UK Employment surges in June

After yesterday’s news that inflation is not only rising but showing signs it will be here for the summer and autumn we have some better news for the UK economy today. It came from the labour market release.

The number of payroll employees showed another monthly increase, up 356,000 in June 2021 to 28.9 million…. For the first time since the beginning of the pandemic, some regions are now above pre-pandemic (February 2020) levels. These include North East, North West, East Midlands and Northern Ireland.

That is quite a monthly rise and provides some hope for the June GDP figures. There have been times in the credit crunch era where we have seen employment lead output in the official numbers. That is a reverse of economic theory but of course we have torn so many chapters out of those books. So after the 0.8% growth in May we can cross our fingers for June.

Next up on the hopium front was this.

There were 862,000 job vacancies in April to June 2021 – 77,500 above its pre-pandemic level in January to March 2020. All but one industry saw quarterly increases in their number of vacancies. In June 2021, the experimental monthly vacancies data, and the experimental Adzuna online vacancies data both continued to surpass pre-pandemic levels.


So both employment and vacancies had a really good June and let me praise our statisticians for speeding up their work and providing numbers for June as the previous system would only be at May. There are accuracy risks but especially at a time like this we are keen to be as timely as possible.

This coincides with what we were told last week by Markit/REC.

Permanent appointments growth hit a fresh series record, while the upturn in temp billings was among the fastest in the survey history. At the same time, vacancy growth hit a new series record.

As well as this from the Composite PMI report.

A rapid turnaround in staffing numbers continued in June,
led by additional hiring across the service economy.
Measured overall, the rate of private sector employment
growth was the strongest recorded since the series began in
January 1998.

So things here look good and ironically maybe a little too good in some areas.

In some key shortage sectors like hospitality, food, driving and IT, more support is likely to be needed to avoid slowing the recovery. ( Markit/REC )

Which has led to this response.

The government is to relax rules this month for how long lorry drivers can work, as a temporary fix for a severe shortage of qualified heavy goods vehicle (HGV) operators. ( Reuters)


For the unwary things look fantastic.

Growth in average total pay (including bonuses) was 7.3% and regular pay (excluding bonuses) was 6.6% among employees for March to May 2021.

Regular readers will be aware that I made a complaint to the UK Office for Statistics Regulation in March about this.

So after more than a decade of weak real wage growth that has been so poor we have failed to recover the previous high from 2008 we see that according to these figures all we needed was an economic depression.

Shaun Richards to Ed Humpherson: ONS Average earnings figures

There has been an effort to explain the numbers but sadly the headlines go around the world and have done so this morning.How often does the follow-up detail get read?

compositional effects where there has been a fall in the number and proportion of lower-paid employee jobs so increasing average earnings; and base effects where the latest months are now compared with the start of the coronavirus (COVID-19) pandemic when earnings were first affected and pushed down.

This to quote Carly Rae Jepsen this “really, really, really, really, really, really” matters because we are now telling people that UK real wages have recovered from the credit crunch slump. Next year when (hopefully) the economy has recovered we are likely to be wondering why real wages have hit trouble again when the issue is how it is measured not what is actually happening.

The Deputy National Statistician has written a bog explaining the issues which are exit effects via the annual numbers although he calls them “base effects” and compositional issues where last year lots of lower paid workers lost jobs. Thus if you then calculate an average you have a higher number even if no-one has had a pay rise, which is a pretty basic fail. Here are his thoughts.

Well, this month the headline regular earnings growth rate is 6.6%. We estimate that the base effect would reduce the headline rate by between 1.8 and 3.0 percentage points based on the two methods set out above. In addition, the compositional effect we estimate at 0.4 percentage points above pre-pandemic levels. This would give an underlying rate of between 3.2% and 4.4%.

So we have an underlying rate assuming he is right which is pretty much what we concluded for inflation yesterday ( of the order of 3.4%). So suddenly there is no earnings growth at all in real terms. I also note he had ducked the issue of bonuses so we know little more there.

Basically they do not know.

Our calculations of an underlying rate are there to help users understand base and compositional effects, but at risk of repeating myself, there remains a lot of uncertainty about how best to control for these effects.

So as people try to understand the economic effects of the pandemic they will be misled by the average earnings data which is why I reported them. Under the Quality standard “and should not mislead” is an objective.

Hours Worked

These have proved especially useful during the pandemic due to the way the response affected the other numbers. For example whilst I welcome the fall in the unemployment rate to 4.8% we will not fully know the state of play until the Furlough Scheme is over.

The estimated 5% of businesses’ workforce reported to be on full or partial furlough leave in late June 2021 suggests that approximately 1.1 to 1.6 million people were furloughed within the industries surveyed in BICS.

You can drive a double-decker bus through that estimate when surely we should know how many we are paying?

The Hours Worked numbers continue to improve.

In March to May 2021, total actual weekly hours worked in the UK increased by 23.3 million hours from the previous quarter, to 981.4 million hours (Figure 5). This coincided with the relaxing of coronavirus lockdown measures, which had stalled the recent recovery in total hours.

But we have a fair way to go.

However, this is still 6.7% below pre-pandemic levels (December 2019 to February 2020).

From other numbers such as GDP we know May was an improvement and after today’s release we have bigger hopes for June. But for now they remain hopes.


There is a fair bit of good news around here. June seems to have been a good month for employment and if we return to the Markit/REC report we think there have been wage rises. It reported increases for both permanent and temporary staff especially in London.

A sharp rebound in demand for labour and a notable fall in the supply of workers led to further rapid increases in both starting salaries and temp pay. Permanent starters’ salaries rose at the sharpest rate since July 2014, while hourly rates of pay for short-term staff increased at the fastest pace since October 2004.

As for this month that should continue but it is also true that supply shortages are appearing in some areas and the recent spate of isolations due to Covid-19 may impact too.

Hundreds of staff at Nissan’s car plant in Sunderland are self-isolating due to “close contact” with Covid-19, the company has confirmed.

It comes amid a surge in cases of the Delta variant of the virus in the north east of England.

The company, which employs 6,000 people at the Wearside site, said production in “certain areas” had been “adjusted” as it manages numbers off work. ( BBC )

That impact depends on the line of work undertaken because if you have few symptoms many have got used to working from home.



Inflation is back on the march

Yesterday brought troubling news on the inflation front as the US CPI measure of inflation rose to 5.4%. Personally I was more bothered by the annual rise of 0.9% due to the problems at the moment with annual comparisons created by the Covid pandemic. That set something of an underlying theme for the UK release this morning so to any logical person it is rather curious to find this being reported by in this instance Ed Conway of Sky News.

