jka on economics UK

UK Trade in Goods in January - no rebalancing - it's getting worse.

Is it possible to look at the world through rose coloured glasses with your head in the sand? If you are an economic analyst it appears you can. According to the Daily Telegraph, “January’s trade figures lift hopes of an export led recovery.” 

“Economists said the figures raised hopes that trade will make a positive contribution to GDP growth in the first quarter. The Government is pinning its hopes on exports to lead the economy back to health to offset the hit to consumer spending from the austerity measures.” 

According to the Financial Times, “Britain’s deficit in trade in goods narrowed by much more than expected in January, raising hopes that the economy can rebalance away from its dependence on domestic consumption of goods and services.”

The latest trade figures released by the ONS yesterday are the source of all the excitement. The UK’s seasonally adjusted deficit on trade in goods was £3.0 billion in January compared to a deficit of £5.5 billion in December.

The trade in goods deficit was £7.1 billion in the month compared to a deficit of £9.7 billion in December. 

For some analysts, the latest data is welcome confirmation of the “rebalancing of the economy towards export led manufacturing growth. David Cameron said the numbers were "exactly the sort of rebalancing our economy needs".

No doubt the Governor of the Bank of England will be pleased as he stated during the February presentation of the Inflation Report. “I think it would be very peculiar if a 20% fall in the real exchange rate did not lead to some rebalancing. There are very few examples where if you have a persistent fall in the real exchange rate you don't see a rebalancing. You clearly see it in the figures for exports. I think there is certainly evidence that some forms of import expenditure switching is occurring.”

But here is the problem, monthly data on trade can be erratic and subject to revision. Over the latest three month period, the deficit on goods was £25.4 billion compared to £22.5 billion over the same period last year. The deficit is getting worse not better. A quick look at the chart shows the ten year data and the trend line. The deficit was too high in December and too low in January.

In the pro.manchester Economics Review we forecast the trade in goods to continue to deteriorate through the year. The January data does nothing to change this view.

In our forthcoming paper on “Forty years of UK trade data” we will explain why.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK retail sales January, Britain isn't eating or are we eating each other?

The seasonally adjusted value of retail sales in January 2011 rose by 8.2 per cent compared with January 2010 and the seasonally adjusted volume of retail sales in January 2011 rose by 5.3 compared with January 2010. It’s a retail boom or is it?

Too hot, too cold,

Too wet, too dry,

This is why my sales won’t fly.

Christmas too early, Easter too late,

Missed sales targets that’s my fate.

This is an old retail mantra to explain retail sales. I have always found this to be extremely useful in scientific retail analysis.

This January sales are booming in comparison with 2010 because compared to last year, there is just not enough snow. Sales are up by over 5% in volume terms but this is against a snow bound comparison, when sales actually fell last year by three per cent.

There is no boom, the underlying trend rate of growth in January is around 1%. Sales were hit last year by snow and an increase in VAT from 15% to 17.5%. This year sales have been hit by light rain and the VAT increase from 17.5% to 20%.

Non food stores are up by 9.5% and household goods stores experienced sales growth of 9.8%. The large increases occur because of the weak figures last year rather that an illogical response to VAT rise and the sluggish housing market. Sector sales offer little assistance to understanding what is happening within the economy.

On line sales increased by 22% and now account for 10% of total retail sales. In sectors such as books and DVDs the figures must be heading for 50%. 

What is happening to food? Britain isn’t eating according to the official figures. Consumers having emptied the freezer in December must have started eating each other in January as sales fell by a further 2.7%. I love data and I love the ONS but something is happening to the numbers. Can it be that more and more food sales are going on line.

The Governor of the Bank of England will love the ONS too. Retail prices increased by an estimated 2.7% in January compared to the horrible headline CPI 4%. Using the CPI - ONS data, he wouldn't have had to write a letter to the Chancellor.

Sign up today and "subscribe" for e-mail notification of updates. The pro.manchester economics review for the first quarter is out next week.

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK inflation rises to 4% - the hawks are circling, will rates have to rise?

Inflation CPI basis in January increased to 4%, that’s twice the level of the Bank of England target. The Governor has had to write yet another letter to the Chancellor explaining why the MPC was failing in the challenge to curb inflation. In his letter to the Chancellor, Mr King said three primary factors were behind the increase, the fall in sterling, the rise in VAT and recent increases in the prices of commodities, particularly energy. 

Ultimately, he said, “inflation was as likely to be below target as it was to be above target in two to three years’ time”. Well here is the problem, as we have often said, Service sector inflation in January was 4.1%. It has averaged 3.6% for almost twenty years! That’s half the index. This was creating a problem for policy long before the fall in Sterling, the rise in VAT and the prices of commodities. Service sector inflation accounts for half the index. Goods inflation will have to fall to zero, to meet the 2% target. It doesn’t seem probable given the step change in China and the Far East. 

RPI and RPIX inflation were over 5%. This is a very uncomfortable number for policy makers. Major increases in the twelve month CPI inflation rate were Food (6.3%) , Alcohol (6.7%) Transport (7.7%) Education (5.3%) and restaurants (4.5%).

The inflation alphabet includes, the CPI, the RPI, the RPIX, the RPIY, the CPIY, and the CPI-CT. Gradually all have exceeded target rate in recent months.

Expect to see anytime soon, the CPI-MK. This is the Mervyn King special inflation index which excludes indirect taxes, housing costs, local taxes, commodities, imported prices, energy costs, core and non core items but includes anything around the 2% CPI target by special Hodrick-Prescott filter process.

The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising. The dependence on “gapology” is anachronistic. Two hawks are on the wing already but more doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK trade figures - the J curve is down the U bend ..

The trade (in goods) figures this week dashed the hopes of analysts and policy makers hoping for a rebalancing of the economy to export growth. Exports surged by 17% in the final quarter of the year but so did imports up by 18.5%. As a result the trade deficit ballooned to over £26 billion compared to just £21 billion in the final quarter of 2009.

For readers of this blog, the result will come as no surprise. We have long explained why exports increase in response to world trade with little impact from sterling devaluation. On the other hand, devaluation pushes up the cost of imports, including food, energy, raw materials, semi manufactures and export components. 

For those in business, the principle is easy to understand. Devaluation is reducing prices whilst agreeing to pay more to suppliers for import components. It doesn’t make sense for a company and it doesn’t make sense for an economy, the volume requirement will never offset the margin squeeze.

The Governor of the Bank of England said recently in Newcastle, each unhappy economy is unhappy in its’ own way. [apologies to Tolstoy]. The tragedy is our unhappy economy is unhappy, not in its’ own way but because of the persistence of policy makers to pursue strategies dominated by theories of yore, incorporating folklore, mythology, runes and ritual. Relying on Keynes is about as useful as switching off Sky News and reading Nostradamus. It is time to switch on to and accept the reality of, real time economics.

Rebalancing the economy, “waiting for the day the boats no longer come in” will be as probable as Miss Haversham’s trip to the registry office. It is time for the Old Lady to take off the cobwebbed wedding dress, dust off the cake and get out more.

Manufacturing output prices increased to 4.8% in January and input prices increased to 13.4%. The CPI and RPI figures out next week will be further bad news for the economy. Interest rate rises are inevitable. Rate rises will lead to an increase in Sterling, offsetting dollar denominated import inflation with little impact on export volume.  

The trade deficit will continue to deteriorate and for those lovers of ancient trade theory, the J curve is heading for the U bend along with the Phillips curve, the meandering NAIRU, obsession with the TROGS, (trend rates of growth) and the capacity gap. JKA.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK GDP - it's the wrong kind of snow, at the wrong time of year

The ONS estimates for GDP growth came as something of a surprise for the final quarter of 2010 with q on q growth down by 0.5%. Even more disturbing was the sight of the Chancellor of the Exchequer explaining how snow had derailed the economic recovery in the final month of the year. The wrong kind of snow at the wrong time of year.

Manufacturing and construction avoided the snowfalls but business services, transport, storage, communication, distribution, hotels and restaurants were badly hit. The year on year growth was just 1.7% but adjusted for the “snow effect”, growth was a respectable 2.2%.

Preliminary estimates from NIESR, the National Institute of Economic and Social Research projected growth to be 2.7% in the final quarter of the year. NIESR has a pretty good forecasting performance in this area with strong correlation with the prior quarter results.

