Car production for export is boosting the UK economy

This morning has brought us a barrage of news on the UK economy and no I do not mean the apparent progress on the negotiations with the European Union. Though even if we dodge the politics it is nice to see a better phase for the UK Pound £ with it rising to above US $1.34 and 1.14 to the Euro as well as above 153 Yen. The barrage came as it is one of the theme days at the Office for National Statistics giving us an outpouring of data on the UK economy.

Let us start with a nod to my subject of Wednesday which was the automotive or car sector.

In October 2017, car production grew by 4.6% compared with September 2017 to match the record index level reached in July 2017.

If we look into the detail we see this.

Motor vehicles, trailers and semi-trailers provided a similar contribution and rose by 6.3%. An increase in export turnover of 20.7% was reported by this sub-industry compared with October 2016;

This further reinforces the view that UK car production is mostly for export as otherwise the rise in production of 4.6% in October would look very odd with the fall in registrations of 11.2% on a year on year basis. Here is the data in chart form.

A little care is needed as this is a value or turnover index and not volume so it is a little inflated but not I would suspect a lot. With the same caveat it is in fact a record.

 Within the MBS production industries dataset, the value of exports for the motor vehicle, trailers and semi-trailers were at a record level in October 2017, exceeding £4 billion for the first time.

Of course single monthly data can be misleading but the news remains good if we look further back for more perspective.

Within this sector, transport equipment provided the largest contribution, rising by 2.5%, due mainly to an increase of 3.2% in motor vehicles, trailers and semi-trailers following an increase of 4.2% in the three months to September 2017. The index level for motor vehicles, trailers and semi-trailers averaged 107.1 in the three months to October 2017 due to a strong increase in exports during October 2017, compared with 103.8 in the three months to July 2017, due mainly to a weak June 2017.

If we look further back we see that vehicle production was blitzed by the credit crunch falling from 95.1 in August 2007 where  2015 = 100 to a chilling 45.6 in February 2009. It is no coincidence that the Bank of England introduced QE then when you look at that icy cold plummet. We did not reach the levels of the summer of 2007 until the spring of 2014 which makes one think. Over that period there was scope for plenty of what might come under the category of “tractor production is increasing” but it is also true that there were nearly seven lost years. Since then we have done well with both exports and home sales rising but the latter has been a smaller influence which is fortunate as it is now over!

Over the years and decades I have followed the UK economy it is not that often one can say or type that the economy is being helped by strong car production and exports.

Manufacturing

This is also having a good phase.

The largest upward contribution came from manufacturing, which increased by 3.9%. There was broad-based strength throughout the sector, with 11 of the 13 sub-sectors increasing.

So there was a strong increase on a year ago and as well as the car sector we have already looked at we seem to have ambitions for what in the end will be the largest market of all.

Within this sub-sector, air and spacecraft and related machinery increased by 11.5%, continuing the prolonged month-on-same-month a year ago strength for this sub-industry since November 2014.

Not quite the “space aliens” that Paul Krugman once opined we needed but we seem to be doing well in the more mundane business of satellites and the like.

Just for clarity the pharmaceutical industry seems to be growing modestly as opposed to the yo-yo movements we did see and the overall picture still could do with some improvement.

manufacturing output has risen but remain below its level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 2.1% respectively in the three months to October 2017.

At least we are getting there.

Trade

Some might say that the better vehicle export data might take us from our desert of deficits in this area into an oasis. But maybe we will have to live forever to see that.

When erratic commodities are excluded, the value of the total UK trade deficit widened by £0.8 billion to £6.9 billion in the three months to October 2017.

 

We did export more but in a familiar pattern we imported at an even faster rate.

The widening excluding erratic commodities was due primarily to trade in goods imports increasing 2.9% (£3.3 billion) to £116.5 billion, which was offset slightly by a 0.5% (£0.2 billion) decrease in trade in services imports. Although trade in goods exports increased 1.7% (£1.4 billion) to £81.7 billion, the increase in imports was larger, therefore the total trade deficit excluding erratic commodities widened.

