The UK plans to Spend! Spend! Spend!

There is something of an irony today as the UK faces a Spending Review which is not called a Budget but is set to be more significant than nearly all of the latter. Also we are reminded that previous to this phase we were in uncertain times but that has been squared or even cubed this year. Perhaps the biggest example of that affecting the public finances came with Lockdown 2.0 as the government announced this on Bonfire Night.

Today, we are extending the CJRS until the end of March for all parts of the UK. We will review the policy
in January to decide whether economic circumstances are improving enough to ask employers to
contribute more. The Job Support Scheme is postponed.
Eligible employees will receive 80% of their usual salary for hours not worked, up to a maximum of £2,500
per month.

Interestingly they switched to telling us the cost when the scheme for the self-employed was announced at the same time.

This is £7.3 billion of support to the self-employed through November to January alone, with a further
grant to follow covering February to April. This comes on top of £13.7 billion of support for self-employed
people so far, one of the most comprehensive and generous support packages for the self-employed
anywhere in the world.

The Resolution Foundation has calculated the costs this year as this.

The largest AME components of these increases are the estimated £56 billion spent on the Job Retention Scheme (JRS) and £23 billion on the Self-Employed Income Support
Scheme.

Having checked the numbers on Friday which covered the period until October some £61 billion or so has already been spent to the danger in those numbers looks set to be from the upside. In terms of a total they think this.

We estimate that in the region of £250 billion of additional Covid-related spending will take place in 2020-21. This, and the much smaller economy, combine to mean that the
size of the state relative to GDP is set to sky-rocket this year, from 40 per cent of GDP to around 60 per cent of GDP.

So there is an element of today being a bit after the Lord Mayor’s Party so let me lighten the atmosphere with some examples of the first rule of OBR Club.

GDP growth in the third quarter of 2020: the level of GDP was 7 per cent higher than the OBR had expected in July

That is a pretty spectacular fail and there is another.

Since that forecast, unemployment has risen
only slightly, as shown in Figure 4: unemployment in 2020 Q3 was 4.8 per cent, less than half that expected in the OBR’s central scenario.

There are two issues here which in my opinion the Resolution Foundation miss. They treat OBR forecasts seriously and hang their view on the future off them when as you can see the future is very unlikely to be as forecast. Also the unemployment definition has failed us and we should be looking at underemployment measures such as hours worked to get a much better view of the state of play.

What about today?

The Financial Times gives us an example of government by leak.

Rishi Sunak will on Wednesday set out a £4.3bn plan to tackle the threat of mass unemployment as the chancellor braces Britain for the brutal economic fallout from the coronavirus crisis. Mr Sunak will tell MPs in his spending review that his “number one priority is to protect jobs and livelihoods”.

What does this mean in practice?

Mr Sunak will announce £2.9bn of spending over three years on a “Restart” programme to help Britons find jobs, plus £1.4bn of new funding to increase the capacity of the Jobcentre Plus network to help more people back to work. The Restart scheme, offering regular and intensive “tailored” job support, is particularly aimed at older workers who are most likely to be left facing “the scarring effects” of long-term unemployment.

Let us hope that this works although it relies on there being jobs to go to. The Jobcentre Plus scheme has seen famine after 2015 but now is back to feast so I wonder how effectively it can be expanded? Sadly the FT continues the media obsession with the fairly useless unemployment numbers.

The latest official statistics show that an estimated 1.6m people were unemployed in the three months to September — 318,000 more than a year earlier. The unemployment rate stands at 4.8 per cent of the workforce.  With many companies pressing ahead with redundancy plans, unemployment is set to rise further in the coming months.

The BBC takes a wider view including other measures some of which have already been announced.

These include an extra £3bn for the NHS in England to help tackle the backlog of operations delayed due to Covid, an increase in defence spending and a £4.6bn package to help the unemployed back to work.

So whoever leaked this to the BBC has added some £300 million to the unemployment plan compared to the leak to the FT. Also there is something of a difference into the issue of future austerity. The FT suggests it is a can to be kicked into the future wheres the BBC gives examples of it already beginning.

The government is expected to announce a cut in the UK’s overseas aid budget to 0.5% of national income, down from the legally binding target of 0.7%……There have also been reports that the chancellor is considering a pay freeze for all public sector workers except frontline NHS staff.

There are even reports that this will extend to Members of Parliament.

Comment

The main issue here I think is what is the role of government? I am not particularly thinking of the size of it here. What I mean is what can it do about employment and unemployment? It can make a major difference if it can pock out which are the viable jobs that need support for say a year and can then thrive. We win out of that via future tax payments before we get to other issues. The problem is that the credit crunch was far from the best example of this as we ended up protecting the banks with a The Precious! The Precious perspective only for them to then retrench anyway and have a zombie business model. Along the way inflating the housing market was a consequence too, although that has become an international game.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 7.0% annual gain in September, up from 5.8% in the previous month.

As to whether we can afford it then as I pointed out as recently as Monday we can borrow very cheaply. We are paid to borrow at the shorter end and even the fifty-year yield is a mere 0.73%. So it has completely ignored the expected spending increases. That requires a so far,as back in the Gordon Brown days it used to wait until late afternoon on the day. Our reputation may be damaged by the announcement on the RPI that I reported on last week.

Massive day for the UK index-linked gilt market. Today we get the government’s response to the RPI Reform Consultation: likely that RPI will be aligned to CPIH from 2030, with no compensation for investors. Some even think this might be moved forward to 2025. ( @bondvigilantes )

If I was in charge I would scrap that plan and I would look to strengthen our position by issuing some one hundred year bonds. As Steve Winwood so aptly put it.

While you see a chance
Take it

 

Can the UK afford all the extra debt?

I thought that it was time to take stick and consider the overall position in terms of the build up of debt. This has come with a type of economic perfect storm where the UK has begun borrowing on a grand scale whilst the economy has substantially shrunk.So an stand alone rise in debt has also got relatively much larger due to the smaller economy. Hopes that the latter would be short and sharp rather faded as we went into Lockdown 2.0. Although as we look to 2021 and beyond there is increasing hope that the pace of vaccine development will give us an economic shot in the arm.

In terms of scale we got some idea of the flow with Friday’s figures.

Public sector net borrowing (PSNB ex) in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion, £169.1 billion more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.

The pattern of our borrowing has changed completely and it is hard not to have a wry smile at the promises of a budget balance and then a surplus. Wasn’t that supposed to start in 2016? Oh Well! As Fleetwood Mac would say. Now we face a year where if we borrow at the rate above then the total will be of the order of £370 billion.

If we switch to debt and use the official net definition we see that we opened the financial year in April with a net debt of 1.8 trillion Pounds if you will indulge me for £500 million and since then this has happened.

Public sector net debt excluding public sector banks (PSND ex) rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, or around 100.8% of gross domestic product (GDP); debt to GDP ratios in recent months have reached levels last seen in the early 1960s.

You nay note that the rise in debt is quite a bit higher than the borrowing and looking back this essentially took place in the numbers for April and May when the pandemic struck. Anyway if we assume they are now in control of the numbers we are looking at around £2.2 trillion at the end of the financial year if we cross our fingers for a surplus in the self assessment collection month of January.

