How could the current UK economic boom turn to dust?

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Today sees or if you are reading this later has seen a policy meeting of the Monetary Policy Committee of the Bank of England. There is virtually no speculation about what it will do as it has tied itself into the straitjacket called Forward Guidance which promises that it will keep base rates at 0.5% for a long as possible. Of course it is also true that there is little speculation because everyone is too busy trying to read the runes of the hints of action that have been emanating from the Frankfurt towers of the European Central Bank over the past couple of weeks! If it were also to take the “masterly inaction” route so prized by the apocryphal civil servant Sir Humphrey Appleby then it has misled people.

However whilst you might not believe it from the (in)action of the Bank of England much is going on under the bonnet of the UK economy.

Business Surveys

The purchasing managers indices published this week have continued their optimistic view of UK economic growth.

Manufacturing production is currently expanding at a quarterly rate close to 1.5%, according to the PMI…….May data indicated another sharp increase in UK construction output…..Business activity in the UK service sector continued to increase markedly during May, supported by another firm increase in volumes of incoming new work.

The numbers for the construction and services sectors also came with hints of wage pressure. This means that the business surveys are far more positive for wages than the official numbers. So we find yet another area where the situation is masked by a fog of contradictory data. Overall the UK economy remains strong even if we note that these surveys can be over optimistic.

Car registrations surge again

The numbers here have been a clear positive for the UK economy. I have discussed before how I feel that they are likely to have benefited from the PPI (Payment Protection Insurance) misselling payouts and the more recent rise in unsecured credit following the Funding for Lending Scheme. It was only on Monday that I pointed out that the 3 monthly growth rate of unsecured credit was 5.9%. Perhaps another push will come from today’s news?

Some leading banks may have underpaid compensation certain customers are due for mis-sold Payment Protection Insurance, the BBC has learned.

Early estimates are that around another £1 billion will be thrown into the overall pot. I would say that this would further reduce confidence in our banks if I felt that it was not already at rock-bottom.

Even without this the car registration numbers are very good. From the SMMT.

May increase drives UK new car market to 27 consecutive months of growth, breaking record set in the late 1980s.

New car registrations increased 7.7% in May to 194,032 units – the most in May since 2004.

Registrations for 2014-to-date pass the one million mark, rising 11.6% to 1,058,974 units.

Such was the strength of our position we were able to offer a helping hand to the struggling French economy as (h/t @Weayl ) registrations of Renaults rose by 62%. If you are looking for signs of boom time for some, well, sales of Bentleys are up 42% in 2014 so far and Porsches by 20%.

House prices

It was only on Tuesday that the Nationwide Building Society had the bare faced cheek to tell us that annual house price inflation running at a rate of 11.1% was a sign of “moderation”. So the number below can be called “great moderation” then?

The average house price increased by 3.9% in May

This was from today’s release from the Halifax and it was tucked away in the report presumably in a failed attempt to tuck it away inconspicuously! Of course monthly numbers are volatile so let us take stock.

House prices in the latest three months (March 2014-May 2014) were 2.0% higher than in the preceding three months (December 2013-February 2014).

So we are still at full steam ahead in the manner of the Titanic and it would appear that forecasts of a fall in the annual rate of house price inflation were very wide of the mark.

Prices in the three months to May were 8.7% higher than in the same three months a year earlier. This was marginally higher than in April (8.5%).

Up is the new down one more time.

We also see that there was only a minor sign that anticpation of the new mortgage rules (MMR) had caused a change in activity and volumes.

Home sales edged down by 1% in April to 103,690, however, transactions are still a third higher than in April 2013.

There are a mulitplicity of measures of UK house prices each with their flaws but in essence the message we are being given is along the lines of “up, up and away”. The cautionary note is that the numbers are being inflated by the house price bubble that is raging in central London. However price rises are spreading across the country and are exceeding wage growth (official version).

We can look at this from the sugar soaped version (full-time male earnings) of the house price to earnings ratio used by the Halifax which nearly needed to start with a 5 today. There must have been relief when the answer came to 4.96! This compares to the 4.53 of May 2013 and is only just shy of the record for this particular series.

One area where there is disagreement between the various house price measures is to whether we have passed the peaks of 2007. Many do record this but the Halfax has us still 7.6% below.

Another way of looking at this is to look at aother signs. I would suggest that the fact that the online house sale agency Zoopla is about to be listed on the London Stock Exchange and is aiming for a valuation of £1 billion is one. A full set would be if one of our banks stepped in to buy it!

Trade figures

Yesterday saw some numbers released which are eye watering for those who remember the way that house price booms in the UK have been accompanied by trade and balance of payments issues too.