 

However if we switch to volumes maybe there is a little by little improvement.

Total goods export volumes increased 3.2% in the three months to October 2017, which was the fourth consecutive and largest increase since January 2017. Import volumes increased 0.5% over the same period.

 

Production

This was driven higher by the manufacturing data.

In the three months to October 2017, the Index of Production was estimated to have increased by 1.2% compared with the three months to July 2017…….Total production output for October 2017 compared with October 2016 increased by 3.6%

The other factor pushing it up was North Sea Oil and Gas where not only less maintenance but some new oilfields opened in the summer. Thus for once we seem to have higher output with higher prices ( Brent Crude is ~ US $63 as I type this).

We also got an example of why economics is called the dismal science as most people would be pleased to have better weather and not to have to turn the heating on!

 energy supply provided the largest downward contribution, decreasing by 3.3%, mainly because of unseasonably warm temperatures in October 2017,

Its effect was to subtract 0.39% from production in October meaning the monthly change was 0%.

The overall picture here lags the manufacturing one partly due to the decline of North Sea Oil.

production output has risen but remains below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.1% in the three months to October 2017.

Construction

These did fit with the view I expressed on Monday. The present seems recessionary.

Construction output contracted for the sixth consecutive period in the three-month on three-month time series, falling by 1.4% in October 2017.

The future looks brighter.

New orders saw record growth in Quarter 3 (July to September) 2017, growing by 37.4% compared with the previous quarter.The record growth was driven predominantly by growth in the infrastructure sector, caused by the awarding of several high-value new orders relating to High Speed 2 (HS2).

So a definitely maybe then especially as we note that it is for HS2 which seems so set in stone such that we will have to roll with it I guess.

Comment

In terms of official data and business surveys the UK is seeing a good period for manufacturing particularly in the vehicle sector which is pulling overall production higher. Whilst it is only 14% of our economy these days the improvement is welcome. The rise in vehicle exports has not yet been picked up by the trade figures as I note the use of the phrase “to be exported” in the production data so hopefully we will see this in the trade figures for November and December.

The trade figures have a problem as you see there is plenty of detail on the goods sector but virtually nothing on services! I have scanned it again and can only seem a mention of services imports. This is pretty woeful if you consider it is the largest sector of our economy and frankly no wonder these numbers are “not a national statistic”. It is frightening that they then go into the GDP numbers and even more frightening that we will get monthly GDP data soon.

The construction series is “not a national statistic” meaning that in this instance I have to disagree with Meatloaf about the three main series analysed today.

Now don’t be sad (Cause)
‘Cause two out of three ain’t bad

 

 

 

 

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What about QE for manufacturing and construction rather than stock and bond markets?

Let us begin today by looking at something to cheer the cockles of a central bankers heart. Firstly from Alliance News on Tuesday.

The FTSE 100 index closed up 1.93 points at 7,562.28 on Monday, building on its fresh all-time closing high set on Friday.

It has dipped away from that level a little since but never mind as the Bank of England is usually behind the times and no-one will notice it especially if a chart from 2008 showing it around 3800 then is used. What a triumph for the period of lower interest-rates and QE ( Quantitative Easing). Tuesday brought us this from the Halifax..

House prices rose by 0.3% between September and October, following a 0.8% increase in September. The average price of £225,826 is the highest on record and 2.8% higher than in January (£219,741).

So as you can see the ” wealth effects” should be pouring into the economy right now. Sadly unlike the Bank of Japan there are no equity and property holdings to claim a profit on but never mind. If you are a young researcher in Threadneedle Street the way to career advancement is to write about wealth effects boosting the economy especially if you avoid writing about how the major wealth effects are for the few rather than the many.

Wages

There has been some potential good news on this front as well. Yesterday the agents of the Bank of England reported this.

