The return of the unreliable boyfriend causes carnage for the Pound £

Yesterday was not one of the better days for the Bank of England. To explain why let us take the advice of Kylie Minogue and step back in time. We go back to its house journal or the economics editor of the Financial Times Chris Giles on the 22nd of March.

The Bank of England has set the stage for an interest rate rise at its meeting in May, saying that pay growth was picking up and inflation was expected to remain above its 2 per cent target.

For Chris this was an example of deja vu and another success on its way for Forward Guidance.

Michael Saunders and Ian McCafferty broke ranks and voted for an immediate increase in interest rates, in a replay of events last September, when their dissenting views foreshadowed the MPC’s policy tightening announced in November.

The hits kept coming for the rise in May and go away camp.

The remaining seven MPC members argued that while nothing had changed significantly enough since the February meeting to justify an immediate move, they still believed rates would have to rise faster than markets had expected at the last meeting.

So the view advanced that an interest-rate rise in May was pretty much a done deal and markets moved towards suggesting a 90% chance of it. This was further reinforced by a speech given by Gertjan Vlieghe which I have mentioned before. From April 6th.

But last month Gertjan Vlieghe, an external MPC member, broke ranks with his colleagues on the nine-member committee when he said that rates could rise above 2 per cent over the same period.

So the stage was set and if there was a warning from the FT it was heavily coded and looked at something else.

The Riksbank has had some difficulties with its predictions. Until last year, it had been persistently over-optimistic about its ability to raise interest rates, always expecting rates to start rising soon

A bit like the England batsman James Vince who plays some flashy eye-catching shots but then gets out in the same familiar fashion.

Yesterday

Unfortunately for Governor Carney all his troubles were not so far away and it looked as though they were about to stay. He gave an interview to the BBC.

The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.
Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.

There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.

All those events would weigh on how fast interest rates rises would occur.

This poses more than a few problems. Firstly there is the issue of Brexit about which of course there are opposite views. But whichever side of the fence you are on the truth is that the water has been much less choppy recently so the Governor is flying a false flag. This adds to the problem he has in this area because he has been consistently too pessimistic on this subject, From the Guardian in May 2016.

That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.

Of course the difficult balancing act suddenly became cut as fast as he could with a promise of a further cut that November which was later abandoned. This contrasts in polar fashion with the pace at which interest-rate increases arrive as we are still waiting for the one promised back in the summer of 2014. From the Wall Street Journal.

Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, sending the clearest signal yet that Britain’s central bank is inching closer to calling time on five years of record-low borrowing costs.

Well not that clear as it turned out to be comfortably numb.

A distant ship, smoke on the horizon
You are only coming through in waves

This was something which created quite a disturbance in the markets as they scrambled to move interest-rate and bond futures. It is easy to forget now but the words of Governor Carney caused quite a bit of damage as the move eventually reversed. Also there was this.

And he warned the BOE intends to be vigilant over any risks to the recovery emanating from the housing market, where rising prices are stoking fears that Britons could become too indebted.

Indeed

Term Funding Scheme. Our Term Funding Scheme (TFS) provides funding to banks and building societies at rates close to Bank Rate. It is designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses.

Oh sorry not that £127 billion one nor the extra £60 billion of QE Gilt purchases. anyway as there is nothing to see here let;s move along.

How fast?

This issue is something which just gets ever more breathtaking so let me take you to the Bank of England Minutes.

All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

The problem here is that whilst this is repeated by the media like a mantra nobody points out that we have had years of such hints and promises now with us remaining at the “emergency” Bank Rate of 0.5%. We did of course get a panic cut in the summer of 2016 followed after what was considered to be a suitable delay to avoid embarrassment an overdue reversal but no increases at all.I am reminded of the explanation of what minutes mean by the apochryphal civil servant Sir Humphrey Appleby which was along the lines of “Whatever you want” from Status Quo, But feel that this from June 2014 was more accurate.

Part of that normalisation would be a rise in Bank
Rate at some point

The some point has never arrived but of course the hot air rhetoric carries on regardless. From Bloomberg.

Bank of England Governor Mark Carney says the U.K. should prepare for a few interest-rate increases over the next few years.

Perhaps he means after June 2019 when he leaves.

Comment

We find ourselves looking at a familiar theme which is the woeful forecasting record of the Bank of England. In this instance we see that it has changed its mid again about pay growth and inflation if we look through the Brexit inspired smokescreen. This matters because the present Governor Mark Carney has placed enormous emphasis on so-called Forward Guidance which of course has turned out to be anything but. It is a feature of his tenure that he is a dedicated follower of fashion but in his private moments he must regret following that particular central banking one. His forward guidance on climate change also has its troubles.

Carney said in the comments, made on the sidelines of the International Monetary Fund meetings in Washington.

This morning another member of the Bank of England Michael Saunders has demonstrated what a land of confusion they live in.

because the economy’s response to
changes in interest rates, especially rises, is more uncertain than usual.

Is it? Maybe one day we will find out! Also there is this rather bizarre statement and the emphasis is mine.

He also discusses why any further tightening is likely to be at a gradual pace and to a limited extent.