UK CPI inflation rises above expectations again. Up to 2.5% in June.

If you had not be following the producer prices data we check each month you did get a clue from the US yesterday. It has different specific circumstances but broad trends for and other commodities will be in play.

Thus this was not really a surprise at all.

The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to June 2021, up from 2.1% to May; on a monthly basis, CPI rose by 0.5% in June 2021, compared with a rise of 0.1% in June 2020.

We can break it down but the initial one helps a bit but as you can see whilst goods inflation is higher by the standards of this the gap is not large. However goods prices have seen a particular acceleration.

The CPI all goods index annual rate is 2.8%, up from 2.3% last month……The CPI all services index annual rate is 2.1%, up from 1.9% last month.

We can take that further although the official analysis is only for the similar CPIH as they try to force people to use their widely ignored favourite.

There were upward contributions to the change in the CPIH 12-month inflation rate from 9 of the 12 divisions, partially offset by a downward contribution from health.

So the move was fairly broad and we can specify it more.

The largest upward contribution (of 0.08 percentage points) to the change in the CPIH 12-month inflation rate came from transport, where prices rose by 1.3% between May and June 2021, compared with a rise of 0.5% between the same two months of 2020. The effect was principally from second-hand cars and motor fuels.

The second-hand car effect was something seen in the US where the unadjusted annual number was 45.2%. A lot of reliance was placed on the seasonal adjustment which reduced it to 10.5% as you can see by the difference in the numbers. The UK situation is not so different with second-hand cars seeing a monthly price rise of 4.4%. In terms of the technicalities they have reduced the weight by 20% which has proved convenient in keeping recorded inflation low but looks a clear mistake in hindsight.

Due to second-hand cars, where prices overall rose this year but fell a year ago. There are reports of prices rising as a result of increasing demand. This follows the end of the latest national lockdown and with some buyers turning to the used car market as a result of delays in the supply of new cars caused by the shortage of semiconductor chips used in their production.

That category was also impacted by rises in fuel prices of the order of 2.4 pence per litre which meant a 2% rise on the month for fuels.

Next come something rather troubling for those relying on seasonal adjustment.

A final, large, upward contribution (of 0.05 percentage points) came from clothing and footwear. Prices, overall, rose by 0.8% between May and June this year, compared with a fall of 0.1% between the same two months a year ago. Normally, prices fall between May and June as the summer sales season begins  but the seasonal patterns have been influenced by the timing of lockdowns since the onset of the coronavirus pandemic.

The US Bureau of Labor Statistics which adjusted US used car prices so heavily may have an itchy collar when reading that.

The ongoing issue of how to treat prices in area’s which see heavy discounting or the same from going in and out of best-seller charts swung the other way this month.

The largest downward contribution of 0.06 percentage points came from games, toys and hobbies, where prices fell this year but rose a year ago, with the main effects coming from computer games and games consoles.

Also the rate of increase of prices for pills,lotions and potions has faded.

A partially offsetting, small downward contribution (of 0.03 percentage points) to the change in the CPIH 12-month inflation rate came from health. Prices of pharmaceutical products, other medical and therapeutic equipment rose by 0.8% between May and June 2021, compared with a larger rise of 3.1% between the same two months a year ago.

Tax Cuts

There have been some indirect tax cuts of which the largest has been the cuts to VAT. If you fully factor them in then the inflation episode is a fair bit larger.

The annual rate for CPI excluding indirect taxes, CPIY, is 4.2%, up from 3.8% last month.



No perhaps it will not all be passed through but even if you halve the impact you end up at 3.4%

Housing Costs

This has been a contentious issue for some time and the heat is not only on it is getting hotter all the time. Why? Well the official view is this.

The OOH component annual rate is 1.6%, up from 1.5% last month. ( OOH = Owner Occupiers Housing Costs)

I had to look that up because they quote all sorts of numbers to try to hide what is so obviously embarrassing. Even the man from Mars that Blondie sang about is probably aware that house prices are soaring and will be wondering how costs are only rising .

by that little? Especially when only 2 and and half hours later we are told this.

UK average house prices increased by 10.0% over the year to May 2021, up from 9.6% in April 2021.

So prices are up 10% but costs only by 1.6%! So what fell? Well mortgages are doing little so our official statisticians have to explain how their smoothed ( it is up to 16 months out of date) number for rents which do not exist impacts with reality.

After all how can you add soaring housing costs to the CPI at 2.5% and manage to then get 2.4% as CPIH does…..

I have regularly pointed out that this is an area of strength for the Retail Prices index or RPI and the reason why is shown below.

Annual rate +4.3%, up from +3.8% last month

It is picking up the rises that everyone can see much more accurately and let me specify that. It uses house prices via depreciation which is good but even it is handicapped by the smoothing process I described earlier and would change given the chance. If so it would give a higher reading right now and be a better measure.


I thought you might enjoy my perspective on the official inflation view..

The official inflation story
1. There wont be any
2. It will be transitory
3. It was above expectations
4. It is too late to do anything about it now.

Next there is the house price issue which if we put into the CPI measure at current weights would put it at 4%. Regular readers will have noted Andrew Baldwin commenting on this and so let me refine it. In reality if they let house prices in they will have the weights even though no brick is moved,window opened or door closed. But even if we so that we get to 3.2% and the Governor of the Bank of England is in the zone where he has to write an explanatory letter. That would be awkward as this afternoon the Bank of England will buy another £1.15 billion of UK bonds in an attempt to raise the inflation rate.

Looking ahead we see that whilst the shove is not as large as last month there still is a large one.

The headline rate of output prices showed positive growth of 4.3% on the year to June 2021, down from 4.4% in May 2021.

The headline rate of input prices showed positive growth of 9.1% on the year to June 2021, down from 10.4% in May 2021.

The monthly rise for output prices was 0.4% so the beat goes on. In terms of the input ones there was a 0.1% dip but this was mostly driven by the swings in oil so we need to check again next month.

Meanwhile is some action building in services inflation?

The annual rate of growth for the Services Producer Price Index (SPPI) showed positive growth of 2.0% in Quarter 2 (Apr to Jun) 2021, up from 1.3% in Quarter 1 (Jan to Mar) 2021.

The Bank of England will be vigilant in its efforts to ignore house price rises

This morning has been one where a little known committee has emerged blinking into the spotlights. It is the Financial Policy Committee (FPC) of the Bank of England and just to prove that they are central bankers they got straight to what is the beating heart of their concerns.

he UK banking system has the capacity to continue to provide that support. The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the interim results of the 2021 solvency stress test.

We have learnt to be more than suspicious about the use of the word “resilient” especially after noting how across the Irish Sea what was labelled the best bank in the word suddenly collapsed in the credit crunch.  As so often it was time to throw The Precious a bone.

