As UK house price growth fades so has the economy

Today has opened with news that is in tune with my expectations for 2017. This is my view that house price growth will slow and that it may also go negative. Such an event would make a change in the UK’s inflation dynamics as that would mean that official consumer inflation would exceed asset or house price inflation and of course would send a chill down the spine of the Bank of England. Here is the Royal Institute of Chartered Surveyors.

The headline price growth gauge slipped from +7% to +1% (suggesting prices were unchanged over the period), representing the softest reading since early 2013.

The date will echo around the walls of the Bank of England as its house price push or Funding for Lending Scheme began in the summer of 2013. Also the immediate prospects look none too bright.

Looking ahead, near term price expectations continue to signal a flat trend over the coming three months at the headline level……..Going forward, respondents are not anticipating activity in the sales market to gain impetus at this point in time, with both three and twelve month expectations series virtually flat.

Actually flat lining on a national scale conceals that there are quite a few regional changes going on.

house prices remain quite firmly on an upward trend in some areas, led by Northern Ireland, the West Midlands and the South West. By way of contrast, prices continue to fall in London…….. the price balance for the South East of England fell further into negative territory, posting the weakest reading for this part of the country since 2011.

We see that price falls are spreading out from our leading indicator of London and wait to see how they ripple out. Northern Ireland is no doubt being influenced by the house price rises south of the border. A cautionary note is that this survey tends to be weighted towards higher house prices and hence London.

The Real Economy

Let us open with the good news which has come from this morning’s production figures.

In June 2017, total production was estimated to have increased by 0.5% compared with May 2017, due mainly to a rise of 4.1% in mining and quarrying as a result of higher oil and gas production.

It is hard not to have a wry smile at the fact that something that was supposed to be fading away has boosted the numbers! Of the 0.52% increase some 0.51% was due to it and as well as the impact of a lighter maintenance cycle there was some hopeful news.

In addition, use of the re-developed Schiehallion oil field and use of the new Kraken oil field are contributing to the increase in oil production. Both are expected to increase UK Continental Shelf (UKCS) production over the longer-term.

If we move to manufacturing then the position was flat as a pancake.

Manufacturing monthly growth was flat in June 2017.

However this concealed quite a shift in the detail as we already knew that there has been a slow down in car and vehicle production.

Transport equipment provided the largest downward contribution, falling by 3.6% due mainly to a 6.7% fall in the manufacture of motor vehicles, trailers and semi-trailers.

This was mostly offset by increases in the chemical products and pharmaceutical sectors with some seeing quite a boom.

Chemical products provided the largest upward pressure, rising by 6.9% due mainly to an increase of 31.2% within industrial gases, inorganics and fertilisers.

If step back we see that over the past year there has been some growth but frankly not much.

Total production output for June 2017 compared with June 2016 increased by 0.3%, with manufacturing providing the largest upward contribution, increasing by 0.6%

There is an irony here as a good thing suddenly gets presented as a bad one and of course as ever the weather gets some blame.

energy supply partially offset the increase in total production, decreasing by 4.6% due largely to warmer temperatures.

If we look at other data sources we can say this does not really fit with the Markit PMI business surveys which have shown more manufacturing growth. It may be that they have been sent offside by the fact that the slowing has mostly been in one sector ( vehicles). If the CBI is any guide then the main summer months should be stronger.

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

The overall perspective is that the picture of something of a lost decade has been in play.

Since then, both production and manufacturing output have risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (January to March) 2008, by 7.8% and 4.4% respectively in the 3 months to June 2017.

Trade

One of the apparent certainties of life is that the UK will post an overall trade deficit and the beat remains the same.

Between Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, the total trade deficit (goods and services) widened by £0.1 billion to £8.9 billion as increases in imports were closely matched by increases in exports.

So essentially the same as there is no way those numbers are accurate to £100 million. Even the UK establishment implicitly accept this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

If the problems were minor this would not be ongoing more than 2 years later would it? But if we go with what we have we see that as we stand the lower level for the UK Pound post the EU Leave vote has not made any significant impact.

In comparison with Quarter 1 and Quarter 2 of 2016, the total trade deficit over Quarter 1 and 2 of 2017 has been relatively stable.

This gets more fascinating when we note that prices and indeed inflation have certainly been on the move.