So there you have it. As to the decision well the Bank of England has led itself and the markets up the garden path and now is having second thoughts. The real problem is not the current view which is more realistic but why it keeps being wrong?

A new Governor?

An ability not to see anything inconvenient seems a good start and of course the ability to deny almost anything would be of great help. Some have suggested he has gone because he wants to be in Europe next season but personally I think we should remember the positive influence he brought to English football in the early days. A big change to the drinking and eating cultures for a start.

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We have good news as the Bank of England gets an inflation headache

As our attention moves today to inflation in the UK there is something we have cause to be grateful for. Let me hand you over to the Independent.

The pound hit its highest level against the dollar since the Brexit vote in June 2016, rising to $1.4364 by mid-morning………….

It has fallen back to US $1.43 since that but the principle that we have seen a considerable recovery since we fell below US $1.20 holds. If we look back to a year ago then we were just below US $1.28 and this matters for inflation trends because so many basic materials and commodities in particular are priced in US Dollars. We have not done so well against the Euro as we are around 2% lower than a year ago here which used to be considered as a dream ticket but as ever when we get what we want we either ignore it or forget we wanted it. The Euro has been strong which we can observe by looking at it versus the Swiss Franc where it has nearly regained the famous 1.20 threshold which caused so much trouble in January 2015.  But overall for us currency driven inflation has become currency driven disinflationary pressure.

Oil

On the other side of the coin we are seeing some commodity price pressure from crude oil and those who follow trading will be worried by this development.

DG closes long USDJPY position (Short of 3 units of yen vs the dollar). Opens short WTI & Brent (one unit of each) ( @RANsquawk )

You have reached a certain level of fame or infamy in this case when you are known by your initials but Dennis Gartman has achieved this with claims like the oil price will not exceed US $44 again in his lifetime. So we fear for developments after finding out he has gone short and if we look back we see that the price has been rising. The rally started around midsummer day last year when it was just below US $45 per barrel for Brent crude as opposed to the US $72 as I type this. More specifically it was at US $53  a year ago.

If we look wider at commodity prices we see that there has been much less pressure here as the CRB Index was 423 a year ago as opposed to the 441 of now. What there has been seems to have been in the metals section which has risen from 894 to 968. We can add to that the recent Russia sanctions driven rise in the Aluminium price as it is not included in the index.

Shrinkflation

This is on my mind because as many of you will recall we were told that products were shrinking because of the lower level of the UK Pound £. Last July the Office for National Statistics told us this.

No, you’re not imagining it – some of your favourite sweets really are shrinking. In November 2016, Toblerone chocolate bars reduced in size by about 10%, provoking outrage online. And Maltesers, M&Ms and Minstrelshave gone the same way.

It’s a phenomenon known as “shrinkflation” – where manufacturers reduce the package size of household goods while keeping the price the same.

I just wondered if any of you have seen signs of prices going back down or more specifically pack sizes growing? If we move to the price of ingredients which was blamed I note that sugar prices are lower over the past year from above US $17 to below US $12 and whilst cocoa prices have risen this year they are still below where they were in early 2016.

Even if the picture for chocoholics is a little mixed there were plenty of products which rose in price which we were told was due to the lower Pound £, have any of these fallen back now it is higher? I can tell you that the new running shoes I have just received were at the new higher £65 rather than the previous £55. I also recall Apple raising prices did they come back down?

Moving back to a more literal shrinkflation there was this a week ago. From City AM

According to new research from LABC Warranty, average house sizes have shrunk by over 12 square metres over the last 50 years.

The study looked at 10,000 houses built between 1930 and the present day, using open data from property sites Rightmove and Zoopla. The analysis concluded that house sizes are smaller than they were in the 1930s, after reaching a peak in the 1970s.

How does that work with the obesity crisis?

Today’s data

There was more of the welcome news we have been expecting on here although I note that the Financial Times has called it “disappointing.”

The all items CPI annual rate is 2.5%, down from 2.7% in February.

We do get a hint that the rally in the UK Pound £ has helped from this part of the detail.

The CPI all goods index annual rate is 2.4%, down from 3.0% last month.

Good prices were pushed up by the previous fall in the currency but now inflation in this area is rather similar to that in the services sector ( 2.5%) so after the recent drops we may see a plateau of sorts. As to the factors at play this month as I have noted several times in the past couple of years it is time to say thank you ladies.

Large downward effect…….. Prices overall rose this year by less than a year ago, with the main downward contributions coming from women’s dresses, jumpers, cardigans and coats, and boys’ T-shirts.

The good news carried on with the Retail Prices Index although of course with a higher number albeit less of a gap than we have got used to.

The all items RPI annual rate is 3.3%, down from 3.6% last month.

Producer Prices

These give us an idea of what is “coming up that hill” as Kate Bush would put it. Here we see some better news at the start.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

However we do see the beginnings of the influence of the higher oil price further in the distance.

Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

House Prices

We even had better news on this front.

Average house prices in the UK have increased by 4.4% in the year to February 2018 (down from 4.7% in January 2018). The annual growth rate has slowed since mid-2016 but has remained generally under 5% throughout 2017 and into 2018. Average house prices in the UK decreased by 0.1% on the month.

