The UK Public Finances are improving fast

A feature of the credit crunch era is the way that the same or similar stories get recycled and this is what I was thinking of when the proposed NHS ( National Health Service) spending boost was announced by Theresa May at the weekend.

There has been a change of Chancellor as George Osborne was removed and replaced with Phillip Hammond and it looks as though the new government will be fiscally looser.

That was from October 3rd 2016 and you may recall it was in tune with the mood music as even the IMF which had helped impose so much austerity on Greece had come out in favour of fiscal stimuli. However like with so much about the current government it never really happened on any scale. In fact if we look at the numbers I quoted then we see that the UK has continued to reduce its deficit and as ever confound the forecasts of the Office of Budget Responsibility or OBR.

In the financial year ending March 2016 (April 2015 to March 2016), the public sector borrowed £76.5 billion. This was £18.9 billion lower than in the previous financial year and less than half of that in the financial year ending March 2010 (both in terms of £ billion and percentage of GDP).

That was the picture then and it has been replaced by a deficit more like £40 billion in the fiscal year just completed. So whilst there has been an ongoing stimulus as we have had a persistent deficit the annual amount has been reduced partly due to growth in the economy which has made the national debt situation look more contained and to some extent better.

Public sector net debt (excluding public sector banks) was £1,777.3 billion at the end of April 2018, equivalent to 85.1% of gross domestic product (GDP), an increase of £56.8 billion (or 0.3 percentage points as a ratio of gross domestic product (GDP)) on April 2017.

As you can see it is rising in amount but the growth in the economy means that relatively it has changed much less.

Today’s data

This morning has brought borrowing figures which are very good.

Public sector net borrowing (excluding public sector banks) decreased by £2.0 billion to £5.0 billion in May 2018, compared with May 2017; this is the lowest May net borrowing since 2005.

Of course monthly data can be erratic but the fiscal year so far seems set fair as well.

Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to May 2018) was £11.8 billion; that is, £4.1 billion less than in the same period in 2017; this is the lowest year-to-date (April to May) net borrowing since 2007.

Should we continue on anything like such a trajectory this year will see a solid fall in the fiscal deficit.

The NHS Proposal

If we skip the foaming at the mouth over the phrase “Brexit Dividend” it was reported like this by the Financial Times.

The NHS financial settlement — which could be unveiled as soon as next week, ahead of the taxpayer-financed system’s 70th anniversary — is expected to provide increases to the £150bn UK health budget of at least 3 per cent above inflation every year.

As you can see implementing such a policy would be a boost in real terms as at least 3% is circa £5 billion a year. The Institute for Fiscal Studies puts it like this.

Yesterday’s announcement implies that day-to-day spending by NHS England will increase by £16 billion in real terms between now and 2022–23 (with a further £4 billion in 2023–24).

Paying for it

There are three routes. One is simply higher economic growth which in the short-term is problematic as we are in a soft patch which the monetary numbers are signalling will remain through the autumn. Taxes could rise but this government ha shad trouble with that as the debacle over national insurance for the self-employed showed. This leaves borrowing more which in the circumstances seems feasible.

In terms of amount we are borrowing less as discussed above and the cost of our borrowing remains cheap. The UK ten-year Gilt yield is a mere 1.3% and the more relevant for these purposes thirty-year yield is 1.77% . This is of course more expensive than in the late summer of 2016 when Bank of England Governor Mark Carney spent £60 billion on in this respect kamikaze style purchases driving the market to all-time price highs and yield lows including in the madness some negative ones. But it is in terms of the thirty-years I have been following this market certainly low and in fact ultra low.

The Institute of Fiscal Studies is rather dismissive of this route.

But a significant increase in forecast borrowing would mean that the government was not taking its stated commitment to eliminate the deficit by the mid-2020s seriously. The deficit is already forecast to be £21 billion in 2022–23, implying further consolidation measures – in the form of tax rises or spending cuts –would need to be implemented.  The Government could decide to abandon its fiscal objective, as its predecessors have frequently done in the past.

Actually the recent fiscal data suggests that they probably would not have to do that as we see yet another Ivory Tower lost in the clouds of its own rhetoric.

What has today’s data told us?

For all the talk of a fiscal stimulus something of a squeeze has been going on.

In the latest financial year-to-date, central government received £112.9 billion in income, including £82.6 billion in taxes. This was around 3% more than in the same period in 2017.

Over the same period, central government spent £123.6 billion, roughly equal to that spent in the same period in 2017.

In terms of controlling public spending we have come to learn that this is about as good as it gets. We are mostly incapable of reducing it in nominal terms but we do have phases of reducing it in real terms.

Also the receipts data hint at the economy having been stronger than we thought. What I mean by this is that income tax receipts have risen by £2,5 billion to £25,5 billion in the latest couple of months. Indeed even the much maligned retail sector may be getting some support as VAT ( Value Added Tax) receipts rose by £1.1 billion to £23.2 billion. In case this seems like over explaining the rise the numbers are influenced by Bank of England QE from which dividend or coupon payments are taken as receipts and that was a -£0.9 billion influence.

Oh and the spending numbers have been boosted by a fall in debt costs as the rise in ( RPI) inflation washes out of the system.

Comment

There is a lot to consider here so let us start with the UK public finances. Back in October 2016 they were disappointing in the circumstances and now they are good in the circumstances. As some tax receipts represent past activity there may be at least some logic at play as it takes time for the numbers to reflect it. If the data carries on like this then those who use tax receipts as a measure of the economy may feel it is out performing what the GDP data tells us and fits the employment numbers.