Sterling was 8.7% lower than a year ago, with UK goods export and import prices rising by 8.2% and 7.8% respectively over the period Quarter 2 2016 to Quarter 2 2017.

Construction

This is sadly yet another area where the numbers are “not a National Statistic” and I have written before that I lack confidence in them but for what it is worth they were disappointing.

Construction output fell both month-on-month and 3 month on 3 month, by 0.1% and 1.3% respectively.

This differs from the Markit PMI business survey which has shown growth.

Comment

We are finding that the summer of 2017 is rather a thin period for the UK economy. I do not mean the weaker trajectory for house prices because I feel that it is much more an example of inflation rather than the official view that it is economic growth. Yes existing owners do gain ( but mostly only if they sell) but first time buyers and those “trading up” lose.

Meanwhile our production sector is not far off static. So far the hoped for gains from a lower exchange rate have not arrived as we mull again J-Curve economics. Looking forwards there is some hope from the CBI survey for manufacturing in particular and maybe one day we can get it back to previous peaks. But we find ourselves yet again looking to a sector which appears to be on an inexorable march in terms of importance for the services sector dominates everything now and for the foreseeable future.

Meanwhile there is plainly trouble at the UK Office for National Statistics as the rhetoric of data campuses meets a reality of two of today’s main data sets considered to be sub standard.

Me on Core Finance TV

http://www.corelondon.tv/bank-england-mpc-confusion/

http://www.corelondon.tv/bitcoin-will-5000-next-level/

http://www.corelondon.tv/ecb-hardcore-operators-inflation-targets/

 

 

 

 

 

The UK sees falling house prices and production data

Today is one of the data days for the UK economy so let us get straight to one of the priorities of the Bank of England. From the Halifax.

House prices have flattened over the past three months. Overall, prices in the three months to June were marginally lower than in the preceding three months. The annual rate of growth has fallen, to 2.6%; the lowest rate since May 2013.

The timing is significant as the Funding for (Mortgage) Lending Scheme of the Bank of England began in the summer of 2013. This kicked off the rises in UK house prices we have seen. However Governor Carney’s morning espresso will have a taste analogous to corked wine as he notes these numbers and looks at the £75.5 billion of cheap funding he has given the banks since last August via the Term Funding Scheme. Can’t a central banker even bribe the banks to do things anymore?

There was in the report some grist to my mill if you recall that I warned that house prices looked like they would slip slide away in 2017.

House prices fell by 1.0% between May and June. This was the first monthly decline since January (1.1%)……House prices in the last three months (April-June) were 0.1% lower than in the previous three months (January March). This was the third successive quarterly fall; the first time this has happened since November 2012.

As you can see we are now looking back nearly five years to a different time when we had just emerged from worrying about a possible “triple dip” in the UK economy. However if we look for perspective the overall picture is as shown below.

Nationally, house prices in June 2017 were 9% above their August 2007 peak. The average house price of £218,390 is £63,727 (41%) higher than its low point of £154,663 in April 2009.

Of course this hides a large amount of regional variations as some places have struggled whilst London has soared. Also tucked away there was something rather unexpected unless the bank of mum and dad is at play.

The number of first-time buyers (FTBs) reached an estimated 162,704 in the first half of 2017, only 15% below the peak in 2006 (190,900), according to the latest Halifax First Time Buyer Review. The number of new buyers is up from 154,200 in the same period in 2016 and more than double the market low in the first half of 2009 (72,700).

The Real Economy

This morning has not been a good day for the underlying UK economy as we note the production figures.

In the 3 months to May 2017 compared with the 3 months to February 2017, the Index of Production was estimated to have decreased by 1.2%, due mainly to falls of 1.1% in manufacturing and 3.5% in energy supply.

As we have a wry smile one more time about the ( good in this instance) poor old weather taking the blame we see some poor figures. If we look at the month in isolation we continue to be disappointed.

In May 2017, total production was estimated to have decreased by 0.1% compared with April 2017, due to falls of 0.2% in manufacturing and 0.8% in energy supply; transport equipment provided the largest contribution to the manufacturing decrease, followed by food products, beverages and tobacco.

The bit that stands out there is the reference to transport equipment as that is consistent with other data showing a slowing in this area. Whilst engine production was up car production was down. Also these numbers fit very badly with the Markit PMI reading of 56.3 for May which indicated a good rate of growth as opposed to the fall reported by the official data.

Looking deeper I see that the wild and erratic ride of the pharmaceutical sector continues.