The FPC supports the Prudential Regulation Committee’s (PRC’s) decision that extraordinary guardrails on shareholder distributions are no longer necessary, consistent with the return to the Prudential Regulation Authority’s (PRA’s) standard approach to capital‐setting and shareholder distributions through 2021

How many civil servants does it take to let the banks pay dividends again? As you can imagine it has gone down well with bank shareholders.

Whilst they are there I guess they felt they also needed to help keep the lending taps open.

To support this, the FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Due to the usual 12‐month implementation lag, any subsequent increase would therefore not be expected to take effect until the end of 2022 at the earliest.

What about the real economy?

Some businesses have been hit hard.

The increase in indebtedness has not been large in aggregate, but has been more substantial in some sectors and among small and medium‐sized enterprises (SMEs)…..companies with weaker balance sheets, particularly in sectors most affected by restrictions on economic activity and SMEs, may be more vulnerable to increases in financing costs.

But it is not going to worry about them because others have not.

UK businesses’ aggregate interest payments as a proportion of earnings did not increase over 2020, and are around historic lows.

Such statements can hide a lot of woes especially for businesses where earnings have been hit hard.

As to households things are not as bad as when things collapsed last time.

The share of households with high debt‐servicing burdens has increased slightly during the course of the pandemic, but remains significantly below its pre‐global financial crisis level

Pumping up house prices was one of the few things we could do.

House price growth and housing market activity during 2021 H1 were at their highest levels in over a decade, reflecting a mix of temporary policy support and structural factors.

We need to find a way that people can borrow even more.

However, so far, there has only been a small increase in mortgage borrowing relative to income in aggregate, and debt‐servicing ratios remain low.

It has been good to see that low equity mortgages are back but in case that backfires again we had better cover ourselves.

The FPC’s mortgage market measures are in place and aim to limit any rapid build‐up in aggregate indebtedness and in the share of highly indebted households. The FPC is continuing its review of the calibration of its mortgage market measures.


This is an awkward area for central bankers. After all their main policy lever these days is pumping up asset prices via purchases of government bonds. The Bank of England will do another £1.15 billion of that this afternoon. So we get this sort of buck passing statement.

Risky asset prices have continued to increase, and in some markets asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ in a low interest rate environment, and higher risk‐taking.

Ah the very yields the central banks have set out to take away! This is also why those who set interest-rates and have previously been so busy cutting them are always in a rush to blame secular trends. It wasn’t their fault you see. Of course if it had worked it would have been their triumph.

It gets worse in the next bit. The Bank of England piled into the Corporate Bond market in spite of the fact that previously it had got into a mess in doing so. This is because UK businesses of that size are mostly international and thus often choose to issue in Dollars and Euros to match currency risk. Thus the £ sterling market is smaller than you might think and it ended up being like The London Whale in there. Also it was so desperate to find bonds to buy it bought the ones of Apple. Exactly what support did the richest company in the world need? Yet it tries to point put what is below as if it had nothing to do with it.

The proportion of corporate bonds issued that are high‐yield is currently at its highest level in the past decade, and there is evidence of loosening underwriting standards, especially in leveraged loan markets.

Encouraging that was official Bank of England policy. Below is as close to admitting they have stored up trouble for the future as they will ever get.

This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.

Next is even more classic central banker speak which completely ignore their role in creating this.

Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth or inflation, and therefore interest rates.

Even Bloomberg pointed this out last week. What did central bankers think would happen in response to this?

Central banks in the U.S., Europe and Japan have become ultimate market whales during the pandemic, with combined assets of $24 trillion.

Is there any market-based finance left after all their interference?

Any such correction could be amplified by vulnerabilities in market‐based finance, and risks tightening financial conditions for households and businesses.

Many reviewing this will think The Beatles were rather prescient here about QE.

You never give me your money
You only give me your funny paper

Especially if their situation is like this.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go


There are a couple of contexts here. I have critiqued the FPC as being a waste of space where people you have mostly never heard of are selected because they have the “right” views. The official view was that the FPC would set macroprudential policies which would keep house prices under control. Remember macropru as it became called? Where are all its supporters now as they seem to have disappeared?

“Over the last twelve months, our index has shown the average price of a home sold in England and
Wales has increased by some £32,500, or 10.7%. If we exclude London from this then the figure is a
very considerable 14%. Nevertheless, even including the capital, this is the highest annual rate since
February 2005. It is now fourteen months since any of the areas in our index have recorded a fall in
house prices, and this is while the UK economy has been under the severest pressure it has faced in
living memory.” ( Acadata)

So where are they then?

Still it looks as though one member has been checking his own position.



UK Trade figures are subject to a lot more doubt than we are usually told

Today is a cleat example of the morning after the night before so let me open by congratulating Italy on their victory in the European Championships football last night. However I wish to look back to Friday lunchtime when the UK released some new details on trade some 5 hours after they were supposed to be released. A good day to bury bad news or has the issue of there being rather different numbers on European trade being produced by the UK and EU come to a head?

What were the numbers for May?

They started well as we note a rise in exports.

Total exports of goods, excluding precious metals, increased by £1.3 billion (4.9%) in May 2021, driven by a £1.0 billion (8.0%) increase in exports to EU countries.

The first part is no great surprise as we are looking at a period where economies picked up and the second part of a rise to the EU is hopeful for the post Brexit era. As it happens the other side of the balance sheet was good for the trade balance too.

Total imports of goods, excluding precious metals, fell by £0.5 billion (1.4%) in May 2021 because of a £0.7 billion (3.4%) fall in imports from non-EU countries, which offset a slight increase of £0.1 billion (0.8%) to EU countries.

So we imported less in spite of the economy growing by 0.8% in May and it was a non-EU issue. Indeed by our admittedly poor standards we seem to be in a better run for the trade data.

In the three months to May 2021, the total trade deficit, excluding precious metals, narrowed by £2.2 billion to £3.5 billion.

If we now switch to the Brexit issue we see that there has been a change.

Monthly goods imports from non-EU countries, excluding precious metals, continues to be higher than the EU for the fifth consecutive month, but the gap is narrowing.

But that was it and as someone who has formally asked for more detail on services trade it is hard not to have a wry smile. Because we have ended up with it being nearly the same as the detail on goods trade where we learn very little about either.

In the three months to May 2021, the trade in services surplus fell by £0.2 billion to £28.1 billion.

If you were hoping to find out if it was exports or imports changing I am afraid that was it.