The Bank of England

How does this get involved? Mostly by bad design of its attempts to keep helping the banks. But also via a curious form of accountancy where marked to market profits as its bond holdings are counted as debt.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of October 2020 would reduce by £232.9 billion (or 11.3 percentage points of GDP) to £1,843.9 billion (or 89.5% of GDP).

So on this road we look set to end the fiscal year with a net debt of the order of £2 trillion.

Quantitative Easing

This is another factor in the equation but requires some care as I note this from the twitter feed of Richard Murphy.

Outside Japan QE was unknown until 2009. Since then the UK has done £845 billion of it. This is a big deal as a consequence. But as about half of that has happened this year it’s appropriate to suggest that there have been two stage of QE, so far. And I suggest we need a third.

Actually so far we have done £707 billion if you just count UK bond or Gilt purchases. That is quite a numerical mistake.As we look ahead the Bank of England plans to continue in this manner.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

We see that this changes the numbers quite a lot. There are a lot of consequences here so let me this time agree with Richard Murphy as he makes a point you on here have been reading for years.

The first shenanigan is that the so-called independence of the Bank of England from the Treasury is blown apart by the fact that the Treasury completely controls the APF and the whole QE process. QE is a Treasury operation in practice, not a Bank of England one. ( APF = Asset Protection Fund)

Actual Debt Costs

These are extraordinarily low right now. Indeed in some areas we are even being paid to borrow. As I type this the UK two-year yield is -0.03% and the five-year yield is 0%. Even if we go to what are called the ultra longs we see that the present yield of the fifty-year is a mere 0.76%. To that we can add the pandemic effect on the official rate of inflation.

Interest payments on the government’s outstanding debt were £2.0 billion in October 2020, £4.4 billion less than in October 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

As an aside this also explains the official effort to neuter the RPI measure of inflation and make it a copy of the CPIH measure so beloved of the UK establishment via the way they use Imputed Rents to get much lower numbers. I covered this issue in detail on the 18th of this month.

So far this financial year we have paid £24.1 billion in debt costs as opposed to the £33.9 billion we paid in the same April to October period last year.

Comment

The elephant in the room here is QE and by using it on such a scale the Bank of England has changed the metrics in two respects. Firstly the impact on the bond market of such a large amount of purchases has been to raise the price which makes yields lower. That flow continues as it will buy another £1.473 billion this afternoon. Having reduced debt costs via that mechanism it does so in another way as the coupons ( interest) on the debt it has bought are returned to HM Treasury. Thus the effect is that we are not paying interest on some £707 billion and rising of the debt that we owe.

Thus for now we can continue to borrow on a grand scale. One of the ways the textbooks said this would go wrong is via a currency devaluation but that is being neutered by the fact that pretty much everyone is at the same game. There are risks ahead with the money supply as it has been increased by this so looking ahead inflation is a clear danger which is presumably why the establishment are so keen on defining it away.

I have left until the end the economy because that is so unpredictable. We should see some strength in 2021 as the vaccines kick in.But we have a long way to go to get back to where we were in 2008. On a collective level we may need to face up to the fact that in broad terms economic growth seems to have at best faded and at worst gone away.

Podcast

 

 

The UK shopper strikes yet again!

This morning has brought an example of something which is both remarkable and familiar. You might argue that you cannot use those two words together but 2020 is a year that continues to defy convention. What I am referring too is more good news for the UK economy from this sector.

In October 2020, retail sales volumes increased by 1.2% when compared with September; the sixth consecutive month of growth in the industry.

This means that the annual picture looks really rather rosy too.

In October, the year-on-year growth rate in the volume of retail sales saw a strong increase of 5.8%, with feedback from a range of businesses suggesting that consumers had started Christmas shopping earlier this year, further helped by early discounting from a range of stores.

In recent times the pattern has changed with for example Black Friday being in a week’s time and there is also Cyber Monday. Some Black Friday offers seem to have already started, if the advertising I see is any guide. So the structure underlying seasonal adjustment has been changing and maybe there has been another shift this year. Thus there may be a hangover from these numbers but we simply do not know how much it will be?

If we try to compare we the period pre the pandemic we see another strong recovery and then boom.

Looking at October’s total retail sales values (excluding fuel), which is a comparable measure to our online series, sales increased by 7.9% when compared with February; driven by a strong increase in sales online at 52.8% in comparison to reduced store sales at negative 3.3%.

From all the deliveries I see happening the online numbers are hardly a surprise, but with Lockdown 2.0 now adding to the problems I fear for quite a bit of the high street.

So we do have a V-shaped recovery for one part of our economy and I guess the orders for the economics text books are already on their way to the printers.

What this has done is out the switch to the online world on speed with food sales seeing a particular boom. That will be fed by the stories that Covid-19 is being spread by supermarket visits.

In October, we can see that online sales for all sectors increased when compared with February. Online food sales nearly doubled, with an increase of 99.2% in comparison with food store sales, which saw a fall of 2.1%. Overall, total food sales increased by 3.4% when compared with February.

Clothing stores, with an overall decline of 14.0% in value sales, increased their online sales by 17.1% but saw the biggest fall in store sales at negative 22.1%.

The area which has most struggled does not really have an option for online sales.

In October, fuel sales still remained 8.8% below February’s pre-lockdown level, while car road traffic reduced by an average 14.2%.

Looking at the overall picture it is also a case of Shaun 1 Bank of England 0 because my case that lower prices lead to growth has got another piece of evidence in its favour.

This was the sixth consecutive month of growth resulting in value and volume sales 5.2% and 6.7% higher respectively than in February 2020, before coronavirus (COVID-19) lockdown restrictions were applied in the UK.

With value growth or if you prefer expenditure in Pounds lower than volume growth there has been disinflation or price falls combined with volume growth. For newer readers I first made the point formally on here on the 29th of January 2015.

Looking ahead that boost may now fade as October gave a hint of a change of trend.

All measures in the total retail sales industry saw an increase in October 2020. The monthly growth rate for value sales was 1.4% and for volume sales 1.2%.

It may take a while to note anything like that as Lockdown 2.0 will affect the December and particularly the November numbers.

Public Finances

These too were numbers that the forecasters got wrong by quite a bit. So today was yet another failure as Retail Sales were supposed to flat line and borrowing be much higher.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £22.3 billion in October 2020, £10.8 billion more than in October 2019, which is both the highest October borrowing and the sixth-highest borrowing in any month since monthly records began in 1993.

Of course, we are borrowing extraordinary amounts so this is relatively good news rather than being outright good. As you can see below a more than half of the rise is extra central government spending.

Central government bodies are estimated to have spent £71.3 billion on day-to-day activities (current expenditure) in October 2020, £6.4 billion more than in October 2019; this growth includes £1.3 billion in Coronavirus Job Retention Scheme (CJRS) and £0.3 billion in Self Employment Income Support Scheme (SEISS) payments.

Also revenues have fallen and some of that is deliberate with the VAT and Stamp Duty cuts.