Recruitment difficulties had intensified and were above normal in a range of activities, alongside continued
modest employment growth. As a result, pay growth had edged up and was expected to be somewhat higher in
2018 than this year.

This of course brings them into line with the official Bank of England view from the past 5 years or so that wage growth is rising. Of course the possible catch is that the Bank is not only the witness but the judge and jury here as we mull what somewhat higher means? One group who have managed a solid wage rise are these. From the Evening Standard about Southern Rail.

Members of Aslef, the train drivers’ union backed the deal, which includes a 28.5 per cent pay rise over the next five years, by 731 votes to 193, a majority of 79 per cent.

Industrial action by train drivers leading to pay rises feels like something from the 70s and maybe 80s but long-suffering commuters from the south will be grateful if this puts an end to the problems. As to the pattern of wages growth going forwards we can only wait and see if what used to be called “relativity’s” re-emerge and it leads to wage claims and rises elsewhere. That sort of thing has been missing for some time and is a hint that the UK employment situation may not be as strong as the headline figures imply. Although Governor Carney thinks the opposite.

with unemployment at a 42 year low, more people in work than ever before. This isn’t a false read on
the unemployment rate,

Savers

Here we find that Governor Carney was very bullish for their immediate prospects after his Bank Rate rise.

It will have an impact on borrowers over time, it will have a more immediate positive impact on savers, in terms of deposit rates.

So that is the state of play in his Ivory Tower, meanwhile if we look at the real world the BBC reported this yesterday.

Seven days after the rise in base rates, just 17 out of 150 providers have passed on improved returns to their savers.

The Bank of England raised rates by 0.25% to 0.5% last Thursday, the first rise in a decade.

Many banks are still considering whether to pass on the benefits.

But even if their provider does choose to increase rates in full, some savers will still find themselves worse off than when rates were last at 0.5%.

As to the slower impact on borrowers.

By contrast, lenders have been quick to raise the cost of mortgages.

Most customers with tracker mortgages have seen an immediate rise of 0.25%.

So far 20 banks have announced increases to their Standard Variable Rate (SVR) mortgages, including Barclays, Halifax, Lloyds, Nationwide, Santander and TSB.

Poor old Mark perhaps he might like to play some PM Dawn to help relax.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine

Production

This morning’s numbers brought some good news for the UK economy but mixed news for the Bank of England.

In September 2017, total production was estimated to have increased by 0.7% compared with August 2017……Total production output for September 2017 compared with September 2016 increased by 2.5%.

It might only be 14% of the economy these days but it has improved recently and this improvement has been driven by this.

Manufacturing provided the largest upward contribution, increasing by 0.7%, with 10 of the 13 sub-sectors rising. This is the fifth consecutive monthly rise in this sector and follows growth of 0.4% in August 2017. Machinery and equipment not elsewhere classified provided the largest upward contribution to the growth in manufacturing, rising by 3.2%, following 0.0% in August 2017.

Also North Sea Oil and Gas ended its maintenance period and of course as we go forwards ( these numbers are up to September) will be seeing higher oil prices. Also those who joke we might need to trade with space in future well…..

Within this sub-sector, air and spacecraft and related machinery rose by 10.2%.

Trade

Whilst there was better news from the monthly data for September alone the background picture continued on its usual not very merry way.

Between the three months to June 2017 and the three months to September 2017 (Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017), total trade (goods and services) exports decreased by 0.2% (£0.3 billion), while total trade imports increased by 1.6% (£2.6 billion). This resulted in a widening of the total trade (goods and services) deficit by £3.0 billion to £9.5 billion.

There are some ways in which this fits with the other data we have for example weaker oil exports go with the summer maintenance period and higher exports of vehicles with the manufacturing data. But it is odd that exports are falling with rising production and particularly manufacturing figures. Perhaps we will find over time that exports of services were higher than we thought at the time.