The catch is the current slow down and the one we expect from the money supply data which will weaken the above trends. However we find yet another situation where the first rule of OBR Club has hit the cricket ball for six.

 and £5.7 billion less than official (Office for Budget Responsibility) expectations;

So as we stand the UK Public Finances might shrug off a fiscal boost for the NHS although as ever recession would change that. As to how much of a good idea it is remains open to question. On a personal level Frimley Park Hospital gave good care to my father and on less serious matters my mother and I am grateful to Chelsea and Westminster for the work on my knee. Yet there is also an institutional problem.

An expert on hospital mortality data has said scandals such as the deaths at Gosport War Memorial Hospital could be being replicated elsewhere in the NHS.

Prof Sir Brian Jarman told the Today Programme he thinks “it is likely” similar situations are happening in other hospitals.

An inquiry found doctors at the hospital gave patients “dangerous” amounts of powerful painkillers.

More than 450 older patients’ lives were shortened as a result. ( BBC)

 

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London House Prices are falling on one measure and also rising!

This morning has seen Rightmove update us on the UK property market and in response we have learnt where Bloomberg journalists live.

London house prices fell the most since the beginning of the year in June as the capital’s property market continued to lag behind the rest of the country.

The price of property coming to market in London dropped by 0.9 percent, bringing the average price to 631,737 pounds ($838,000), property-website operator Rightmove said in a report Monday. Values fell 1 percent from a year earlier, marking the 10th negative month in a row.

The rest of the country only gets a brief look in.

Nationally, prices grew 0.4 percent on the month and 1.7 percent on an annual basis.

Then it is time to get back to the heart of the matter.

In London, “new-to-the-market sellers recognize that the traditionally busier spring selling season is drawing to a close,” said Rightmove Director Miles Shipside.

Oh and as it is Bloomberg there is a consistent scapegoat for pretty much all seasons.

London’s property market has been hit particularly badly by uncertainty surrounding Britain’s impeding exit from the European Union.

Actually we get a reminder of what Rightmove really say from property industry eye.

New asking prices have bounced up to another record, averaging £309,439.

This morning Rightmove said asking prices for properties new to the market are 0.4% up on last month, and 1.7% up on June last year.

The Rightmove data is not for the price at which property is sold it is what sellers are asking for the property or trying to get. In terms of a rising price by this measure then it is a northern thing as the stock available has declined.

From the west midlands northwards, stock has fallen away since a year ago, by between 2.2% and 10.4% in Scotland.

Stock has also dwindled in Wales, by 10.3%.

Whereas prices are under pressure from something of a wave of more housing stock coming onto the market in the south.

By contrast, the amount of available stock has shot up almost 25% on a year ago in the east of England; by 20% in the south-east; by 16.4% in London; 8.2% in the south-west; and by 4% in the east midlands.

Land of Confusion

I am using the Genesis lyric because if we move to LSL/Acadata we get told something very different about London house prices.

Despite the lack of movement in prices, there is one big change in the market this month: London and the South East are no longer a brake on the market. Taking into account these two regions, there was a 2.2% annual price growth – taking them out of the equation, the growth rate is lower – at 2.1 %. It reverses the trend of most of last year.

Although we have learnt from past experience to feel something of a chill when we read something like this.

This is partly due to a change in methodology, which better captures sales of new build properties. These tend to cost more than existing homes and have a particularly strong impact on the average price in London.

In fact the major impact from this is on flats in London.

This was particularly pronounced for flats, where new build flats sold at an average premium of almost
a third (32.3%). They also made up a substantial proportion of sales of all flats, accounting for more than a quarter (26.4%), whereas new builds accounted for just 2.4% of sales of detached properties.

Once you have done that you get this.

The revised figures in London, taking into account new build properties, show annual growth of 2.9%, the lowest since March 2012. Prices also fell on a monthly basis, down 0.3%, taking the average house price in the capital to £636,947.

In case you are no aware the issue of how to treat new builds is a difficult one and is one where the official Office for National Statistics series has had trouble too. Obviously a brand new property cannot have a price rise per se but you can calculate an index based on say quantity like size or number of bedrooms. Much more difficult and perhaps impossible is to allow for the quality of the property.

Also treating London as one market gets a bit of a critique from reality below.

A number of London boroughs are recording big falls over the 12 months to April 2018. They include the City of London (down 24.9%, albeit on a small number of sales), Southwark, down 19.1% (largely as a result of high value properties sold the year before); and Wandsworth, down 13.1%. Growth has been more modest, with only Kensington and Chelsea, the most expensive borough, recording double-digit growth, up 10.4% to £2.17 million. The next highest increase over the year was Lambeth, where prices increased 5.8%.

The issue at this level is that you are down to a small number of sales in some cases leading to large swings. For obvious reasons people like to view the data for Kensington and Chelsea but if it is based on only a handful of sales it is to say the least problematic. Although sometimes just one sale can be crystal clear at least for it.

For those wondering if the previous owners had overpaid back in 2013 I did ask.

Number Crunching

Moving on here is some Monday morning humour from the British Chambers of Commerce.