Central government tax receipts are estimated to have been £39.7 billion in October 2020 (on a national accounts basis), £2.7 billion less than in October 2019, with falls in Value Added Tax (VAT), Business Rates and Pay As You Earn (PAYE) income tax.

You might think that the balancing amount was local councils especially after the blow up in Croydon, which for those unaware is below.

Cash-strapped Labour-run Croydon Council has imposed emergency spending restrictions with “immediate effect”, the BBC has learned.

The Section 114 notice bans all new expenditure at Croydon Council, with the exception of statutory services for protecting vulnerable people.

A document seen by the BBC said “Croydon’s financial pressures are not all related to the pandemic”.

It is under a government review amid claims of “irresponsible spending”.

Section 114 notices are issued when a council cannot achieve a balanced budget. ( BBC News)

However the main other recorded component was the Bank of England at £2.8 billion. This is really rather awkward as it has not actually borrowed anything at all! But a Monty Python style method records it as such and it is the first time I can recall an issue I have regularly flagged about the national debt so explicitly affecting the deficit as well.

National Debt

So without further ado here is the misleading headline that much of the media has gone with today.

Public sector net debt (excluding public sector banks) rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, £283.8 billion more than in October 2019.

This is misleading because it includes the activities of the Bank of England which are not debt. I am no great fan of the Term Funding Scheme but recording its £120 billion as all being debt is quite extraordinary and is a major factor leading to this.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of October 2020 would reduce by £232.9 billion (or 11.3 percentage points of GDP) to £1,843.9 billion (or 89.5% of GDP).

It makes quite a difference especially for fans of debt to GDP ratios as we go from 89.5% to “around 100.8% of gross domestic product” on this really rather odd road.

Comment

The continued growth of UK retail sales is good news as we see an area that has recovered strongly. This comes with two caveats. The first is that with out enthusiasm for imports it poses a danger for the trade figures. The second is that in a tear with so many changes I doubt any survey is completely reliable so we are more uncertain that usual.

Switching to the public finances and taking a deeper perspective we are posting some extraordinary numbers.

Public sector net borrowing (PSNB ex) in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion, £169.1 billion more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.

We seem set to keep spending more in some areas ( defence) but want to cut back in others ( public-sector pay) so all we can do at the moment is be grateful we can borrow so cheaply. Even the fifty-year Gilt yield is a mere 0.77% and as I have written before at these levels I would issue some one hundred year ones as the burdens are not going away anytime soon.

My theme that low inflation helps economies also gets support from the public finances.

Interest payments on the government’s outstanding debt were £2.0 billion in October 2020, £4.4 billion less than in October 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

The Bank of England never gets challenged as to why it keeps trying to raise our debt costs in this area. Also you see another reason why the establishment wants to neuter the Retail Prices Index ( RPI)

 

 

 

 

 

The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

A feature of these times is that we see so many official attempts to hide the truth. In the UK at the moment one of the main efforts is around the inflation numbers and next week on the 25th we will get an announcement about it. The official documentation shows the real reason for the change albeit by accident.

Since 2010, the measured rate of RPI annual inflation has been on average one percentage point per annum above the CPIH.

They want to get rid of the RPI for that reason that it gives a reading some 1% higher as they can then tell people inflation is 1% higher at a stroke. The “independent” UK Statistics Authority and National Statistician have  thoroughly embarassed themselves on this issue. There have been 2 main efforts to scrap the RPI both of which have crumbed under their own inconsistencies and now the plan is to neuter it by applying some Lord of the Rings style logic.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them.

In the future we will only have one inflation measure and it will be the one that has been widely ignored since its introduction in spire of desperate attempts to promote it.

The Authority remains minded to address the shortcomings of the RPI by bringing the methods and data sources from the National Statistic, the CPIH, into the RPI. In practice this means that, from the implementation date, the RPI index values will be calculated using the same methods and
data sources as are used for the CPIH. Monthly and annual growth rates will then be calculated directly from the new index values.

So the “improvement” will involve including rents which do not exist and they comprise quite a bit of the index.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 16% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

For those unaware if you own your own home you are assumed to pay yourself rent and then increases in the rent you do not pay are put in the inflation numbers. Even worse they have little faith in the numbers used ( from actual renters) so they “smooth” them with an average lag of about 9 months. So today’s October rent numbers reflect what was happening around January and are therefore misleading. Putting it another way if you wish to have any idea of what is happening in the UK rental sector post pandemic do not look here for clues.

The supposedly inferior RPI uses house prices via a depreciation component ( a bit over 8%) and mortgage interest-rates ( 2.4%). Apparently using things people actually pay is one of the “shortcomings”. Meanwhile back in the real world if I was reforming the RPI I would put house prices in explicitly.

I find myself in complete agreement with the TUC on this.

Nobody is claiming the RPI is perfect. But it remains the best measure for living costs and would be straight forward to modernise.

As has been shown across Europe it would be perfectly possible to have RPI existing in parallel to CPIH (​or CPI) and have the latter measure focus on guiding monetary policy.

We are disappointed that expert calls to retain the RPI have been repeatedly ignored. The Royal Statistical Society and House of Lords Economic Affairs ​Committee have both presented compelling evidence for keeping it.

The basic issue is that the inflation numbers will be too low.In addition measures of real wages will be distorted too. These things echo around the system as for example when RPI was replaced by CPI in the GDP data the statistician Dr. Mark Courtney calculated that GDP was then higher by up to 0.5% a year. If you cant change reality then change how it is presented.

Today’s Data

We see that inflation is starting to pick up.

The Consumer Prices Index (CPI) 12-month rate was 0.7% in October 2020, up from 0.5% in September.

Remember that prices are being depressed right now by the VAT cut.

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

I appreciated it last night when I bought a cooked chicken which has become cheaper. In terms of the inflation numbers we do have measures which allow for this. They are at 2.3% ( if you exclude indirect taxes called CPIY) and 2.4% ( if you have constant indirect tax rates or CPI-CT). We do not know exactly how prices would have changed without it but we do know that inflation would be a fair bit higher and would change the metric around Bank of England policy and its 2% inflation target.

The major movers were as follows.

Clothing; food; and furniture, furnishings and carpets made the largest upward contributions (with the contribution from these three groups totalling 0.16 percentage points) to the change in the CPIH 12-month inflation rate between September and October 2020………These were partially offset by downward contributions of 0.06 and 0.04 percentage points, respectively, from the recreation and culture, and transport groups.

You may note they have sneaked CPIH in there as it is the only way they can get it a mention as it is so poor it is widely ignored.

Another point of note is that the inflation measured by CPI is in services at 1.4% whereas good inflation is 0%.

If we look at the RPI we see another reason why it is described as having “shortcomings”. It has produced a higher number as it has risen from 1.1% in September to 1.3% in October.

The trend

In terms of the 2 basic measures we see that opposite influences are at play. The UK Pound £ has been reasonably firm and is just below US $1.33 as I type this so mo currency related inflation is on the way and maybe a little of the reverse. However the price of crude oil has been picking up lately with the January futures contract at US $44.27. Whilst this is around 30% below a year ago the more recent move this month has been for a US $7 rise.