Trade in services exports have been revised up by £0.3 billion for both July and August 2017. This is due to survey data replacing earlier estimates.

Construction

I have been worried about the accuracy of these numbers for some time ( regular readers may recall when a large business was switched from services to construction a couple of years ago which did not inspire confidence). However such as they are the sector has plunged into a recession.

However, construction dropped for the second quarter running, driven by falls in commercial work and housing repairs……Activity in the construction sector continued to weaken in Quarter 3 2017, with total output falling by 0.9%……..consecutive quarterly declines in current estimates of total construction output have not been seen since Quarter 3 2012.

I asked online for thoughts as to why this might be and one group of replies suggested a combination of a lack of demand and uncertainty.Another suggested that the credit crunch wiped out some smaller house builders which have never really been replaced.

Comment

There is a lot to consider here. Let us start with some good news which is that the production sector has improved and it has been driven by manufacturing. That is not showing up yet in the trade figures on any grand scale but there is hope we will see that feed in as 2017 ends and moves into 2018. As to construction it is in a decline and recession and I wonder if Governor Carney will be awake at night thinking that the £10 billion he splashed around in the corporate bond market or the £60 billion giving Gilt holders an early Christmas present might have been better spent helping the real economy?. Should it be the case it is suffering from uncertainty and a lack of demand there may be a case for government spending here. The main flaw in that is of course we might get more expensive projects like HS2 and Hinkley Point.

However perspective is also needed because if we look at the credit crunch era construction has recovered well. If we use 2010 as our benchmark then in August it at 118.5 was even above services at 117.2 and way ahead of manufacturing at 106 and production at 101.7.

If I return to the title of this piece if only the Bank of England put the same effort into supporting UK manufacturing as it has into propping up the housing market. Of the £90.1 billion of the Term Funding Scheme the only way I see it helping manufacturing is via the car leasing/finance sector and of course that mostly helps overseas manufacturers.

 

 

 

 

 

 

 

Let us continue to remember what has been inflicted on Greece

Yesterday the Financial Times revealed the results of an intriguing poll in Greece,

More than half of all Greeks agreed it was a mistake to have joined the euro. Barely a third of Greeks thought the euro wasn’t a mistake. Even among those who wanted to remain in the euro area at the end of 2015, fewer than half would have chosen to join again if given the chance to go back in time and warn their fellow citizens.

That survey took place almost two years ago. Since then, Walter finds that support for the euro has dropped by 10 percentage points.

Frankly I find it a bit of a surprise that even more Greeks do not think that joining the Euro was a mistake! But in life we see so often that some support the status quo again and again almost regardless of what it is. After all so many in the media and in my profession have sung along to Blur about Euro area membership for Greece.

There’s no other way
There’s no other way
All that you can do is watch them play

Regular readers will be aware that I have been arguing there was and indeed is another way since 2011. One of the saddest parts of this sorry saga has been the way that those who have plunged Greece into a severe economic depression accused those suggesting alternatives of heading for economic catastrophe.

If we look at the current state of play we see this.

The available seasonally adjusted data indicate that in the 2nd quarter of 2017 the Gross Domestic Product (GDP) in volume terms increased by 0.5% in comparison with the 1 st quarter of 2017, while in comparison with the 2nd quarter of 2016, it increased by 0.8%.

So economic growth but not very much especially if we note that this is a good year for the Euro area in total. So far not much of that has fed through to Greece although any signs of growth are welcome. To put this in economic terms this is an L-shaped recovery as opposed to the V-shaped one in my scenario. The horizontal part of the L is the fact that growth after the drop has been weak. The vertical drop in the L is illustrated by the fact that twice during its crisis the Greek economy shrank at an annual rate of 10% leaving an economy which had quarterly GDP of 63 billion Euros as 2008 opened now has one of 46.4 billion Euros. By anyone’s standards that is quite an economic depression.