The British Chambers of Commerce (BCC) has today (Monday) slightly downgraded its growth expectations for the UK economy, forecasting GDP growth for 2018 at 1.3% (from 1.4%) which, if realised, will be the weakest calendar year growth since 2009, when the economy was in the throes of the global financial crisis. The BCC has also downgraded its GDP growth forecast for 2019 from 1.5% to 1.4%.

Yes they think they can forecast GDP growth to 0.1%!

Next come courtesy of those suffering from a type of amnesia.

Households could be left up to £1,000 a year worse off because of Brexit trade barriers, a report will suggest.

Global consultancy firm Oliver Wyman will say that under the most negative scenario of high import tariffs and high regulatory barriers the cost to the economy could total £27bn.

The problem here is the authors so with the help of FT Alphaville let me show you how their crystal ball has worked out in the past.

It has long been known that consulting firm Oliver Wyman crowned Anglo Irish the world’s best bank in 2006 — just when Anglo was actually… well, you know the story.

Sadly, the report that bestowed this fateful distinction has (quite unaccountably!) vanished from the Oliver Wyman corporate site.

Or this.

North American Investment Bank – Bear Stearns (SPI 230) is the best-performing company in this year’s most improved sector, investment banking.

Comment

After a barrage of contradictory numbers let us step back and take stock. We see that the background for UK house prices is not what it was. For example the Term Funding Scheme of the Bank of England ended in February and whilst it still represents some £126.6 billion of cheap liquidity for the banks it is now gently declining. Other factors such as a 0.5% Bank Rate and £435 billion of QE have been at play in raising prices but that has worn off now. Perhaps we are still seeing the influence of the Help To Buy scheme in the North but unless prices fall more in London many are still above its cap of £600,000.

A welcome development is that house price growth seems to have fallen back in line with wage growth although of course the official numbers still disagree (3.9%). Even that development has the issue of course that it does not help with prices being much too high in many parts of the country. As to detail all we can honestly say is that house price inflation has fallen and some parts of London especially in the centre are seeing falls.

Moving onto my new measure which refers to a block of around 80 flats near the US Embassy in Nine Elms there was an improvement this week, There were signs of life (open windows etc) in 12 as opposed to 8.

 

 

Putting rents which do not exist in a consumer inflation measure is a disgrace

Yesterday the Economic Affairs Committee took a look at the Retail Price Index measure of consumer inflation in the UK. An excellent idea except as I have contacted them to point out.

Accordingly I am making contact for two reasons. Attending the event would give your members exposure to a much wider range of expertise on the subject of the RPI than the limited group you have today. Also it will help you with the subject of balance as the four speakers you will be listening too today are all against the RPI with some being very strongly so. This gives a very unbalanced view of the ongoing debate on the subject.

The event I refer too is this evening at the Royal Statistical Society at which I will be one of those who reply to the National Statistician John Pullinger.

I intend to point out that the RPI does indeed have strengths and it relates to my letter to Bank of England Governor Mark Carney from February.

“. I am not sure what is a step up from known error but I can say that ignoring something as important to the UK as that sector when UK  house prices have risen by over 29% in your term as Governor when the targeted CPI has only risen by more like 7% is exactly that.”

This is because it makes an effort to reflect this.

This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.

This compares for example with the Consumer Price Index which completely ignores the whole subject singing “la,la,la” when it comes up. There has been a newer attempt to reflect this issue which I look at below.

Also it means that the influence is much stronger that on the only other inflation measure we have which includes house prices which is CPI (NA). In it they only have a weighting of 6.8%. So the RPI is already ahead in my view and that is before you allow for the 2.4% weighting of mortgage interest-rates.

As you can see the new effort at least acknowledges the issue but comes up with a lower weighting. This is because they decided that they only wanted to measure the rise in house prices and not the land. This is what they mean by Net Acquisitions or NA.

Now with 8.3% ( 10.7%) and 6,8% in your mind look what happens with the new preferred measure CPIH.

Now let me bring in the alternative about which the National Statistician John Pullinger and the ONS are so keen. This is where rather than using house prices and mortgages of which there are many measures we see regularly in the media and elsewhere, they use fantasy rents which are never actually paid. Even worse there are all sorts of problems measuring actual rents which may mean that this is a fantasy squared if that was possible.

But this fantasy finds itself with a weight of 16.8% or at least it was last time I checked as it is very unstable. Has our owner-occupied housing sector just doubled in size?

As you can see whilst you cannot count the (usually fast rising ) value of land it would appear that you can count the ( usually much slower rising) rent on it. That is the road that leads to where we are today where the officially approved CPIH gives a lower measure than the alternatives. Just think for a moment, if there is a sector in the UK with fast rising inflation over time it has been housing. So when you put it in the measure you can tell people it is there but it gives a lower number. Genius! Well if you do not have a conscience it is.

Yet the ordinary man or woman is not fooled and Bank of England Governor Mark Carney must have scowled when he got the results of his latest inflation survey on Friday.

After all when asked ( by the Bank of England) they come up with at 3.1% a number for inflation that is closer to the RPI then the alternatives.

Just because people think a thing does not make it right but it does mean you need a very strong case to change it . Fantasy rents are not that and even worse they come from a weak base as illustrated below.

The whole situation gets even odder when you note that from 2017 to this year the weighting for actual rents went from 5.6% to 6.9%.

Who knew that over the past year there was a tsunami of new renters? More probably but nothing like a 23% rise. This brings me back to the evidence I gave to the UK Statistics Regulator which was about Imputed Rents which relies on essentially the same set of numbers. I explained the basis for this was unstable due to the large revisions in this area which in my opinion left them singing along to Fleetwood Mac.