The out turn was well below consensus estimates and well below our own expectations.

The release yesterday, provides preliminary estimates subject to revision. At worst the provisional figure is a blip in the recovery process, at best a low opening shot subject to upward revision. The seasonal adjustments for manufacturing and construction have a long history of short time working in the final month of the year, which is embedded into the models.

The sectors most badly hit by the snow, have no such history. Expect a significant upside adjustment to follow. JKA

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Retail Sales in December - take the food sales with a pinch of salt ....

Retailers suffer worst December on record according to the Daily Telegraph as the retail sales figures for December were released by the Office of National Statistics. “British retail sales suffered their worst December on record as retailers battled with Arctic weather conditions and shoppers shunned higher prices.”

Retail sales including fuel were at a standstill compared to December 2009, excluding fuel sales volumes increased by just 1%. Certain sectors did well, online sales were up by almost 15%, textiles, clothing and footwear were up by 3.4%.

Household goods were hammered, down by 8.6% and travel plans were curtailed by the weather as fuel volumes fell by over 10%. That’s the equivalent of three days stuck in the snow or at home with the kids. Not pleasant but a plausible economic scenario.

But food, what happened to food. Let them eat flake, or snowflakes presumably as food sales fell by 3.4% compared to December last year. That is the equivalent of one days destocking from the freezer as supplies came under pressure from families housebound.

Or could it be that families were fasting in the month, according to the official data, food volumes have been falling since the end of last year. Part of a slimming plan? or a more volumes are going on line? Is it a problem with food prices and the deflators, or is it the old problem of lies, damned lies and seasonal adjustments?

It is going to be a tough year ahead for retail, especially in household goods, retail sales were flat in December but the food figures should be taken with a pinch of salt.

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In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK Growth will be stronger than expected in 2011 and private sector will create jobs.

GROSS domestic product will be stronger than expected in 2011 and the private sector is set to create the job growth to offset spending cuts.

Every one percent growth in GDP will lead to the creation of around 100,000 jobs according to the research and growth should be above trend in the recovery process.

In the first of planned quarterly economic reviews, we have analysed the world economic recovery and the implications this has for the UK and North West.

The first report will be published in February but a summary of the forecasts has been provided in our monthly presentation. 

Having looked at a range of economic measures including UK main forecasts, GDP data and employment, public sector net borrowing, inflation, export and import figures and interest rates the presentation is  a comprehensive analysis of what we should expect during the next 12 months.

As well as predicting GDP growth will be stronger than suggested, manufacturing and business investment will lead the expansion with exports also enjoying strong growth. The balance of payments will continue to provide a negative drag on headline GDP.

“There will be winners this year with new technologies such as digital media and creative as well as clean tech and green tech sectors providing growth.

“Manufacturing is leading the recovery. The service sector, professional services and the property rental market will flourish alongside export, commodity retail and e-commerce.

“There will be inevitable losers in 2011, the housing market will create problems in related retail sectors, inflation will remain above target and interest rates are set to rise .”

We also identify a number of market challenges ahead, such as the oil price, commodity prices and currency tensions between the Dollar, Renminbi and the Euro but there are reasons to remain optimistic about 2011.

The quarterly economic reviews are one of the new initiatives launched by pro.manchester for 2011/2012. Data sources for this report include the National Institute of Economic and Social Research, International Monetary Fund, the Organisation for Economic Co-operation and Development, Netherlands Bureau for Economic Policy Analysis, Office for Budget Responsibility, Deloitte, PwC, UK Treasury and Greater Manchester Forecasting model.

John Ashcroft is Chief Executive of pro.manchester, a director of Marketing Manchester and a visiting professor at MMU business school. Educated at the London School of Economics, London Business School John completed a PhD in macro economics at Manchester Metropolitan University.

You can download the full monthly presentation here.

UK GDP up 2.8% in the third quarter, at last a recovery worth killing?

UK GDP grew by a 2.8% in the third quarter year on year following 1.6% growth in the second quarter. The economy is on track to post growth in the full year of over 1.6%. A strong recovery in manufacturing output (up by 5.3%) and in construction (up by 11%) appeared to be the major contributors to growth.