Of course if we look at all the different measures we seem to be bouncing between 0% and 5% but that in itself is better and the 5% upper barrier looks like it might be set to fall.

Comment

Just in time for the sunny spring weather the UK economy has produced two days of good data. Yesterday’s employment data has been followed by a fall in nearly all our inflation measures which of course sprinkles a few rays of sunshine on the prospects for real wages. These numbers will take time to filter into the other data such as consumption and GDP ( from the autumn perhaps) but the worm has now turned in this respect albeit not in time for the first quarter of this year.

Meanwhile there are two pockets of trouble and they are centred within our establishment. Firstly Bank of England Governor Carney has apparently had a headache and asked for some ibuprofen as he mulls how an inflation targeting central banker can raise interest-rates into falling inflation having ignored its rise?

Also the Office of National Statistics has argued itself into an increasingly lonely corner with this.

The all items CPIH annual rate is 2.3%, down from 2.5% in February.

Why has it become the economics version of “Johnny no mates”? Because nobody believes this version of property inflation.

The OOH component annual rate is 1.2%, unchanged from last month

If you have to make up a number my tip is to make at least some effort at credibility.

 

 

 

Is this something of a Goldilocks scenario in the UK labour market?!

Today brings us to the latest official wages and labour market data for the UK . If that feels wrong you are indeed correct and the rationale for switching from a Wednesday is both breathtaking and probably true. From City AM in February.

The ONS said today: “Publication of labour market statistics on the day of Prime Minister’s Questions – one of the most important and most widely covered parliamentary occasions – means there is a risk that these detailed statistics are not fully understood by Parliamentarians on both sides of the House before they can be debated. This reduces the public value of these statistics.

Of course recent events suggest that they still will not understand them!

If we move to wages then the mood music generally is that they are rising. This is an international theme as anecdotes from the US are accompanied by talk of rises in Japan. The particular problem with Japan is that seems to come each year with the flowering of the Cherry Blossoms and usually lasts about as long as the flowers. Switching back to the UK we were told this last week. From the Recruitment and Employment Confederation.

March data signalled a further sharp increase in permanent staff placements across the UK, with the pace of expansion edging up fractionally since February. In contrast, temp billings expanded at the weakest pace for over a year.

So we see what is in labour market terms signs of a mature phase of the expansion. Jobs growth cannot boom for ever so employers may well be switching from offering temporary to permanent work in response to fears that they may find it harder to get temporary workers. If we look back for some perspective we see that the rally in UK employment began at the end of 2011 and the around 29,300,000 of then has been replaced by around 32,300,000 now. Frankly it told us something was changing well before the output or GDP data with the caveat being the question around what does employment actually mean these days?

Moving to wages the REC told us this.

Pay pressures remain marked

 

Average starting salaries continued to increase sharply in March, despite the rate of inflation softening to a ten-month low. Pay for temporary/contract staff rose at the quickest pace since last September.

Let us hope so as we have a lot of ground to regain as the Office for National Statistics suggested last week. Some of you have been kind enough to suggest its production of income data minus the imputed numbers is a success for my efforts but either way it have given some food for thought.

Cash real household disposable income (RHDI) per head fell for the second successive year, both on a national accounts and cash basis. Cash RHDI per head fell, by 0.7% year on year, whereas national accounts RHDI per head fell 0.3% year on year.

This is an interesting result although I am not sure that they have the numbers under control as they rose by 5% in 2015 perhaps excluding the fantasy numbers is proving more problematic than they thought. They also give a great definition of fantasy or made-up numbers though!

 it is not expenditure (or income) directly observed by homeowners. As a result, the national accounts measure of RHDI can differ from the perceived experience of households.

Today’s data

Having noted earlier the way that the level of employment turned out to be a better signal than GDP back in 2011/12 lets us go straight to it.

There were 32.26 million people in work, 55,000 more than for September to November 2017 and 427,000 more than for a year earlier.

which leads to this.

The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.4%, higher than for a year earlier (74.6%) and the highest since comparable records began in 1971.

So our labour market has continued in quantity terms to improve and for perspective here is the low on these figures.

The lowest employment rate for people was 65.6% in 1983, during the economic downturn of the early 1980s.

On this measure we are doing extraordinarily well and if we look into the detail we see that over the past year the gains have been mostly in full-time work (280,000) at least according to the ONS as its definition of this is a bit of a chocolate teapot. Also perhaps confirming points made by many of you in the comments section we are finally shifting back away from self-employment as it fell by 30,000 to 4.76 million as employment rose by 427,000.

Wage growth

This is both better and something of a curate’s egg.

Between December 2016 to February 2017 and December 2017 to February 2018, in nominal terms, both regular pay and total pay increased by 2.8%.

The better bit comes from the fact that on this measure it has improved over the past few months and according to our official statisticians it has done this.

regular pay for employees in Great Britain increased by 0.2% while total pay for employees in Great Britain increased by 0.1%.

Of course that relies on the really rather woeful ( we are back to imputed rent) headline inflation measure they use as we are still slightly below on their previous measure and more than 1% below using the measure before that ( RPI). Is there a trend there?