Services Trade

I thought I would scan the data and I return to the issue I raised with the Bean Review. In each of the last 3 sets of 3 months data we have a surplus of around £28 billion. So in a world with the changes we have seen the 3 months to May gives the same answer as the 3 months to February and the 3 months to November 2020. Does anyone actually believe that?

There is one change in that services trade has fallen compared to the peaks in 2019 with exports some £15 billion per quarter lower and imports £18 billion lower.

Why did we get so little May data?

This was singing along with Lyndsey Buckingham.

I think I’m in trouble
I think I’m in trouble

Here are the details and nice effort to blame HMRC ( the tax body).

We identified an error in the UK trade data prior to the planned release on 9 July 2021. The error occurred as we opened up the 2020 year to take on board corrections to HMRC data for non-EU trade which has caused a processing issue for the EU data.

With all the debate over Brexit it was in fact trade outside of it which saw the big move with exports in 2020 revised down by £4.5 billion.

Ironically the numbers improved the view of post full Brexit trade. The moves were more minor but January and February saw a downwards imports revision of £500 million. Then March and April saw an upwards revision of £600 million to exports.

Oh and the HMRC changes were published on the 29th of June so in plenty of time…

Brexit Trade Number Crunching

Regular readers will be aware that some time back I looked at the figures for trade between the US and China. The problem was that you git rather different answers depending on whose figures you looked at. This has been repeated in 2021 as we look for signs as to what a full Brexit has done to UK trade with the EU. Here is the Office for National Statistics.

We have been exploring several possible reasons for the growing disparities between EU and UK trade statistics.

So what is it?

A key reason for the differences we have found is that Trade statistics for imports can be reported on a country of dispatch and country of origin basis. Whereas for exports only country of destination is recorded.

Seems a bit odd that you would count exports and imports differently. So who does what?

For the UK, our main publications for trade statistics shows imports based on country of dispatch and exports on country of destination. This is both for EU and non-EU trade.
The European Union and its Member States will record the country of dispatch and country of origin for non-EU import but will publish their non-EU imports trade based on country of origin.

The finger is pointed at Eurostat as this pre Brexit.

Eurostat statistics record this transaction as £200 imports from UK to NL.

Now becomes this for the same transaction.

Eurostat statistics record this transaction as £200 imports from China to NL.

What does this mean in terms of numbers? Well this was the state of play.

 Just looking at 2020 as an example, the difference between the ONS and Eurostat non-seasonally adjusted datasets were as little as under £100 million in some months, while reaching around £1.5 billion in others.

Which has been replaced by this.

Revisiting the differences now between the UK and Eurostat non-seasonally adjusted datasets, the divergences are much larger, up to £2.7 billion in some months

The areas especially affected are these.

The commodities driving this increased divergence are ‘machinery & transport equipment’ and ‘miscellaneous manufactures’. While a large volume of goods for these commodities, for example cars being finished, pass through the UK, the importing European country receiving the finished good will report country of origin and not country of dispatch.


This has been a humbling period for official economic statistics. Indeed with the way the the Markit PMIs have got manufacturing so wrong recently we can widen the troubled list. Trade figures have long been amongst the worst and I recall the UK version losing their National Statistics status back in 2014.

This adds to the fact that there has been trouble elsewhere like in the Labour Force Survey.

In addition, a change to the non-response bias means that we appear to have a poorer response from some subsets of the population, in particular those with a non-UK country of birth.

which means this.

Another a distinct but related issue was the fact that the population estimates that feed into published the LFS statistics predate the pandemic, and so do not show its demographic and structural impacts.

Which reminds me of this problem.

Our latest data, using information from the Annual Population Survey (APS), shows that in mid-2020 there were around 3.5 million EU citizens living in the UK, a lot smaller than the 6 million applications for the EU Settlement Scheme.

Are there 6 million? No I do not think so but the 3.5 million is probably wrong too.


Can we Test and Trace for UK GDP?

Due to the economic impact of the Covid-19 pandemic we are even more keen than usual to peer under the bonnet of the economy. There is an irony in that in normal times I advise care with the monthly economic output or GDP data and there are obvious reasons to think that is exacerbated now. But we are where we are and here it is.

Monthly real gross domestic product (GDP) is estimated to have increased by 0.8% in May 2021 as coronavirus (COVID-19) restrictions continued to ease to varying degrees in EnglandScotland and Wales. This is the fourth consecutive month of growth, albeit slower compared with March (2.4%) and April (2.0%).

In ordinary times monthly growth of 0.8% would be at party levels but the main point here is that things look to have slowed from what we had in March and April. However we now have four months in a row of growth and some factors are shifting towards a more normal setting.

The service sector grew by 0.9% in May 2021 – accommodation and food service activities grew by 37.1% as restaurants and pubs welcomed customers back indoors following the easing of coronavirus restrictions.

The default setting for the UK is for growth in the services sector to lead the economy and it looks to be back. On a personal level I saw quite a bit of filming going on by the lake in Battersea Park earlier this week suggesting that industry is getting back into its groove although that is a couple of months ahead of the numbers today. For them we were told this.

Consumer-facing services grew by 3.2% as coronavirus restrictions continued to ease throughout May, with output levels now at the closest to their pre-pandemic level, at just 7.8% below. Despite growth in consumer-facing services, it is travel, transport and other personal services that continue to contribute to output remaining below pre-pandemic levels.

That can be broken down to this and at the end we see that the film industry looks to have been picking up in May as well.

Food and beverage services activities was the main contributor to the growth in consumer-facing services, growing by 34.0% in May 2021 as restaurants and pubs could serve the public indoors for part of the month. Strong growth means that the industry is now 9.4% below its pre-pandemic level (February 2020), but 0.3% above its August 2020 peak when the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants. Arts, entertainment and recreation also contributed positively to consumer-facing services growth, growing by 7.3%.

Education and Health

Two of the sectors most affected by the pandemic and it has led to quite a lot of issues as to how this is measured in economic terms and in particular for GDP.

education output contributed negatively to gross domestic product (GDP) in May 2021, as it fell by 0.5% compared with the previous month. Weighted attendance (taking into account the impact of remote learners) for May 2021 was approximately 91.6%, compared with 93.0% in April 2021.

Whilst in many ways this is worthy stuff there does anybody really believe that weighted attendance is accurate to a decimal point? Next up is health and for foreign readers there have been a lot of questions in the UK about the Test and Trace scheme and how effective it has been which provides a background to this.

Human health activities returned to growth, growing by 0.3% in May 2021. Output levels also remain high, driven by NHS Test and Trace services, and vaccine schemes across the UK.

The vaccine is rather different as it has been a success. The measurement is an issue because I have my doubts about how they get to this.

These adjustments are applied to both the government expenditure data as well as output data, and are applied only to volume data .

