are boosted by the sector which is in recession as we mull the shambles of the Brexit deadline which came at the end of May in more ways than one. Also it is a sector which has seen some good news since those figures. From the BBC yesterday.

BMW has given a boost to the UK car industry by confirming that the production of its new electric Mini will start in Cowley in November.

Deliveries of the brand’s first fully electric car will start in March 2020.

This adds to the boost provided by Jaguar Land Rover last week.

Jaguar Land Rover (JLR) is investing hundreds of millions of pounds to build a range of electric vehicles at its Castle Bromwich plant in Birmingham.

Initially the plant will produce an electric version of the Jaguar XJ.

So it is an ever-changing picture which perhaps some hopes looking ahead after what has been a rough run. Oh and we sometimes discuss robots as we find out where more than a few are.

The state-of-the art automated Cowley plant has more than 1,000 robots on the assembly line

Moving to the latest three monthly data there was this in the report on the services sector.

The financial and insurance activities sector fell again in the latest three months; it decreased by 0.7% and contributed negative 0.06 percentage points. This sector has not seen positive growth since the three months to April 2017, the longest period on record without a rise.

This is something that may attract the attention of the Bank of England where the concept of “The Precious” shrinking for two years in a row will set off an alarm or two. Of course that is before this week’s news of job losses at Deutsche Bank London which will further depress the numbers which already reduced GDP by 0.05%.

Oh and it would appear that the film industry continues to be on something of a tear in the UK.

The information and communication sector also saw a large rise in the latest three months. The sector increased by 1.1% and contributed 0.09 percentage points. There was widespread growth within the sector, with the motion pictures, information services activities and computer programming industries all contributing to the rise.

If we look at the specific category which includes TV and music we see that the index which was set at 100 in 2016 is at 139.4 and it grew by 6.4% in the year to May. So please be nice to any luvvies you may meet!


There was some better news here.

The total trade deficit (goods and services) narrowed £4.6 billion to £12.6 billion in the three months to May 2019, due mainly to the trade in goods deficit narrowing £4.6 billion to £39.7 billion.

I mean better news in relative terms because switching to an absolute theme we saw another deficit in what is an extremely long-running series. Part of it was due to likely stockpiling to cover the March Brexit deadline.

Falling imports of machinery and transport equipment, and chemicals were the main drivers in the narrowing of the trade in goods deficit in the three months to May 2019.

It is time for my regular reminder that we get lots of detail on trade in good including sectoral and geographical detail but for services we get this.

The trade in services surplus remained flat at £27.1 billion in the three months to May 2019. Exports of services increased £0.4 billion to £74.0 billion, while imports also increased £0.4 billion to £46.9 billion.

Er that’s it…..


So it turns out that May was not too bad which is a bit awkward for the Markit PMI which at 50.7 suggested no growth. We wait to see of they were right about this.

The June reading rounds off a second quarter for which the
surveys point to a 0.1% contraction of GDP.

Today’s March revision from -0.1% to 0.1% reminds us that the numbers are however not as accurate as many try to have us believe.

So the picture is complex and going forwards we will be receiving a boost from two factors. The first is the lower value of the UK Pound £ and the second is the impact of lower Gilt yields. They have rebounded from the lows but even so the ten-year Gilt yield is the same as the 0.75% Bank Rate. I do expect this to filter into mortgages although the effect so far has been disappointing. From Mortgage Introducer about Barclays.

For residential purchases and remortgages a 2-year fix at 60% loan-to-value (LTV) with a £299 fee will see its rate cut from 1.59% to 1.55%

At 75% LTV two mortgages, both with a £999 fee, will have their rates reduced, a 1.52% 2-year fix will decrease to 1.48% and a 1.88% 5-year fix will be cut to 1.83%.

Along the way I spotted a what could go wrong moment?

Danny Belton, head of lender relationships, Legal & General Mortgage Club, said: “The Kensington of today has a refreshing approach when it comes to understanding customers.

“Through this new lens, and with the use of data, they are able to offer great products that really meet the needs of those customers who want to borrow larger amounts and higher LTVs.

UK manufacturing surges as we see some Mervyn King style “rebalancing”

Today brings a torrent of UK economic data bringing us up to the end of the first quarter of this year. Actually this particular “theme day” provides too many numbers and data points to be analysed in one go and is another in a sadly long list of examples of our national statisticians barking up the wrong tree. Moving to the numbers themselves this morning’s news has already unwittingly provided its own critique. From the BBC.