Where it is a curate’s egg is two-fold. Firstly given the employment situation it should be much higher if the past is any guide and will have many Ivory Towers gasping for air. Secondly the last three months from December to February have gone 3.1% then 2.8% and now 2.3%. Best of luck finding an upwards trend in that! Your only hope is that the numbers are erratic.

Unemployment

This looked set to rise and indeed we had seen some flickers and hints of that but it was replaced this time around by this.

For December 2017 to February 2018, there were: 1.42 million unemployed people, 16,000 fewer than for September to November 2017, 136,000 fewer than for a year earlier and the lowest since June to August 2005.

For some reason the ranks of unemployed men are shrinking much faster than that of women for which I have no good explanation.

Inactivity

This is a subject often ignored but we do seem to have a difference with the US and its participation rate issue.

the economic inactivity rate for people was 21.2%, lower than for a year earlier (21.6%) and the joint lowest since comparable records began in 1971.

Comment

The UK performance on the quantity measures of the labour market would be described as “outstanding” by the now sadly departed Drill Sargeant in the film Full Metal Jacket. But as we have observed so many times the relationship between it and wages growth has broken down. There has been some new research on this subject from David Bell and David ( Danny) Blanchflower.

We also provide evidence that the UK Phillips Curve has flattened and conclude that the UK NAIRU has shifted down. The underemployment rate likely would need to fall below 3%, compared to its current rate of 4.9% before wage growth is likely to reach pre-recession levels. The UK is a long way from full-employment.

I have a lot of sympathy with those who argue that under employment is an issue although it is sad to see the Phillips Curve being resurrected from its grave yet again. Also whilst it is about the UK it is hard not to think of Japan and its lack of wage growth with unemployment under the threshold. Of course the mention of an unemployment threshold will send a chill down the spine of the Bank of England economics department as we wonder if 3% will be the new 7%?

The reality is that for all the economic good news the state of play is this and remember this involves what we might call a favourable definition of inflation plus puts self-employed wages under the floorboards.

average total pay (including bonuses) for employees in Great Britain was £486 per week before tax and other deductions from pay, £36 lower than the pre-downturn peak of £522 per week recorded for February 2008

 

 

The Nine Elms problem is one of over supply

Partly because it is back in the news ( did it ever really go away?) and partly due to the nicer weather I cycled past Battersea dogs and cats home yesterday heading up to Vauxhall which gave me a cyclists eye view of the Nine Elms and Battersea Power Station developments. One simple measure is that it takes more than a few minutes to do this which gives an initial idea of scale. Another is my crane count which has now reached 32 as opposed to the 24 or 25 of the past. So activity is rising which of course is in the opposite direction to the official UK construction series but of course for me there is a type of locality bias here. Also if you cycle through the development as I did a couple of months ago you find that adding depth to height and length adds even more to the scale.

The Financial Times has been on the case too.

Battersea luxury homes scheme powers on despite oversupply fears

Frankly I am not sure what choice there is now but let us look deeper.

Now surrounded by hoardings and scaffolding, it lies at the heart of one of the most ambitious redevelopment schemes in Britain’s capital, with nearly 40 sites, owned by domestic and overseas developers, clustered in the surrounding 561 acres known as Nine Elms.

So nearly 3 Battersea Parks and there was an effort to pinch some of the park as well back in the day which fortunately was rebuffed. This has led to this.

It is four years since the prime property market peaked in London, but estate agency group JLL estimates that 3,323 upmarket homes are under construction and another 6,332 in the pipeline across the wider Nine Elms area. The volume of homes planned for the area has prompted fears of an oversupply of luxury properties that most Londoners cannot afford. According to JLL, properties in Nine Elms command £1,400 per sq ft on average, while landlords investing in one-bedroom flats can expect to command £450 a week rent.

This takes me back to February 7th when I noted this from the Guardian.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

I guess ghost towers are a special(s) case of a ghost town.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Prices?

Back in February the FT was telling us this.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Whereas now it is giving us examples of larger falls.

A glance at property listings online reveals hefty discounts being offered as owners cut overblown prices. A one-bedroom flat in Aykon London One, a 50-story tower planned by Dubai-based developer Damac Properties, is being offered at £1.1m — a 36 per cent discount to its initial £1.7m price in November…………
Elsewhere, a five-bedroom penthouse is available for £11m — it was listed at close to £14m six months ago. Property agents say many vendors will be investors who bought off-plan early and no longer wish to complete.

What we do not know is how realistic these asking prices were in the first place? Also if you had bought off-plan as it is called then rather than take a 36% loss if that is what it is then you would presumably simply abandon your 10% deposit.

Number Crunching

There is the issue of value which of course is in this instance a little like asking how long is a piece of string? However a reply to the FT article from B gives it a go.

Work out the numbers with stamp duty, Agent fees, maintenance costs etc and the yield works out to 1.5% per annum for a cash buyer in an oversupplied market with limited prospect of capital gains at least for some years.