In terms of this morning’s release there was a hint of a change.

The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020……The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.

So less negative and at this point crude oil was still depressing the prices so we can expect much more of a swing next time around if we stay at present levels.

Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.

House Prices

I think you can see immediately why they want to keep house prices out of the official inflation measures.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

They much prefer to put this in.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020.

Just as a reminder home owners do not pay rent so this application of theory over reality conveniently reduces the headline inflation number called CPIH.

As ever there are regional differences in house price growth.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%)….London’s average house prices hit a record high of £496,000 in September 2020.

Comment

Next week we will get the result of the official attempt to misrepresent inflation in the UK. All inflation measures have strengths and weaknesses but the UK establishment is trying to replace what is a strong measure (RPI) with a poor one ( CPIH). I think it is particularly insidious to keep the name RPI but in reality to make it a CPIH clone. A group that will be heavily affected is first time buyers of property who will be told there is little inflation because of a theoretical manipulation involving imputed rents but face a reality of much higher house prices.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter )

If you set out to destroy trust in national statistics then they are on the right road.

A curious treatment of inflation has knocked more than 3% off UK GDP

This morning has brought us up to date on the UK economy in the third quarter of this year. These days we get the numbers with a bit more of a delay than in the past and in this confused pandemic period our official statisticians must be grateful for it. It gives them more time to check matters and collect a fuller set of quarterly data.

Following two consecutive quarters of contraction, UK gross domestic product (GDP) is estimated to have grown by a record 15.5% in Quarter 3 (July to Sept) 2020. This is the largest quarterly expansion in the UK economy since Office for National Statistics (ONS) quarterly records began in 1955.

So we see quite a bounce back, but it is also true that momentum was lost.

The monthly path of GDP in Quarter 3 2020 reveals that there has been a slowdown of growth in August and September as momentum has eased through the quarter. GDP increased by 6.3% in July, driven by accommodation and food services as lockdown restrictions were eased.

That was the peak followed by this.

GDP grew by 2.2% in August, driven by accommodation and food services because of the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme, as well as growth in the accommodation industry as international travel restrictions boosted domestic “staycations”.

Of course, there is a different perspective to the Eat Out to Help Out Scheme as we mull how much it contributed to the second wave of the Covid-19 pandemic and thus reduced GDP later on. Fortunately we continued to grow in September as some thought we might not.

In September, GDP further slowed to 1.1% where professional, scientific and technical activities had the largest contribution and legal activities, accounting and advertising saw strong growth after a muted August.

Actually September saw a swing back in something I drew attention to in the second quarter data where the UK statisticians treated education in a really rather odd way. From August 12th.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020.

That as I pointed out at the time was really quite bizarre and led to around 5% being subtracted from UK GDP. This time around they put some of it back as I note this in the September detail.

Education also had a large positive contribution in September as schools made further advances in returning to a level of teaching similar to before the lockdown started on 23 March 2020, primarily through increased attendance.

The state sector in GDP

This has long been a problem in GDP numbers which rely on prices and therefore hit trouble in areas where you do not have them.With much of UK education and health provision being state provided there is not a price mechanism and instead we see all sorts of often dubious assumptions. As a reminder I recall Pete Comley telling me that he had looked into the inflation measure for this sector ( called a deflator), when I provided some technical advice for his book on inflation  and felt they simply made the numbers up. Well in that vein remember the deflator which surged by 32.7%, well in Question of Sport style what happened next? We get a hint from the nominal data.

Nominal GDP increased by 12.6% in Quarter 3 2020, its largest quarterly expansion on record

So a 2.9% gap between it and the real GDP number with this causing it.

The implied deflator fell by 2.5% in the third quarter, the first quarterly decline since Quarter 4 (Oct to Dec) 2015. This primarily reflects movements in the implied price change of government consumption, which fell by 7.0% in Quarter 3 2020.

So we got a bit under a quarter of it back. The explanation would have been described by the Alan Parsons Project as Psychobabble.

This decrease occurred because the volume of government activity in the third quarter increased at a much greater rate than nominal government expenditure. This is partly because of the unwinding in some of the movements that occurred in the second quarter, which saw a fall in the volume of government activity at the same time as an increase in government expenditure in nominal terms.

This really is a bit of a dog’s dinner.

 In education, the large fall in the volume of education activity in the second quarter followed by the large increase in the third quarter help explain the most recent quarterly movement in the implied deflator.

The same happened to health.

In the third quarter, nominal spending on health was largely unchanged, while volumes increased, which has impacted upon the growth rate of the implied deflator in the third quarter.

Applying normal metrics to abnormal times has them singing along with Kylie Minogue.

I’m spinning around, move out of my way
I know you’re feeling me ’cause you like it like this
I’m breaking it down, I’m not the same
I know you’re feeling me ’cause you like it like this.

We can compare this with others to see the scale of what has happened here. We do not have numbers for the full Euro area but Germany for example saw its deflator rise by 0.5% in the second quarter and then returned to a slightly lower level in the third quarter. So very different. France saw more of a move with its deflator rising by 2.4% but has now reduced it to below the previous level. Spain saw barely any change at all

A Trade Surplus

The UK finds itself maybe not quite in unknown territory but along the way.

In the 12 months to September 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £35.9 billion to a surplus of £5.2 billion.

Yes you did see the word surplus which is a rare beast for annual data for the UK and we can continue the theme.

The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased £3.4 billion to £4.2 billion in Quarter 3 (July to Sept) 2020, as imports grew by £17.3 billion and exports grew by a lesser £13.8 billion.

However the theme does hit rougher water with the latest monthly data.

The total trade balance for September 2020, excluding non-monetary gold and other precious metals, decreased by £3.6 billion to a deficit of £0.6 billion; imports increased by £3.6 billion while exports remained flat.

Comment

The pandemic has created all sorts of issues but in terms of economics we find ourselves here, or rather this is where we were at the end of the third quarter.

the level of GDP in the UK is still 9.7% below where it was at the end of 2019. Compared with the same quarter a year ago, the UK economy fell by 9.6%.

In spite of the media obsession with recessions this is a depression and we should call it such. Looking ahead we know that things will be depressed by the four week lockdown we are presently in meaning the economy looks set to shrink again in this quarter. There are some newer official surveys for October which suggest we had lost more growth momentum as restrictions began again.

BICs for 5-18 October 2020, found that of businesses currently trading, 45% reported their turnover had decreased below what is normally expected for October, compared to 48% reporting decreases in September……While it is not clear exactly how strong a relationship there is between GDP and BICs, the business survey data suggests the outlook has improved only modestly, if at all, as we moved into October. ( @jathers_ONS )

However if we return to the overall pattern for 2020 we see that a decision by the Office for National Statistics has depressed the way it records UK GDP and that it is ongoing with less than a quarter being reversed. This makes international comparisons very difficult especially for those unaware of the situation. We need I think to add at least 3% to the UK number when we try to compare internationally.

On a statistical level I regularly find the ONS justifying things on the basis of “international standards” so it needs in my opinion to explain why it has taken such a different path this time.