A replacement for how Britain’s emergency services communicate is set to go over budget by at least £3.1bn, a spending watchdog has warned.

The Home Office has already delayed switching off the existing system by three years to 2022.

But the National Audit Office (NAO) has raised doubts about whether the project will be ready by then

We observe another in a growing list of IT infrastructure projects for the NHS which are both late and way over budget. The track record is so poor that we may end up being grateful it works at all, assuming it does. But here is the GDP link because that extra £3.1 billion is likely to go straight to the future UK GDP bottom line in an example of us being worse off but it being recorded as a gain. That is the problem with using a measure which counts spending as an automatic gain rather than a type of inflation.

On a more technical level I looked at the area of the public-sector and GDP a few years back when I provided some technical advice to Pete Comley for his book on inflation. He had investigated the deflator ( inflation measure) used for GDP in the public-sector and found it to have more holes than a Swiss cheese.


This week has seen some extraordinary progress into the Champions League and Europa League finals but what is it worth in economic terms? @SwissRamble has produced some estimates.

Due to the significant increase (around 50%) in Champions League revenue in 2018/19, all English clubs will earn much more than prior season (2017/18 comparatives in brackets). As it stands:

€107m (€81m)

€102m (€61m)

€93m (€64m)

€93m (€40m)

As you can see it was a good year to do well as there is much more money in it and for those of you wondering why Liverpool and Spurs have not done much better than the two Manchester clubs it is because Manchester City got more out of the TV pool and because of  a coefficient based on the last 10 years.

On this basis, English clubs received following payments: €31m, €24m, €23m and €16m.

Mind you with the inflation in the price of players that total represents what you might pay for a world-class one. As a Chelsea fan I await the Europa League update with particular enthusiasm.

Today’s Data

Former Bank of England Governor Baron King of Lothbury must be very disappointed that he missed an opportunity to shout “rebalancing” from the rooftops as we were told this in the GDP report.

driven by growth of 2.2% in manufacturing output.

If we look for some detail we see this.

The quarterly increase of 2.2% in manufacturing is due mainly to rises of 9.4% from pharmaceuticals, 2.7% from food products, beverages and tobacco, and 3.2% from metals and metal products.

The first sector is hard to read because we know form past research that the UK pharmaceutical sector has erratic output levels that do not conform to monthly and sometimes quarterly timetables. As to the others I guess maybe nicotine addicts were stockpiling against the horrible fear of going cold-turkey!

Returning to the GDP numbers we see that production gave it a tug upwards.

Production output rose by 1.4% in Quarter 1 (Jan to Mar) 2019, compared with Quarter 4 (Oct to Dec) 2018, due to rises from manufacturing, and mining and quarrying.

There was a minor curiosity in this as we wonder who was getting ready for war?

basic metals and metal products (3.2%), driven by monthly strength during January 2019 from the weapons and ammunition subindustry, which increased by 25.5%.

Continuing our rebalancing journey the usual suspect for UK economic growth was taking something of a breather.

Growth in the services sector slowed to 0.3% in the latest quarter,

The slow down was particularly marked in these areas.

Professional, scientific and technical activities fell by 0.6% in Quarter 1 2019. However, this decrease broadly reflects a fallback following particularly strong growth throughout the second half of 2018. In addition, financial and insurance services output continued to fall in Quarter 1 2019, decreasing by 0.4%. The quarterly fall predominantly reflected a fall in financial service activities, which has not contributed positively to growth since Quarter 1 2017.

Moving to the headline number there was some good news.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.5% in Quarter 1 (Jan to Mar) 2019 having slowed to 0.2% growth in the previous quarter.

If we take this in round numbers terms we see that a combination of production and construction which rose by 1% pulled us up from 0.3% growth to 0.5%. Just addressing the construction numbers they do seem to coincide with my Battersea Dogs Home to Vauxhall crane count of 49 but the official series remains troubled.

The annual picture improved too.

In comparison with the same quarter a year ago UK GDP increased by 1.8% to Quarter 1 (Jan to Mar) 2019; up from 1.4% in the previous period.

This all happened in spite of this.

Monthly GDP growth was negative 0.1% in March 2019, as the services and construction sectors contracted.


This is a more complex issue than some would like to think and indeed have already claimed. Let me illustrate by opening with this.