Assuming the FT data is correct then applying my rule of thumb for such matters means that the price needs to halve. Of course central London runs down a different road but this from Vanessa Warwick in January provides some perspective looking at a house in Newcastle.

*Trending* Is this 3 bed terrace for £39K with £550 pcm rental income a deal?

Actually if you look into it the start price seems to have been more like £55k but on that basis our Nine Elms yield just gets worse. It would also appear from the comments that the area might be what has become called a “sh*thole” by President Trump but then of course according to him Nine Elms is an “off location”.

If City-AM was right last week perhaps someone will be along.

The number of buy-to-let investors in the UK has hit an all-time high of 2.5m in the latest tax year. According to research from real estate agency Ludlow Thompson, the number of buy-to-let investors has increased five per cent in the last year, and 27 per cent over the last five years.

Mind you with rents in London falling I am not so sure about this bit.

Rising numbers of landlords shows the enduring appeal of buy-to-let, particularly in London,” said Stephen Ludlow, chairman at Ludlow Thompson. “The long-term picture for the buy-to-let market remains strong.”

Notice the use of “long-term” which in this instance appears to mean strong in spite of falling prices and rents. Mind you for some in central London his long-term may have come true. From Acadata this morning.

This is, however, almost entirely due to a massive 30.7% annual increase in the average price in Kensington and Chelsea,
London’s most expensive borough – and that largely the result of just seven high value property sales

lucky number 7?

Mortgages

It is hard not to think of the famous quote by Karl Marx after the news from the weekend.

History repeats itself, first as tragedy, second as farce.

From This Is Money.

The Post Office has launched a mortgage designed to help first-time buyers get onto the property ladder without the need for a deposit.

The deal – known as the family link mortgage – works by giving the first-time buyer a 90 per cent loan-to-value mortgage secured against the property they’re buying plus an interest-free five-year loan secured on a close relative or parent’s home.

There’s a catch – the parental home needs to be mortgage-free for the buyer to be eligible.

But unlike alternative family mortgages, this one costs the parents nothing so long as the buyer repays the loan on time.

This may not be of enormous use at Nine Elms due to the maximum size being £500,000.

Comment

There is a fair bit to consider here although some seem to have made up their mind before it even began. The perhaps aptly named Tony Islington in the FT comments.

Stuck in the wastelands of South London…..

Perhaps he drives a London black cab but whilst some parts of the area have stunning views over the Thames there are also some like this.

You have different developers putting up “luxury” towers and blocks cheek-by-jowl.  As a resident. your view would be either that of a neighbouring development or a set of railway tracks leading into the busiest railway station in the country.   Virtually all residents have on the ground is a giant supermarket. ( Nguba )

If anybody spots the giant supermarket please let me know. In the end the project will be reliant on foreign buyers as there are so few in the UK who can buy at these prices. But there is a flow of businesses to the area as this from the Wandsworth Guardian points out.

Dorling Kindersley (DK), the world leading illustrated reference publisher will move to One Embassy Gardens in Nine Elms from their 80 Strand Office by 2020……..DK have chosen to join colleagues from its sister company, Penguin Random House UK, whose move was announced in December 2017. The move is in line with a general shift in the media and publishing industries, with Apple to soon unveil London headquarters within the Nine Elm’s district.

But for now it looks like a classic case of over-supply.

R Lee Emery

The drill instructor who was so terrifying in Full Metal Jacket has sadly passed away. Let me leave you with this from him.

Here, you are ALL equally useless!

 

 

 

UK production and manufacturing have seen a lost decade

Today brings us what is called a theme day by the UK Office for National Statistics as we get data on production, manufacturing and trade. This comes at a time when the data will be especially prodded and poked at. This is mainly driven by the fact that there have been hints of an economic slow down both in the UK and in the Euro area. Added to that we have seen rising tensions around Syria and the Middle East which have pushed the price of a barrel of Brent Crude Oil above US $70 which if sustained will give us another nudge higher in terms of cost push or if you prefer commodity price inflation. If we return to yesterday’s topic of Bank of England policy we see the potential for it to find itself between a rock and a hard place as a slowing economy could be combined with some oil price driven inflation.

Production

This opened with a worrying note although of course the issue is familiar to us.

In the three months to February 2018, the Index of Production decreased by 0.1% compared with the three months to November 2017, due to a fall of 8.6% in mining and quarrying, caused mainly by the shutdown of the Forties oil pipeline within December 2017.

If we move to the February data we see that it rose but essentially only because of the cold weather that caused trouble for services and construction.

In February 2018, total production was estimated to have increased by 0.1% compared with January 2018; energy supply provided the largest upward contribution, increasing by 3.7%.

If we look into the detail we see that the colder weather raised production by 0.43% meaning that there were weaknesses elsewhere. Some of it came from the oil and gas sector where in addition to some planned maintenance there was a one-day shut down for the rather accident prone seeming Forties field. But there was also something which will attract attention.

Manufacturing output decreased by 0.2%, the first fall in this sector since March 2017, when it fell by 0.4%. Within this sector 7 of the 13 sub-sectors decreased on the month; led by machinery and equipment not elsewhere classified, which fell by 3.9%, the first fall since June 2017, when it decreased by 4.9%.

