Posts Tagged ‘uk economy’

file0001742232424The UK economy grew by 0.7 per cent in the second quarter of 2015, and by 2.6 per cent over the past year. The US economy grew at an annualised pace of 2.3 per cent. The media and markets greeted the figures with relief, but they were wrong.

To understand why, first consider what things were like in the first quarter of this year. The UK grew by 0.4 per cent, that’s quarter on quarter, and the US grew by 0.6 per cent– annualised. Actually, the data for Q2 had been revised upwards, so the markets had a kind of double celebration. They were chuffed by the okay figures for Q2, and even more chuffed by the upwards revision for Q1. Even so, bear in mind that in the latest quarter both the UK and US economies grew at a rate that was still way below average. As for Q1, the data may say that the US grew by 0.6 per cent annualised in Q1, but frankly that is a pretty awful performance. It’s just not as awful as the figures originally suggested. It is like coming last in a race, and then celebrating because the judges discovered they had made a mistake and in fact you only came second from last.

History tells us that economies tend to enjoy a period of above average growth when coming out of recession. History tells us that when an economy suffers a one off shock, which is supposed to have been what happened in Q1 of this year, then the following quarter should expand at a faster than normal pace to make up for the lost production of the previous quarter.

We are told that poor figures on the first quarter were down to a shockingly bad winter in the northeast corner of the US. This even affected US imports to the UK, knocking the UK economy. If that is so, however, shouldn’t the second quarter have seen unusually fast expansion, making up for lost ground?

In the US, the Federal Reserve is losing patience, it will be a big surprise if US interest rates don’t go up very soon, September most likely. Rates will be rising in the UK soon too, probably January.

Once again, consider the lesson of history. The Fed increased rates in 1994, after a period in which they had been at 3 per cent for 18 months or so. A year and a half later, US interest rates were at 6 per cent. Crisis soon followed, however. The global economy had got used to low US interest rates, when they rose capital left developing markets and headed west. We had the Asian crisis of 1997 and the Russian crisis of 1998. The global banking system tottered.

A similar story occurred all over again the following decade. This time though, US rates were cut to 1 per cent, stayed there for about a year, and then gradually began to rise. Within a year or two, come 2008, the global banking system did more than totter, it fell over. We all know how nasty that was.

This time US rates have been at near zero per cent for almost seven years. As they rise, the shockwaves across the world will be nasty.

The problem is compounded. Critics of the Fed say that by cutting interest rate to near zero, it has nothing left to give in the event things make a turn for the worse. The snag with that is that if the Fed hadn’t cut rates so low its economy may have suffered an even more nasty turnaround. It is like a runner in a race, holding back for a sprint finish. But if the race leader sets a fast pace, and our runner goes with the leader and has the sprint run out of him, or indeed her. You can’t criticise the runner for going too fast, there was no choice.

In short, rates are low because they had to be, now they are rising because they have to. Neither the US or UK economy are strong though, indeed they are more like a wheezy athlete, about to start a long uphill climb.

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?


It was the biggest UK trade deficit since last August, but maybe there was a glimmer of hope in the figures.

The UK trade deficit was £3.6 billion in February, compared to £2.5 billion in January. That was not very good. In fact you would need to rewind the clock to August last year to find the last time the monthly deficit was so bad.

The deficit with the EU rose, but worryingly so did the deficit with the rest of the world.

Forget about the month on month data, it is not usually very reliable. Instead look at the last three months. During this period exports to Germany fell by £677 million, and by £670 million to the Netherlands. Exports to Sweden were down by £211 million and down £97 million to the US.

On the other hand, the UK exported £326 million more to Belgium/Luxembourg, £262 million more to China, and £101 million more to Italy.
As for imports from the US, the three month period saw something of a crash, with imports from the US falling by £490 million. Imports from Italy, Belgium/Luxembourg and Germany also fell. Imports from the Netherland, China, Norway and Spain all rose. It was good to see exports to China rise faster than imports from the country.

On the other hand, total UK exports to China during the three month period were £2854 million. Imports were £7759 million, so the UK has a long way to go to bridge that particular deficit.

The trade figures may contain some bright points, but overall they are not good. But why is this the case when sterling is so much cheaper? You can see why the deficit with the Eurozone is worsening; after all, the region is going through an even more torrid time than the UK, but why have exports to the rest of the world fallen?

A falling pound does not seem to be working. What the UK needs is investment, and that can probably only happen if QE is directly more specifically at companies.

©2013 Investment and Business News.