The decrease in manufacturing is due mainly to the highly volatile pharmaceutical industry, which fell by 7.8%, following a decrease of 12.0% in the 3 months to April 2017.

It rose by 1.1% in May and if we look at its pattern it should do better and help out in July so fingers crossed.

Trade

Here the news was much more normal although in this area that means bad.

Between April and May 2017, the total trade (goods and services) deficit widened to £3.1 billion, reflecting an increase in imports on the month (2.7%). The main contributor to this was an increase in imports of trade in goods….. There was a larger increase in goods imported from non-EU countries, mainly due to increases in mechanical machinery, followed by material manufactures (non-ferrous metals and silver) and oil.

If we look for some more perspective the same general pattern is to be seen.

Between the 3 months to February 2017 and the 3 months to May 2017, the total UK trade (goods and services) deficit widened from £6.9 billion to £8.9 billion.

A driver of this again appears to be a weaker phase for the UK automotive industry.

driven predominantly by increased imports of goods from non-EU countries; transport equipment (cars, aircraft and ships), oil and electrical machinery were the main contributors to this increase.

These numbers are of course just more in a decades long series of deficits. Also I note that the figures have yet to regain “national statistics” status so they are more unreliable than usual.

Some better news came on the inflation front as we had another data set which indicated that the inflationary pressure is easing.

Between April 2017 and May 2017, goods export and import prices decreased by 1% and 0.8% respectively……. the sterling price of crude oil decreasing by 6.2% in the 3 months to May 2017

Construction

The same beat was hammered out by these numbers today.

Construction output fell in May 2017 by 1.2%, in both the month-on-month and 3 month on 3 month time series…….The 3 month on 3 month decrease represents the largest 3 month on 3 month fall in output since September 2012, driven by falls in both repair and maintenance, and all new work.

This was particularly unexpected because for a start the warm weather which took some of the blame for the industrial production fall is usually a boost to construction. Also all the talk of higher infrastructure spending seems to have met a somewhat different reality.

most notably from infrastructure, which fell 4.0% following strong growth in April 2017.

Oh and yet again we have rather a mis-match with the business survey from Markit.

Comment

There were two bits of good economic news today. These were that the inflationary burst looks like it is fading and that house prices have stopped rising and may be falling. Of course the Bank of England will no doubt consider this as bad news. On the other side of the coin we are now in the phase where post the EU Leave vote the economic water was always likely to be colder and more choppy. We are in a phase where production and manufacturing are struggling with little sign that trade is providing much of a boost. Care is needed with the numbers as ever ( especially construction and trade) but our economy is now only grinding ahead and won’t be helped by this news from yesterday and the emphasis is mine.

Despite improvements in both GDP per head and NNDI per head, real household disposable income (RHDI) per head declined by 2.0% in Quarter 1 2017 compared with the same quarter a year ago

Please spare a thought for Bank of England Chief Economist Andy Haldane at this difficult time. For newer readers this “sage” pushed for a “Sledgehammer” expansion of policy when the economy was doing okay and has now switched to talking about rate rises as it slows fulfilling the policy making nightmare of being pro cyclical.

Some Friday Humour

I bring you this from the Wall Street Journal last night.

Japan shows Europe how to dial back stimulus without spooking investors

Only a few hours later Business Insider was reporting this.

the Bank of Japan (BoJ) went all-in earlier today, pledging to buy an unlimited amount of 10-year bonds at a yield

Up is the new down yet again.

British and Irish Lions

I hope that our Kiwi contingent will not be too offended if I wish the Lions all the best for their historic opportunity tomorrow. Victories in New Zealand are rarer than Hen’s teeth can they manage 2 in a row? Here’s wishing and hoping…….

 

Where does the events of last night leave the UK economy?

That was an extraordinary night as yet again much of the polling industry was completely wrong and the UK electorate turned up quite a few surprises. In fact it was not only the political world which spun on its axis because financial markets had cruised into this election as if asleep as I pointed out only on Wednesday. Against the US Dollar the UK Pound £ had been above US $1.29 for a while and had if anything nudged a little higher. Oh and Wednesday suddenly seems like a lifetime away doesn’t it as we sing along to Frankie Valli and the Four Seasons.