This has been a strength of the UK economy in recent times and concerns about a possible slow down were only added to by this.

 It should be noted that the growth in this sector of 0.1% during January 2018 and published last month, has been revised this month to 0.0%, further supporting evidence provided in the January 2018 bulletin of a slow-down in manufacturing output.

Although our statisticians found no supporting evidence for this there remains the possibility that the bad weather played a role in this. Otherwise we are left with an impression of a manufacturing slow down which does fit with the purchasing managers indices we have seen. The annual comparison however remains good just not as good as it was.

 in February 2018 compared with February 2017, manufacturing increased by 2.5%.

Also there were hopes that we might regain the previous peak for manufacturing output which was 106.8 in February 2008 where 2015 = 100 but we scaled to 105.4 in January and have now dipped back to 105.2. The situation in production is somewhat worse as we are still quite some distance from the previous peak which on the same basis was at 111.1 in February 2008 and this February was at 104.8. The issue is complicated by the decline of North Sea Oil and Gas but overall those are numbers which look like a depression to me especially after all this time which one might now call a lost decade.

Trade

We traditionally advance on these numbers with some trepidation after years and indeed decades of deficits on this particular front. So let us gather some cheer with some better news.

Comparing the 12 months to February 2018 with the same period in 2017, the total trade deficit narrowed by £12.9 billion to £27.5 billion; the services surplus widened by £11.1 billion to £108.3 billion and the goods deficit narrowed by £1.8 billion to £135.8 billion.

Tucked away in this was some good news and for once a triumph for economics 101.

Total exports rose by 10.4% (£59.4 billion) to £627.6 billion compared with total imports, which increased by 7.6% (£46.5 billion) to £655.1 billion.

In true Alice In Wonderland terms our exports have to do this to make any dent in our deficit because the volume of imports is larger.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Both goods and services imports have responded well to the lower value of the UK Pound £ as well as being influenced by the favourable world economic environment.

 Goods exports rose by 11.3% (£34.9 billion) to £345.0 billion ……..Services exports rose by 9.5% (£24.5 billion) to £282.6 billion

We rarely give ourselves the credit for being a strong exporting nation because it gets submerged in our apparent lust for imports.

As to the more recent pattern I will let you decide if the change below means something as it is well within the likely errors for such data.

The total UK trade deficit (goods and services) widened by £0.4 billion to £6.4 billion in the three months to February 2018

A little wry humour is provided by the fact that in terms of good exports our annual improvement was due to exports to the European Union. However the humour fades a little as I note our official statisticians have no real detail at all on our services exports which is a great shame as they are a strength of our economy.

Construction

After the cold spell in February this was always going to be a difficult month.

Construction output continued its recent decline in the three-month on three-month series, falling by 0.8% in February 2018………Construction output also decreased in the month-on-month series, contracting by 1.6% in February 2018, stemming from a 9.4% decrease in infrastructure new work.

In the circumstances I thought this was not too bad although this may have left me in a class of two.

You see the past is better than we thought it was which also confirms some of the doubts I have expressed about the reliability of this data.

The annual growth in 2017 of 5.7% is revised upwards from the 5.1% growth reported.

So it is not in a depression but has entered a recession.

Comment

There is a fair bit to consider as we note that any continuation of the recent falls will see manufacturing continue its own lost decade as we note that overall production seems trapped in one with little hope of  what might be called “escape velocity”. That means that the Bank of England faces a scenario where the picture for this particular 14% of the economy has seen the grey clouds darken. By contrast construction went from a really good phase into a recession which  the bad weather has made worse. I would expect the weather effect to unwind fairly quickly but that returns us to a situation which looked weak,

This leaves the expressed policy of the “unreliable boyfriend” in something of a mess as his forward guidance radar seems to have looked backwards again. Perhaps his new private secretary James Benford will help although I note his profile has been so low Bloomberg had to look him up on LinkedIn, I hope they got the right person. Also life can be complex as for example Russians in the UK might be thinking as they go from threats of financial punishment to seeing the UK Pound £ rally by 2% today and by over 10% in the past week to around 91 versus the R(o)uble .

Let me remain in the sphere of the serially uncorrelated error term by congratulating Roma on a stunning win last night.

 

 

Individual measures of GDP and household income show weak UK growth since 2008

Today has opened with not so good news for a sector of the UK economy that has been troubling us for the last year or so. From the SMMT or Society of Motor Manufacturers and Traders.

The UK new car market declined in March, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT), with registrations falling -15.7% compared with the same month last year. March 2017 was the biggest month ever for new car registrations, as buyers seized the chance to purchase cars before new Vehicle Excise Duty (VED) rates came into force in April last year. However registrations are still running at a historically high level and last month’s market was the fourth biggest March on record.

As you can see they are in a rush with explanations but we do get some more perspective from this.

New car registrations have fallen for the 12th consecutive month, with year-to-date performance down -12.4%.

The domestic car market has been contracting for a while now and sadly we have to review a scenario that involves government meddling as we note this.