Breakdown of Q1 suggests stockbuilding added 0.7 percentage points (pp) to quarterly growth, but note that net trade – including the imports being stockpiled -subtracted 0.6pp (excl. volatile components). ( @JulianHJessop)

As you can see the lazy response is to look at the stockbuilding adding to GDP forgetting that a lot of it was probably imported.


Our usual problem was added to by the increase in imports and thus turned into quite a subtraction from the numbers.

The total trade deficit (goods and services) widened £8.9 billion to £18.3 billion in the three months to March 2019, as the trade in goods deficit widened £6.4 billion to £43.3 billion and the trade in services surplus narrowed £2.5 billion to £25.0 billion.

There are several issues with this. As I regularly point out we have very little idea of our services trade data which tends to be fleshed out a year or two after the event. Also the fact we are large custodians of and traders in gold makes discerning the true trade position even more complex.

Excluding erratic commodities, such as non-monetary gold, the total trade deficit increased £3.1 billion to £14.5 billion in the three months to March 2019.


These numbers especially the pick-up in the annual rate of GDP growth are good news for the UK. There are of course issues looking ahead and one of them seems set to be in the headlines today as the Chinese arrive to meet President Trump. The news looks bad but was there a reason why the Chinese stock market rose by more than 3% today?

Moving back to GDP then a couple of media establishment themes took a knock from the GDP breakdown. Let me start with business investment.

Following four consecutive quarters of decline throughout 2018, business investment grew by 0.5% in the first quarter of 2019, driven by higher investment in IT equipment and other machinery and equipment.

The wider concept of investment provided more food for thought.

Gross fixed capital formation (GFCF) increased by 2.1% in the first three months of 2019

And as for austerity?

Government consumption increased by 1.4% in Quarter 1 2019, following growth of 1.3% in Quarter 4 (Oct to Dec) 2018.

Pump-priming? Well they were at play in the investment ( GFCF) numbers too.

mainly reflecting the 8.1% increase in general government investment.

So perhaps the Rolling Stones summed it all up some years ago.

You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes you might find
You get what you need




Manufacturing and Production help to drive UK GDP growth

Today brings us up to date with the latest monthly data on the UK economy. the problem with this is as I feared that the numbers are in practice rather erratic.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018.

Actually December recorded a -0.4% GDP growth rate so if you take the figures literally there was quite a wild swing. More likely is that some industries do not conform to a regular monthly pattern in the way we have seen the UK pharmaceutical industry grow overall but with a boom and bust pattern on a monthly basis.

There are areas where we see two patterns at once in the UK economy. For example Tesco has produced good figures already this morning.

Tesco has reported a 28.8% rise in full-year pre-tax profits to £1.67bn with revenue at the supermarket rising 11.2% to £63.9bn ( Sky News)

On the other hand this week has already seen this.

Ailing department store chain Debenhams has been rescued by its lenders after falling into administration.

Three years ago, the 166-strong chain was worth £900m, compared with £20m as of this week. ( BBC News)

Sadly the BBC analysis seems to avoid this issue highlighted by the Financial Times.

Debenhams troubles stem partly from a period of private equity ownership at the start of the millennium, when CVC, Merrill Lynch and TPG sold off freehold property, added debts and paid themselves large dividends.

It looks a case of asset-stripping and greed followed by over expansion which was then hit by nimbler retailers and the switch to online sales. Without the asset-stripping it would be still with us. Meanwhile the BBC analysis concentrates on Mike Ashley who put up £150 million and offered an alternative. I am no great fan of his business model with its low wages and pressure on staff but he does at least have one.


Speaking of wages there are several strands in the news so let us start with the rather aptly named Mr. Conn.

The chief executive of Centrica, the owner of British Gas, received a 44% pay rise for 2018, despite a difficult year in which the company imposed two bill increases, warned on profits and announced thousands of job cuts.

Iain Conn received a total pay package worth £2.4m last year, up from £1.7m in 2017, according to Centrica’s annual report. His 2018 packet was bolstered by two bonuses, each worth £388,000.  ( The Guardian )

Yet on the other side of the ledger we see things like this. From The Guardian.

Waterstones staff told how they have had to back on food in order to afford rent as they travelled across the country to deliver a 9,300-signature petition to the chain’s London headquarters, calling for the introduction of a living wage.

Mind you we seem to be making progress in one area at least.

Golden goodbyes for public sector workers will be capped at £95,000 in a clamp down on excessive exit payments, the government has confirmed. ( City-AM)

Although I note that it is something planned rather than already done, so the modern-day version of Sir Humphrey Appleby will be doing his or her best to thwart this. Here is his description of the 7 point plan to deal with such matters.