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If house prices boom all over again, then the chancellor may be able to take much of the credit. In fact, it rather looks as if he is gambling on rising house prices. It’s a shame, because there is something else the UK really needs to rise, and that is its stock of entrepreneurs and wealth creators.

George Osborne is spending £3.5 billion on helping people chasing a new mortgage. That’s a lot, and he is guaranteeing £130 billion worth of mortgages. That is a risky thing to do but perfectly safe, if – and it is a big if – house prices rise.

The plan is for the UK government to extend its share equity scheme, so that the government will offer an equity loan worth up to 20 per cent of the value of a new build home to anyone looking to move up the housing ladder. House buyers will be required to put down a five per cent deposit from savings, and the government will then loan a further 20 per cent interest free for the first five years and repayable when the house is sold.

“It’s a great deal for homebuyers,” said George.

The government will also offer a new mortgage guarantee, to be available to lenders to help them provide more mortgages to people who can’t afford a big deposit. These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending. In all, the government will guarantee £130 billion of mortgages.

These are bold moves. But what effect will they have?

The risk is that these measures will push up house prices, which will soon become unaffordable again, but for a new reason. At the moment the challenge for home buyers is raising finance. If house prices rise, the challenge will relate to being able to afford mortgages, even if the finance is available.

If the government really wants to help more people own their own homes, it needs to try to get house prices down, not up. It can do this by taxing land that is lying idle, and reforming planning regulation. It can do this by forcing zombie banks and home builders to revalue the value of land on their balance sheets. Such measures will benefit the UK in the long run, but will be hugely controversial.

You can’t blame George for not implementing these measures, because if he did, an election disaster may await but it would have nonetheless been the right thing to do.

For too long the UK has grown on the back of rising house prices, giving consumers the confidence to borrow and spend.

The UK needs to grow via business making bold investments, entrepreneurs creating wealth by dint of their ingenuity, and through creating an innovation culture in which innovators are not afraid to risk failing.

Instead George tweaked. Sure corporation tax is falling to 20 per cent: “The lowest business tax of any major economy in the world,” he said. But US companies are sitting on $1.4 trillion worth of cash, according to Moody’s. Companies in the UK and across the world have money, and they are not spending it.

Cutting UK corporation tax will give the UK an advantage over rivals in much the same way that a trade subsidy would benefit UK exporters, but it will do nothing to solve the problem of cash lying idle and sitting on corporate balance sheets around the world. There is a case for saying we need to see a global fixed level of corporation tax. Mr Osborne is pushing for the opposite.

The Chancellor is also cutting £2,000 from every employer’s contribution to national nsurance. This is a bold move. George put it this way: “For a person who’s set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000, or four people on the minimum wage, and pay no jobs tax.” Hats off to George – that is an interesting move.

But the UK’s underlying problem is productivity. According to the ONS, output per hour in the UK was 16 percentage points below the average for the rest of the major industrialised economies in 2011, which was the widest productivity gap since 1993. On an output per worker basis, UK productivity was 21 percentage points lower than the rest of the G7 in 2011. To enjoy sustainable growth, the UK needs improvements in productivity, and reducing the tax on jobs will not help.

The Chancellor announced other measures: a fivefold increase in the value of government procurement budgets spent through the Small Business Research Initiative; vouchers available to small firms seeking advice on how to expand, but these are little more than tinkering.

The most interesting idea to help business may have been his plan to cut stamp duty on shares traded on the AIM market. The Chancellor said: “Many observers of the British tax system complain that it has long biased debt financing over equity investment.” So the reform to stamp duty will encourage equity investment over debt.

Now it is time to turn to the missed opportunity. What entrepreneurs need is hard cash – money they can see, touch and smell.

Supposing that the £3.5 billion set aside to help home buyers was instead spent on funding entrepreneurs; perhaps spent on a sort of student loan system but for entrepreneurs, or just invested into venture capital firms and business angel networks. Now that really would have created the foundations for the UK to become the most dynamic economy in the world.

©2013 Investment and Business News.

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Of course it boils down technical definitions. The odds that the UK is not currently in the midst of recession are improving, but that does not mean the UK economy is in great shape.

It might also be worth pointing out, that actually the UK may not even have suffered a double dip, but that is no real cause for celebration either.

By the time the ONS has finished revising its data for Q4 2011 and the first two quarters of 2012, it may well revise its estimates for GDP up, so that they no longer show three months, or even two successive months of contraction.