Continuing the recent trend, diesel registrations declined in March, down -37.2%

So far this year diesel sales are down a third from 361,000 in 2017 to 241,000 this year as people wait to see what government policy will be in this area. After the Volkswagen scandal people are much less likely to believe the industry that the new diesels are clean and of course that adds to people like me who were pushed into clean diesels by government company car tax policy back in the previous decade only to discover that by clean they meant poisoning myself and other Londoners.

Whilst sales of hybrid cars are doing better I wonder if more and more buyers are wondering how green they really are?

 In the first quarter of this year 146,614 of these vehicles hit British roads, an increase of 2.7%, as the inclement weather appeared to lead to a boost in registrations.

There are two issues with the green agenda here in my view. Firstly the resources cost of a new car regularly gets ignored and secondly the technology uses some relatively rare elements.

Returning to diesels this is also a problem much wider than for the UK. From Reuters.

Volkswagen AG (VOWG_p.DE) has paid more than $7.4 billion to buy back about 350,000 U.S. diesel vehicles through mid-February, a recent court filing shows. The German automaker has been storing hundreds of thousands of vehicles around the United States for months.

Volkswagen has 37 secure storage facilities around the United States housing nearly 300,000 vehicles, the filing from the program’s independent administrator said.

Should these now be subtracted from German exports, production and GDP figures?

Economic impact

The SMMT tells us this.

 Some 200,000 people are employed in new car retail alone, while UK-based car finance firms employ over 45,000 more, with an annual £12.5 billion economic contribution. On the road, the vehicle fuel industry supports 40,000 jobs, and a further 347,000 are employed in vehicle servicing and repair.

The fall in sales will impact on production but not as much as you might think as we mostly export what we make and some of these numbers are good as this from the 29th of March highlights.

More than a quarter of a million engines produced by British factories in February.Exports jump 16.1% in the month as 157,880 units head overseas – 62.0% of all output. Engine manufacturing up 10.3% so far this year as strong start to 2018 continues.

The future

There was some positive news from Vauxhall yesterday.

PSA, which last year acquired Opel/Vauxhall from General Motors (GM.N), will build Peugeot and Citroen models as well as the next Vauxhall Vivaro van in Luton, north of London. Production will rise to 100,000 vehicles from 60,000 in 2017. ( Reuters).

The banks

There is an interrelation here in addition to the obvious as we note that via the growth of car financing the car companies now effectively have banking subsidiaries. From Bloomberg.

Moody’s cut Barclays’ long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. The bond grader assigned a stable outlook to the ratings for Barclays. Rival Deutsche Bank AG is currently rated one notch higher.

However, the ratings agency gave the British lender a stable outlook and highlighted its “strong franchises in U.K. retail, business banking and global credit cards.”

Things are not so hot when you are a notch below my old employer Deutsche Bank. But I note that the credit agencies suggest times are good in domestic credit as when have they told us that before?

Purchasing Managers Indices

This morning Markit have completed their sequence of surveys and have told us this.

March data signalled a slowdown in business
activity growth across the UK service sector, with
the latest expansion the weakest for over one-and a-half
years. However, survey respondents noted
that snow disruption and unusually bad weather
conditions in March had been a key factor holding
back business activity growth.

The poor old weather always gets the blame for bad news! Some areas will have benefited ( energy suppliers ) but they are invariably silent. I am sure there was some impact via not being able to get to work but more deeply I wonder if this reflects the fact that some output for construction comes under services. We have noted this before when a large company was shifted from services to construction a few years back. Records and statistics seem to be rather malleable.

Moving onto the wider impact we were told this.

“The UK economy iced up in March……..The PMI surveys collectively
signal a quarterly GDP growth rate of just under
0.3%, down from 0.4% in the fourth quarter, albeit
with the rate of growth sliding to just 0.15% in
March alone.”

We will have to see as the last time they told us the UK economy had lurched lower post the EU leave vote Markit ended up with a lot of egg on its face. If we look back to weather related issues it reversed quickly back in 2010.

Encouragingly, in January 2010 and
December 2010, the PMI fell sharply due to heavy
snow but in both cases the decline was more than
reversed in the following month.

Comment

There is a fair bit to consider here. UK manufacturing seems to be still doing okay in spite of the woes of the domestic car market ( partly because we import so many cars) and engine production is strong perhaps because of petrol engine shortages in Europe. Construction was hit by the weather and whilst this seemed to miss manufacturing it did hit services. So we seem likely to see lower first quarter GDP numbers which after a panic will probably then bounce back.

However if we look at some official statistics also released today at the individual level economic growth has been less than the aggregate.

Gross domestic product (GDP) per head grew by 0.8% in real terms in Quarter 4 (Oct to Dec) 2017 compared with the same quarter a year ago.

On this metric we have only grown by 3% since 2008 and if we continue and shift to income we see this.

Real household disposable income (RHDI) per head increased by 1.0%;  ( on a year before)

Slightly odd if we look at wages and inflation until we note it was this.

Furthermore, net property income (in nominal terms) contributed 1.0 percentage point to RHDI per head, leading to an overall positive position. Property income is not (as might be suggested by the name) the income generated by the ownership of buildings (rental). It is in fact, made up of interest, the distributed income of corporations (dividends, repatriated profits and so on) and rent on land.