Reinforced by this bit.

we have used the latest available quarterly government data

Hang on this is a monthly series. I am not sure the detail improves things much as how accurate can it be?

the estimated cost to secure and manufacture vaccines for the UK and deploy vaccines in England, and testing and vaccination data, and estimated imports – and applied indicative volume adjustments to preserve the growth within the health sector and its impact on the economy, rather than applying an adjustment to preserve the level that could give an incoherent growth.

If we take it out of the figures we get quite a different pattern because March was then 1.3%, April was 2.4% and May 0.9%. So whilst growth is lower the pattern changes quite a bit because essentially GDP was assumed to surge in March via the above and we have taken just under half of it away since.

Another Disaster For the Markit PMI Survey

These matter not only in themselves but because central bankers rely on them. Regular readers may recall the Bank of England’s absent minded professor Ben Broadbent revealing this in the autumn of 2016 as he tried to explain how he had got things so wrong. That theme continues here as we note this.

LONDON, June 1 (Reuters) – A deluge of new orders helped to drive a record increase in British manufacturing activity last month as the economy began to recover from the COVID-19 pandemic, a survey showed on Tuesday.

The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to 65.6 in May from 60.9 in April.

Okay so this morning’s data showed quite a surge then?

The manufacturing sector remained broadly flat, contracting slightly for a second consecutive month, by 0.1%. Production in 6 out of the 13 manufacturing sub-sectors fell in May 2021.

So for the second month in a row they have predicted growth like a rocket and have seen a fall. Those who followed my analysis of how this went so badly wrong in Ireland will have a clue as in the case of the “pharmaceutical cliff” one large producer of a anti-cholesterol drug went off patent but was only one down tick in one hundred up-ticks, well here is the UK version.

 The largest contribution to the fall came from the manufacture of transport equipment, falling by 16.5%, as microchip shortages disrupted car production.

Didn’t pretty much everyone know that? The same happened in France and from this mornings release probably in Italy as well so as Britney would say it is a case of.

Hit me, baby, one more time


Returning to more like normal as lockdown eases seems to have had a negative effect here.

Construction output fell for a second consecutive month in May 2021, by 0.8%, following exceptionally strong growth in February and March, and an upwardly revised 0.7% decline in April 2021. Despite the fall, construction remains the only sector to have output levels at above its pre-coronavirus (COVID-19) pandemic level (February 2020).

I have long had my doubts about the measurement here and there was an official confession about problems a few years ago.


We can take a further perspective from this.

Overall, GDP grew by 3.6% in the three months to May 2021, mainly because of strong retail sales over the three months, increased levels of attendance as schools reopened from March, and the reopening of food and beverage service activities

Overall that is a solid performance but there is both a ying and a yang in the number below.

remains 3.1% below the pre-coronavirus (COVID-19) pandemic levels seen in February 2020.

So we are still well behind where we were in spite of the further progress we have made. So still a little sobering as we hope to get right back where we started from in say the winter of this year.

Mind you there is one area which has seen quite a surge.

Persimmon sales rose above pre-pandemic levels in the first half of 2021, as tax cuts and booming British house prices continued to benefit housebuilders.

The UK’s largest housebuilder said on Thursday that revenues reached £1.84bn in the first six months of 2021, outstripping the £1.75bn recorded in the same period of 2019. Persimmon’s sales had dropped to £1.2bn during the first half of 2020. ( The Guardian )

Rethinking The Dollar

I did an interview yesterday which from the comments placed already seems to have gone well.

What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.


Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.


Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved


An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.


The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )


Should we raise taxes to deal with the new debt?

The establishment response to the Covid-19 pandemic was to reach for the fiscal policy button and press it. This was in addition to what are called the fiscal stabilisers where more unemployment benefits are paid and less tax is collected. So for example we saw the furlough scheme deployed on a grand scale which was both a new venture and an adventure for the UK. Actually we got some news on it only yesterday.

provisional figures show that the number of employments on furlough has decreased by 1.2 million from 30 April to 2.4 million on furlough at 31 May 2021, down from 3.5 million on 30 April. (These figures do not sum exactly due to rounding.) Numbers on CJRS last peaked at 5.1 million in January and have fallen since. ( HMRC)

In case you were wondering the main falls were as you might expect.

across all more detailed industry sectors, the beverage serving activities group saw the largest reduction in jobs on furlough between 30 April and 31 May: a decrease of 179,700. This was followed by the restaurants and mobile food service activities group which saw a reduction of 133,000.

But for our purposes today the main impact was that these were rather different numbers to what the Office for National Statistics had told us.

The proportion of UK businesses’ workforce who are reported to be on furlough has decreased to 6% (approximately 1.5 million people) in early June 2021; this is the lowest level reported since the furlough scheme began.

It does go into June but as you can see has given us a very different answer as this seems to have misfired.

This number is based on multiplying the BICS weighted furlough proportions by HM Revenue and Customs (HMRC) Coronavirus Government Retention Scheme (CJRS) official statistics eligible employments1 for only those industries covered by the BICS sample.

It posts a warning about economic statistics but also for today it suggests that the path of public borrowing is going to be higher than we were thinking based on the ONS data.

Social Care

The news above may have rattled things a bit at HM Treasury which is always nervous about this sort of thing. A sort of institutional memory if you like. This presumably led to this from the Financial Times.

New health secretary Sajid Javid is to form a powerful alliance with chancellor Rishi Sunak to insist that major reform of England’s creaking social care system must be funded through higher taxes.

Presumably aides for the two politicians wrote the “powerful alliance” bit for the FT. Then we get to the crux of the matter.

Boris Johnson has promised to fix the social care funding crisis — with annual costs estimated at up to £10bn — but his reluctance to raise taxes has caused tensions with Sunak, who wants to tackle the £300bn deficit accumulated during the coronavirus pandemic.

So this is the crux of the matter and is why we have seen other tax raising moves floated such as reduction in the tax relief on personal pensions for higher-rate payers. That has various problems though. Firstly it does not apply to those imposing it as they usually have taxpayer funded final or average salary pensions. Next the pension structure has taken various hits around the areas of likely returns and especially the very low level of annuity rates. We have seen it appear before as a suggestion and then disappear although of course the deficit is larger now.

Indeed the drumbeat may even have reached The Sun.

NEARLY 2.5 million Brits are still on furlough as the scheme winds down — with the total bill reaching £66billion.

A conceptual issue here is that governments seem to have lost the power to raise rates for income tax. In the past the response would be to add a penny or two to the basic rate or to raise higher rates. They do seem able not to raise the various thresholds and thus get more money via people getting wage rises but that is about it. So a passive rather than an active move.