Service sector growth was up by 2.1% with distribution, hotels and restaurants up by 3.2% and business services up by 2.9%. Government spending increased by just 1.1% and transport storage and communication was flat.

Link reaction will see a rally in utilities and transport in due course, the UK is in line for a strong recovery which would have seen growth well above trend into 2011. The recovery can only be subdued by the impact of the comprehensive spending review equivalent to 1% of GDP per annum. This we anticipate could cut growth by approximately 0.4% over the forecast period.

The office of budget responsibility has forecast growth of 1.2% in 2010 and 2.3% in 2011 rising to 2.8% and 2.9% in 2012 and 2013. According to our estimates, growth of 1.6% this year is now feasible rising to 2.4% in 2011 and running slightly above trend 2.5% in subsequent years.

The problem for the economy is inflation with RPI at around 5% and CPI around 3%. The OBR forecasts assume inflation will fall to target by 2012 and sit obediently, like a dog at peg, at 2% CPI basis until 2015.

The economy is 4% below the 2008 peak and inflation is still well above trend. the economy is recovering. Interest rates at 50 basis points are incompatible with this macro economics scenario. There is no scope for QE2 and every scope for an increase in base rates into 2011. 

As for the Office of Budget Responsibility it is churlish to point out the supreme forecasting body will get the GDP growth figure wrong for 2010. If so, the outlook for the remainder of the forecast looks pretty bleak.

For the spending review, the economy will recover despite government policy. Cerdic the Saxon king said of King Arthur “finally, a man worth killing”. The Chancellor appears to have discovered a recovery of similar ilk. JKA.

Sign up today and "subscribe" for e-mail notification of updates.The comments should not be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK CPI inflation remains at 3.1%

CPI inflation in September was 3.1% unchanged from the figures recorded in July and August. Service sector inflation fell to 3.7% from 4.0% but goods inflation increased from 2.4% to 2.6%. This is not a deflationary scenario explained by an output gap but an inflationary environment exacerbated by a weak outlook for Sterling.

In the month on month comparisons, the main downward pressure came from transport and petrol prices and frequent flyers also benefitted from lower air fares down by 28%. On a year on year basis, food, beverages, alcohol, tobacco, transport, education and communication costs all increased by around 5%. Clothing and footwear, housing and household services, increased by just 1%. 

For those who still believe the old indices are best, RPI inflation nudged slightly lower to 4.6% from 4.7% and RPIX inflation (RPI excluding mortgage interest payments) fell similarly from 4.7% to 4.6%.

Inflation is well above target rate and GDP growth in Q2 and Q3 indicate a vibrant recovery. The threat and overhang of the October spending review suggest monetary policy will remain overly accommodating in the short term, with calls for a further round of QE(2) to be brought into play. As yet we have no way of knowing what really happened to the first £200 billion in terms of efficacy. It may be too soon to propose a further £50 billion is committed to an extended gilt repurchase programme.

The consensus is for base rates to remain on hold into 2011 with a median forecast of a rise to 1.25% by the end of 2011. Clues to the real direction of rates will emerge once the spending review is announced later this month. Growth, inflation and loose monetary policy do not model well. 

Sign up today and "subscribe" for e-mail notification of updates.In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

World trade recovers but raw material prices are up 34%.

World trade has recovered to the high levels of 2008, according to the latest data (July 2010) from the CPB Netherlands Bureau for Economic Policy Analysis,. Over the seven year period from 2002 to 2008 the trend rate of growth was 7% per annum before a dramatic plunge in 2009 as trade volumes fell by 20%. Since the nadir, the recovery rate of growth has been 14.5% on an annualised basis to bring volumes within 1% of the 2008 high.

Imports into the advanced economies increased by 17% in the USA and Japan and by just 10% into the Europe. In Asia and Latin America import growth was 23% and 25% respectively.

Exports from Asia increased by 25%, by 30% in Japan and 18% in the USA. In the Euro area export growth was 12%. Prices of manufactures were unchanged on a year ago but energy prices were up by 17% and raw material prices were up by 34%.

Production levels were up by 9% year on year to bring output to within 3% of the 2008 high. Overall the pattern is one of a strong recovery with an obvious caveat on the strength of energy and raw material prices.

Sign up today and "subscribe" for e-mail notification of updates.In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.