I’m over my head (over my head)
Oh, but it sure feels nice

Today’s data

Let me start with the number which was much the closest to what people think inflation is according to the Bank of England.

The all items RPI annual rate is 3.3%, down from 3.4% last month. The all items RPI is 280.7, up from 279.7 in April.

So reasonably close to the 3.1% people think it is as opposed to.

The all items CPI annual rate is 2.4%, unchanged from last month. The all items CPI is 105.8, up from 105.4 in April

When we ask why? We see that a major factor is the one I have been addressing above.

Average house prices in the UK have increased by 3.9% in the year to April 2018 (down from 4.2% in March 2018). This is its lowest annual rate since March 2017 when it was 3.7%.

In spite of the slow down in house price inflation it remains an upward pull on inflation measures. You will not be surprised to see what is slowing it up.

The lowest annual growth was in London, where prices increased by 1.0% over the year.

Now let me switch to what our official statisticians,regulators and the economics editor of the Financial Times keep telling us is an “improvement” in measuring the above.

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

Which is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to May 2018; unchanged from April 2018.

So they take rents ( which they have had all sorts of trouble measuring and maybe underestimating by 1% per annum) and imagine that those who do not pay rent actually do and hey presto!

The all items CPIH annual rate is 2.3%, up from 2.2% in April.

I often criticise the media but in this instance they deserve praise as in general they ignore this woeful effort.

Comment

Today has been a case of me putting forwards my views on the subject of inflation measurement which I hold very strongly. This has been an ongoing issue since 2012 and regular readers will recall my successful battle to save the RPI back then. I take comfort in that because over time I have seen my arguments succeed and more and more join my cause. This is because my arguments have fitted the events. To give a clear example I warned back in 2012 that the measure of rents used was a disaster waiting to happen whereas the official view was that it was fine. Two or three years later it was scrapped and of course we saw that the Imputed Rent numbers had a “discontinuity”. The saddest part of the ongoing shambles is even worse than the same sorry crew being treated as authorities about a subject they are consistently wrong about it is that we could have spent the last 6 years improving the measure as whilst it has strengths it is by no means perfect.

Let me give credit to the Royal Statistical Society as it has allowed alternative views an airing (me) and maybe there is a glimmer from the House of Lords who have speedily replied to me.

Staff to the Committee will be in attendance this evening, and we have emailed the details to the members: the unfortunate short notice and the busy parliamentary schedule currently means it may be unlikely for them to attend. We will report back to them on the event nevertheless.

I hope the event goes well for you.

Returning to today’s we now face the risk that this is a bottom for UK inflation as signalled by the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.

This has been driven by the rise in the price of oil where Brent Crude Oil is up 56% on a year ago as I type this and the recent decline in the UK Pound £. This will put dark clouds over the Bank of England as the wages numbers were a long way from what it thought and now it may have talked the Pound £ down into an inflation rise. Yet its Chief Economist concentrates on matters like this.

Multiversities ‘hold key to next leap forward’ says ⁦⁩ Chief Economist Andy Haldane ( @jkaonline)

Isn’t that something from one of the Vin Diesel Riddick films?

 

 

 

 

 

UK real wages resume their fall

This morning brings us to the UK labour market data and if it feels early you are right. You see the UK statistics bodies decided that our Members of Parliament needed more time to digest the numbers before Prime Ministers Questions on a Wednesday lunchtime. It is not that big a deal except perhaps for confidence in the mathematical ability of our MPs.

In terms of expectations the mood music for wages has been positive with the latest survey from Markit/REC leading the way.

Strong demand for staff and low candidate
availability underpinned further increases in starting salaries and temp pay. Notably, salaries awarded to successfully placed permanent workers rose at the
steepest rate for three years.

This was driven by this.

Growth of demand for staff strengthened to a sixmonth
high in May, with sharp increases in both
permanent and temporary roles signalled by the
latest data.

So according to them there was more demand for staff which ran into shortages.

Overall, candidate availability declined at a sharper
rate midway through the second quarter. Permanent
candidate numbers fell at the fastest rate for four
months, while short-term staff availability
deteriorated at the quickest pace since last
November

Hence the higher pay albeit that beating the last 3 years is not spectacular but it is an improvement. Of course after yesterday’s data we are likely to be more sceptical about surveys from Markit as I note that it contradicts that release in a coupe of ways. Firstly this.

Although growth of demand for both permanent and
temporary staff in the private sector edged down
slightly since April,

It seems unlikely that manufacturers were looking for extra staff in April after the decline in production but let us be optimistic for now and hope that there was a surge in May leading to this.

Engineering was the best performing sector in the
demand for permanent staff league table during May.

Retail

Even the Markit/REC report pointed out the signs of trouble here.

with the exception of Retail, which registered a further
decline.

Indeed this seemed to be on the march again only yesterday.

Discount retailer Poundworld has appointed administrators, putting 5,100 jobs at risk.

The move came after talks with a potential buyer, R Capital, collapsed leaving Poundworld with no option other than administration. ( BBC)

This morning brought news of a major factor driving this as the high street New Look fashion store had very weak figures and the online Boohoo very good ones. But even if we add in the job gains as for example Amazon announcing 2500 new jobs recently to deliver all this online business this is a sector with falling employment overall.

Today’s data

Let us start with wages.