 

 

 

 

 

UK hours worked have fallen 12% since the Covid-19 pandemic began

This morning has brought the focus back on the UK and the labour market release has brought some better news. Sadly the unemployment numbers are meaningless right now so we need to switch to the hours worked data for any realistic view.

Between April to June 2020 and July to September 2020, total actual weekly hours worked in the UK saw a record increase of 83.1 million, or 9.9%, to 925.0 million hours.

Average actual weekly hours worked saw a record increase of 2.7 hours on the quarter to 28.5 hours.

This is our first real look at a fullish set of data for the third quarter as we do not get the Gross Domestic Product or GDP numbers until Thursday. Will they also show a bounce of around 10%? Our official statisticians seem to have lost a bit of faith in their own figures as they quote the Markit PMI as back up.

The IHS Markit states that the recovery in business activity, which continued across the manufacturing and service sectors in September 2020, reflects the record increase in total hours worked on the quarter to September.

Perhaps they are unaware of the reduction in credibility for that series. However we can sweep this section up by noting that whilst we have much better news we are in a situation described by Foreigner.

But I’m a long, long way from home

That is because the numbers are still 12% below the pre pandemic peak of 1,052.2 million hours.

Redundancies

We had feared a rise in these, and sadly they have been coming.

Redundancies increased in July to September 2020 by 195,000 on the year, and a record 181,000 on the quarter, to a record high of 314,000 (Figure 3). The annual increase was the largest since February to April 2009.

In terms of what they tell us? We have an issue because we were seeing rises ahead of the further wind down and then end of the Furlough scheme which then saw a U-Turn extension to March. So much for another form of Forward Guidance. So the real message here is somewhat confused.

Using the tax system

This is a new innovation designed to give more timely data and to that extent it helps as we get a signal for October.

Early estimates for October 2020 indicate that the number of payrolled employees fell by 2.6% compared with October 2019, which is a fall of 763,000 employees……..In October 2020, 33,000 fewer people were in payrolled employment when compared with September 2020 and 782,000 fewer people were in payrolled employment when compared with March 2020.

These numbers have proved useful for a direction of travel but again due to the furlough scheme are much too low in scale. Also the wages numbers are best filed in the recycling bin.

Early estimates for October 2020 indicate that median monthly pay increased by 4.6%, compared with the same period of the previous year.

What they are most likely telling us in that job losses have been concentrated in the lower paid which has skewed the series.

Unemployment

Sadly the BBC seems not to be aware that these numbers are way of the mark and so are actively misleading.

The UK’s unemployment rate rose to 4.8% in the three months to September, up from 4.5%, as coronavirus continued to hit the jobs market.

The reason for that is the furlough scheme.

Experimental estimates based on returns for individual weeks show that the number of people temporarily away from work rose to around 7.9 million people in April 2020 but has fallen to around 3.9 million people in September 2020. There were also around 210,000 people away from work because of the pandemic and receiving no pay in September 2020; this has fallen from around 658,000 in April 2020.

Following international guidelines has led us up the garden path.

Under this definition, employment includes both those who are in work during the reference period and those who are temporarily away from a job.

Wages

We can now switch to the price of labour where according to out official statisticians there has also been some better news.

Annual growth in employee pay continued to strengthen as more employees returned to work from furlough, but pay growth was still subdued as some workers remained furloughed and employers were paying less in bonuses…..Growth in average total pay (including bonuses) among employees for the three months July to September 2020 increased to 1.3%, and growth in regular pay (excluding bonuses) increased to 1.9%.

As you can see below there were hard times still for some sectors.

During the early summer months, the industry sectors accommodation and food services and construction had seen the largest falls in pay, down more than 10% in April to June; in July to September, both recovered some loss although their average total pay growth remained down, at negative 1.8% and negative 3.9% respectively.

Actually the construction numbers seem curious as in my part of London it all seems to have got going again, but as ever London may not be a good guide.

We can see who is doing relatively well by switching to the most recent single month numbers which are for September. Here we see public-sector total pay was up 4.4% on a year ago. Also that the services sector has risen to 3,5%. Switching to manufacturing we see that annual growth has finally become positive but is at a mere 0.6%.

The improvement has followed through into the real wages data at least according to the Office for National Statistics.

In real terms, total pay in July to September grew at a faster rate than inflation, at positive 0.5%, and regular pay growth in real terms was also positive, at 1.2%.

In terms of actual pay those numbers mean this.

For September 2020, average total pay, before tax and other deductions, for employees in Great Britain was estimated at £553 per week in nominal terms. When expressed in real terms (constant 2015 prices), the figure in September 2020 was £509 per week, notably higher than the £488 per week estimated in June 2020.

It may be notably higher than June but is still below the pre credit crunch peak of £522 for the constant price series from February 2008. Actually that number looks a bit of a freak or more formally an outlier but even if we discount it we are still below some of the others from around then.

Comment

We find ourselves again mulling the way that conventional economic metrics have failed us. To be specific we see that underemployment measures are much more useful that unemployment ones as a 12% fall in hours worked gives a much more realistic picture than a 4.8% unemployment rate. In the short-term the improvement in the situation will clash with the November lock down and thus get worse. Although with the Hopium provided by the positive vaccine news from Pfizer there are now more realistic hopes for a better 2021.

Switching to the wages numbers I think there is a compositional effect making them also unreliable or rather more unreliable than usual. We even have an official denial to confirm this.

 that is, if the profile (percentage within each industry) of employee jobs had not changed between July to September 2019 and July to September 2020, the estimates of growth in total pay and regular pay would have been 0.1% lower than reported in this bulletin.

In my opinion the numbers are not accurate enough to claim that. So we know more but much less than some try to claim.

By the way those pushing the 4.8%  unemployment rate ( and thereby believing it) surely they should be pushing for the Bank of England to raise interest-rates as it is well below the levels it was supposed to?

 

The UK house price boom is facing higher mortgage rates

This morning will have brought sounds of high excitement and smiles to the Bank of England. It would have been too early to raid its excellent wine cellar but a liveried flunkey will have brought its best coffee to Governor Andrew Bailey as he peruses the latest news from the Halifax on UK house prices.

The average UK house price now tops a quarter of a million pounds (£250,547) for the first time in history, as annual
house price inflation rose to 7.5% in October, its highest rate since mid-2016. Underlying the pace of recent price
growth in the market is the 5.3% gain over the past four months, the strongest since 2006.

Governor Bailey will no doubt issue a satisfied smile and may mimic the end of the television series Frasier which had an “I did that” at the end. He may even be pleased that he has helped to do this without getting a mention from the Halifax.

This level of price inflation is underpinned by unusually high levels of demand, with latest industry figures showing
home-buyer mortgage approvals at their highest level since 2007, as transaction levels continue to be supercharged
by pent-up demand as a result of the spring/summer lockdown, as well as the Chancellor’s waiver on stamp duty for properties up to £500,000.

I find the “pent-up demand” bit curious as surely there will also have been pent-up supply? Bur we do see signs of a an active market.