They are now thinking of a different route which is a specific tax for a policy.

Javid is sympathetic to a Japanese-style levy on the over-40s to fund social care, according to colleagues, while the Treasury is looking at whether a dedicated tax could be introduced.

The UK does not do this although some still think that National Insurance contributions do pay for the NHS and pensions. Whilst they do help there is no direct link at all as it just goes into one big pot and is then spent. One reason for this is that they do not want people objecting to specific areas such as conscientious objectors saying no to their taxes going to defence.

Actually using a Japanese example rams it  home as they have struggled to raise taxes at all as the two attempts with the Consumption Tax have taken quite some time partly because they have torpedoed the economy. So we may have a touch of The Vapors in more than one respect.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Oh and I did say that HM Treasury loves this sort of thing.

Nick Macpherson, Treasury permanent secretary from 2005 to 2016, told the Financial Times that now was a good time to introduce a new tax.

They miss out the bit that they always think that! He even has a PR line ready

“The public want greater NHS capacity and a better social care and this can’t be financed by fiddling around the edges of the tax system,” he said. “A social solidarity charge payable by all adults at a rate of 2 to 3 per cent of their income could put the health and social care sector on a sustainable footing.”

He has even dropped the over-40s bit in what no doubt seems a cunning plan to a Treasury Mandarin.

But we return to the question posed by The Jam.

And the public gets what the public wants

Or is it?

And the public wants what the public gets


The Chancellor is trying to have his cake and eat it here as he tries to manoeuver around this.

Johnson has so far insisted the Conservatives should honour their 2019 election manifesto commitment to freeze the rates of the “big three” taxes: income tax, national insurance and value added tax.

The undercuts to this are that whilst we are borrowing very heavily there are contexts. For example we can borrow very cheaply as the 50-year yield is 1.04% as I type this. As we stand there is more of a risk from higher inflation and our topic of yesterday nudging debt costs higher via our index-linked debt.

Also there is the swerve of our times via all the Bank of England QE purchases where some £808 billion as of the end of June has been if not wiped from the ledger (and there are roads where that is true) charged at a Bank Rate of 0.1%. That is one of the reasons why they are so reluctant to increase it.

Next is the fact that the UK economy is growing quickly and recovering the lost ground. Here though there is a catch, because once we do will we return to the slow growth we had before? That is not so hopeful for the public finances as we find ourselves returning to the Turning Japanese theme.

Will UK inflation exceed 5%?

The last 24 hours have seen the inflation debate move on in the UK and some of that has happened in the last ten minutes as the speech by Governor Andrew Bailey has been released. Many of the issues are international ones and trends so let me open by taking a look at what the Riksbank of Sweden has announced today.

Both in Sweden and abroad, the recovery is proceeding slightly faster than expected and the Riksbank’s forecasts have been revised up somewhat.

So like the Bank of England it has been caught out but its view attracted my attention because it is somewhat different.

Inflation has varied to an unusually large degree during the pandemic. This is partly due to energy prices but also to measurement problems and people’s changed consumption patterns during the pandemic. Inflationary pressures are still deemed moderate and it is expected to take until next year before inflation rises more persistently.

Not the inflation technicalities which are a generic but the fact they expect it next year which is different to the US view for example of “transitory” from now. We already ready know from one Fed member that “transitory” has gone from 2/3 months to 6/9 but more next year is a different view. Also “persistently” is the sort of language that will get you banned from central banking shindigs.

Andy Haldane

The Bank of England’s chief economist gave us his view on inflation trend yesterday which started with philosophy.

The first, nearer-term, is discomfort at whether continuing monetary stimulus is consistent with central banks hitting their inflation targets on a sustainable basis.

The fact he is publicly asking the question means he thinks it isn’t. But then we get the gist of his views for 2021.

With public and private financial fuel being injected into a macro-economic engine already running hot, the result could well be macro-economic overheating. When resurgent, and probably persistent, demand bumps up against slowly-emerging, and possibly static, supply, the laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion.

As you can see he too uses the word “persistent” and does so twice, which is about a revolutionary as a 32 year bank insider can get I think. Then we see significantly added into the mix.

This we are now seeing, with price surges across a widening array of goods, services and asset markets. At present, this is showing itself as pockets of excess demand. But as aggregate excess demand emerges in the second half of the year, I would expect inflation to rise, significantly and persistently.

Actually aggregate excess demand is not what it was. What I mean by that is the change to us predominantly being a service economy means that there is a much wider range of responses to demand now.

For instance, hairdressing and personal grooming inflation was strong in particular, at an annual rate of 8%, and saw a 29 year high.

This is one example ironically in a way from Governor Bailey’s speech where there is a clear limit as hairdressers can work harder but only so much. Whereas other areas in the services sector may not be far off no limits at all. Oh and after him being on TV during the England game versus Germany I suspect we are onto the 2021 look now.

Pent-up demand, essential need, or recreating the early 1990s David Beckham look, I leave that to others to judge.

Returning to Andy Haldane his musings lead him to conclude this.

By the end of this year, I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.

That has been reported as 4% which is not quite what he said but by the time one converts it from CPI to Retail Prices Index ( a 1%+ rise as for example it was 1.2% in May) we arrive at the 5% of my headline.

What does Governor Bailey think?

The opening part of the section on the economic recovery illustrates something of a closed mind on the subject.

what conclusions can we draw on the temporary nature of the causes of higher inflation

The next bit is a type of PR after thought.

and what should we look out for to judge if those causes might be more sustained?

Under his plan we look set to go to stage four of the Yes Minister response which is “It’s too late now”. One area where there is plenty of inflation is in the use of the word temporary.

There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.

Those dealing in shipping costs seem much less clear about that.

International #container #freight rates cont. their almost vertical ascent with the Drewry global composite rising to $8k some 6X the normal rate. Routes out of China surging on #SupplyChains disruptions, some temporarily triggered by Covid-19 outbreaks reducing loadings ( @Ole_S_Hansen)

Another problem is that the Bank of England has under estimated both the UK economy recovery and consequent inflation.

CPI inflation rose to 2.1% in May, just above the MPC’s target and above where we thought it would be in the MPC’s May forecast.

In the May forecast they said it would be below 2% in both the second and third quarters. I do not know about you but I would not be assuring people inflation will be temporary when these are in play.

 Further up the supply chain, food input prices were up, and producer input inflation was around a 10-year high.

Also if we look at the absolute disaster area the concept of rebalancing was for his predecessor it is brave and perhaps courageous to deploy it again.

Over time, this should lead to an easing of inflation as spending is redirected towards sectors with more spare capacity. But, initially, that rebalancing may be uneven.