Between February to April 2017 and February to April 2018, in nominal terms, total pay increased by 2.5%, slightly lower than the growth rate between January to March 2017 and January to March 2018 (2.6%).

That is not inspiring for the survey we looked at earlier although there is some better news if we look into the detail. This is because total wage growth was revised up to 2.5% in March which April matched. So the numbers are now holding on a monthly basis at a higher level than we though last month but they are not rising.

As ever many prefer to cherry pick the data as for example the BBC is using a sub set of the numbers.

Between February to April 2017 and February to April 2018, in nominal terms, regular pay increased by 2.8%, slightly lower than the growth rate between January to March 2017 and January to March 2018 (2.9%).

This poses a problem as bonus pay matters to many so why does it get ignored? For example if you get the number quoted for average regular pay of £484 per week would you ignore the £32 of bonuses? At a time of pressure on real wages surely bonuses are more important.

If we stick with cherry pickers it was a dreadful month for the Bank of England as it has guided us towards private-sector regular wages which rose by 3.2% in March and 2.5% in April! Ooops and time for that to be redacted and replaced by a new measure like the unemployment rate was in the first phase of Forward Guidance. On a 3 monthly comparison it only falls from 3% to 2.9% but the catch is that April will be in the next two versions of that.

Moving to real wages we see sadly yet more cherry-picking. From the official release.

Between February to April 2017 and February to April 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.1%.

They use the woeful CPIH for this which assumes that owner occupiers rent their property to themselves when they do not. Whereas if they used the CPI for example as the casual reader might assume then real wages fell by 0.1% if compared to total pay. Fan of the Retail Price Index or RPI will continue to see falling real wages.

This is a familiar issue and seems to be something of a never-ending story.

Employment and Unemployment

The number below continues to be rather stellar.

There were 32.39 million people in work, 146,000 more than for November 2017 to January 2018 and 440,000 more than for a year earlier.

This does confirm at least part of the recruiters survey above. Let me just point out for newer readers that this is a quantity measure not a quality one and we have already had an issue with the quality number called wages. As another example the definition of full-time employment is of the chocolate teapot variety in my opinion. We may be getting a hint of an issue here from this alternative measure.

but total hours worked decreased by 4.1 million to 1.03 billion. (the number of people in employment increased by 146,000)

Maybe this was an impact of the cold snap we got in February/March but it is a rare sign of weakness in these section of data as hours worked per full-time employee fell.

Meanwhile there was more good news on unemployment

There were 1.42 million unemployed people (people not in work but seeking and available to work), 38,000 fewer than for November 2017 to January 2018 and 115,000 fewer than for a year earlier.

We have had loads of forecasts that unemployment will rise in the UK and even sectoral examples of it ( Retail) but overall it continues to fall even though it includes the recent weaker period if we look at the GDP numbers.

Also I get asked on here from time to time about the residual sector in these numbers which has been improving too.

The inactivity rate (the proportion of people aged from 16 to 64 years who were economically inactive) was 21.0%, lower than for a year earlier (21.5%) and the joint lowest since comparable records began in 1971.

Comment

Let me open with  piece of good news which is that it looks like UK productivity is currently improving as we may not have had much economic growth in 2018 but it is divided by a falling number of hours worked.

That is something although if we switch to the Ivory Towers things are going from bad to worse. After all the Office for Budget Responsibility switched about 9 months ago to projecting weaker productivity growth. That is before we get to the output gap theories it and the Bank of England hold so dear. As unemployment falls below what the Bank of England considers to be the equilibrium rate wages should be soaring except when you climb out of its dark,dank and dusty bunker they are not growing at the 5% per annum suggested by the OBR back in the day.  Forward Guidance and all that.

Let me finish by pointing out that rather shamefully the self-employed are excluded from the average earnings data. The numbers need some Coldpaly.

Lights will guide you home
And ignite your bones
And I will try to fix you

 

 

 

The UK joins France and Germany with falling production in April

Today brings us a raft of new detail on the UK economy and as it is for April we get the beginnings of some insight as to whether the UK economy picked up after the malaise of only 0.1% GDP ( Gross Domestic Product) growth in the first quarter of this year. According to Markit PMI business survey we have in the first two months of this quarter but of course surveys are one thing and official data is another.

So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.

As for the manufacturing sector the same set of surveys has told us this.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®
) rose to 54.4, up slightly from April’s
17-month low of 53.9, to signal growth for the
twenty-second straight month.

So we see that April can be looked at almost any way you like. Manufacturing has been in a better phase for a while now partly in response to the post EU leave vote fall in the UK Pound £. According to the survey we are still growing but April was the weakest month in this phase although some caution is required as I doubt whether a survey that can be in the wrong direction is accurate to anything like 0.5.

Of course the attention of Mark Carney and the Bank of England will be on a sector that it considers as and maybe more vital. From the Local Government Association.

Councils’ ability to replace homes sold under Right to Buy (RTB) will be all but eliminated within five years without major reform of the scheme, new analysis from the Local Government association reveals today.

The detail of the numbers is below.

The LGA said that, in the last six years, more than 60,000 homes have been sold off under the scheme at a price which is, on average, half the market rate, leaving councils with enough funding to build or buy just 14,000 new homes to replace them.

We sometimes discuss on here that the ultimate end of the house price friendly policies of the UK establishment will be to give people money to buy houses. Well in many ways Right To Buy does just that as those who have qualified buy on average at half-price. Also we see that one of the other supposed aims of the scheme which was to replace the property sold with new builds is failing. I guess we should not be surprised as pretty much every government plan for new builds fails.

Production and Manufacturing

These were poor numbers as you can see below.

In April 2018, total production was estimated to have decreased by 0.8% compared with March 2018, led by a fall of 1.4% in manufacturing and supported by falls in energy supply (2.0%), and water and waste (1.8%).

The fall in energy supply is predictable after the cold weather of March but the manufacturing drop much less so. If we review the Markit survey it was right about a decline but in predicting growth had the direction wrong. On a monthly basis the manufacturing fall was highest in metal products and machinery which both fell by more than 3% but the falls were widespread.

with 9 of the 13 sub-sectors falling;

If we step back to the quarterly data we see that it has seen better times as well.

In the three months to April 2018, the Index of Production increased by 0.3% compared with the three months to January 2018, due primarily to a rise of 3.2% in energy supply; this was supported by a rise in mining and quarrying of 4.3%………..The three-monthly fall to April 2018 in manufacturing of 0.5% is the largest fall since May 2017, due mainly to decreases in electrical equipment (9.4%), and basic metals and metal products (1.8%).

So on a quarterly basis we have some production growth but not much whereas manufacturing which was recently a star of our economy has lost its shine and declined. There has been a drop in trade which has impacted here.

The fall in manufacturing is supported by widespread weakness throughout the sector due to a reduction in the growth rate of both export and domestic turnover.

Actually for once the production and trade figures seem to be in concert.

Goods exports fell £3.1 billion, due mainly to falls in exports of machinery, pharmaceuticals and aircraft, while services exports also fell £2.5 billion in the three months to April 2018…….Falling volumes was the main reason for the declines in exports of machinery, pharmaceuticals and aircraft in the three months to April 2018 as price movements were relatively small.

That is welcome although the cause is not! But we see a signs of a slowing from the better trend which still looks good on an annual comparison.

In the three months to April 2018, the Index of Production increased by 2.3% compared with the same three months to April 2017, due mainly to a rise of 2.3% in manufacturing.

If we compare ourselves to France we see that it’s manufacturing production rose by 1.9% over the same period. However whilst we are ahead it is clear that our trajectory is worsening and we look set to be behind unless there is quite a swing in May. As to the Markit manufacturing PMI then its performance in the latest quarter has been so poor it has been in the wrong direction.

As we move on let me leave you with this as a possible factor at play in April.

 It should also be noted that survey response was comparatively high this month and notable weakness was due mainly to the cumulative impact of large businesses reporting decreased turnover.

Trade

We have already looked at the decline in good exports but in a way this was even more troubling.

 services exports also fell £2.5 billion in the three months to April 2018.

Regular readers will be aware that I have a theme that considering how important the services sector is to the UK economy we have very little detail about its impact on trade. As an example a 28 page statistical bulletin I read had only one page on services. I am reminded of this as this latest fall comes after our statisticians had upgraded the numbers as you see the numbers are mostly estimates.

So not a good April but the annual picture remains better.

The UK total trade deficit (goods and services) narrowed £6.7 billion to £30.8 billion in the 12 months to April 2018. An improvement to the trade in services balance was the main factor, as the trade surplus the UK has in services widened £9.9 billion to £108.7 billion. The trade in goods deficit worsened, widening £3.2 billion to £139.5 billion over the same period.

Construction

This was yet again a wild card if consistency can be that.

Construction output continued its recent decline in the three-month on three-month series, falling by 3.4% in April 2018; the biggest fall seen in this series since August 2012.

The consistency comes from yet another fall whereas the wild card element is that it got worse on this measure in spite of a small increase in April

Comment

There is a lot to consider here today but let us start with manufacturing where there are three factors at play. The money supply numbers have suggested a slow down and it would seem that they have been accurate. Next we have the issue that exports are weak and of course this is into a Euro area economy which is also slowing as for example industrial production fell by 0.5% in France and 1% in Germany in April on a monthly basis. Some are suggesting it is an early example of the UK being dropped out of European supply chains but I suspect it is a bit early for that.

Moving to construction we see that it is locked in the grip of an icy recession even in the spring. It seems hard to square with the 32 cranes between Battersea Dogs Home and Vauxhall but there you have it. I guess the failure of Carillion has had quite an effect and linking today’s stories we could of course build more social housing.

Looking forwards the UK seems as so often is the case heavily reliant on its services sector to do the economic heavy lifting, so fingers crossed.

 

 

Are interest-rates on the rise now?

As we find ourselves heading into the second decade of the credit crunch era we find ourselves observing an interest-rate environment that few expected when it began. At the time the interest-rate cuts ( for example circa 4% in the UK) were considered extraordinary but the Ivory Towers would have been confident. After all they had been busy telling us that the lower bound for interest-rates was 0% and many were nearly there. Sadly for the Ivory Towers the walls then came tumbling down as Denmark, the Euro area , Sweden, Switzerland and Japan all entered the world of negative official interest-rates.

Even that was not enough for some and central banks also entered into sovereign and then other bond purchases to basically reduce the other interest-rates or yields they could find. Such QE ( Quantitative Easing) purchases reduced sovereign bond yields and debt costs which made politicians very happy especially when they like some official interest-rates went negative. When that did not work either we saw what became called credit easing where direct efforts went into reducing specific interest-rates, In the UK this was called the Funding for Lending Scheme which was supposed to reduce the cost of business lending but somehow found that  instead in the manner of the Infinite Improbability Drive in the Hitchhikers Guide to the Galaxy  it reduced mortgage interest-rates initially by around 1% when I checked them and later the Bank of England claimed that some fell by 2%.

