What can we expect from the Bank of England in 2018?

Today we find out the results of the latest Bank of England policy meeting which seems set to be along the lines of Merry Christmas and see you in the new year. One area of possible change is to its status as the Old Lady  of Threadneedle Street a 200 year plus tradition. From City AM.

The Bank will use further consultations to remove “all gendered language” from rulebooks and forms used throughout the finance sector, a spokesperson said.

Perhaps it will divert attention from the problems keeping women in senior positions at the Bank as we have seen several cases of “woman overboard” in recent times some for incompetence ( a criteria that could be spread to my sex) but not so in the case of Kristin Forbes. There does seem to be an aversion to appointing British female economists as opposed to what might be called “internationalists” in the style of Governor Carney.

Moving onto interest-rates there is an area where the heat is indeed on at least in relative terms. From the US Federal Reserve last night.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative

The crucial part is the last bit with its clear hint of more to come which was reinforced by Janet Yellen at the press conference. From the Wall Street Journal.

Even with today’s rate increase, she said the federal-funds rate remains somewhat below its neutral level. That neutral level is low but expected to rise and so more gradual rate hikes are likely going forward, she said.

The WSJ put the expectation like this.

At the same time, they expect inflation to hold steady, and they maintained their expectation of three interest-rate increases in 2018.

Actually if financial markets are any guide that may be it as the US Treasury Bond market looks as though it is looking for US short-term interest-rates rising to around 2%. For example the yield on the five-year Treasury Note is 2.14% and the ten-year is 2.38%.

But the underlying theme here is that the US is leaving the UK behind and if we look back in time we see that such a situation is unusual as we generally move if not in unison along the same path. What was particularly unusual was the August 2016 UK Bank Rate cut.

Inflation Targeting

What is especially unusual is that the Fed and the Bank of England are taking completely different views on inflation trends and indeed targeting. From the Fed.

 Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In spite of the fact that consumer inflation is below target they are raising interest-rates based on an expectation ( incorrect so far) that it will rise to their target and in truth because of the improved employment and economic growth situation. A bit of old fashioned taking away the punch bowl monetary policy if you like.

The Bank of England faces a different inflation scenario as we learnt on Tuesday. From Bloomberg.

The latest data mean Carney has to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

If you were a Martian who found a text book on monetary policy floating around you might reasonably expect the Bank of England to be in the middle of a series of interest-rates. Our gender neutral Martian would therefore be confused to note that as inflation expectations rose in the summer of 2016 it cut rather than raised Bank Rate. This was based on a different strategy highlighted by a Twitter exchange I had with former Bank of England policymaker David ( Danny) Blanchflower who assured me there was a “collapse in confidence”. To my point that in reality the economy carried on as before ( in fact the second part of 2016 was better than the first) he seemed to be claiming that the Bank Rate cut was both the fastest acting and most effective 0.25% interest-rate reduction in history. If only the previous 4% +  of Bank Rate cuts had been like that…….

 

Even Norway gets in on the act

For Norges bank earlier today.

On the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September Report.

China is on the move as well as this from its central bank indicates.

On December 14, the People’s Bank of China launched the reverse repo and MLF operation rates slightly up 5 basis points.

I am slightly bemused that anyone thinks that a 0.05% change in official interest-rates will have any effect apart from imposing costs and signalling. Supposedly it is a response to the move from the US but it is some 0.2% short.

The UK economic situation

This continues to what we might call bumble along. In fact if the NIESR is any guide ( and it has been in good form) then we may see a nudge forwards.

Our monthly estimates of GDP suggest that output expanded by 0.5 per cent in the three months to November, similar to our estimate from last month.

The international outlook looks solid which should help too. This morning’s retail sales data suggested that the many reports of the demise of the UK consumer continue to be premature,

When compared with October 2017, the quantity bought in November 2017 increased by 1.1%, with household goods stores showing strong growth at 2.9%……..The year-on-year growth rate shows the quantity bought increased by 1.6%.

As ever care is needed especially as Black Friday was included in the November series but Cyber Monday was not. Although I note that there was yet another signal of the Bank of England’s inflation problem.