Overall it is up 4.1% since 2008. So now we shift from wondering about a slow down to mulling how little we have grown at all.

Me on Core Finance TV

http://www.corelondon.tv/financial-asset-valuations-stretched-shaun-richards-notayesmaneconomics/

 

 

What happens if consumer spending is debt fuelled but slows anyway?

Today brings us to a sector of the UK economy that has been running rather red-hot which is the unsecured credit data. The BBC caught up with this on Monday albeit from data which is incomplete.

Debt on UK credit cards is growing at the fastest rate since before the financial crisis, figures show.

The more regular use of these cards for smaller, contactless purchases explains in part the greater debt being built up over short periods.

However, figures from UK Finance show that the annual growth rate in outstanding credit card debt of 8.3% in February was the highest for 12 years.

Some of you will already be smelling a rat as you recall that it has been over 10% in response to the Bank of England opening the credit taps with its “Sledgehammer” in August 2016. It is interesting to see though that on this series we are finally getting the same message. Oh and if you are wondering who UK Finance are they are the new name for the British Bankers Association in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield.

If we look further into the data there was potentially good news for the economy which does fit with news elsewhere.

“Bank lending to businesses saw modest year-on-year growth in February, driven by investment within the manufacturing sector”

Today’s Data

The data from the Bank of England could have been released with KC and the Sunshine Band in the background.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song

Or to put it another way.

The annual growth rate for consumer credit ticked up slightly to 9.4% (Table J), although net lending remains broadly in line with its previous six-month average.

The monthly number rose from £1.3 billion in January to £1.6 billion in February and the total is now £209.6 billion. If we break that down the fastest growing component is credit cards which if we annualise the quarterly growth rate have risen by 11.3% and now 11.2% in 2018 so far meaning the total is now £70.6 billion. But for that we would be worried by the larger other loans and advances ( personal loans and overdrafts ) which total some £138.6 billion and on the same criteria have grown at 8.2% and 8.5%. Individual months can be erratic but this sector has been a case of the trend is your friend for a couple of years or so now.

Never believe anything until it is officially denied

One of my favourite phrases because it works so well. Brought to you this time by the Bank of England credit conditions survey and the emphasis is mine.

The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017 (Chart 1). Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

So they reduced it in the third quarter if you recall as well cut it back in the 4th and then gave it a “significant decrease” to er 9.4% in February. This is heading into comical Ali territory now.

Back in February 2017 Governor Mark Carney told us this at the Inflation Report press conference.

From an MPC perspective, just to put those numbers into
context, on the most expansive definition, the increase in
consumer borrowing would contribute up to a tenth of the
increase in consumption. So it’s something, but it’s not
everything. This is not a debt-fuelled consumer expansion
that we’re dealing with.

Of course he may still have been rattled by the opening question.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

This is not a debt-fuelled consumer expansion

I would like to stick with the statement by the Governor and bring in this from the Office of National Statistics earlier.

The accumulation of debt (measured by the amount of short-term and long-term loans households took out) in 2017 outstripped the amount of total financial assets they accumulated in the same period. This was the first time this happened since records began in 1987.

Also is anybody thinking of the Sledgehammer QE of August 2016 and of course the promises back then of further “muscular” action in November 2016?

Up until Quarter 3 2016, the households sector was a net lender. In the five quarters since, households have been net borrowers at an average of £3.3 billion per quarter. As a result, 2017 was the first year in which households were net borrowers – meaning that they had to borrow in order to fund their spending and investment activities.

Perhaps this is what the Governor meant at Mansion House last year.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations ( his especially).

Business Lending

This was supposed to be the main target of the Funding for Lending Scheme as it was fired up in the summer of 2012. The priority was smaller businesses so how is that going?

Net lending to SMEs has increased following a rather weak January

It rose by £700 million after falling by £700 million then. This means that the annual growth rate has risen from 0% to 0.1% and reminds us yet again of the true meaning of the word counterfactual.

Comment

So the beat goes on for UK unsecured credit although it seems to have taken UK Finance quite some time to catch up. The national accounts breakdown also tells us that there has been something of a shift although it includes secured debt and has issues with accuracy. On that subject if we stay with GDP here is an example of something from the research centre of the UK ONS.

Our initial results suggest that imputation of pension
accruals raises both the Gini coefficient and the geometric mean of equivalised household income materially, while the effects of imputing investment income are more marked on the Gini coefficient than on the geometric mean of household income.

So if we have imputed rent, pensions and investment income why not stop counting anything and simply input the lot and tell us that tractor production is rising. You may not be surprised to read that one of the authors is Martin Weale who is building a consistent track record.

Moving back to unsecured debt I note that the Bank of England ( of course Dr. Weale’s former employer )  is of course vigilant. But in spite of all this vigilance even growth at these levels does not seem to be helping the retail sector much as we observe a steady stream of receiverships and closures. On the more hopeful side falling inflation will help improve the real wages situation this year and mean that we may get some more of this.

UK gross domestic product (GDP) increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the second estimate of GDP published on 22 February 2018.

Happy Easter to you all.