HMRC Monthly property transactions data shows a fifth consecutive monthly rise in UK home sales
in September. UK seasonally adjusted residential transactions in September 2020 were 98,010 – up by
21.3% from August. The latest quarterly transactions (July-September 2020) were approximately 63.6%
higher than the preceding three months (April-June 2020). Year on year, transactions were 0.7% lower than
September 2019 (2.4% higher on a non seasonally adjusted basis). (Source: HMRC, seasonally-adjusted
figures)

Although I do note that whilst we have seen high rates of monthly growth it only brings us back to around what were last years levels. The picture on mortgage approvals is more clear-cut.

Mortgage approvals rose in September to the highest level seen in 13 years. The latest Bank of England figures show the number of mortgages approved to finance house purchases, rose by 7% from August to 91,454, down from a rise of 27% reported in August. Year-on-year, the September figure was 39% above September 2019.

Monetary Policy

We can now switch to what I call the Talking Heads question. From Once In A Lifetime.

And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well… how did I get here?”

The Bank of England’s role in us getting here started with the interest-rate cuts in response to the credit crunch. Then as they realised how interest-rates actually worked they added on bond buying in the form of what is called QE to reduce longer-term interest-rates too. It is easy to forget now but this did not do the trick for house prices so in the summer of 2012 we got what the then Chancellor George Osborne called credit easing. This was the Funding for Lending Scheme where the Bank of England channeled cheap cash ( Bank Rate was 0.5%) to the banks so that they did not have to indulge in the no doubt tiresome business of competing for depositors.

This was a crucial change in 2 respects. The first is access to funds at Bank Rate but in many ways more crucial is the access to large amounts of funds. So a quantity issue. This allowed banks to reduce mortgage-rates and I recall pointing out that mortgage-rates fell by 0.9% quite quickly and the Bank of England later claimed they fell by up to 2%.

Bringing this up to now we have the Term Funding Scheme operating that role and in its original form it has supplied £70.6 billion and the new pandemic era version has supplied some £49.6 billion. So as you can see the Bank of England keeps the banks supplied with cash and these days it can get it as cheap as the present Bank Rate of 0.1%. On this road we see that the cut in Bank Rate is not especially significant in itself these days but comes more into play via the Term Funding Scheme.

Next as more people moved to mortgages with fixed interest-rates ( around 92% of new mortgages last time I checked) QE also came back into play as an influence on mortgage rates via its impact on UK bond or Gilt yields. So this part of yesterday’s announcement matters.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

There are issues with the stock but for our purposes today in looking at the mortgage market it is the flow ( presently £4.4 billion a week) that matters. It has helped keep my proxy for fixed-rates, which is the five-year bond yield negative since mid June now apart from one brief flicker. As I type this it is -0.06%.

Comment

So the theme starts singing along with Steve Winwood for house prices.

I’ll be back in the high life again
All the doors I closed one time will open up again

However all the government and Bank of England pumping has the problem that it means that they are ever more socially distanced from wages and earnings. So many are on 80% wages from the furlough scheme and real wages have been falling. There has to be some sort of reckoning here in the end. As well there are signs that the pumping system is creaking.

As you can see mortgage rates for those with lower amounts of equity or if you prefer high loan to value numbers have risen quite sharply. So the heat is on especially for those with only 5% equity where they have gone above 4% which really rather contradicts all the official rhetoric of low interest-rates.  So I see trouble ahead which to be frank I welcome. I do not wish anyone ill in financial terms but we do need lower house prices to help first-time buyers.

Meanwhile something I have long warned about looks to have come true this week.

The Bank of England is investigating a potential leak of Thursday’s QE announcement ( @fergalob)

I do like the description of it being in The Sun as a “potential leak”……

UK Retail Sales are seeing quite a surge

These times are ones where the news is often a combination of bad or grim.Indeed the mainstream media seems to be revelling in it. From time to time we do get some better news which I welcome.In the UK version of the pandemic that has regularly come from the retail sales data and this morning is no exception.

In September, we saw growth across all measures. The value of retail sales increased by 1.4% and volume sales by 1.5% when compared with the previous month.

The first point is that we have seen another month of growth which means that the pattern has been of a very strong recovery.

A strong rate of growth is seen in the three-month on three-month growth rate at 17.7% and 17.4% for value and volume sales respectively. This is the biggest quarterly growth seen on record as sales recovered from the low levels experienced earlier in the year.

If course a lot of care is needed because there was quite a previous fall.

In Quarter 2 (Apr to June), the volume of retail sales fell by 9.7%.

The effect of this is that we are now quite a bit above the pre pandemic level of retail sales.

When compared with February 2020’s pre-pandemic level, total retail sales were 3.9% and 5.5% higher in value and volume terms respectively.

Also one of my themes has been in play. Regular readers will recall that I argued back on the 29th of January 2015 that low inflation and indeed falling prices boost retail sales by making them cheaper in real terms, especially relative to wages. If you now look at the numbers again there has been a registered price fall of the order of 1.6% ( the difference between the value and volume figures above) and it has been associated with strong growth. This is bad news for those who argue that we need more inflation such as those setting policy at the Bank of England as they are replying on a “Wages Fairy” that has been absent for more than a decade now.

Breaking it down

The pandemic era seems to have made as hungry.

When compared with February, volume sales within food stores were 3.7% higher in September. Food retailers had suggested that the peak in March 2020 was because of panic buying at the start of the pandemic, and despite seeing a notable fall in sales following this peak, spending remained high. This may be a result of the government tightening restrictions for other services such as bars and restaurants at the end of September, which may have encouraged spending in food stores.

More seriously as the release above suggests there has been a shift here with people eating out less and therefore eating more at home. Unfortunately it is pretty much impossible to quantify. Perhaps some people still have cupboards full of tinned food and freezers full up as well.

There has also been a shift towards online retailing, or more accurately what was already happening got turbocharged.

In September, volume sales within non-store retailing were 36.6% higher than in February. Despite some contraction from the sharp rate of increase in this sector, consumers were still carrying out much of their shopping online when compared with February.

It is a case of what the Black-Eyed Peas would call “Boom! Boom! Boom!”

Despite monthly declines across all sectors except department stores, the proportion of online sales was at 27.5%, compared with the 20.1% reported in February. The proportion of online sales increased across all sectors with food stores nearly doubling their online proportions from 5.4% in February to 10.4% in September.

Putting it another way online sales are up 53% on a year ago.

I guess we should not be surprised that times like these have led to higher sales reflecting people passing the time by gardening and doing some home improvements.

Many retailers selling gardening products commented on increased demand during lockdown as consumers socially distanced in their gardens where possible.Flowers, plants and seeds stores provided strong positive contributions at 0.5 percentage points………Volume sales in household goods stores and “other” non-food stores increased to 11.0% and 10.7% above February, respectively. Feedback from household goods stores had informed us that home improvement sales from DIY and electrical goods stores did well in recent months and helped with the recovery of sales

There should be no great surprise with so many working from home that fuel sales are down.

In September, fuel sales volumes were still 8.6% below February with reduced travel as many continued to work from home, and clothing sales volumes were still 12.7% below February.

But as you can see clothing sales have suffered too. Perhaps a lack of work clothes.O have dome my bit for the October figures by buying a new sweatshirt and some running shorts.