What next?

Yesterday brought a reminder that not everywhere is like this so let me hand you over to the Reserve Bank of India.

On the basis of an assessment of the current and evolving macroeconomic situation at its
meeting today, the Monetary Policy Committee (MPC) decided to:
• increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points to 6.25 per cent.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the
marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.

There are two clear differences with life in Europe and the first is a rise in interest-rates with the second being that interest-rates are at or above 6% in India. It feels like another universe rather than being on the sub-continent but it does cover some 1.3 billion people. Sometimes we over emphasise the importance of Europe. As to why it raised interest-rates the RBI feels that the economy is going well and that inflation expectations are rising as domestic inflation ( official rents) has risen as well as the oil price.

The US

This has moved away from zero interest-rates and now we face this.

to maintain the federal funds rate in a target range of
1½ to 1¾ percent

It seems set to raise interest-rates again next week by another 0.25% which has provoked Reuters to tell us this.

With inflation still tame, policymakers are aiming for a “neutral” rate that neither slows nor speeds economic growth. But estimates of neutral are imprecise, and as interest rates top inflation and enter positive “real” territory, analysts feel the Fed is at higher risk of going too far and actually crimping the recovery.

Personally I think that they do not understand real interest-rates which are forwards looking. So rather than last months print you should look forwards and if you do then there are factors which look likely to drive it higher. The most obvious is the price of crude oil which if we look at the West Texas Intermediate benchmark is at US $65 per barrel around 35% higher than a year ago. But last month housing or what the US callers shelter inflation was strong too so there seems to be upwards pressure that might make you use more like 2.5% as your inflation forecast for real interest-rates. So on that basis there is scope for several more 0.25% rises before real interest-rates become positive.

One point to make clear is that the US has two different measures of inflation you might use. I have used the one that has the widest publicity or CPI Urban ( yep if you live in the country you get ignored…) but the US Federal Reserve uses one based on Personal Consumption Expenditures or PCE. The latter does not have a fixed relationship with the former but it usually around 0.4% lower. Please do not shoot the piano player as Elton John reminded us.

If we move to bond yields the picture is a little different. The ten-year seems to have settled around 3% or so ( 2.99% as I type this) giving us an estimated cap for official interest-rates. Of course the picture is made more complex by the advent of Quantitative Tightening albeit it is so far on a relatively minor scale.

The Euro area

Here we are finding that the official line has changed as we await next week’s ECB meeting. From Reuters.

Money market investors are now pricing in a roughly 90 percent chance that the European Central Bank will raise interest rates in July 2019, following hawkish comments from the bank’s chief economist on Wednesday.

In terms of language markets are responding to this from Peter Praet yesterday.

Signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2% over the medium term.

For newer readers he is saying that in ECB terms nirvana is near and so it will then reduce policy accommodation which is taken to mean ending monthly QE and then after a delay raising interest-rates.

So it could be a present from Mario Draghi to his successor or of course if he fails to find the switch a job he could pass on without ever raising interest-rates in his eight years as President.

Comment

Before I give my opinion let me give you a deeper perspective on what has been in some cases all in others some of our lives.

Since 1980, long-term interest rates have declined by about 860 basis points in the United States, 790 basis points in Germany and more than 1,200 basis points in France. ( Peter Praet yesterday)

On this scale even the interest-rate rises likely in the United States seem rather small potatoes. But to answer the question in my title I am expecting them to reach 2% and probably pass it. Once we move to Europe the picture gets more complex as I note this from the speech of Peter Praet.

the underlying strength in the euro area economy

This is not what it was as we observe the 0.4% quarterly growth rate in Euro area GDP confirmed this morning or the monthly and annual fall in manufacturing orders for Germany in April. Looking ahead we know that narrow money growth has also been weakening. Thus the forecasts for an interest-rate rise next June seem to be a bit like the ones for the UK this May to me.

Looking at the UK I expect that whilst Mark Carney is Bank of England Governor we will be always expecting rises which turn out to be a mirage. Unless of course something happens to force his hand.

On a longer perspective I do think the winds of change are blowing in favour of higher interest-rates but it will take time as central bankers have really over committed the other way and are terrified of raising and then seeing an economic slow down. That would run the risk of looking like an Emperor or Empress with no clothes.

 

 

 

 

The Bank of England seems determined to ignore the higher oil price

This morning has brought the policies of the Bank of England into focus as this from the BBC demonstrates.

Petrol prices rose by 6p a litre in May – the biggest monthly increase since the RAC began tracking prices 18 years ago.

Average petrol prices hit 129.4p a litre, while average diesel prices also rose by 6p to 132.3p a litre.

The RAC said a “punitive combination” of higher crude oil prices and a weaker pound was to blame for the increases.

It pointed out that oil prices broke through the $80-a-barrel mark twice in May – a three-and-a-half year high.

As well as the higher global market price of crude, the pound’s current weakness against the US dollar also makes petrol more expensive as oil is traded in dollars.

There is little or nothing that could have been done about the rising price of crude oil but there is something that could have been done about the “pound’s current weakness against the US dollar”. In fact it is worse than that if we look back to April 20th.