This strategy has never failed us yet. Since our colleagues in the Treasury have already persuaded the Chancellor to spin the process out until 2008, we can be sure that, by then, there will be a new chancellor, a new prime minister and, quite possibly, a new government. At that point, the whole squalid business can be swept under the carpet. Until next time.

As for payoffs it is the ones for those at the top who are quite often switching jobs which need to stop as often it is merely a name change of their employer.

Today’s GDP data

This was good in the circumstances.

Monthly GDP growth was 0.2% in February 2019, after contracting by 0.3% in December 2018 and growing by 0.5% in January 2019. January growths for production, manufacturing, and construction have all been upwardly revised due to late survey returns.

As you can see December was revised up as was January although not enough in January to raise it by 0.1%. But it is an erratic series so let us step back for some perspective.

UK gross domestic product (GDP) grew by 0.3% in the three months to February 2019

Whilst we do not yet have the March data regular readers may recall that the first quarter in the UK ( and in the US at times) can be weak so this is better than it may first appear.

As ever services were in the van as we continue to rebalance in exactly the opposite direction to that proclaimed by the former Bank of England Governor Baron King of Lothbury.

The services sector was the largest contributor to rolling three-month growth, expanding by 0.4% in the three months to February 2019. The production sector had a small positive contribution, growing by 0.2%. However, the construction sector contracted by 0.6%, resulting in a small negative contribution to GDP growth.

Inside its structure this has been in the van.

The largest contributor to growth was computer programming, which has performed strongly in recent months.


Thanks to the business live section of the Guardian for reproducing this from my twitter feed.

One possible hint is that production numbers for Italy and France earlier have been strongish, will the UK be the same?

It turned out that this was so.

Production output rose by 0.6% between January 2019 and February 2019; the manufacturing sector provided the largest upward contribution, rising by 0.9%, its second consecutive monthly rise……In February 2019, the monthly increase in manufacturing output was due to rises in 11 of the 13 subsectors and follows a 1.1% rise in January 2019; the largest upward contribution came from basic metals, which rose by 1.6%.

In the detail was something I noted earlier as pharmaceutical production was up by 2.5% in the last 3 months which put it 4.3% higher than a year ago in spite of a 0.1% fall in February.

But whilst this was a welcome development for February the overall picture has not been of cheer in the credit crunch era.

Production and manufacturing output have risen since then but remain 6.1% and 1.9% lower respectively for the three months to February 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Things have been singing along with The Beatles since late 2012.

I have to admit it’s getting better (Better)
It’s getting better

but overall we are left mulling the John Lennon counter at the end of this line.

A little better all the time (It can’t get no worse)


This morning’s numbers were strong in the circumstances and confirm again my theme that we are growing at around 0.3/4% per quarter. Yet again the prediction in the Sunday Times that there would be no growth turned out to be a reliable reverse indicator. Of course there are fears for March after the Markit PMI business survey so as ever we await more detail.

As to stockpiling this has become an awkward beast because I see it being put as the reason for the growth, although if so why did those claiming this not predict it. Anyway I have done a small online survey of what people have been stockpiling.

Okay inspired by and her stockpiling of Scottish water we have from paracetamol for her dad for scare stories and dog has been burying treats

Meanwhile one area which has been troubled for many years continues to rumble on.

The total trade deficit (goods and services) widened £5.5 billion in the three months to February 2019, as the trade in goods deficit widened £6.5 billion, partially offset by a £0.9 billion widening of the trade in services surplus.

Perhaps there was some stockpiling going on there although as any departure from the European Union seems to be at Northern Rail speed those stockpiling may now be wondering why they did it?



The UK productivity puzzle is mostly a result of outdated economics and statistics

Today has brought us two flashes of indirect insight on the issue of productivity and what has become called the productivity puzzle. In case you are wondered what that is here is the OECD from August last year.

Since the start of the Great Recession, labour productivity growth has been weak in the United Kingdom, weaker than in many other OECD countries. The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, was nearly 20% for output per hour at the end of 2016.

I am dubious about measures which use the bubbilicious boom for their trend but Ivory Towers love that. Also there is clearly an issue to consider and the OECD had a go at a breakdown.

Most of the UK productivity underperformance is structural rather than cyclical. Half of the productivity shortfall is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction.