The UK current account deficit was at near record highs in Q4 2013, reflecting both a substantial trade deficit and a sharp decline in the value of UK income earned on overseas investments.

If we look into the detail of this we see that our worst fears are being realised.

The UK current account – which has been consistently negative since the late 1990s – deteriorated markedly in the second half of 2013, with deficits of 5.6% and 5.4% of nominal GDP in Q3 2013 and Q4 2013 respectively.

Our income from investments abroad has declined relative to what overseas investors get from the UK and this has nudged the overall balance lower and needs watching to see if it continues.

There is one other regular drain on our balance of payments.

negative net transfer payments accounted for a further 1.0% of GDP on average over the same period.

I am sure that readers can figure out for themselves where the UK government is making payments too…

Comment

Whilst the situation of the UK economy appears healthy as high economic growth rates are combined with low inflation there are two sharks in the water. Firstly there is the situation regarding our housing market which has added a new word “moderation” to my financial lexicon for these times. Also there is the issue of the current account of the balance of payments which used to be considered important but now I find myself in much more select company in analysing it! Is this time really different or much more likely was Bob Seger right to sing this.

‘Cause you’re still the same
You’re still the same
Moving game to game
Some things never change
You’re still the same

 

This entry was posted in Bank of England, Forward Guidance, House Prices, Inflation, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • shrimpers

    Hi Shaun, whatever happened to Bob Seger?

    I suppose everybody has to replace their vehicles eventually and, why not, when the car companies or major retail outlets all have access to such cheap finance so can offer extremely favourable terms (especially the Germans) – I understand that approximately 90% of new cars in the UK are purchased on a form of finance (e.g. lease, unsecured loans, car manufacturers’ funding) – all of this on top of the burgeoning student debt and, of course, obscene mortgage multiples based upon declining real incomes with flimsy job security plus advancing consumer credit.

    Seriously, most of the commentators on here cry wolf so many times, including myself, surely we will be proved correct eventually and, when the murky stuff finally hits the fan, it is going to be one almighty collapse; this time there’s no back stop??

  • Jimbob

    Hi Shaun
    I was reading a blog recently regarding house prices in the USA, which indicated that house prices for the 1% were increasing massively, whilst house prices for the 99% were static or falling (http://www.testosteronepit.com/home/2014/5/28/housing-bubble-2-already-collapsing-for-the-99.html). I cannot comment on the veracity of the article, but on the face of it the same seems true in the UK; high end properties are increasing massively in price, whilst the normal properties are creeping up in value.
    Is this the final resting place for the money created by QE, as the elite turn their electronic money into bricks and mortar.

  • anteos

    great article Shaun.

    A recovery based on HPi and increasing debt. What could possibly go wrong……

    can the tories keep the plates spinning until the next election?

  • Anonymous

    Our income from investments abroad has declined relative to what overseas investors get from the UK

    Any ideas what’s driving this Shaun? Strengthening GBP?

  • Anonymous

    I don’t think posters are crying wolf. They are correct to state that we are well through the looking glass. The only mistake some have made is the depths our masters will sink to. We cannot enter the mindset of these filthy nihilists.

  • Jim M.

    hi Shaun,

    I would only note that the Bob Seger song you quote goes on to add…
    “Turning on the charm long enough to get you by…”

    A sentiment for all politicians to admire, no?

    And it comes to you how it all slips away
    Youth and beauty are gone one day
    No matter what you dream or feel or say
    It ends in dust and disarray

    Like wind on the plains, sand through the glass
    Waves rolling in with the tide
    Dreams die hard and we watch them erode
    But we cannot be denied

    The Fire Inside. Bob Seger

  • Jim M.

    It’s not that I can’t enter their mindset so much as I really don’t want to emulate the selfish bastards!

    “When law and morality contradict each other, the citizen has the cruel alternative of either losing his moral sense or losing his respect for the law.” – Bastiat

  • Anonymous

    The upsurge in new cars is cyclical, in 2008 they dropped heavily. Hence there is a relative shortage of modern second hand cars.

    Some of the car lease/buyback deals are dubious. After 3 years there is a fixed contractual amount you owe, but the car repurchase/trade in price is dependent on “market value”.

    In 2008, someone was touting a 3.2 petrol VW Toureg – £12,000 off list price, you drive it for 3 years and resell it at the same price ???? They pushed 3 years driving for nothing. I kept my old, paid off car. In hindsight, I would have been £10,000 down in 2011.

  • Forbin

    Hello Shaun,

    echos of the last Romans in Britain seem to apply

    anyway who said we’re having a recovery ? GDP fantasy football style ?