In terms of the overall index we are now at 107.6 with 2018 as the benchmark of 100.

On the other side of the coin this was reported as well.

The GfK Consumer Confidence Index tumbled to -31 in October, its lowest level since late May and down sharply from a nine-month high of -25 in September, as well as being below all forecasts in a Reuters poll of economists. ( Reuters)

It is hard not to laugh at the forecasts.We have had a litany of simply dreadful ones in the pandemic era yet some still seem to have faith in them.As to the numbers October has its issues but I find a survey that is at -25 at a time of record retail sales in September somewhat puzzling.

Business Surveys

Today’s Purchasing Managers Index or PMI was also positive. Whilst the reading fell unlike in the Euro area we retained at least some growth.

The pace of UK economic growth slowed in October to
the weakest since the recovery from the national COVID-19
lockdown began. Not surprisingly the weakening is most
pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.

The growth that we are seeing is to be found here.

Where a rise in output was reported, survey
respondents pointed to factors such as pent up demand in the manufacturing sector, rising residential property transactions and the restart of work on projects that had been delayed at the start of the pandemic.

 

Comment

If we continue with today’s optimistic theme we see that we do have an example of a V-Shaped recovery in the UK economy. This is because retail sales are now a fair bit above pre pandemic levels. So a clear V shape. However this area has been the one which has benefited the most from income being supported by the furlough scheme which ends soon. The replacements are stronger than they were but we may see an impact from the November data. Also there are some extraordinary goings on in Wales which will be affecting retail sales there from tomorrow.

Supermarkets will be unable to sell items like clothes during the 17-day Covid firebreak lockdown in Wales.

First Minister Mark Drakeford said it would be “made clear” to them they are only able to open parts of their business that sell “essential goods”.

Many retailers will be forced to shut but food shops, off-licences and pharmacies can stay open when lockdown begins on Friday at 18:00 BST.

Retailers said they had not been given a definition of what was essential. ( BBC)

Frankly that looks quite a shambles in the making.

So in an echo of the weather as the sun has come out in Battersea we have received some good news today but sadly I suspect the Moody Blues were right about future prospects.

The summer sun is fading as the year grows old
And darker days are drawing near
The winter winds will be much colder

The Bank of England has become an agent of fiscal policy

It is time to take a look at the strategy of the Bank of England as there were 2 speeches by policymakers yesterday and 2 more are due today including one from the Governor. But before we get to them let us first note where we are. Bank Rate is at 0.1% which is still considered by the Bank of England to be its lower bound, however it did say that about 0.5% and look what happened next! We are at what might now be called cruising speed for QE bond purchases of just over £4.4 billion per week. Previously this would have been considered fast but compared to the initial surge in late March it is not. The Corporate Bond programme has now reached £20 billion and may now be over as the Bank has been vague about the target here. That is probably for best as whilst the Danish shipping company Maersk and Apple were no doubt grateful for the purchases there were issues especially with the latter. It is hard not to laugh at the latter where the richest company in the world apparently needed cheaper funding. Also we have around £117 billion deployed as a subsidy for banks via the Term Funding Scheme and some £16 billion of Commercial Paper has been bought under the Covid Corporate Financing Facility of CCFF.

The Pound’s Exchange Rate

It has been a volatile 2020 for the UK Pound £ as the Brexit merry-go-round has been added to by the Covid-19 pandemic. The initial impact was for the currency to take a dive although fortunately one of the more reliable reverse indicators kicked in as the Financial Times suggested the only was was down at US $1.15. Yesterday saw a rather different pattern as we rallied above US $1.31. However as we widen our perspective we have been in a phase where both the Euro and the Yen have been firm,

If we switch to the trade-weighted or effective index we see that the Pound fell close to 73 in late March but has now rallied to 78. Under the old Bank of England rule of thumb that is equivalent to a 1.25% increase in Bank Rate. Right now the impact is not as strong due to trade issues but even if we say 1% that is a big move relative to interest-rates these days.

Ramsden

Deputy Governor Ransden opened the batting in his speech yesterday by claiming  that lower interest-rates were nothing at all to do with the cuts he and his colleagues have voted for at all.

Over time, these developments reduced the trend interest-rate, big R*, required to bring stocks of capital and wealth into line. And policy rates, including in the UK, followed the trend downwards.

So we no longer have to pay him a large salary and fund an index-linked pension as doe example AI could do the job quite easily? Also it is hard not to note that we would not be told this if the interest-rate cuts had worked.

As a former official at HM Treasury one might expect him to be a fan of QE as it makes the Treasury’s job far easier so this is little surprise.

QE has been an effective tool for stimulating demand through the 11 years of its use in the UK .

Really? If it has been so effective why has it been required for 11 years then? He moves onto a suggestion that there is plenty of “headroom” for more of it. This is followed by an extraordinary enthusiasm for central planning.

But again my starting point is that we have plenty of scope to affect prices. While yields on longer-dated Gilts are at historically low levels, that does not mean they could not still go lower.

There is a problem with his planning though because the QE he is such an enthusiast for has given the UK negative interest-rates via bond yields. At the time of writing maturities out to 6 years or so have negative yields of around -0.06%, Yet he is not a fan of negative interest-rates.

While there might be an appropriate time to use negative interest-rates, that time is not right now, when the economy and the financial system are grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties this crisis has created.

Ah okay, so he is worried about The Precious! The Precious! Curious that because we are told they are so strong.

the banking sector as a whole starts from a position of strength.

Perhaps somebody should show Deputy Governor Dave a chart of the banks share prices. That would soon end any talk of strength. Also if you are Deputy Governor for Markets and Banking it would help if you had some idea about markets.

As a generic I would just like to point out that those who claim the Bank of England is independent need to explain how it has come to be that all the Deputy-Governors have come from HM Treasury?

The Chief Economist

The loose cannon on the decks has been on the wires this morning as he has been speaking at a virtual event. From ForexLive

  • Nothing new to say on negative rates
  • BOE is doing work on negative rates, not the same as being ready to use it
  • Monetary policy can provide more of a cushion to the crisis
  • But more of the heavy lifting has to be done by fiscal policy

Actually he then went on what is a rather odd excursion even for him.

There Is An Open Question Whether Voluntary Or Involuntary Social Distancing Is Holding Back Spending ( @LiveSquawk)

For newer readers he seems to be on something of a journey as previously one would expect him to be an advocate of negative interest-rates whereas now he is against them.

Comment

There is a sub-plot to all of this and let me ask the question is this all now about fiscal policy? The issues over monetary policy are now relatively minor as any future interest-rate cuts will be small in scale to what we have seen and QE bond buying is on the go already. The counterpoint to this is that the Bank of England has seen something of a reverse takeover by HM Treasury as its alumni fill the Deputy Governor roles. Its role is of course fiscal policy.

The speech by Deputy Governor Ramsden can be translated as we will keep fiscal policy cheap for you as he exhibits his enthusiasm for making the job of his former colleagues easier. That allows the Chancellor to make announcements like this.