But recession or not, what is true is that the UK’s total output is almost 4 per cent down on the peak recorded some five years ago. To celebrate that the UK did not suffer a recession during the midst of this particular downturn is like celebrating when your football team only gets beaten five nil, because the week before it was beaten seven nil.

According to our official compiler of statistics, the UK economy contracted by 0.3 per cent in Q4 last year, but over the course of 2012 expanded by 0.2 per cent, whereas it previously estimated flat growth.


But what about the here and now?

The Purchasing Managers’ Indices or PMIs from Markit/CIPS are as good a guide as any. In fact, they are typically a more accurate guide than early ONS estimates.

According to the latest PMIs out during the first few days of March, February was a bad month for manufacturing, and a bad month for construction, but services were sufficiently okay for recession to have been avoided.

Put the three PMIs together to form a composite and the composite PMI reading for February was 50.8, from 51.7 in January.

Any score over 50 is mean to be consistent with growth.

Markit reckons its surveys suggest the UK is on course for expanding at a quarterly pace of 0.1 per cent.

It’s growth, but not much growth.

On the other hand, service sector confidence about the year ahead lifted to its highest since last May and, according to Markit, at least some of the weakness in manufacturing and construction in February was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March.

Markit did say, however that it is clear that the bad weather alone was not to blame for the weakness, and that underlying demand remains fragile. It said: “The underlying picture is one of a modest and hesitant upturn.”

The UK needs wage growth to exceed inflation, and then sustainable demand can lift GDP. It needs exports to rise, and it is being aided by recent falls in the pound in this respect. It needs greater investment to help improve the pretty awful productivity performance. Alas, it can’t have all three.

©2012 Investment and Business News.

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Let’s define a downturn as the period of time that GDP has been below peak. GDP peaked in early 2008, but here we are in 2013 and still the UK economy is smaller than it was some five years ago; in fact it is about four per cent smaller.

It is not like that everywhere and it was not like that before.

Germany may be re-entering recession, but at least it has the comfort of knowing that the pre-recession level of GDP was at an all-time high

US economic growth may be anaemic, but at least Uncle Sam knows that every month GDP moves into new territory.

Alas in the UK, we are running along a valley, and it remains a long way to the top.

According to the National Institute of Economic and Social Research:

In the early 1920s the UK’s recession was severe to begin with, but within four years the downturn was over.

In the early 1930s the recession wasn’t quite as bad as the previous one, but the recovery was slower. But within two years, things looked better, and within four the downturn was over.

The recessions of the 1970s and 1990s were much milder. The recession of the late 1970s early 1980s was nasty, not as bad as the pre-war recessions, but, once again, within four years it was over.

This time we are almost 60 months in.

This chart looks pretty, because it has lots of nice colours. Its inference is not so attractive, however.


©2012 Investment and Business News.

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When the Office of National Statistics (ONS) revealed data to show the UK economy was contracting again at the end of last year, a lot of people were surprised.

So cast your mind back to January 2012, or 25 January to be precise. The UK’s official statistical authority released data showing that the UK contracted by 0.2 per cent in Q4 2011. At the time, many economists said they didn’t believe the data.

When the ONS updated its figures, many thought they would be revised upwards, but instead the data got worse – so much so that now the ONS has the UK contracting by 0.4 per cent in Q4 of last year.

But the puzzle related to the Purchasing Managers’ Indices (PMIs). The PMI for manufacturing stood at 49.6 in December 2011, the PMI for construction stood at 53.2 and for services at 54. Markit, which was the co-complier of the PMI data, said that the figures were consistent with zero growth in the quarter. At the time many economists said that they thought the PMIs gave a more accurate picture.

Three months later, the story was even more puzzling. According to the ONS, Q1 2012 saw 0.3 per cent contraction. In March 2012 the manufacturing PMI stood at 52.1, the index covering construction stood at 56.7 and the index for services stood at 55.3. Markit said the data was consistent with growth of 0.5 per cent.

Even more economists said they thought the PMIs gave a more accurate story.

And yet the ONS data just carried on being bad. In fact, it finally recorded three quarters of contraction: Q4 2011, and Q1 and Q2 this year. It was a puzzle, all right.

Now forward wind the clock to today. The ONS recorded a 1.0 per cent growth rate in the quarter just gone. Yippee, thank goodness for that news.

Except the PMI for manufacturing in October was 50.6; for construction it was 50.9 and for services 47.5.

The fact is that when the UK economy was supposedly in recession Markit data suggested growth.

Right now it is consistent with contraction.


©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here