Clearly the 5% productivity shortfall explained by the financial sector needs a much more thorough investigation as the ongoing weak state of the banks is due to the fact that their position was over reported on the pre crisis boom and thus so was productivity. Or as the OECD put it.

its steep increases in the run-up to the crisis.

But they do at least manage a minor swipe at the Zombie business era that has been supported by central bank QE.

weak corporate restructuring have both held back productivity improvements in the manufacturing sector.

Output Gap

Economic theory has had a real problem with this and let me give an example from Japan this morning. The Ivory Towers will tell you that wages should be soaring due to a tight labour market with unemployment at 2.3% and a number of jobs to applicants at a more than forty-year high. Meanwhile back on Earth.

Labour cash earnings dropped 0.8 per cent from a year ago, the ministry reported on Friday, compared with projections for them to advance 0.9 per cent. The reading for January was revised down to -0.6 per cent from 1.2 per cent………..

Real wages, which are adjusted for inflation, fell 1.1 per cent, compared with economists’ median forecast of 0.8 per cent.

The real wages figure for January was revised down to -0.7 per cent from 1.1 per cent. ( Business Times)

As you can see the output gap theory has had another complete failure as wages have failed to increase. This makes us mull productivity which is supposed to be strongly linked to wage growth and real wage growth especially. Also I am afraid we have another problem with official statistics as there has been a major revision after clear flaws were discovered such as only a third of the businesses in Tokyo with over 500 employees that were claimed to be sampled actually were. That adds to the problems seen elsewhere with official Japanese data such as the GDP numbers which is completely the opposite of stereotypes.

UK House Prices

These are beginning to offer a more hopeful perspective. The reason why I argue this is that in my opinion way too much economic effort in the UK has gone towards the housing sector where in many areas substantial capital gains have been available via owning a house. This led for quite some time to the boom in the buy-to-let sector and took both investment, attention and effort from other parts of the economy. This was fed by the various “Help To Buy” policies of the government and the multitude of efforts by the Bank of England to reduce mortgage rates and raise mortgage lending to get house prices higher.

Thus the numbers from the Halifax this morning are welcome as they show that things have slowed down.

The average UK house price is now £233,181 following a 1.6% monthly fall in March…….The more stable measure of annual house price growth rose slightly to 3.2% and is still within our expectation for the year.

You need to go through their numbers carefully to get to that as the monthly UK house prices series of the Halifax has become very erratic and has now gone 2.5%, -3% ,6% and now -1.6%. We thought the 5.9% rise in February was extraordinary at the time yet we now discover it was 6%! If we look at March compared to a year ago we see that there has been a 2.4% rise which seems to reflect better the numbers we get from elsewhere.

As to the overall reliability of the Halifax data well let me quote anteos who commented on the last set of numbers from them as follows.

So, just as the annual indicie was heading towards negative territory, up comes a 5.9% increase.
Very similar to Decembers figures which were then reversed the following month. If I was a betting man, a big negative value will pop up next month.


Productivity Data

There was something of an irony as I searched for the update here.

404 – The webpage you are requesting does not exist on the site

That was not entirely hopeful for productivity as the UK Office for National Statistics and leads into the official enquiry into out data which is ongoing. Sadly the leadership seem lost in a world of click bait and telling us that tractor production is rising. When we got the numbers they posed another problem.

Labour productivity for Quarter 4 (Oct to Dec) 2018, as measured by output per hour, decreased by 0.1% compared with the same quarter a year ago; this is the second successive quarterly fall following the decrease of 0.2% seen for the previous quarter.

If we look back it is the fall in the third quarter which is the most concerning as GDP growth was particularly strong at 0.7%. For the year just gone we had some growth but not much.

In 2018, labour productivity measured as output per hour grew by 0.5% compared with the previous year, with increases in both services and manufacturing of 0.8% and 0.3% respectively.

This meant that the overall picture in the credit crunch era is this.

Labour productivity increased by 0.3% in Quarter 4 2018 compared with the previous quarter. This increase left productivity 2.0% above its pre-downturn peak in Quarter 4 2007,

So not much allowing us to update the OECD style analysis above.

Productivity in Quarter 4 (Oct to Dec) 2018, as measured by output per hour, was 18.3% below its pre-downturn trend – or, equivalently, productivity would have been 22.5% higher had it followed this pre-downturn trend.


The first problem with the productivity puzzle is whether we can measure it with any degree of accuracy. As we have seen from the Japanese wages and UK house price data above both official and private-sector data have serious issues. This spreads wider and in my opinion is highlighted by this.