I note that he is already tilling the ground should he be wrong.

His first point is no more than stating he might be wrong ( rather likely on his track record). Next up we get this.

Second, we could see demand pressures on either side of the most likely outcome.


Third, we could also see wage pressures arising if the number of people in work or seeking work does not return to pre-Covid levels, and inactivity remains at a higher level. A return of labour supply is therefore important.

The last sentence is rather curious in the circumstances. And finally.

Fourth, a further challenge would arise if these temporary price pressures have a more persistent impact on medium-term inflation expectations, which shift to a higher level inconsistent with the target.

That is a type of psychobabble as it is based on what exactly?


We have here the two main courses of the inflation debate with a side order from the Riksbank. The main debate has been about this year and it is the first to break ranks about 2022.  If we start with the Governor’s view we see the asymmetry problem repeated yet again.

It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.

So if things go well you wait and if they are not going well you wait too, oh hang on.

Over the last sixteen months we have used monetary policy decisively to respond to an unprecedented crisis which was disinflationary.

Decisively on one side and on the other “we watch” is the new “vigilant”.

But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level.

There is also an elephant in the room that everyone seems to be ignoring in the same manner as the UK inflation target does. So let us remind ourselves of how we started Tuesday.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide).

Also remember inflation will be higher when the tax cuts ( VAT and Stamp Duty) expire.

Let me end with some good economic news via Sky but with the kicker that it is in an area that has proved highly inflationary.

Nissan announces £1bn ‘gigafactory’ boosting electric car production and creating thousands of jobs.

The Covid Pandemic poses new challenges for the use of GDP

This week has brought rather a flurry of news about UK GDP as we have changed this century and today the last quarter. Let us start with this morning’s headline.

UK gross domestic product (GDP) is estimated to have decreased by 1.6% in Quarter 1 (Jan to Mar) 2021, revised from the first estimate of a 1.5% decline.

The level of GDP is now 8.8% below where it was pre-pandemic at Quarter 4 (Oct to Dec) 2019, revised from a first estimate of 8.7% below.

So a marginal downgrade but not much in the scheme of things. However there is a fair bit going on below the surface including something which I was the first to point out last summer.

Nominal GDP fell by a revised 0.2% in Quarter 1 2021, while the implied deflator increased by 1.4%. Compared with the same quarter a year ago, the implied GDP deflator increased by 4.8%, mainly reflecting an increase in the implied price change of government consumption.

The nominal GDP issue is a consequence so let us zero in on a cause which is the way that the widest inflation measure in the economy has been bounced around by the way we measure real government consumption. Compared to other inflation measures a quarterly rise of 1.4% and an annual one of 4.8% is a lot. For example we were being told back then there was very little consumer inflation.

The Consumer Prices Index (CPI) rose by 0.7% in the 12 months to March 2021, up from 0.4% to February.

Education Education Education

The famous phrase from former Prime Minister Tony Blair has echoed in the GDP numbers.

The downward revision in education output reflects a monthly reprofiling of education output across the first quarter of 2021 because of updated attendance data, and estimates reflecting the effect of remote learners.

We end up with an Alice Through The Looking-Glass situation caused by this.

In volume terms, the measurement of education output is based on cost-weighted activity indices.

In theory a good idea but in practice this has happened.

have required us to keep innovating…….we have reviewed and aligned our measurement approaches …….We have also adapted our measurement for the further school closures and change in policy regime in the first few months of 2021,

Whilst these are worthy efforts you get big swings as for example the initial impact of the changes was to reduce the numbers by £2.3 billion or to reduce that quarters GDP by 0.5%. This time around the change had a smaller impact but it was still this.

The move to remote learning for the majority of pupils was the largest contributor to the 2.1% fall in services output in Quarter 1 2021

Education went from -0.86% to -1.06% in the services numbers via the latest revision.

Nominal GDP

There is a bit of a defeat here for the methodology as we are guided towards ones with no inflation measure or deflator at all.

Nominal GDP estimates – which may be more comparable –show that Canada and the United States are now above their Quarter 4 2019 levels.

There are two sides to this as for example it makes no difference ( okay 0.1%) for Japan as you might expect, But if you compare the UK with Spain it makes an enormous difference. Using the real GDP numbers we have both seen falls of around 9% but using nominal GDP the UK has seen a fall of 3% and Spain 8.7%.


These numbers regularly see significant revisions and we have both the pandemic and the final Brexit move to add to the issues. So we are about as uncertain as we ever are about the latest numbers so let me switch to another issue highlighted in the deeper series.

The UK’s net international investment position liability position narrowed by £56.4 billion to £582.9 billion as the revaluation impact on UK debt securities decreased the value of UK liabilities more than the fall in the value of UK assets.

They do their best but they simply do not know this as it gets worse as you delve deeper.

In Quarter 1 2021, the gross asset and liability positions decreased by £446.5 billion and £502.8 billion respectively. This was mostly because of a large decrease in financial derivative activity as market volatility continued to recede from the height of the coronavirus (COVID-19) pandemic.

So I suggest you take any investment position data with the whole salt cellar. The numbers depend entirely on assumptions which frankly have a tenuous grip on reality and sometimes not even that.


There has been a deeper review of things and it has led to this which does feed into one of my themes. That is that things were not as good pre credit crunch as was recorded at the time.

average annual volume GDP growth over the period 1998 to 2007 is now 2.7%, revised down from 2.9%; average annual volume GDP growth stands at 2.0% from 2010 to 2019, revised up from 1.9%.

A factor in play here has been something I have mentioned before which has been the work of Diane Coyle on inflation in the telecoms sector.

In addition, we have introduced new ways of removing the effects of price changes in both the telecoms and clothing industries. These mean ‘real’ GDP (where we’ve removed the impact of price changes) grew a little less than we previously estimated in the years before the financial crisis and a little more in the years after it.

They hope this will allow them to allow for inflation more accurately.

To give an example, when previously estimating the value of goods produced from a furniture maker over time we would measure the value of the tables being sold, remove the cost of the wood, then adjust for inflation by removing the changing cost of the tables only. Under the new system we will separately be removingthe impact of inflation from the changing cost of the wood and the changing cost of the tables, giving an improved and more detailed estimate of changes in the economy.

That will be interesting to follow but sadly will not help with the education issue because the problem there is that there is no price in the first place.

Also  this change should help with the issue I reported to the Bean Review which was over the lack of detail in services data and trade especially.

we will also introducea new Financial Services Survey, which will give much more detailed information about the activities and outputs of the financial sector, which makes up around 7% of GDP.