The governor of the Bank of England has said that an interest rate rise is “likely” this year, but any increases will be gradual.

This was quite an unreliable boyfriend style reversal on the previous forward guidance towards a Bank Rate rise in May that the Financial Times thought was something of a triumph. But the crucial point here is that the UK Pound £ was US $1.42 the day before Mark Carney spoke as opposed to US $1.33. Some of that is the result of what we call the King Dollar but Governor Carney gave things a shove. After all we used to move with the US Dollar much more than we have partly because our monetary policy was more aligned with its. Or to be precise only cuts in interest-rates seem likely to be aligned with the US under the stewardship of Governor Carney.

Just as a reminder UK inflation remains above target where it has been for a while.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in April 2018, down from 2.5% in March 2018.

The welcome fall in inflation due to the rally in the UK Pound £ has been torpedoed by the unreliable boyfriend and a specific example of this is shown below.

Let us give the BBC some credit for releasing those although the analysis by its economics editor Kamal Ahmed ignores the role of the Bank of England.

Silvana Tenreyro

Silvana in case you are unaware is a member of the Monetary Policy Committee who gave a speech at the University of Surrey yesterday evening. As you can imagine at a time of rising inflation concerns she got straight to what she considers to be important.

Many critics have laid the blame on the tools that economists use – our models.So, in my speech today, I
will attempt to shed some light on how and why economists use models. Specifically, I will focus on how they
are useful to me as a practitioner on the MPC

Things do not start well because in my life whilst there has been a change from paper based maps to the era of Google Maps they have proved both useful and reliable unlike economic models.

An oft-used analogy is to think of models as maps

Perhaps Silvana gets regularly lost. She certainly seems lost at sea here.

Similarly, economic models have improved with greater
computing power, econometric techniques and data availability, but there is still significant uncertainty that
cannot be eliminated.

Let me add to this with an issue we have regularly looked at on here which is the Phillips Curve and associated “output gap” style analysis.

Many commentators have recently argued that the Phillips curve is no longer apparent in the data – the
observed correlation between inflation and slack is much weaker than it has been in the past. If the Phillips
curve truly has flattened or disappeared, then the current strength of the UK labour market may be less likely
to translate into a pick-up in domestic inflationary pressures. Given that the Phillips curve is one of the
building blocks of standard macroeconomic models, including those used by the MPC, a breakdown in the
relationship would also call for a reassessment.

Er no I have been arguing this since about 2010/11 as the evidence began that it was not working in the real world. However Silvana prefers the safe cosy world of her Ivory Tower.

My view is that these fears are largely misplaced. I expect that the narrowing in labour market slack we have
seen over the past year will lead to greater inflationary pressures, as in our standard models.

The fundamental problem is that the Bank of England has told us this for year after year now. One year they may even be right and no doubt there will be an attempt to redact the many years of errors and being wrong but we are now at a stage where the whole theory is flawed even if it now gets a year correct. As we stand with four months in a row of falling total pay in the UK the outlook for the Phillips Curve is yet again poor. Here is how Silvana tells us about this.

Although average weekly earnings (AWE) growth has now been strengthening since the middle of 2017,

Inflation

Fortunately on her way to the apparently important work of explaining to us of how up is the new down regarding economic models Silvana does refer to her views on inflation.

such as energy costs. And indeed, Chart 2 shows that the contribution of the purple bars to inflation
is correlated with the peaks and troughs of oil-price inflation over the past decade or so

It is probably because her mind is on other matters that she has given us a presumably unintentional rather devastating critique of the central bankers obsession with core inflation which of course ignores exactly that ( and food). Mind you it does not take her long to forget this.

Since the effects of oil-price swings are transitory, there is a good case for ‘looking through’ their impact on inflation.

Oh and those who recall my critique of the Bank of England models on the subject of the impact of the post EU leave vote will permit me a smile as I note this.

But in the past few quarters, we have seen some
building evidence that import prices have been rising slightly less than we had expected (only by around half
of the increase in foreign export prices – Chart 3). For me, this may be one reason why CPI inflation has
recently fallen back faster than we had expected.

I have no idea why they thought this and argued against it correctly as even they now admit. This is of course especially awkward in the middle of a speech designed to boost the economic models that have just been wrong yet again!

Comment

If we move to the policy prescription the outlook is not good for someone who has just dismissed the recent rise in the oil price as only likely to have a “transitory” effect. In fact as we move forwards we get the same vacuous waffle.

While I anticipate that a few rate rises will be needed, the timing of those rate rises is an open question

Okay but when?

With falling imported inflation offset by a gradual pick-up in domestic costs, I judge that conditional on the
outlook I have just described, a gradual tightening in monetary policy will be necessary over the next three
years to return inflation to target and keep demand growing broadly in line with supply.

So not anytime soon!

The flexibility is limited, however – waiting a few more
quarters increases the likelihood that inflation overshoots the target. In May, I felt that as in these scenarios, the costs of waiting a short period of time for more information were
small.

So more of the same although let me give Silvana a little credit as she was willing to point out that Forward Guidance is a farce.

Taken literally, the models suggest implausibly large economic effects from promises about interest rates many years in the future. There is ample empirical evidence that these strong assumptions do not hold in real-world data.

Also she does seem willing to accept that the world is a disaggregated place full of different impacts on different individuals.

Another unrealistic assumption in many macroeconomic models is that everyone is the same. Or more
accurately, that everyone can be characterised by a single, representative household or firm.