Some good news

Here I would like to switch to what used to be the objective of the International Monetary Fund or IMF which is trade. In essence it helped countries with trade deficits by suggesting programme’s involving reform, austerity and devaluation/depreciation. The French managing directors of the IMF were never going to be keen on devaluation for Greece for obvious reasons and as to reform well you hear Mario Draghi call for that at every single European Central Bank press conference which only left austerity.

This was a shame as you see there was quite a problem. From the Bank of Greece.

In 2010, the current account deficit fell by €1.8 billion or 6.9% in comparison with 2009 and came to €24.0 billion or 10.5% of GDP (2009: 11.0% of GDP).

Even the improvement back then was bad as it was caused by this.

Specifically, the import bill for goods excluding oil and ships fell by €3.9 billion or 12.6%,

The deficit improvement was caused by the economic collapse. Now let us take the TARDIS of Dr. Who and leap forwards in time to the present.

In the January-August 2017 period, the current account improved year-on-year, as the €211 million deficit turned into a €123 million surplus.

This was driven by a welcome rise in tourism to Greece.

In August 2017, the current account showed a surplus of €1.8 billion, up by €163 million year-on-year………The rise in the surplus of the services balance is due to an improvement mostly in the travel balance, since non-residents’ arrivals and the corresponding receipts increased by 14.3% and 16.4%, respectively.

The Bank of Greece is so pleased with the new state of play that it did some in-depth research to discover that it is essentially a European thing.

In January-August 2017, travel receipts increased by 9.1%, relative to the same period of 2016, to €10,524 million. This development is attributed to a 14.5% rise in receipts from within the EU28 to €7,117 million,

I am pleased to note that my country is doing its bit to help Greece which with the weaker Pound £ might not have been expected and that Germans seem both welcome and willing to go.

as did receipts from Germany, by 29.0% to €1,638 million. Receipts from the United Kingdom also increased, by 17.7% to €1,512 million.

So finally we have some better news but there are two catches sadly. The first is that it has taken so long and the second is that Greek should have a solid surplus in terms of scale after such a depression.

Money Money Money

A sign of what Taylor Swift would call “trouble,trouble,trouble” can be found in the monetary system. The media world may have moved onto pastures new but Greece is still suffering from the capital flight of 2015.

On 26 October 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €28.6 billion, up to and including Wednesday, 8 November 2017, following a request by the Bank of Greece.

The amount of Emergency Liquidity Assistance is shrinking but it remains a presence indicating that the banking system still cannot stand on its own two feet. This means that the flow of credit is still not what it should be.

In September 2017, the annual growth rate of total credit extended to the economy stood at -1.5%, unchanged from the previous month and the monthly net flow was negative at €552 million, compared with a negative net flow of €241 million in the previous month.

Also in a country where the central bank has official interest-rates of 0% and -0.4% we see that banks remain afraid to spread the word to ordinary depositors.

The overall weighted average interest rate on all new deposits stood at 0.29%, unchanged from the previous month.

Also we learn that negative official interest-rates are not destructive to bank profits and how banks plan to recover profits in one go.

The spread* between loan and deposit rates stood at 4.26 percentage points from 4.28 points in the previous month.

Comment

There is a lot to consider here but we can see clearly that the “internal devaluation” economic model or if you prefer the suppression of real wages has been a disaster on an epic scale. Economic output collapsed as wages dropped and unemployment soared. Even now the unemployment rate is 21% and the youth unemployment is 42.8%, how many of the latter will never find employment? As for the outlook well in the positive situation that the Euro area sees overall this from Markit on Greek manufacturing prospects is a disappointment.

“The latest PMI data continue to paint a positive
picture of the Greek manufacturing sector, with the
headline PMI signalling an improvement in
business conditions for the fifth month in
succession……….There was, however, a notable slowdown in output growth, which poses a slight cause for concern
going forward.

A bit more than a slight concern I would say.

Meanwhile I note that the media emphasis has moved on as this from Bloomberg Gadfly indicates.

Greece is taking a step closer to get the respect it deserves from Europe.

It is how?

Yields on the country’s government bonds, which have already taken great strides lower this year, hit a new low last week on news the government is preparing a major debt swap.

I have no idea how the latter means the former but let us analyse the state of play. Lower bond yields for Greece are welcome but are currently irrelevant as it is essentially funded by the institutions and mostly by the European Stability Mechanism. There are in fact so few bonds to trade.

So Greece will have an opportunity to issue debt more expensively than it can fund itself via the ESM now? Why would it do that? We come back to the fact that it would get it out of the austerity programme! Not quite the Respect sung about by Aretha Franklin is it?

 

What is happening in the US economy?

It is time and in some ways past time for another delve into the state of play in the US economy which some would have you believe has been doing extraordinarily well. I spotted this from @Trickyjabs on Twitter earlier this week.

George Osborne, January 2015:
“Britain could be richer than US by 2030”

2.5 years later:
US GDP +21.5%
UK GDP +4.5%

If we skip the attempt to make a political point this is the sort of thing to cheer Donald Trump especially if he could find a way to argue it had all happened this year! Sadly of course the lesson here is not to use figures you do not understand as the US figures are realised in an annualised version. So still better than the UK but not by much.

Perspective

If we look back we see that the US Bureau of Economic Analysis or BEA tells us that economic output as measured by GDP peaked at 14.99 Trillion US Dollars in the last quarter of 2007 ( 2009 prices). If we jump forwards to the second quarter of this year we see that it had risen to 17.03 Trillion US Dollars. So if we allow for the likely growth in the third quarter an increase of the order of 14%. This tells us that the US has done relatively well on this measure but that growth is lower than what used to be considered normal. Putting it another way we have a type of confirmation that as output did not reach its previous peak until halfway through 2011 the new normal for economic growth may be of the order of 2% per annum.

Also the BEA gives us an insight into the structure of the US economy which goes as follows. 69% is consumption, just under 17% is investment and just over 17% is the government. You may have spotted a mathematical flaw which is solved when we put in net trade which is -3%.So investment has fallen as has the relative size of the government and the gap has partly been filled by services consumption rising from 44% to 47%.

Perhaps the most interesting change is the decline in the trade deficit which peaked at just under 6% of GDP before the credit crunch but is now around 3%. I wonder how much of a role the shale oil industry has played in this.

Looking ahead

One view was expressed by the Donald back in August. From CNBC.

“If we achieve sustained 3 percent growth that means 12 million new jobs and $10 trillion of new economic activity. That’s some number,” Trump said during a speech last month in Missouri promoting tax reform. “I happen to be one that thinks we can go much higher than 3 percent. There’s no reason we shouldn’t.”

If the US Federal Reserve was on board with that then we would have seen more interest-rate increases but its latest forecasts suggest annual economic growth of around 2%. So belatedly they have caught up with us on here!

Interest-Rates

This is an intriguing one as markets expect another rise to circa 1.25% in December and it became more intriguing as we learnt this from the European Central Bank and its President Mario Draghi yesterday.

Real GDP increased by 0.7%, quarter on quarter, in the second quarter of 2017, after 0.6% in the first quarter. The latest data and survey results point to unabated growth momentum in the second half of this year

So better than the US so far in 2017 and the Euro area has seen growth for a while.

Growth is growing and momentum is also growing and labour market and everything is doing – well, I think it’s, I can’t remember how many quarters of consecutive growth, 17 I believe.

But the picture for interest-rates is completely different.

The sequence stays what it is, namely this – the interest rates will stay and they remain at their present – are expected to remain at their present levels for an extended period of time and well past the horizon of our net asset purchases.

So President Draghi is giving us Forward Guidance that the ECB deposit rate will remain at -0.4% for at least the next couple of years and maybe beyond. This is because the cut to the monthly amount of QE to 30 billion Euros a month was accompanied by not only an extension of its term but more hints that it might go “on and on and on ” to coin a phrase.