Oh, I felt a rush like a rolling bolt of thunder
Spinning my head around and taking my body under
Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)

The Exchange Rate

It was not quite like the EU leave vote night which if you recall saw a sharp rally to US $1.50 before plunging as actual results began to come in. But the UK Pound did drop a couple of cents to US $1.275 in a flash. Since then it has drifted lower and is at US $1.27 as I type this. There was a similar move against the Euro as a bit above 1.15 found itself replaced with 1.135 as Sterling longs ended the night with singed fingers.

This means that UK monetary conditions have loosened again and should the fall in the Pound be sustained then we have just seen the equivalent of a 0.5% Bank Rate cut.

Government Bonds

In spite of the fact that there has been something of a shift in the UK political axis and hence potential changes in the economy and fiscal deficit this market has met such a reality with something of a yawn. The ten-year Gilt yield is currently 1.03% meaning there is zero political risk priced into the market there and if we look at what might happen over the next 2 years an annual return of 0.08% barely covers a toenail of it in my opinion!

What we are seeing her in my opinion is how central banks have neutralised bond markets as a signal of anything with their enormous purchases. In this instance it is the £435 billion of UK Gilt purchases by the Bank of England which seem to have left it becalmed in the face of not only higher political risk but also higher inflation.

FTSE 100

This too fell in response to the exit poll forecasting a hung parliament and quickly dropped around 70 points. However then things changed and a rally started and as I type this it is up nearly 50 points around 7500. Why the change? Well there has been an inverse relationship between the value of the Pound and the FTSE 100 for a while now due to the fact that many of the larger UK companies have operations overseas.

By contrast the UK FTSE 250 has fallen by 0.9% to 19,576 on the basis that it is much more focused on the domestic economy. Again though the moves are small compared to the political shift as we mull yet another implication of the expanded balance sheets of central banks. As I wrote only a few days ago are equity markets allowed to fall these days?

Today’s Data

Production

The numbers here start with some growth albeit not much of it.

In April 2017, total production was estimated to have increased by 0.2% compared with March 2017, due to rises of 2.9% in energy supply and 0.2% in manufacturing.

So better than last month, but once we go to the annual comparison we see a decline has replaced the rise.

Total production output for April 2017 compared with April 2016 decreased by 0.8%, with energy supply providing the largest downward contribution, decreasing by 7.4%.

Those who are familiar with the poor old weather taking the blame may have a wry smile at the fact that of a 0.75% fall some 0.74% was due to lower electricity and gas production presumably otherwise known as warmer weather.

Manufacturing

As you can see above this was up by 0.2% on a monthly basis but was in fact unchanged on a year ago with its index being at 104.5 in both April 2016 and 17. You could claim some growth if you go to a second decimal place but that is way to far into spurious accuracy territory for me.

As we look into the detail we see something familiar which is that the erratic and volatile path of the pharmaceutical industry has been in play one more time.

Within manufacturing, there were increases in 10 of the 13 sub-sectors, but this was offset by the weakness within the volatile pharmaceutical industry, which provided the largest downward contribution, decreasing by 12.2%, the weakest month-on-same month a year ago growth since February 2013.

It has yo-yo’d around for a while now albeit with a rising trend but we will have to wait until next month to see if that continues. However there is of course the issue of what the Markit PMI ( Purchasing Managers Index) told us.

The UK manufacturing PMI sprung back to a three
year high in April after a brief blip in March…….“The British manufacturing industry is moving at
such a pace that suppliers are struggling to keep up
with demand.

The “growth spurt” with a reading of 57.3 does not fit well with an annual flatlining does it?

Trade

Again there was a monthly improvement to be seen.

The UK’s total trade deficit (goods and services) narrowed by £1.8 billion between March and April 2017 to £2.1 billion…….Imports fell across most commodity groups between March and April 2017, the largest of which were mechanical machinery, oil and cars;

This was needed as March was particularly poor leading to bad quarterly data.

Between the 3 months to January 2017 and the 3 months to April 2017, the total trade deficit (goods and services) widened by £1.7 billion to £8.6 billion;

Thus the underlying theme here is of yet more deficits. Maybe not the “thousands of them” of the film Zulu but definitely in the hundreds.

An upgrade of the past

The first quarter saw a couple of minor upgrades as the data filtered through this morning.

The total trade in goods and services balance in Quarter 1 2017 has been revised up by £1.3 billion, to £9.3 billion.