    What is the recovery based on ? Russians buying into the London housing market?

    Now they want more sanctions on Russia? force more here or break the boom ?

    oh deary me !

    Forbin

  • Anonymous

    Hi Jimbob

    That is interesting point which as you say does at least have some veracity to it. Unfortunately the link does not work for the US statistics.As for the UK we have very few price falls now (I think according to the Nationwide the North east had one last month) so it would be the gap in house price rises that was relevant and of course the price of the property in the first place needs to go into the mix.

  • Anonymous

    Hi Shrimpers

    If Wikipaedia is any guide then he seems to pop up from time to time. He has not yet featured on the BBC 4 friday night documentaries but James Taylor and Carole King were featured last week so perhaps he will soon.

  • Anonymous

    Hi Anteos

    I think that the coalition government will do the best it can and there are now only 11 months to go so they have a decent chance. They must be dreading any type of so-called Black Swan event!

  • Jimbob
  • therrawbuzzin

    It all goes mammaries skywards if Scotland votes for Independence.
    Balance of payments goes into warp drive, GDP takes a kick in the gonads, and there is no longer $1trn in oil reserves to back the debt.
    Why does no-one do “The economics of rUK after a YES vote in Scotland?”
    Any chance Shaun?
    I’m virtually certain that would show why such lying, chicanery, and black propaganda.

  • Noo 2 Economics

    Is foreign income measured following conversion into GBP? Is UK income sent abroad measured following it’s conversion from GBP to the relevant foreign currency?

  • Anonymous

    Hi Progrock

    That is an interesting point and one missed by the ONS explanation but yes it will have had an influence. They think this.

    “The recent fall in the UK’s income balance is explored in more detail in Figure 4. It divides the income balance (UK earnings on overseas assets less overseas earnings on UK assets) into
    the balances on several types of assets: direct investment, equity, debt securities and other. It suggests that the recent fall in the income balance has arisen as a result of lower balances on direct
    investment and debt securities. Earnings from direct investment fell from an average surplus of 2.6% of nominal GDP per quarter between 1997 and 2007 to just 0.8% in Q4 2013 – the lowest value since the early 1990s. Net earnings from debt securities have grown increasingly negative in recent quarters – falling from an average surplus of 0.2% of nominal GDP between 1997 and 2007, to a deficit of 0.2% between 2008 and 2011, and to a deficit of 1.4% in Q4 2013. Both balances have contributed to a sharp fall in the UK’s income balance.”

    Why might this be?

    It’s explanation now gets a bit circular as it argues overseas agents are now getting a higher rate of return…

    I will be watching the numbers to see if this pattern repeats.

  • Anonymous

    Hi Jim M

    Thanks for the lyrics. Quoting from a song on here often reminds me of other songs from that particular artist too.

  • Anonymous

    Hi Forbin

    There were some numbers on this front published earlier by Knight Frank as shown below.

    https://twitter.com/knightfrank/status/474763774981709824/photo/1

    It is interesting to see who is buying what and where. I note that UK buyers are appearing in places, I guess the higher pound £ has influenced that.

    As to corn futures they have dipped below US $4.50 now.

  • Anonymous

    Hi therrawbuzzin

    A good point,maybe it is because the vote is out of rUK’s hands as they do not get to vote on the issue. Ironically the major two issues I discussed the other day apply here too, how will the oil and gas be split and the same for the national debt.

    I guess rUK would have to start opening up its coal mines again!

  • Anonymous

    Hi Noo2

    In the UK accounts the measurement is in pounds £. So the UK income from abroad needs to be converted into £ and the rise in the pound will have reduced it ceteris paribus. The money from the UK will already be in pounds, although foreign investors are of course likely to convert it into their currency, that is not counted.

  • ian

    As the central banks are desperate to drive spending & investment they are simply driving up asset prices as the risk/reward is greater there. They’ve lost all credibility on asset inflation as its clear that the Central banks will always bail out investors thus making it a safe bet. The bubble will continue to be driven but will need more and more QE or such wheezes to keep it going thus in the end real inflation will break out.

    Its the 1970′s but on steroids.

  • Anonymous

    I see, thanks for replying. I’d imagine that over the medium term as the UK declines we are selling off overseas assets (just as we are selling off domestic assets to overseas investors) which must see the return decline.

    Now onto your next article!

  • Max

    Shaun , You don’t really answer the question in the title of this article. When I was growing up I remember that the chancellor of the exchequer used to raise rates as house prices went up. Now this is something new to me. Presumably at this rate a 1 bed flat in outer London could be £2 million before long.
    I am struggling to see what will stop this relentless rise now. It is madness.