Total average store prices increased by 3.1% in November 2017 when compared with the same period last year, with price increases across all store types, in particular food stores had the largest price increase of 3.6% since September 2013.

Comment

The Bank of England finds itself in a similar position to the US Federal Reserve in one respect which is that it had two dissenters to its last interest-rate increase. The clear difference is that the Fed is in the middle of a series of rises whereas the Bank of England has so far not convinced on this front in spite of saying things like this. From the Daily Telegraph.

“We’ve said, given all the things we assume in our forecast, many of which will be misses – there are always unknown things and unpredictable things happening – but given our outlook currently, we anticipate we will need maybe a couple more rate rises, to get inflation back on track, while at the same time supporting the economy,” Ben Broadbent told the BBC’s Today programme.

I wonder if he even convinced himself. Also it is disappointing that we will not get the formal letter explaining the rise in inflation until February as it is not as if Governor Carney has been short of time.

So it seems we will only see action from the Bank of England next year if its hand is forced and on that basis I am pleased to see that Governor Carney plans to get about.

Me on Core Finance

http://www.corelondon.tv/inflation-employment-uk/

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UK productivity rises as real wages and employment fall

After yesterday’s inflation paradox where we in the UK were told it was rising ( CPI), falling ( RPI) and also staying the same ( CPIH) there has been a couple of bits of good news. First not only for inflation prospects but the prospect of having reliable heating this winter and for the latter Italy will be even more grateful after having to declare a state of emergency. From Reuters.

All main arteries that supply neighbouring countries from Austria’s main gas pipeline hub were back online before midnight after a deadly explosion there shut it down on Tuesday, the co-head of Gas Connect Austria said on ORF Radio on Wednesday.

Also looking ahead UK consumers can expect lower water bills as the regulator has announced this already today.

Our initial view of the cost of capital – based on market evidence – is 3.4% (on a real CPIH basis). In RPI terms it is 2.4%, which is a reduction of 1.3% from the 2014 price review. The effect of this change alone should lower bills of an average water and wastewater customer by about £15 to £25.

It is hard not to have a wry smile in that they are in line with the UK establishment by using CPIH but also reference RPI! Oh and whilst the news is welcome we should not ignore the fact that Ofwat has looked the other way as UK water bills have risen year after year.

Real Wages

Whilst the news above is welcome sadly inflation has been higher than wage growth in the credit crunch era as shown by the chart below.

The one area where a little cheer is provided is clothing. They do not compare with house prices so let me help out. Yesterday’s data release is very unwieldy but if we pick the middle of 2007 as June the house price index was 97.7 and as of October this year it was 117.4. Plenty of food for thought there as against nominal wages may be not so bad but there is a catch which is that we are comparing to the previous peak. Of course the picture in terms of real wages is worse as they have fallen.

As to the more recent trend then housing costs are depressing real wages still. The establishment try to hide this as we see here.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.9% in Quarter 3 (July to Sept) 2017 compared with the corresponding quarter of the previous year.

In their fantasy world ( remember they use Imputed Rents which are never paid) you might think that housing costs are rising more slowly than other inflation. But if you switch to actual and real prices of which house prices are one then you get this.

OOH according to the net acquisitions approach have grown by 3.9% in Quarter 3 2017 compared with the corresponding quarter of the previous year.

As you can see the impact of housing costs on the ordinary person’s budget over the past year looks very different if you use real numbers as opposed to made up ones from the fake news registry. On this road the UK real wages situation looks different as a rough calculation shows that CPIH would have been 3.1% just like CPI in October.

The end of “overtime”?

Just for clarity this in the UK involves working beyond your contracted hours and the state of play according to the Resolution Foundation is this.

The typical premium has gone from over 25 per cent in the 1990s to under 15 per cent today. Only one in five workers now get traditional time and a half rates. Most women get absolutely no pay premium at all, possibly because they are more likely to work in sectors without unions.

We can see that as time has passed the reduction in the premium for overtime has put downwards pressure on pay measures. The scale of the issue is shown here.

This is a big deal because a lot of us do paid overtime – 2.6 million people do over 1 billion hours of it a year (and that’s before we even start on the 1.5bn hours of unpaid overtime). Men and those doing manufacturing or transport jobs are most likely to be doing some, but amongst those that do overtime it is a bigger deal financially for part timers and women.

So it has a solid impact which if we look at the trends has negative. The problem is what to do about it? Invariably the Resolution Foundation aligns itself with the central planners but sadly I doubt we can simply wish the problem away by legislation. After all we have an employment success story and some of that seems likely to be due to lower wages at the margin. You could argue employers are being more efficient in allocating hours and work which is a good thing. However it is an alloyed good thing as this time period is one where we have seen the growth of zero hours contracts which presumably have taken up some of the slack. Some types of work ( most of my career for example) are defined around performing tasks not how long it takes to do them so perhaps this definition of work has expanded. More research is welcome though especially into why women seem much less likely to benefit from overtime.

Today’s data

There was slightly better news on wages driven mostly by higher bonuses.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.3% excluding bonuses, compared with a year earlier.

Still a fair way below the hopes and expectations of the Bank of England and this is what it does to real wages.

In the three months to October 2017, real earnings decreased by 0.2% (including bonuses) and by 0.4% (excluding bonuses) compared with a year earlier.

That is using the CPIH measure so if you want it with house prices add around 0.3% to the decline.

Adding to the welcome news was another fall in unemployment.

There were 1.43 million unemployed people (people not in work but seeking and available to work), 26,000 fewer than for May to July 2017 and 182,000 fewer than for a year earlier.

However for perhaps the first time there is a hint of a change ( 2 months data now) in what up until now has been an employment success story.

The UK employment rate fell by 0.2 percentage points to 75.1% in the three months to October 2017 compared with the previous quarter.The level of employment fell by 50,000 for men and by 6,000 for women.

Comment

We see a complex picture in today’s data. Wage growth is up on a three monthly basis but this is not because October was an especially good month ( 2.3%) it was that July which dropped out of the data was a particularly weak one (1.7%). Ironically the weaker employment data may offer a little hope as rising output with lower employment will be good for the productivity data and this is confirmed by the hours worked numbers.

Between May to July 2017 and August to October 2017, total hours worked per week decreased by 5.9 million to 1.03 billion.

However on the other side of the coin the employment data is simultaneously troubling as the success saga has at best reached a soggy patch. Mostly it seems that it was the self-employed who saw a change.

 The employment level decreased by 50,000 for men and by 6,000 for women………..The total number of self-employed decreased by 41,000 in the three months to October 2017 compared with the three previous months.

 

Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

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

 

 

 

 

Ironically falling UK car registrations are impacting on French manufacturers

Yesterday afternoon saw some good news for my topic of the day. It came from a sector of the UK economy which over the past decade has seen an extraordinary boom which is premiership football. From the BBC.

Crystal Palace’s chairman has unveiled plans to increase Selhurst Park’s capacity to more than 34,000.

Steve Parish said the expansion, expected to cost between £75m-£100m, would be an “icon” for south London.

The full revamp is expected to take three years to complete, and work could begin “within 12 months”.

KSS, the architects behind the project, have previously redeveloped sporting venues including Anfield, Twickenham and Wimbledon.

If you travel past the ground then without wishing to upset Eagles fans it is to put it politely in sore need of redevelopment. But as well as a boost and if you make the usually safe assumption that it ends up costing the higher end of the estimate we see that each extra seat costs something of the order of £12,500. Is that another sign of inflation in the UK or good value.?

If we continue on the inflation beat then this morning has bought grim news for railway commuters as the BBC points out.

Train fares in Britain will go up by an average of 3.4% from 2 January.

The increase, the biggest since 2013, covers regulated fares, which includes season tickets, and unregulated fares, such as off-peak leisure tickets.

The Rail Delivery Group admitted it was a “significant” rise, but said that more than 97% of fare income went back into improving and running the railway.

A passenger group said the rise was “a chill wind” and the RMT union called it a “kick in the teeth” for travellers.

The rise in regulated fares had already been capped at July’s Retail Prices Index inflation rate of 3.6%.

We see a clear example of my theme that the UK is prone to institutionalised inflation in the way that the rises are capped at the highest inflation measure they could find. Suddenly the “not a national statistic” Retail Prices Index or RPI is useful when it can be used for something the ordinary person is paying in the same way it applies to student loans. Whereas when it is something that we receive or the government pays then the lower ( ~1% per annum) Consumer Prices Index or CPI is used.

The rail industry is an unusual one where booming business is a problem.

Here’s some examples. Passenger numbers on routes into King’s Cross have rocketed by 70% in the past 14 years. On Southern trains, passenger numbers coming into London have doubled in 12 years…….There is a push to bring in new trains, stations and better lines, but it’s difficult to upgrade things while keeping them open and it’s seriously expensive.

Ah inflation again! Of course railways suffer from fixed costs due to their nature but we never seem to get to the stage where maximising use reduces costs do we?

The economic outlook

If we look at the business surveys from Markit ( PMIs) we see that the UK economy continues to grow at a steady pace with according to the surveys construction and particularly manufacturing doing well.

On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion…….

This morning has brought the services data which you might think would be good following them but of course things are often contrary.

November data pointed to a setback for the UK
service sector, with business activity growth easing
from the six-month peak seen in October. Volumes
of new work also increased at a slower pace, while
the rate of staff hiring was the joint-slowest since
March.

So growth continued but at a slower rate as the reading fell to 53.8 in November from 55.6 in October. Also there were inflation concerns being reported.

Sharp and accelerated rise in prices charged by
service providers.

This is very different to the official data although it only covers the period to September.

The annual inflation rate in the latest quarter was above the average for the period, at 1.3%.

The average is for the credit crunch era.

This means that according to the business surveys the UK economy is doing this.

The survey data are so far consistent with the economy growing at a quarterly rate of 0.45% in the closing months of 2017.

I did challenge the spurious accuracy here and got this in response from their chief economist Chris Williamson.

Hi Shaun – October UK PMI was consistent with +0.5% GDP while November signalled +0.4%. Seemed sensible to split the difference!

Car Trouble

Regular readers will be aware that the boom in this sector has faded and perhaps turned to dust in 2017. This morning the Society of Motor Manufacturers and Traders has reported this.

The UK new car market declined for an eighth consecutive month in November, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,541 vehicles were registered, down -11.2% year-on-year, driven by a significant fall in diesel demand.

The fall was led by businesses.

Business, fleet and private registrations all fell in the month, down -33.6%, -14.4% and -5.1% respectively. Registrations fell across all body types except specialist sports, which grew 6.7%. The biggest declines were seen in the executive and mini segments, which decreased -22.2% and -19.8% respectively, while demand in the supermini segment contracted by -15.4%.

This means that the state of play for the year so far is this.

Overall, registrations have declined -5.0% in the eleven months in 2017, with 2,388,144 cars hitting British roads so far this year.

Hitting the roads? Well hopefully not but the economic consequences are ironically being felt abroad as much as in the UK. From the UK point of view there is a fall in consumption and to the extent of some business use a fall in investment. But we mostly import our cars so in terms of a production impact it will mostly be felt abroad. As it turns out the major impact will be felt in France as so far this year we see registrations have fallen by 18% for Citroen, 16% for Peugeot and 17% for Renault totalling around 38,000 cars for the sector. Individually the worst hit of the main manufacturers seems to be Vauxhall which is down 22% this year.

As to the type of car that has been worst hit then I am sure you have already guessed it.

heavy losses for diesel, falling -30.6%.

On that subject the SMMT seems lost in its own land of confusion.

Diesel remains the right choice for many drivers, not least because of its fuel economy and lower CO2 emissions.

That ( and the tax advantages) persuaded me to get what I thought was a new green and clean diesel only to discover that instead I have been poisoning the air for myself and other Londoners. So I guess more than a few are singing along to the Who these days.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

We await to see how this impacts on all the car loans and note that the UK is not alone in this if the Irish Motor Industry is any guide.

New car sales year to date (2017)131,200 (2016) 146,215 -10%

Comment

There is a fair bit to consider so let us start with the car market. Whilst there is an impact on consumption and perhaps a small impact on production ironically the impact on our trade and current account position will be beneficial as explained by this from HM Parliament.

The value of exports totalled £31.5 billion in 2016, but imports totalled £40.3 billion, so a trade deficit of £8.8 billion was recorded.

So the impact on UK GDP is not as clear as you might think especially if we continue to export well.

UK car manufacturing rises 3.5% in October with 157,056 cars rolling off production lines.Exports up 5.0% – but domestic demand falls -2.9% as lower consumer confidence continues to impact market.

The main problem for the UK would be if the current inflation surge continues so let us cross our fingers that it is fading. Otherwise 2017 has been remarkably stable in terms of economic growth driven by two factors which are the lower Pound £ and the fact that the world economy is having a better year.

Meanwhile I will leave the central bankers and their acolytes to explain why a development like this is bad news. From Bloomberg.

Among the coconut plantations and beaches of South India, a factory the size of 35 football fields is preparing to churn out billions of generic pills for HIV patients and flood the U.S. market with the low-cost copycat medicines.

 

 

 

 

 

 

 

Is the UK construction sector in a recession?

So far 2017 has been a year of steady but unspectacular growth for the UK economy. However one sector has stood out on the downside and that is construction. Of course this is the opposite of what the unwary might think as we are regularly assailed with official claims that house building in particular is a triumph. But the pattern of the official data series is certainly not a triumph.

Construction output contracted by 0.9% in the three-month on three-month series in September 2017…….This fall of 0.9% for Quarter 3 (July to September) follows a decline of 0.5% in Quarter 2 (April to June), representing the first consecutive quarter-on-quarter decline in current estimates of construction output since Quarter 3 2012.

Whilst our official statisticians avoid saying it this is the criteria for a recession with two quarterly falls in a row and in fact they had revised it a bit deeper.

The estimate for construction growth in Quarter 3 2017 has been revised down 0.2 percentage points from negative 0.7% in the preliminary estimate of gross domestic product (GDP), which has no impact on quarterly GDP growth to one decimal place.

The last month in that sequence which was September showed little or no sign of any improvement.

Construction output fell 1.6% month-on-month in September 2017, stemming from falls of 2.1% in repair and maintenance and 1.3% in all new work.

September detail

Here is an idea of the scale of output.

Total all work decreased to £12,628 million in September 2017. This fall stems from decreases in both all new work, which fell to £8,209 million, and total repair and maintenance, which fell to £4,419 million.

And here are the declines.

Construction output fell by £361 million in September 2017. This fall stems predominantly from a £236 million decrease in private commercial new work, as well as a fall of £165 million from total housing repair and maintenance.

There may be some logic in new commercial work being slow but the fall in repair and maintenance seems odd to say the least. The issues for the former might be that there has been so much building in parts of London combined with uncertainty looking ahead in terms of slower economic growth and what the Brexit deal may look like.

Maybe we are seeing some growth in new house building if we look at the longer trend.

Elsewhere, the strongest positive contributions to three-month on three-month output came from housing new work, with private housing growing £138 million and public housing expanding by £65 million.

Boom Boom

This weaker episode followed what had been a very strong phase for the UK construction industry. The nadir for it if we use 2015 as 100 was 85.3 in October 2012 as opposed to the 105.9 of September this year.  Over this period it has been even stronger than the services sector which has risen from 93.7 to 104.4 over the same period. Of course at 6.1% of the UK economy as opposed to 79.3% the total impact is far smaller but relatively it has been the fastest growing of the main UK economic categories in recent times.

If we look back to possible factors at play in the turnaround it is hard not to think yet again of the Funding for Lending Scheme of the Bank of England which was launched in the summer of 2012. There is a clear link in terms of private housing in terms of the way it lowered mortgage rates by more than 1% and the data here makes me wonder if some of the funding flowed into the commercial building sector as well. At this point we do see something of an irony as of course the FLS was supposed to boost lending to smaller businesses but sadly many of those in the construction sector were wiped out by the onset of the credit crunch.However this from the TSB suggests an impact.

As part of our participation in the Funding for Lending Scheme*, we have reduced the interest rate by 1% on all approved business loan and commercial mortgage applications.

Indeed some loans were made although as Co Star reported in January 2013 maybe not that many.

The Lloyds FLS-funded senior loan funded last Friday. Kier said the “competitively-priced” £30m loan will be used in connection with its infrastructure and related projects.

This is understood to be only the second commercial real estate loan drawn by Lloyds’ Commercial Banking division under the FLS scheme, after the bank drew down a further £2bn under the scheme before Christmas, taking its total capacity to £3bn.

The issue is complex as the Bank of England itself was worried about the state of play in 2014.

 The majority of the aggregate fall in net lending in 2014 Q1 was accounted for by a continued decline in lending to businesses in the real estate sector (Chart 2).

One area that I think clearly did see growth but is pretty much impossible to pick out of the data is lending to what are effectively buy-to let businesses.

Looking ahead

There has been a flicker of winter sunshine this morning from the Markit PMI business survey.

November data pointed to a moderate rebound in
UK construction output, with business activity rising
at the strongest rate since June. New orders and
employment numbers also increased to the greatest
extent in five months.

Indeed in an example of the phrase “there is a first time for everything” the government may this time be telling the truth about house building.

House building projects were again the primary
growth engine for construction activity. Survey
respondents suggested that resilient demand and a
supportive policy backdrop had driven the robust and
accelerated upturn in residential work.

Whilst the overall growth was not rapid at 53.1 ( where 50 in unchanged) at least we seem to have some and it was reassuring to have another confirmation of my theme that the 2016 fall in the UK Pound £ is wearing off.

However, cost inflation eased to its least marked for 14 months, with some firms reporting signs that exchange-rate driven price rises had started to lose intensity.

Comment

So the overall picture is of a boom which then saw a recession and hopefully of the latest surveys are correct a short shallow one. However not everyone is entirely on board with the recession story as this from Construction News last month points out.

Industry activity continued to grow between July and September, according to a new survey by the Construction Products Association.

The official data series in the UK for construction has been troubled to put it politely. The official version is this.

The Office for Statistics Regulation has put out a request for feedback and comments from users of these statistics, as part of the process for re-assessing the National Statistic status for Construction statistics: output, new orders and price indices.

In essence you cannot say what real output is until you have some sort of grip on the price level. Also  the excellent Brickonomics pointed out several years ago that some of the improvement in the data was via simply transferring a large business from services to construction. Solved at the stroke of a pen? Also this year there were large revisions to last year which is not entirely reassuring.

The annual growth rate for 2016 has been revised from 2.4% to 3.8%.

If that error was systemic then this years recession could easily be revised away. The truth is that there is way too much uncertainty about this which is surprising in the sense that the industry relies on physical products many of which are large. A few weeks back I counted the number of cranes along Nine Elms ( 24) for example in response to a question asked in the comments.

So we had a boom ( maybe) followed by a recession (maybe) and are now recovering (maybe). Hardly a triumph for the information era…..

Some Music

Here is a once in a lifetime opportunity to hear Donald Trump as a Talking Head.

 

 

The UK Student Loan problem is going from bad to worse

Sometimes developments flow naturally together and we see a clear example of this today. It was only yesterday that I pointed out that the Bank of England puts its telescope to its blind eye on the subject of student loans.

 In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?

Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008
peak.

This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees.

Losses mount

I am often critical of the Financial Times but this time Thomas Hale deserves praise for this investigation.

The UK government is set to book a loss of almost £1bn from its largest privatisation of student loans, raising questions over the valuation of tens of billions of pounds of remaining graduate debt.

The most obvious question is why are we privatising these loans at a loss? It was of course the banking sector which saw privatisation of profits and socialisation of losses as fears will no doubt rise that this could be the other way around in terms of timing.

As we look at the detail the news gets even more troubling.