They mean revised up to -£9.3 billion and also there was this.

there has been an upward revision of 0.9 percentage points to growth in total construction output – from 0.2% to 1.1%. The potential upward impact of this revision to the previously published gross domestic product (GDP) is 0.05 percentage points.

Comment

So many areas need a slice of humble pie this morning that a large one needs to be baked to avoid running out. As ever I will avoid individual politics and simply point out that there will be quite a lot of uncertainty ahead although of course if you recall that seemed to actually help Belgium’s economy when it had some 18 months or so of it.

As to the economy this is the difficult patch that I have feared where higher inflation impacts. As usual there is a lot of noise as for example the April manufacturing figure is very different to the Markit  business survey. Also we have the impact of warmer weather on production ( whatever the weather is it gets blamed for something) and more wild swings in the pharmaceutical sector which must represent a measurement issue. Meanwhile as I have pointed out before I have little faith in the official construction series but this rather stands out.

a fall in private housing new work

That fits with neither what we have been promised nor the construction business surveys.

 

The possible road to another Bank of England Bank Rate cut

This morning has brought some disappointing news about the UK economy. From the Office for National Statistics.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017.

As the official release goes on to tell us this is slightly worse than the preliminary estimate.

UK GDP growth in Quarter 1 2017 has been revised down by 0.1 percentage points from the preliminary estimate published on 28 April 2017; mainly due to broad-based downward revisions within the services sector.

Whilst this was disappointing it was far from a complete surprise as there have been hints that the services sector had struggled in that quarter. Of course it makes up the vast majority of the UK economy these days leaving not much scope to regain the ground elsewhere.

The detail

It turns out that all sectors of the UK economy grew it is just that they did not do so by much.

In Quarter 1 2017, all four sectors show positive growth; agriculture increased by 0.3%, total production increased by 0.1% and construction and total services both increased by 0.2%.

If we look at the services sector we see that in football terms it was in a way a story of two halves.

The growth was focused in the business services and finance, and government and other services industrial groups, but there was a slow-down in growth in consumer-focused industries, such as retail sales and accommodation. Within the services industries, two of the four main sectors decreased in Quarter 1 2017; distribution, hotels and restaurants, and transport, storage and communications.

The area responsible for today’s downwards revision has ironically been a strength for the UK economy in recent quarters.

Services contributed 0.06 percentage points to the downward revision to UK GDP, the biggest contributor. Within services, the largest contributor to the downward revision is business services and finance. However, within this section, at the more detailed level, the revisions are small and broad-based, primarily reflecting late survey returns.

We can really drill down to see the state of play here.

Total services output rose by 0.2% in Quarter 1 (Jan to Mar) 2017, driven by 0.6% growth in business services and finance, and 0.4% growth in government and other services (Figure 3). Meanwhile, distribution, hotels and restaurants, and transport, storage and communication both recorded negative quarterly growth – falling by 0.6% and 0.2% respectively. This is the first negative quarter-on-quarter growth rate in each series since Quarter 4 (Oct to Dec) 2012 and Quarter 3 (July to Sep) 2013.

What about the individual experience?

The aggregate levels above do not allow for changes in the population so for example a growing population would normally lead to higher economic output and GDP, but that higher GDP would not necessarily indicate people being better off. This often gets ignored by politicians and much of the media because it has shown that we are not doing as well as the headline number would suggest.

In Quarter 1 (Jan to Mar) 2017, gross domestic product (GDP) per head was flat compared with Quarter 4 (Oct to Dec) 2016. GDP per head is now 1.7% above the GDP pre-downturn peak in Quarter 1 2008, having surpassed it in Quarter 4 2015.

That compares with us being some 8.7% higher on the headline number and the gap has just widened even further as we were on a road to nowhere on an individual basis at the start to 2017.

GDP per head in volume terms was flat between Quarter 4 2016 and Quarter 1 2017.

If the trend from the migration data also released today continues then the numbers may be pulled back closer together.

Net long-term international migration was estimated to be +248,000 in 2016, down 84,000 from 2015 (statistically significant); immigration was estimated to be 588,000 and emigration 339,000.

The catch is that these numbers are probably even more unreliable than the GDP ones.

Nominal GDP

This is the number that will attract the interest of Mark Carney and the Bank of England.

GDP in current prices increased by 0.7% between Quarter 4 2016 and Quarter 1 2017.

This is because on an economy wide level it is a measure of how we can deal with the debt issues that exist. Mostly we pay these in nominal rather than real terms. Although they avoid putting it in these terms this is why central banks target a positive rate of inflation ( mostly 2% per annum) because it is in effect a subsidy for debtors as their debts get deflated in real terms. This is also why there are regular suggestions that the target rate of inflation should be raised to either 3% or 4% so that debts can be inflated away even more quickly.

So in terms of debt worries they will be pleased to see the effect of inflation on the GDP numbers so that real growth of 0.2% becomes nominal growth of 0.7%. You may note that the period when we had solid economic growth but around 0% inflation would be pretty much indistinguishable in these terms. Of course we as workers are worse off as this from today’s monthly commentary makes clear.

Adjusted for consumer price inflation including owner occupiers’ housing costs (CPIH), average weekly earnings increased by 0.1% including bonuses, but fell by 0.2% excluding bonuses, compared with a year earlier. This is the first decline in real earnings (excluding bonuses) since the 3 months to September 2014.

There are hints that consumers are beginning to feel some of the pinch of higher inflation as well.

The slowdown in Quarter 1 2017 compared with Quarter 4 2016 reflected a decline in output from consumer focused industries, including the retail industry. As a result, private consumption was a smaller contributor to GDP growth than in recent periods, adding 0.2 percentage points.

Trade

This is something of a problem that it a hardy perennial for the UK economy and GDP. It has been at play yet again.

the total trade deficit widened by £5.7 billion to £10.5 billion between Quarter 4 2016 and Quarter 1 2017. Both the monthly and quarterly widening of the trade deficit were mainly due to increased imports of oil, chemicals, mechanical machinery and cars.

More specifically it did this.

The negative contribution to GDP came from net trade, which contributed a negative 1.4 percentage points.

So over the last two quarters it has given us a large boost and now taken it away. If we look back it has taken 1.4% away, given us 1.7% and now taken 1.4% away over the past 3 quarters. An unlikely sequence which reminds us how volatile and unreliable the trade numbers are especially for the most important sector which is the services one.

Comment

Let me open with some optimistic thoughts. Firstly this is now exactly the same rate of economic growth we had at the opening of 2016 and very little below that in 2015. So we may have a systemic problem similar to the one which has affected the United States for a while. Also we are simply not able to measure GDP to 0.1% even when all the data is in as opposed to the 80% or so we have now. If investment is any guide companies seem to be planning hopefully which coincides with the latest business surveys.

For Quarter 1 2017, the largest positive contribution to GDP came from gross capital formation, which contributed 1.2 percentage points.

However the GDP growth number has just been revised lower by 0.1% and the danger for the rest of 2017 is that the higher trajectory for inflation subtracts from economic growth. Let me leave you with a thought that I expressed to TipTV Finance which is that in any sustained slow down the Bank of England would be likely to ease monetary policy again.

http://tiptv.co.uk/uk-election-manifestos-holes-swiss-cheese-not-yes-man-economics/

 

 

 

 

 

The Bank of England is in a mess of its own making

Today is what is called Super Thursday at the Bank of England although if the brief history is any guide it rarely lives up to the moniker! Actually it is a bit like its Governor Mark Carney whose stewardship has been much more hype than substance.  Indeed only recently we saw that demonstrated by the Charlotte Hogg episode where someone was promoted to the Monetary Policy Committee ( MPC) who when quizzed by Parliament was ignorant of many of the details. In fact as the Deputy Governor for Markets she would have been in charge of the £445 billion QE portfolio a subject about which she knew so little the Treasury Select Committee suggested she spoke to the Debt Management Office ( so she could learn something…). Yet according to Bloomberg the official Bank of England view is from an alternative universe.

Her departure “came at a critical time and represented a material loss to the management of the bank,” the BOE’s Court of Directors said,

Indeed her sacking for breaking rules that she had set is apparently “entirely disproportionate”. The rules presumably were for the little people and proles not for the daughters of baroness’s and earls it would seem. In the same way that whistleblowing rules seem not to apply to Jes Staley of Barclays. By the way this is the banking sector which we are so often told is completely reformed.

Women Overboard

The Carney era has come with protestations of more diversity and at first it seemed like that as more women were appointed. But the more hype than substance theme has appeared in 2017 as they seem to be leaving to go elsewhere. The two women who were on the MPC have either left or are going. Ironically the planned replacement Charlotte Hogg lasted not much longer than a May Fly. Then on April 20th the Financial Times reported this.