In Q4, public service productivity increased by 0.8% on the previous quarter, driven by unusually strong growth in output (1.3%)

It is my opinion that we have very little idea about public sector output and therefore even less about its productivity. Also there are areas we might not always be keen on higher productivity. Returning to the numbers I helped Pete Comley with some technical advice when he wrote his book on inflation and here is what he discovered about the government sector.

The upshot of that review is that estimates inflation on government expenditure no longer use real cost inflation (like wage increases, rises in raw materials costs, etc.) but instead use measures of quality (such as the number of GCSE grades A-C) to calculate the deflator.

So that is a mess.

Also there is a clear problem with the concept of productivity in the services sector. This is because we are often measuring intangible things rather than the tangible of manufacturing. The extraordinary changes for example in the world of information and communications are mostly only captured if there is a price change. I note the paper from Diane Coyle and others that suggested even these were wrong and the situation was much better ( lower prices and higher output). Also I have pointed out before as well as giving evidence to the Sir Charles Bean enquiry, that the UK trade release has at most a couple of pages on services out of the 30 or so with no geographical or sectoral breakdown. This matters even more as we rebalance towards services with growth in the index of services some 21% over the past decade.

Also there has been a shift towards self-employment which makes the numbers less reliable as we know even less about that area.

Finally it would be nice for us to get some capital productivity figures to compare with the labour ones.

Me on The Investing Channel




UK GDP growth was strong in January meaning we continue to rebalance towards services

This will be an interesting day on the political front but there is also much to consider on the economic one. We have a stronger UK Pound £ this morning with it above US $1.32 and 1.17 versus the Euro which as usual on such days has been accompanied by the currency ticker on Sky News disappearing. We also heard yesterday from the newest member of the Bank of England Monetary Policy Committee Jonathan Haskel. As it has taken him six months to give one public speech I was hoping for a good one as well as wondering if he might have the cheek to lecture the rest of us on productivity?! So what did we get.

Very early there was an “I agree with Mark (Carney)” as I note this.

see for example speeches by (Carney, 2019) and (Vlieghe, 2019)

The subject was business investment which in the circumstances also had Jonathan tiptoeing around the political world but let us avoid that as much as we can and stick to the economics.

First, as has been widely noted, UK investment has been very weak in the last couple of years, especially
during the last year, see for example speeches by (Carney, 2019) and (Vlieghe, 2019) suggesting that Brexit
uncertainty is weighing on business investment. Second, looking at the assets that make up investment
reveals some interesting patterns: transport equipment has been particularly weak, but intellectual property
products (R&D, software, artistic originals) were somewhat stronger. Third, regarding Brexit, as Sir Ivan
Rogers, the UK’s former representative to the EU, has said (Rogers, 2018), “Brexit is a process not an
event”. That process has the possibility of creating more cliff-edges; the length of the
transitional/implementation period, for example. Since the nature of investment is that it needs payback
over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to
weigh down on investment.

The issue of business investment is that it has been the one area which has been consistently weak since the EU Leave vote. How big a deal is it?

To fix ideas, Table 1 contains nominal investment
in the UK for 2018. As the top line sets out, it was close
to £360bn. Remembering that nominal GDP is £2.1 trillion, this is around 17% of GDP.

Regular readers will know I am troubled as to how investment is defined and to be fair to Jonathan he does point that out. However this is also classic Ivory Tower thinking which imposes an economic model on a reality which is unknown. Have we see a high degree of uncertainty? Yes and that has clearly impacted on investment but what we do not know is how much will return under the various alternatives ahead. Though from the implications of Jonathan’s thoughts the Forward Guidance of interest-rate increases seems rather inappropriate to say the least.

Raghuram Rajan

There has been a curious intervention today by the former head of the Reserve Bank of India. He has told the BBC this.

“I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism,” he told the BBC.

The problem is that a fair bit of that has been driven by central bankers with policies which boost asset prices and hence the already wealthy especially the 0.01%.

The UK economy

The opening piece of official data today was very strong.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018. Services, production, manufacturing and construction all experienced positive month-on-month growth in January 2019 after contracting in December 2018.

Production data has been in the news as it has internationally slowed so let us dip into that report as well.

Production output rose by 0.6% between December 2018 and January 2019; the manufacturing sector provided the largest upward contribution, rising by 0.8%, its first monthly rise since June 2018……In January 2019, the monthly increase in manufacturing output was due to rises in 8 of the 13 subsectors and follows a 0.7% fall in December 2018; the largest upward contribution came from pharmaceuticals, which rose by 5.7%.

We had been wondering when the erratic pharmaceutical sector would give us another boost and it looks like that was in play during January. For newer readers its cycle is clearly not monthly and whilst it has grown and been a strength of the UK economy it is sensible to even out the peaks and troughs. But in the circumstances the overall figure for January was good.

Some Perspective

This is provided by the quarterly data as whilst the January data was nice we need to recall that December was -0.4% in GDP terms. The -0.4% followed by a 0.5% rise is rather eloquent about the issues around monthly GDP so I will leave that there and look at the quarterly data.

Rolling three-month growth was 0.2% in January 2019, the same growth rate as in December 2018.

This seems to be working better and is at least more consistent not only with its own pattern but with evidence we have from elsewhere.Also there is a familiar bass line to it.

Rolling three-month growth in the services sector was 0.5% in January 2019. The main contributor to this was wholesale and retail trade, with growth of 1.1%. This was driven mostly by wholesale trade.

This shows that we continue to pivot towards the services sector as it grows faster than the overall economy and in this instance it grew whilst other parts shrank exacerbating the rebalancing.

Production output fell by 0.8% in the three months to January 2019, compared with the three months to October 2018, due to falls in three main sectors……The three-monthly decrease of 0.7% in manufacturing is due mainly to large falls of 4.0% from basic metals and metal products and 2.0% from transport equipment.

Continuing the rebalancing theme we have seen this throughout the credit crunch era as essentially the growth we have seen has come from the services sector.

Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively for the three months to January 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Overall construction has helped also I think but the redesignation of the official construction data as a National Statistic  after over 4 years is an indication of the problems we have seen here. Accordingly our knowledge is incomplete to say the least.

Returning to the production data this was sadly no surprise.

Within transport equipment, weakness is driven by a 4.0% fall in the motor vehicles, trailers and semi-trailers sub-industry.

Also I will let you decide for yourselves whether this monthly change is good or bad as it has features of both.

 was a 17.4% rise for weapons and ammunition, the strongest rise since March 2017, when it rose by 25.7%.


We arrive at what may be a political crossroads with the UK economy having slowed but still growing albeit at a slow rate. There is something of an irony in us now growing at a similar rate to the Euro area although if we look back we see that over the past half-year or so we have done better. That was essentially the third quarter of last year when Euro area GDP growth fell to 0.1% whereas the UK saw 0.6%.

If we look back over the last decade or so it is hard not to have a wry smile at the “rebalancing” rhetoric of former Bank of England Governor Baron King of Lothbury who if we look at it through the lens of the film Ghostbusters seems to have crossed the streams. Speaking of such concepts there was a familiar issue today.

The total trade deficit (goods and services) widened £1.3 billion in the three months to January 2019, as the trade in goods deficit widened £2.4 billion, partially offset by a £1.1 billion widening of the trade in services surplus.

Although we got a clue to a major issue here as we note this too.

Revisions resulted in a £0.8 billion narrowing of the total trade deficit in Quarter 4 (Oct to Dec) 2018, due largely to upward revisions to the trade in services surplus.

So in fact we only did a little worse than what we thought we had done at the end of last year. Also one of my main themes about us measuring services trade in a shabby fashion is highlighted yet again as the numbers were revised down and now back up a bit.

In Quarter 4 2018 the trade in services balance contributed £1.1 billion to the upward revision of £0.8 billion in the total trade balance as exports and imports were revised up by £3.3 billion and £2.3 billion respectively.

Pretty much the same ( larger though) happened to the third quarter as regular readers mull something I raised at the (Sir Charlie) Bean Review. This was the lack of detail about services trade. I got some fine words back but note today’s report has a lot of detail about goods trade in 2018 but absolutely none on services.



UK GDP had a relatively good second half of 2018 but a weak December

Today brings a raft of UK economic data as we look at economic growth ( GDP), trade, production (including manufacturing) and construction data. The good news is that we now take an extra fortnight or so to produce the numbers which are therefore more soundly based on actual rather than estimated numbers especially for the last month in the quarter. The not so good news is that I think that adding monthly GDP numbers adds as much confusion as it helps. Also we get too much on this day meaning that important points can be missed, which of course may be the point Yes Prime Minister style.

The scene has been set to some extent this morning by a speech from Luis de Guindos of the ECB.

