The UK economy is doing pretty well but inflation is on the cards

by Shaun Richards 

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3.5% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

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