Jenny Scott, the executive director for communications at the BoE, is leaving to “pursue new opportunities, including those in the third sector”, according to an internal memo sent to Bank staff on Wednesday.

This is so reminiscent of the Yes Prime Minister episode on equal opportunities where the woman concerned says this about the situation.

I find it  comic, but then it is ( the civil service) run by men after all…. most of the work here needs only about 2 O’Levels anyway.

It is also quite a change of tack from the Financial Times from its previous gushing reviews of what it called a “rock star” central banker.

The “Early Wire” Problem

One of Governor Carney’s reforms was that the MPC now votes the day before the announcement. So that at 12 pm today we will be told the results of yesterday’s vote. The danger is of it leaking and makes one wonder about this from the Financial Times.

Two MPC members thought to have voted for increase at latest meeting

That may or may not be right but before the event there are clear fears they may now especially at a time of warnings like this from the Royal Statistical Society.

One of our key requests in this regard is for the government to end the practice of pre-release access to official statistics, whereby ministers and their officials have access to official statistics before they are released to the public.

Forward Guidance

This has of course turned out to be a anything but as it quickly became something of an oxymoron. There were plenty of ch-ch-changes in it as reality proved regularly inconvenient but they were quickly dwarfed by promises of interest-rate rises suddenly metamorphosing into a Bank Rate cut last August. Down was indeed the new up.

Next there was the issue of the post EU leave vote forecasts which were completely wrong which was especially material when the Bank of England cut Bank Rate and added both an extra £60 billion of ordinary QE and £10 billion of Corporate Bond purchases in response to a slow down which never happened! It has responded with a PR campaign to say that its move averted a slow down which would have been a new experience for the UK economy as monetary policy moves have always been considered to fully impact some 18 months or so after the change. Even worse for the spinners at the Bank of England the ECB has offered the view that the lags are now in fact longer than in the past.

The economic outlook

The outlook for inflation has been a problem for the credibility of the Bank of England ever since it cut Bank Rate last August as it did so in spite of expectations of it going above target. It ignored the impact of a weaker Pound £ and ploughed ahead anyway and already we see that consumer inflation is above target and set to go higher. In terms of how much higher both we and the Bank of England have got lucky with the recent dip in oil prices and the stronger trajectory for the Pound £. That was symbolised for me yesterday as I passed a garage in Vauxhall selling a litre of both diesel and petrol for 115.2p. That one is always at the cheaper end of the spectrum but fuel prices at the pump have dipped.

If we move to the prospects for GDP then we are now in the phase which I thought was going to be the difficult bit which was when inflation impacted on real wages. Today’s output and trade data have been in line with that as they were weak. You can excuse the production data as it was affected by mild weather and consequent low electricity output which was 80% of the March fall but manufacturing and trade were both poor.

The overall trade deficit (goods and services) widened both in Quarter 1 2017 and in the month of March, primarily driven by an increase in imports of oil, chemicals, mechanical machinery and motor vehicles. The total trade deficit in Quarter 1 2017 widened by £5.7 billion to £10.5 billion………The monthly fall of 0.6% in manufacturing was broad-based across 8 of the 13 sub-sectors.

Comment

The Bank of England finds itself in a very awkward position for an activist central bank. The Governor has the obvious problem that he told us that the “lower bound” for Bank Rate was 0.5% and then cut it to 0.25%! Should we see a phase of sustained economic weakness then presumably he would vote to cut again ignoring the fact that at such levels the economic gains are in my opinion offset by the losses such as the rise in unsecured credit. Which brings me to my next point if we are going to have a crony culture at the Bank of England why do we need the other 8 MPC members? Any dissent is so rare and has never been policy changing under Mark Carney’s tenure. Indeed Kristin Forbes waited  until after announcing her departure to actually vote for an interest-rate rise confirming the theme of members getting hawkish on the way out. Perhaps the most extreme case of that was the uber dove David Miles who suddenly claimed he was on the edge of voting for  rate rise.

Today is likely to see at least one vote for a Bank Rate rise but does anybody reading this really feel there is any stomach on the MPC for one? The last sequence of votes for a rise faded and ended up in a cut. Also do they still know where the switch is?

 

 

 

UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.

Productivity

This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.

 

Comment

We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!