Euro area data have been weaker than expected in recent months. In fact, industrial production growth fell in the second half of 2018 and the decline was widespread across sectors and most major economies. Business investment weakened. On the external side, euro area trade disappointed, with noticeable declines in net exports.

Whilst that is of course for the Euro area the UK has been affected as well by a change in direction for production. This is especially troubling as in January we were told this.

Production and manufacturing output have risen since then but remain 6.5% and 2.0% lower, respectively, in the three months to November 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

It had looked like we might get back to the previous peak for manufacturing but like a Northern rail train things at best are delayed. Production has got nowhere near. There have been positive shifts in it as efficiencies mean we need less electricity production but even so it is not a happy picture.

Gilt Yields

Readers will be aware that I have been pointing out for a while how cheap it is for the UK government and taxpayers to borrow and a ten-year Gilt yield of 1.17% backs that up. A factor in this is the weak economic outlook and another is expectations of more bond buying from the Bank of England. The possibility of the later got more likely at the end of last week as rumours began to circulate of a U-Turn from the US Federal Reserve in this area. Or a possible firing up of what would be called QE4 and perhaps QE to infinity.

The Financial Times has caught up with this to some extent.

Investors’ waning expectations of future rises in interest rates are giving a lift to the UK government bond market.

They note that foreign buyers seem to have returned which is awkward for the FT’s cote view to say the least. Also as we look back to the retirement of Bill Gross his idea that UK Gilts were on a “bed of nitroglycerine” was about as successful as Chelsea’s defence yesterday.Anyway I think it steals the thunder from today’s Institute of Fiscal Studies report.

If the coming spending review is to end austerity Chancellor will need to find extra billions.

I am not saying we should borrow more simply that we could and that we seem keener on borrowing when it is more expensive. The IFS do refer to borrowing costs half way through their report but that relies on people reading that far. They also offered a little insight between economic growth and borrowing.

A downgrade of GDP of 0.5% would reduce annual GDP by around £10 billion and a rule-of-thumb suggests it would add between around £5 billion and £7 billion to the deficit.

Economic growth

The headline was not too bad but it did come with a worrying kicker.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 3 (July to Sept) 2018 and Quarter 4 (Oct to Dec) 2018; the quarterly path of GDP through 2018 remains unrevised.

There were concerns about the third quarter being affected by a downwards revision to trade data but apparently not via the magic of the annual accounts. Bur even so it was far from a stellar year.

GDP growth was estimated to have slowed to 1.4% between 2017 and 2018, the weakest it has been since 2009…….Compared with the same quarter in the previous year, the UK economy is estimated to have grown by 1.3%.

We shifted even more to being a services economy as it on its own provided some 0.35% of GDP growth meaning that production and construction declined bring us back to 0.2%.

The worrying kicker was this.

Month-on-month gross domestic product (GDP) growth was 0.2% in October and November 2018. However, monthly growth contracted by 0.4% in December 2018 . The last time that services, production and construction all fell on the month was September 2012.

I have little faith in the specific accuracy of the monthly data but it does seem clear that there was a weakening in December and it was widespread. Even the services sector saw a decline ( -0.2%) and the production decline accelerated to -0.5%. Construction fell by 2.8% but that has been a series in which we have least faith of all.


We learn from the monthly GDP data that steel and car production had weak December’s which helped lead to this.

Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%.

Although the detail in this section gives a different emphasis.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

We have learnt over time that the pharmaceutical sector swings around quite wildly ( although not as much as seemingly in Ireland last month) so that may swing back. Also production was pulled lower by the warmer weather but continuing that theme there is a chill wind blowing for this sector none the less.

If we switch to a wider perspective it seems that the worldwide economic slowing is leading to a few crutches being used.

 underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products.


The theme here is of the good, the bad and the ugly. Where the good is the way that the UK outperformed its European peers in the second half of 2018 after underperforming in the first half. The bad is the decline in the quarterly economic growth rate from 0.6% to 0.2%. Lastly the ugly is the plunge in December assuming that the data is reliable. We were never likely to escape the chill economic winds blowing in the production sector and need to cross our fingers about the impact on services. My theme that we are ever more rebalancing towards services continues in spite of the rhetoric of former Bank of England Governor Baron King of Lothbury.

Meanwhile we continue to have a balance of payment deficit.

The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Exactly how much is hard to say as I have little faith in the services estimates. But with economic growth as it is let me leave you with some presumably unintentional humour from the Bank of England.

The Committee judges that, were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

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