As you can see there is much more doubt than we are usually told and we can take a sideways look at another issue. Remember my official complaint about the claimed surge in wages? Well it would appear that the GDP numbers agree with me.

Wages and salaries increased by 0.4% in Quarter 1 2021,

Looking at this series wages growth over the past year is 3% in nominal terms as opposed to the 4.5% in the average earnings series.

Let me switch now to a subject in the news if you follow military matters which in my opinion is an issue for GDP.

New light tanks that have so far cost the army £3.2 billion have been withdrawn for a second time after more troops reported suffering hearing loss during trials,has learnt.All trials involving the Ajax armoured vehicle were paused in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient. ( The Times)

This may end up being a debacle like the Nimrod programme. But how do you measure it in GDP terms? For the income version it is easy as people have been paid so you count it. But for the output version we face the prospect that there will not be any. If you are feeling generous you might make an R&D allowance but of what 10% of what has been spent…. It seems some aspects of military procurement love their Arcade Fire.

If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again

UK house prices surge again

One economic story of the Covid-19 pandemic has been the surge in house prices.Only yesterday we took a look at the way the US Federal Reserve is trying to manage public expectations.  Today we see a further challenge for the vigilant Bank of England.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide)

As you can see they have had a go at doing the Bank of England’s job for it with the mention of what we prefer to call exit effects. But the final sentence rather torpedoes that effort as it points out prices are up nearly 5% since March.

The Nationwide has another go here.

Despite the increase in house prices to new all-time highs,
the typical mortgage payment is not high by historic
standards compared to take home pay, largely because
mortgage rates remain close to all-time lows.

The problem is that for the more thoughtful that is a reminder that mortgage rates and hence interest-rates cannot rise by much without causing what Taylor Swift would describe as “trouble,trouble,trouble”. Also it is kind of them to point out that mortgage payments are a third of take-home pay reinforcing the insanity of the targeted inflation measure ( CPI) ignoring this area. Also in spite of their efforts to tell us everything is fine they cannot avoid a consequence in terms of capital required.

However, house prices are close to a record high relative to
average incomes. This is important because it makes it even
harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time
buyer’s income.

Stamp Duty

We got a hint of what will happen when the holiday here is over from Scotland.

But conditions were more muted in Scotland, which saw a
modest increase in annual growth to 7.1% (from 6.9% last
quarter) and was also the weakest performing part of the UK.
This may reflect that the stamp duty (LBTT) holiday in
Scotland ended on 31 March.

So still growth but much slower reminding us that such holidays simply seem to add any tax gain to prices. So the real winners are in fact existing owners.

By contrast Northern Ireland at 14% and Wales at 13.4% led the rises and would presumably be higher now if we had June numbers rather than quarterly ones.


The Nationwide points out that there has been anther official effort to juice the mortgage market.

The improving availability of mortgages for those with a
small deposit (and the continued availability of the
government’s Help to Buy equity loan scheme) is helping
some people over the deposit hurdle, but it is still very
challenging for most.

Maybe that was in play at least in part in the latest mortgage data from the Bank of England.

Net mortgage borrowing bounced back to £6.6 billion in May. This followed variability in the previous couple of months in anticipation of the reduction in stamp duty ending, which has been extended to the end of June. Net borrowing was £3.0 billion in April, following a record £11.4 billion of net borrowing in March

So a bounce back from these numbers compared to April.

Net borrowing in May was slightly higher than the monthly average for the six months to April 2021 and above the average of £4.2 billion in the year to February 2020.

So a combination of the stamp duty extension and an attempt to make more low deposit mortgages available has pumped up the volume.

If we look further down the chain we see this.

Approvals for house purchases increased slightly in May to 87,500, from 86,900 in April. They have fallen from a recent peak of 103,200 in November, but remain above pre-February 2020 levels. Approvals for remortgage (which only capture remortgaging with a different lender) rose slightly to 34,800 in May, from 33,400 in April. This remains low compared to the months running up to February 2020.

So a small rise and Neal Hudson has looked back for some perspective on them.

Mortgage approvals for house purchase were still 32% higher than recent average (2014-19) in May.


These are another factor in the game because we have seen them soar in the pandemic era as some received furlough payments whilst having lower bills ( no commuting) and less ability to spend due to lockdown. In spite of the increased freedoms it still seems to be happening.

Households deposited an additional £7.0 billion with banks and building societies in May. The net flow has fallen in recent months, and compares to an average net flow of £16.5 billion in the six months to April 2021  and a series peak of £27.6 billion in May 2020. The flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion. ( Bank of England)

So there is money potentially available for house purchase deposits from this source as prospective buyers boost savings or perhaps the bank of mum and dad is more flush with funds.

Whilst we are on the subject of saving we saw more from another source as people who could increased their rate of mortgage repayment.

Gross lending was a little higher at £24.2 billion, while gross repayments dropped to £18.9 billion.

That was of course another example of central bank policy misfiring as a type of precautionary saving acted in the opposite direction to the hoped for one. We see this a lot well except in central banking research.

Consumer Credit

If we look back to the heady pre credit crunch days we can recall that even this area was deployed to boost housing credit as people were able to sign their own income chits. More recently that has been unlikely as we have seen falls but of you hear feet hammering on the floor earlier it was probably at the Bank of England as staff rushed to be first to inform Governor Andrew Bailey about this.

However, for the first time since August 2020, consumers borrowed more than they paid off in May, with net borrowing of £0.3 billion.

We even got some detail from the numbers which is rare. Regular readers will know I have been keen to track car finance movements but we only get an occasional glimpse behind the curtains.

The increase in net consumer credit reflected an additional £0.4 billion of ‘other’ forms of consumer credit, such as car dealership finance and personal loans. Credit card lending remained weak compared to pre-February 2020 levels, with a net repayment of £0.1 billion.


The monetary push from the Bank of England goes on as we note the reason for the Nationwide being able to claim that mortgage repayments are affordable.

The rate on the outstanding stock of mortgages remained unchanged at a series low of 2.07%……..The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 2 basis points to 1.90% in May.

It was no surprise we saw a nudge higher in May but since then not much has happened in terms of bond yields and hence fixed-rate mortgages. As to supply of mortgages we saw the Bank of England funnel cash to the banks only for the furlough schemes to mean they had plenty of new deposits too.

As ever Bank of England research is focused on this area and if you read between the lines you see that banks rip customers off if they can. Their way of explaining that is highlighted below.

What drives these patterns of customer choices and price dispersion? We show that customers facing large price dispersion are typically those borrowing large amounts relative to both their income and the value of their house. These tend to be younger customers, and are more likely to be buying a house for the first time. Lenders thus price discriminate, offering menus with greater price dispersion to customers who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere.