Posts Tagged ‘Markit’

ID-100109044There are two big question marks hovering over the UK economy. The answers  may determine whether the UK is seeing a temporary recovery or something a good deal more real.

First consider the surveys. Every month Markit and CIPS get together to produce Purchasing Managers Indices (PMIs) covering UK manufacturing, construction and services. Then they add them all together and produce a composite index. Over the last few months these indices have been really rather exceptional. A couple of months back the composite PMI hit an all time high. Okay data only goes back to 1998, even so it was impressive stuff.  Since then the PMIs have fallen back a tad, but they still remain way above historic averages.

Some economists reckon that the PMIs are consistent with quarter on quarter growth of around 1.5 per cent. To put that into perspective, there aren’t many emerging markets growing that fast.

But here is the thing, the hard data from the Office of National Statistics (ONS) is not so good. For the third quarter of last  year the ONS had quarter on quarter growth at 0.8 per cent. That growth rate is good, compared to what we have become used to it is marvellous, but it was less than the level the PMIs were indicating.

As for Q4 of last year, the PMIs suggested that was even better than Q3. Alas, not so the data from the ONS, it had the economy growing by 0.7 per cent. Okay, that growth rate may get revised upwards, but it is still way down on what the PMIs suggest.

Drilling down, construction may provide a partial answer. The ONS had this contracting 0.3 per cent in the last quarter of last year, the PMIs had it surging to its highest level in several years. Since then the PMIs tracking construction have got even better. This suggests that the ONS will either revise its estimate of construction’s contribution to UK growth in Q4 upwards, or we will show a marked improvement in Q1.

The latest PMIs also point to the largest backlogs in orders within the services sector since May 2007. That seems to suggest we are either set to see the sector’s output surge, or we may get rising prices instead. Or both.

Then there is business confidence, in the services sector this rose to its highest level since 2012.

These days, it’s popular to talk about that elephant in the living room. You hear the phrase so often, that is a wonder there are any elephants left in the wild, so busy are they filling up our livings rooms. Well apologies for adding to living room congestion, but as far as the UK economy is concerned there are two elephants in the living room

Elephant number one is household debt/house prices. Part of the UK’s recovery is coming on the back of rising house prices, making households feel richer, encouraging them to spend more. This is not new, the idea that the government is repeating the mistakes that led to the finance crisis in the first place is rehearsed most days in the media, and indeed by politicians.  Some deny it of course. But one piece of hard data needs to borne in mind. The fact is in Q3 of last year the savings ratio fell, this was the main contributor to growth. We haven’t got the data for Q4 yet. But given the imminent retirement of the baby boomers, is creating growth via less households savings really a good idea?

The other elephant in the living room is cash sitting on corporate balance sheets. If they could be persuaded to spend it, ideally invest it, the UK economy would boom like it hasn’t done for a very, very long time.

Just to remind you, according to the PMIs work backlogs are soaring, business confidence is rising, might that be enough to get companies spending again?

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The hard data was not that good, but there are signs coming from elsewhere that the UK labour market is recovering. It may not be time to open the champagne, but is it time to at least put it in the fridge?

The number of people in employment rose 301,000 in the three months to June, compared to the same period a year ago. Look at unemployment, however, and the improvement was not so marked, with this number falling by 49,000. Compare the last three month period with the previous three months and unemployment was down by just 4,000.

On the face of it, this does not seem that special. Sure the labour market is improving, but oh so slowly. UK unemployment is 7.8 per cent, surprisingly low given where the economy is, but even so, many had hoped for better.

But then again, some are beginning to make bullish noises.

Take the latest Purchasing Managers’ Indices, which suggested that during July firms took on staff at their fastest rate since 2007. According to Markit, which compiles the Purchasing Managers Indices, the improvement was led by services, although construction employment grew at the sharpest rate since 2008 and meanwhile, manufacturers boosted workforce numbers at the greatest extent for two years.

Or take the CIPD. It has just released its latest labour market survey. The report shows that the net employment balance – which measures the difference between the proportion of employers who expect to increase staffing levels and the proportion who intend to reduce staffing levels – stands at +14. This is an increase from +9 in the previous quarter and the highest figure since the recession in 2008. So far this is all pretty promising. The Bank of England says that it will not increase interest rates until unemployment falls to 7.0 per cent. If the inference from the surveys is right, it seems quite plausible that this level may be reached within a year or so, and ahead, by the way, of what the Bank of England is predicting.

Then there are wages. For over two years now, the percentage increase in average wages has been less than the percentage rate of inflation, meaning that real wages have been falling.

The latest period was no exception, but then again average weekly earnings – including bonus payments – rose by 2.1 per cent, comparing April to June 2013 with the same period a year earlier. This is the first time the growth rate has exceeded 2 per cent since late 2011. Inflation in June was 2.9 per cent, so the gap between wage increases and inflation is still quite large. There is a growing view that UK inflation is set to fall too, and many are predicting an inflation rate of 2 per cent within a few months. So if wages can carry on rising at the rate at which they rose between April and June, and inflation falls as expected, within a few months – say the beginning of 2014 – real wages may be rising.

There is a problem, however. April was a good month for bonuses. If we look at regular pay (that’s without bonuses) in the three months to June, this rose by just 1.1 per cent. Furthermore – and returning to the CIPD survey – employers do not expect wage growth to accelerate significantly. Among those employers who took part in the survey the average anticipated settlement for basic pay (excluding bonuses) in the 12 months to February 2014 was 1.7 per cent, unchanged from the previous quarter.

The UK needs wage increases to exceed inflation in order for consumer demand to rise, which will push up GDP without the need to increase debt. At the moment, consumers are buying more, but they are doing this by reducing saving, and borrowing more, which is surely not sustainable.

But then again, wages can only really increase if productivity improves. And in this respect at least there has been some good news. Output per worker had been steadily falling since early 2011, except that is in Q1, when it improved. (It improved in Q3 last year, too.) Year on year output per worker is still falling, but the extent of the fall has reduced very significantly. Data for Q2 will be out in about six weeks, and that will tell us whether the April to June period saw further improvement in productivity. If it did, we may be able to start talking more confidently about rising wages, leading to sustainable improvements in demand.

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© Investment & Business News 2013

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31 July 2013, and 1 August 2013: mark these dates in your diary. On these days economic news was revealed that meant one of two things; either the economy was well and truly on the mend, or we are seeing one very big blip. If it is the former, celebrate; if it is the latter enjoy it while it lasts.

They hadn’t expected much. Purchasing Managers’ Indices (PMIs) suggested the US economy had a rotten Q2. Sure, said the optimists, Q3 would be better, but the second quarter of this year was one we would rather forget. Then on 31July 2013 the hard data was released and it told a very different tale.

The US economy expanded at an annualised rate of 1.7 per cent in Q2, and by 1.4 per cent year on year. That was much better than expected, much better than the PMIs suggested.

Both business investment and residential investment helped – in the US when house prices go up so does construction, unlike in the UK where the correlation seems only very vague.

So that was the US. The news was good in the Eurozone too. The latest PMI from Markit on manufacturing in the region was out yesterday and it rose, hitting a two year high, with a reading of 50.3. To put that in perspective, any score over 50 is meant to correspond to growth. A reading of 50.3 is nothing special, but by recent standards it is positively wonderful.

Broken down by country things look like this:

Ireland,   51.0,    5-month high
Netherlands   50.8   24-month high
Germany   50.7   18-month high
Italy   50.4   26-month high
Spain   49.8   2-month low
France   49.7   17-month high
Austria   49.1   8-month high
Greece   47.0   43-month high

And finally we turn to the UK. The latest PMI for UK manufacturing rose to 54.6, a 26 month high. And get this. According to Markit which compiles the data along with CIPS: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Apologies for raining on such a pleasant parade, but the story was not good everywhere. In Russia and Turkey the PMIs fell sharply and look worrisome, in China the picture is mixed, with the official PMI pointing to a modest pick-up and the unofficial PMI from HSBC/Markit, which puts more weight on smaller companies, deteriorating.

Still with the PMIs, the news on Poland and the Czech Republic was much better. Watch these two countries closely, especially Poland. If there is truth in all this talk about reshoring, Poland, with its proximity to the developed part of Europe, may be a big beneficiary.

One worry is that other data out yesterday showed that Sweden contracted in Q2. The out and out bears – those who are cynical for a living – question the PMIs. They say they did not predict the slow-down in Sweden; they did not predict the pick-up in the US, and they are giving a misleading picture on Europe. The big fear relates to central bankers tightening policy as a result of this data. The Fed may accelerate its plans to ease back on QE.

As for the European Central Bank, it is cautious and conservative to a T. There is a permanent danger it will lose its nerve, and tighten again, sending the Eurozone back into recession.

© Investment & Business News 2013

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It has been a drip drip of okay news on Spain. There’s nothing sensational; nothing yet to quieten the euro-sceptics, but enough to offer some hope.

The latest PMI for Spanish manufacturing from Markit hit 50 in June, which is the highest reading in 26 months, and suggests the sector is no longer contracting; rather it is now flat. Spain posted its first trade surplus ever in March, with exports rising 2.7 per cent, and finally Spanish unemployment fell in May, with 98,286 joining the Spanish work-force.

Okay, none of this data provides a reason for the bulls of the investment world to start charging all over the market bull rings. A reading of 50 for the PMI still suggests the economy was flat, ie not growing. Sure the balance of trade went positive, but the main reason for this was falling imports, and Spanish unemployment remains at frightening levels.

But then this week (July 23 to be precise) the latest figures on Spanish GDP were out and they gave some reason for cheer.

In Q2 the Spanish economy contracted by 0.1 per cent, after contracting 0.5 per cent in Q1 and by 0.8 per cent in Q4 last year. Year on year growth was minus 1.8 per cent.

So Spain is still in recession, but it needs only a very modest improvement to leave recession and that surely has to be celebrated.

Ben May, European economist from Capital Economics, is not so sure, however. He said: “We expect weak demand in Spain’s major export destinations to mean that the boost from the external sector will fade over the coming quarters. And with the fiscal squeeze, housing slump and private sector deleveraging set to continue for some time to come, domestic demand is likely to contract significantly further.

Based on this, we still expect GDP to fall pretty sharply next year, perhaps by as much as 1.5 per cent.” If Capital Economics is right, and the recent good(ish) news proves to be a one-off, then expect another bond crisis, and more calls for help in 2014-15.

© Investment & Business News 2013

Adam and Eve and Pinch Me went down to the sea to bathe, Adam and Eve got drowned, so who do you think was saved?” Answer: “Pinch Me,” of course. And pinch me and you and cynics and optimists alike may be called for after the latest surveys on the UK economy.

Take a look at some of the words/phrases used to describe the data – in ascending order of magnificence they include: “decent”, “highest level”, “encouragingly”, “even stronger growth possible”, “all time high”, and “impressive stuff”.

So what has happened? Are we dreaming, or indeed do we need to take the latest news with a pinch of salt.

Let’s start the story with the Purchasing Managers’ Indices or PMIs, produced by Markit/CIPS and relating to manufacturing, construction and services.

The story of the latest manufacturing PMI was told here yesterday. In summary: the latest manufacturing PMI from Markit/CIPS, out on July 1, was 52.5 (any score over 50 corresponds with growth). It was the highest reading for the index in 25 months.

A sub-index tracking new orders rose to its highest level since February 2011.

Now let’s move onto construction: the latest PMI tracking UK construction in June, out on July 2, rose to 51, which is the highest reading since May 2012. The rate of new order growth accelerated since May and was the strongest for just over a year. Anecdotal evidence pointed to signs of an upturn in underlying client demand and stronger levels of new work in the house building sector.

Then there is the big one. In the UK, services remain the most important sector. The Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. The index has been above the 50 no change mark for six months. Confidence regarding future activity was also retained, with expectations at their highest for 14 months.

So, put all that together and what do you get?

The all-sector PMI, measuring output across the private sector economy, rose for the fourth month running in June, up from 54.4 in May to 56.0, its highest since March 2011. According to Markit, the recent readings are roughly consistent with GDP growth accelerating from 0.3 per cent in the opening quarter of the year to 0.5 per cent in the three months to June.

Markit said: “Encouragingly, growth in the second quarter is looking more broad-based than earlier in the year… Even stronger growth is possible given the recent flow of upbeat official data. The upturn in business activity was fuelled by inflows of new business growing at the fastest rate since September 2007.”

“Firms took on more staff at the fastest rate since October 2007,” continued Markit. “The increase was concentrated on the services sector, where hiring was the strongest since August 2007. A more modest gain in construction was nevertheless the best recorded since September of last year, while the manufacturing workforce was more or less unchanged.”

Richard Driver, Caxton FX analyst, said: “This really is impressive stuff – the services sector has outstripped market expectations time and time again this year.”

While Martin Beck, UK economist at Capital Economics, said: “It looks increasingly likely that GDP growth in Q2 will turn in a decent performance.”

But the PMIs were not the only bringers of good news. An index from the British Chamber of Commerce measuring service export deliveries rose to +36%, which was the highest level since the survey began in 1989.

The reasons for this surge are not entirely obvious.

Wages growth still lags way below inflation, and for some time economists have argued that the UK will only see sustainable growth once real wages rise. You could understand the recovery if the UK had suffered some creative destruction, leaving a very lean and efficient manufacturing and services sector. But this has not happened, and poor growth in UK productivity makes it all the more puzzling.

It may be too soon to start giving reasons for this apparent recovery or to say whether it will last, but for the time being at least, the news is good.

© Investment & Business News 2013

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The news on the UK economy is actually not bad at the moment. Oh sure there are plenty of reasons for cynicism, and some of the news may contradict common sense, but recent data is looking better, indeed, green shoots seem to be appearing.  Take as an example the latest Purchasing Managers’ Index, or PMI, on UK manufacturing.

The UK economy grew by 0.3 per cent in Q1, according to the ONS, but output is still some 3.9 per cent down from peak, which is pretty awful.

But that was in the past; what about now and what about the future?

The latest data from the ONS on industrial output was okay – it had output up by 0.1 per cent in April, after increasing by 0.7 per cent the month before and 0.9 per cent the month before that. All told, annual growth is now running at 0.6 per cent. That is still contraction, but it is getting better.

Friday saw more data from the ONS, this time on services, and again it was encouraging. The services sector grew by 0.2 per cent over the previous month in April, and is now expanding at 2.0 per cent year on year.

And now it is time to turn to June. The latest manufacturing PMI from Markit/CIPS, out this morning, hit 52.5. So what does that mean? Well, any score over 50 is meant to correspond to growth, and this particular reading was in fact the highest reading for the index in 25 months.

And especially encouraging is the more forward looking data. A sub index tracking new orders rose to its highest level since February 2011.

Markit said: “Manufacturers reported solid demand from domestic markets and clients based in Europe, China, North America, Scandinavia and the Middle East.”

There was good news on the inflation front too. Another sub index tracking input prices showed falling prices for the first time in three and a half years.

There are other signs, both factual and anecdotal, of UK manufacturing enjoying a slow march to recovery. UK car exports have risen rapidly of late and are now running neck and neck with imports. Even DHS has recently announced that it is now manufacturing sofas in the UK.

In this sense the UK seems to be following the US of slowly seeing manufacturers returning home, albeit with a time lag and on a much smaller scale.

Maybe the UK is at last benefiting from the falls in sterling which occurred three years or so ago, or maybe something deeper is at work, and as labour costs in China rise, manufacturing at home looks more attractive.

The big one of course is 3D printing. The jury is out on whether this will create or destroy jobs, but just bear in mind the following two points.

3D printing is likely to have as significant an impact on industry as mass production did in the first few decades of the last century.

3D printing may also make it viable to make niche products like never before, targeted at very small market places. Economies of scale are set to be transformed, and local 3D printing experts/craftsman may find they are in vogue. This may lead to a closing in the gap we have seen in recent years between the very richest and everyone else.

Returning to the here and now, the UK economy has plenty of problems – house prices are too high, household debt has fallen but is still at dangerous levels, too many mortgage holders will face serious problems if interest rates rise, and real wages are falling.

But recoveries have to start somewhere, and there is just a chance that that somewhere is UK manufacturing. Or is it all just hype and is the current apparent recovery just a blip?

© Investment & Business News 2013

“I guess I should warn you,” once said Alan Greenspan, chairman of the US Federal Reserve before Ben Bernanke held that position, “If you think I am making myself clear, that probably means you have misunderstood me.” Ben Bernanke doesn’t say things like that. When he took over at the Fed he vowed to say it straight, tell it like it is, and avoid launching into jargonese whenever possible. And that is how it has panned out. Take monetary policy, for example.

Ben had spelt it out in terms a child could understand, (well at least a child that had studied economics): monetary policy would be tightened under certain circumstances. He then defined what those circumstances were and they now appear to be emerging. This is not new; the data had already been set before us in the full light of media scrutiny. Mr Bernanke has reacted the way in which he always said he would, and the markets react as if the Fed chairman has grown two heads, or taken on an alter ego.

As has been pointed out here many times, the news out of the US has been good of late. Notwithstanding the fact that in Q2 the US is likely to see less growth than in Q1, signs are afoot that the US economy is slowly returning to normal: to pre 2007, or even pre 2004 type conditions.

This is not bad news. It is good news. The US consumer, so long the central hub in the global economy, looks set to be moving back to the centre stage. Companies that export their wares to the US, and US companies that sell their wares to the US consumer can celebrate. There may be a knock on effect too, as companies benefit from a resurgent US themselves see growth rise, giving their suppliers reason for hope.

What do the markets do? They panic.

They panicked because when Ben Bernanke announced that the Fed will be forking out $85 billion a month purchasing bonds – otherwise known as QE – (QE3, or maybe 4, depending on how you define these things), he said that once the economy improves, and unemployment falls to a certain level, the QE campaign will be cut down, and eventually stopped.

They panicked because Mr Bernanke confirmed that he hasn’t changed his mind and that if things carry on improving, QE will be reduced later this year (September being the expected month).

He also confirmed that if things carry on improving next year and the year after that interest rates may rise in 2015.

Certain things in life are predictable, Mr Bernanke’s comments yesterday, or at least their inference, falls in this category.

But the markets are nervous. They fear that in a world where interest rates are higher and US consumers have less debt, more jobs and spend more, certain assets – propped up as they are by bubble-like money flows – may fall or even crash.

The obvious candidates for such falls are US and UK bonds; equities too, but to a lesser extent. The markets themselves are worried about emerging market debt.
Why they are worrying now, over something that was always inevitable is a puzzle. It just goes to show that the markets are as wise as a wise man who has had a lobotomy.

And talking about wise, the latest wisdom out of the Eurozone is that the crisis is nearly over.

Certainly the latest PMI, produced by Markit, suggests the region is now merely in recession, as opposed to being in deep recession.

But here is a tip to the wise; maybe as bond yields rise, as QE comes to an end, it will be indebted Europe that suffers the real woe.

Of course if the ECB launches QE when the Fed stops, that may just be enough to allow the euro area to follow the US into recovery (two years or so behind, but follow nonetheless).

But the ECB is far too wise to do that. Remember Mario Draghi once said the ECB will do whatever it takes to save the euro. But just in case you think Mr Draghi was making himself clear, just remember that he actually said: “Within our mandate, the ECB will do whatever it takes to save the euro.” The markets probably misunderstood what that meant.

© Investment & Business News 2013