The controversial sale of a batch of student loans this week is expected to raise around £1.7bn, according to a Financial Times analysis of deal documentation. The loans, which had a face value of £3.7bn last year, are part of a total of £43bn in loans made to students up to 2012, which are currently on government books valued at just under £30bn, according to the Department of Education’s latest published accounts, as of the end of March this year.

As you can see not only are those loans not alone but they are being sold at a level below previous mark downs in value. The £3.7 billion face value had already been marked down to £2.5 billion and now we see this.

The deal will raise around £1.7bn in cash through the securitisation process, where assets are packaged together and sold off as bonds to investors. The process is a common feature of financing for student borrowing in the US but has rarely been used in the UK.

This seems odd as why would the UK taxpayer want to capitalise his/her losses?

The government’s loan book sale is dependent on passing a “value for money” test, which is designed to ensure that public assets are not sold too cheaply. The details of the test will not be made public but it is expected to provide a different, lower valuation for the loans compared to those on the DfE accounts.

The sale of the loans is part of a wider government effort to sell public assets “in a way that secures good value for money for taxpayers”, according to a statement on the student loans company website. The government aims to raise a total of £12bn through selling an unspecified amount of pre-2012 student loans over the next five years.

This brings us to a combination of Yes Prime Minister and George Orwell. Whilst it is possible that selling something at half its original value is sensible it needs to be checked carefully especially if it is public money . Also if it is a good deal for the new investors why not keep it?

What has happened to these loans?

Essentially these are loans from the previous decade which only have a rump left and guess which rump?

The transaction is made up of loans issued between 2002 and 2006, on which repayments are linked to income. Around half of students who borrowed during that period had already paid off their loans by the end of the 2015-16 financial year, meaning the pool of debt included in the deal is likely to be of a lower credit quality. Of those graduates with outstanding loans, only 60 per cent made a repayment in the same financial year.

So 40% of the remaining loans are seeing no repayments at present and the pricing here suggests that this will continue. One fear is that the buyers of the loans may try to pressurise students to repay even if they cannot afford to. Also there is the issue of what looks like around 20% of the students from over a decade ago still do not earn more than the £17,775 threshold ( confusingly more recent students seem to have a £21,000 threshold).

The rationale

Carly Simon poses the apposite question

Why?…. Don’t know why?

This is what it is all about. Yet again a wheeze for the national debt numbers.

Part of the motive for the sale is to reduce public debt. The cash generated from the transaction will go towards reducing public sector net debt, which was £1.79tn at the end of October. Unlike cash, student loan assets do not count towards the calculation of public sector net debt.

Comment

This is in my opinion a disaster on a national scale. Let me open with an issue which regular readers will be aware of but newer ones may not. This is the cost or interest on these loans and you may like to note that the most the UK would pay on issuing government debt is ~1.5%. From MoneySavingExpert (MSE ).

The rate used is the previous March’s RPI inflation rate. March 2017’s RPI inflation rate was 3.1% meaning interest charged on student loans for the 2017/18 academic year is between 3.1% and 6.1% depending on whether you’re studying or graduated, and how much you earn.

So at least double and maybe quadruple the alternative which speaks for itself. On this subject I both agree and disagree with MSE. He thinks for some it does not matter than much of this will never be repaid and is in that sense “free.” But you see along the way it matters as there is not only the psychological effect of say a £50k debt but it is also it affects mortgage calculations now. Recently reports have arisen of younger people not joining the NHS pension scheme and I wonder if that is linked to the fact that nurses now have student debts and feel burdened.

Back on the first of August 2016 I explained the problem like this.

We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.

It would be much simpler I think to abandon the whole system and go back to providing tuition fees and grants. Also as this reply to the FT from safeside implies perhaps some of the weaker universities should be trimmed.

It would be interesting to see which universities produce graduates who are sub inv grade

It is tempting to suggest we should also write the whole lot off as let’s face it we are writing most of it off along the way anyway. The only major issue I think is how to treat fairly those who have already repaid their loans either in part or in full. It would also end the shambolic way the loans are collected. We seem to have replaced a system which worked with one based on more than few fantasies and if we continue to follow the American way then as I pointed out in August 2016 students can presumable expect this.

It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.

You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.