Whilst 2017 looks like being somewhere between a good year for both the US and Euro area economies sooner or later a recession will come along. Oh except of course in the forecasts of central bankers which seem to actually believe they have ended them! But my point is should it come then we will see a US central bank which has raised interest-rate but an ECB with them starting it in negative territory. The rationale as we look at comparisons is given here.

As such, the US recovery is way more advanced than ours

Quite a compliment for the United States I think.

Inflation

This remains by historical standards relatively mild with this being the latest release from August.

The PCE price index increased
0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.

This means that the annual rate for Personal Consumption Expenditure has fallen from 2.2% in February to 1.4% in August. So good news overall and in case you are wondering why CPI is not used the gap between the two measures is variable but tends to see CPI around 0.4% higher.

Wages

From the Bureau of Labour Statistics or BLS.

Real average hourly earnings increased 0.7 percent, seasonally adjusted, from September 2016 to
September 2017. The increase in real average hourly earnings combined with no change in the average
workweek resulted in a 0.6-percent increase in real average weekly earnings over this period.

So there is some growth but hardly stellar.

Comment

In many ways the US economy has done pretty well in the credit crunch era but this does not mean that there are not begged questions. This start in an apparent area of strength because the unemployment has fallen to 4.2% and the underemployment rate to 8.3%. But the catch as was discussed in the comments section yesterday comes from the participation rate which in spite of an improvement in September is some 3% lower than pre credit crunch. So what has happened to nearly 8 million people or ten million if we look further back?

The next issue is one of debt. I am not particularly thinking of the level of it but the way that it seems to have permulated and percolated back down to the sub-prime level again. From Bloomberg in August.

There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.

“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.

I dread to think what “deep subprime” means don’t you? As to the car market itself this from Automotive News does not seem entirely reassuring.

October is on track to be the second-best month of 2017 for U.S. new-vehicle sales, analysts said, partly due to surging demand in states recovering from hurricane damage, though volume is projected to fall slightly from the same month last year.

When will the next big hurricane come along to boost sales and I note what is happening with prices.

Fleming said incentives have risen to 11 percent of average transaction prices — “an indicator that new-vehicle demand is still contracting, and production cuts could be on the horizon to prevent oversupplies.”
Discounts are all but certain to rise further in the coming months, as automakers roll out year-end promotions that typically start in the next few weeks and stretch into early January.

My financial lexicon for these times of course defines an “incentive” as a price cut.

Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

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

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.

 

 

A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

The UK gets an upgrade and a downgrade in a single day

The weekend just past saw plenty of action but my concentration is on Friday. As you see there were two clear events which operated in opposite directions in terms of views on the UK economy.  Let me open with the one which was reported much less but is in line with one of the themes of this blog which is that economic statistics are much less reliable that many would have you believe. From the Office for National Statistics ( ONS) on Friday morning.

The impact of the new data is largest in 2015 due to forestalling in advance of an increase in tax on dividends; the dividends revision in 2016 will be published on 29 September 2017.

Okay if you recall we thought that was happening back then but wait until you see the new estimate of the impact.

In 2015, the indicative estimate of the household and NPISH (non profit institutions serving households) saving ratio is 9.2%, revised up from the latest published value of 6.5%. The indicative estimate for growth in real household and NPISH gross disposable income is 5.3%, revised up from the latest published value of 3.6%.

Let me start with the savings issue where an extra £41.6 billion of household savings have been found in 2015. In terms of light entertainment we see that “Improvements to Illegal Activities” were £1.6 billion of that where apparently people are doing these to build a savings nest egg. Also as rent and imputed rent total some £1.9 billion I am left wondering how much imputed rent which is of course never received as it is a theoretical construct is saved? Of course Sir Charles Bean will be disappointed as well because it previously looked as though people might have listened to his calls for people not to save whereas now it looks like he was ignored.