Chancellor Rishi Sunak is to unveil new support for workers and firms hit by restrictions imposed as coronavirus cases rise across the UK.
He is due to update the Job Support Scheme, which replaces furlough in November, in the Commons on Thursday. ( BBC )

So we have been on quite a journey where we were assured that monetary policy would work but instead had a troubled decade. Whilst the Covid-19 pandemic episode is a type of Black Swan event there is the issue that something would be along sooner or later that we would be vulnerable to. Now central banks are basically faciliatators for fiscal policy. This brings me to my next point, why are we not asking why we always need more stimuli? Surely that means there is an unaddressed problem.

UK sees a worrying rise in inflation and record borrowing

Today has brought quite a panoply of UK economic data some of it which is hardly a surprise, but there is a section which is rather eye-catching and provides food for thought. It will only be revealed at the Bank of England morning meeting if someone has the career equivalent of a death wish.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.8% last month……The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 1.8% last month.

The pattern for these numbers has been for a rise as CPI-CT initially dipped in response to the Covid-19 pandemic and fell to 0.4% in May. But since then has gone 0.5%,1%,1.8% and now 2.2%.

The sector driving the change has been the services sector which has seen quite a lift-off. If we look back we see that it has been regularly above 2% per annum but after a brief dip to 1.7% in June it has gone 2.1%, 4.1% and now 5%. Something that the Bank of England should be investigating as these seems to be quite an inflationary surge going on here. It is so strong that it has overpowered the good section ( -0.4% and the energy one ( -8.5%) both of which are seeing disinflation.

Nothing to see here, move along now please

Of course the official Bank of England view will be based on this number.

The Consumer Prices Index (CPI) 12-month rate was 0.5% in September 2020, up from 0.2% in August.

On that road they can vote for more QE bond buying next month ( another £100 billion seems likely) and if one policymaker is any guide they are looking ever more at further interest-rate cuts.

There is some debate about the scale of the stimulus that negative rates have imparted on these economies, but the growing empirical literature finds that the effect has
generally been positive, i.e. negative rates have not been counterproductive to the aims of monetary policy.

That is hardly a ringing endorsement but there is more.

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary
policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is
not at a point yet when it can reach a conclusion on this issue. But given how low short term and long term
interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that
headroom.

So should there be a vote on this subject he will vote yes to negative interest-rates.

Returning to inflation measurement there has been something of a misfire. In fact in terms of the establishment’s objective it has been a disaster.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.7% in September 2020, up from 0.5% in August 2020.

The issue here is that the measure which was designed to give a lower inflation reading is giving a higher one than its predecessor CPI. Even worse the factor that was introduced to further weaken the measure is the one to blame.

The OOH component annual rate is 1.2%, up from 1.1% last month.

OOH is Owner Occupied Housing and is mostly composed of rents which are never paid as it assumes that if you own your own home you pay yourself a rent. That is a complete fantasy as the two major payments are in fact the sale price and for many the mortgage costs and rent is not paid. This is quite different to those who do rent and for them it is included. But there is another swerve here which is that the inflation report today is for September but the rent figures are not. They are “smoothed” in technical terms which means they are a composition of rents over the past 16 months or so, or if you prefer they represent the picture around the turn of the year. Yes we have pre pandemic numbers for rent rises ( there were some then) covering a period where there seem to be quite a lot of rent falls.

Returning to the inflation numbers the much maligned Retail Prices Index or RPI continues to put in a better performance than its replacements.

The all items RPI annual rate is 1.1%, up from 0.5% last month.The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.4%, up from 0.8% last month.

They still have mortgage payments reducing inflation which if the latest rises for low deposit mortgages are any guide will be reversing soon.

As to this month’s inflation rise then a major factor was the end of the Eat Out To Help Out Scheme.

Transport costs, and restaurant and café prices, following the end of the Eat Out to Help Out scheme, made the largest upward contributions (of 0.23 and 0.21 percentage points, respectively) to the change in the CPIH 12-month inflation rate between August and September 2020.

Borrowing Has Surged

The theme here will not surprise regular readers although the exact amount was uncertain.

Borrowing (PSNB ex) in the first six months of this financial year (April to September 2020) is estimated to have been £208.5 billion, £174.5 billion more than in the same period last year and the highest borrowing in any April to September period since records began in 1993; each of the six months from April to September 2020 were also records.

We looked a few days ago at a suggestion by the Institute for Fiscal Studies what we might borrow £350 billion or so this fiscal year and we are on that sort of road. As to the state of play we can compare this to what the Bank of England has bought via its QE operations. Sadly our official statisticians have used the wrong number.

At the end of September 2020, the gilt holdings of the APF were £569.2 billion (at nominal value), an increase of £12.2 billion compared with a month earlier. Over the same period, the net gilt issuance by the DMO was £22.7 billion, which implies that gilt holdings by bodies other than the APF have grown by £10.5 billion since July 2020.

That will be especially out for longer-dated Gilts which are being purchased for more than twice their nominal value on occassion. The value of the APF at the end of September was £674 billion. Looking at the calendar the Bank of England bought around £21 billion of UK Gilts or bonds in September meaning it bought nearly all those offered in net terms ( it does not buy new Gilts but by buying older ones pushes others into buying newer ones).

National Debt

The total here is misleading ironically because if the numbers above. Let me explain why.

At the end of September 2020, the amount of money owed by the public sector to the private sector was approximately £2.1 trillion (or £2,059.7 billion), which equates to 103.5% of gross domestic product (GDP).

That seems simple but a reasonable chunk of that is not debt at all and it relates to the Bank of England.

The estimated impact of the APF’s gilt holdings on PSND ex currently stands at £105.6 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. The final debt impact of the APF depends on the disposal of these financial instruments at the end of the scheme.

Further, the APF holds £19.7 billion in corporate bonds, adding an equivalent amount to the level of public sector net debt.

If we just consider the latter point no allowance at all is made for the value of the corporate bonds. In fact we can also throw in the Term Funding Scheme for good luck and end up with a total of £225 billion. Thus allowing for all that this is where we are.

public sector net debt excluding public sector banks (PSND ex) at the end of September 2020 would reduce by £225.6 billion (or 11.4 percentage points of GDP) to £1,834.1 billion (or 92.1% of GDP).

Comment

Some of the numbers come under the category described by the apocryphal civil servant Sir Humphrey Appleby as a clarification. By that he does not mean something that is clearer he means you issue it to obscure the truth. We have seen this consistently in the area of inflation measurement where the last decade has seen a litany of increasingly desperate official attempts to miss measure it. It is also hard not to have a wry smile at one inflation measure rising about the target as the Bank of England is often keen on emphasising such breakdowns. But a suspect a rise will get ignored on the grounds it is inconvenient.

Switching to the UK public finances we see that there is a lot of uncertainty as many tax receipt numbers are estimated. In normal times that is a relatively minor matter but at a time like this will be much more material. Also government expenditure is more uncertain that you might think or frankly in an IT era it should be. The national debt is also much more debatable that you might think especially with the Bank of England chomping on it like this.

Come back stronger than a powered-up Pacman ( Kaiser Chiefs )
Oh well.