But more seriously this update changes the whole trajectory of the UK economy as on this ratio the savings ratio has been ~9% since 2011. This is rather different to the previous number of slightly under 9% declining to 6.1%! If we move to economics we see that those who do sectoral equations and assure us that they cannot be wrong have a problem as if one bit is larger another has to be smaller. For example the ONS now think that UK companies borrowed some £41.1 billion less than in 2015 than previously reported.

Also we should note that disposable income rose considerably more quickly than previously reported.

Surpluses everywhere!

If we move to trade we see yet another example of what would have Lindsey Buckingham singing ” I think I’m in trouble”. From the Financial Times.

 

Statisticians are investigating the delicate matter of why the trade balance between the UK and the US does not balance. At various times over the past decade, the UK and the US have both simultaneously recorded a trade surplus with each other.

Excellent isn’t it? Imagine a world where in football matches both teams win!

 

Last year, for example, the UK claimed a £10bn goods trade surplus with the US, according to official statistics, while the US said it had recorded a surplus of $1bn.

Actually the real problem is below and regular readers will be aware that I have pointed out time and time again that the UK services data leaves a lot to be desired.

 

In services, COMTRADE, the UN trade statistics database, shows that the US claims a services trade surplus of $13bn with the UK, which claims a services surplus of more than $34bn with the US.

Either the FT journalists are unaware of or chose not to report this.

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

Oh and the US figures may be as bad it is just that I have spent quite a bit of time looking at the problems in the UK.

Moodys

More publicised in spite of the fact it was not produced until late Friday evening UK time was this.

Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts.

Which led according to their analysis to this.

Moody’s Investors Service, (“Moody’s”) has today downgraded the United Kingdom’s long-term issuer rating to Aa2 from Aa1 and changed the outlook to stable from negative.

It was a little awkward for them to forecast weaker public finances in a week which had seen better numbers released but some of the arguments seem sound. For example a minority government is likely to spend more than a majority one. Also they expect the UK economy to continue to be on a weaker trajectory.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period.

That puts them in conflict with the Bank of England which of course is now expecting a bit of a pick-up. If we look at track records we are left with problem that neither have a good track record, can they both be wrong? Also after the problems with statistics we have already looked at today can one state the sentence below with any confidence?

Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty.

In essence though the opinion and downgrade has been driven by this view.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.

Comment

Let us start with Moodys where there is some sense to be found in their view of public expenditure I think. The pattern looks set to be higher due to the consequences of minority government and that is consistent with ratings agencies often picking out useful bits of detail. Their problem is their tendency to be behind the times and of course the existence of a credit crunch driven by them labelling instruments as “AAA” which were anything but. If we move to financial markets we see something which shows what power they now have. If you project a worse fiscal position then you would expect bond yields to rise in response whereas at the time of typing this the UK 10 year Gilt yield has fallen to 1.33%. Or perhaps the currency to fall? Not that either as it has moved back above US $1.35 and Euro 1.13.

If we move back to economics the problems are very serious for those who base their work only on statistics and equations. You see it is not only the future which is uncertain it is the present and past too. There is no Dune style Bene Gesserit for the past nor a Muad-Dib for the future. Those who tell you that an economic variable has to be something because of what another is should be made to face a critique every time. This brings me to something which regularly comes back into fashion like a weed in a garden which is targeting nominal GDP ( Gross Domestic Product). This will require adjusting policy based on a variable which is often wrong and sometimes very wrong.

As to the specific data for the UK we saved more in the period up to 2015 which means that more recent figures come from a stronger base. How much the more recent ones will be revised is hard to say as you see some of the changes today have happened in the last month.

Knee Op

After the false dawn of a fortnight ago I am booked in for tomorrow morning for my ACL reconstruction so I will be taking a break of at least a couple of days. On that subject let me wish Billy Vunnipola  well as at least I managed more than 20 years between incidents.