I wish today to examine the UK economy as recent data and information have as a minimum challenged the consensus that had built up about it as 2012 has opened. The consensus in the media has been that we have found some solid economic growth and that inflation will soon be in line with the Bank of England’s target of 2% for Consumer Price Inflation. Many articles have treated the latter as a certainty.
Such thoughts if one may describe them as such have involved ignoring the recent strength in the oil price where a barrel of the Brent crude benchmark has risen by 16% in 2012 so far and now stands at US $125.40. As I pointed out in my article of the 24th of February this rise has both inflationary, via cost pressure, and contractionary effects on the UK economy. Perhaps those sure of an inflation fall do not drive and do not have to purchase petrol or diesel at new higher prices.
UK Industrial Production
On Friday we received the latest statistics on this from the Office for National Statistics and the initial headline disappointed somewhat.
The seasonally adjusted Index of Production fell by 0.4 per cent between December 2011 and January 2012
If we look back for a comparison to 2011 then we received a firmer jolt.
The seasonally adjusted Index of Production fell by 3.8 per cent in January 2012 compared with January 2011.
As this point there would have been some outright concern. Month on month numbers can be erratic but such a year on year fall merits further investigation. Doing so makes you spot this.
This is the 11th consecutive fall on the month a year ago.
What caused this?
Output of the mining and quarrying industries fell by 21.3 per cent in January 2012 compared with January 2011. This was the 16th consecutive decrease. The biggest decrease was in the extraction of oil and gas which fell by 23.9 per cent.
So a major cause in this is the decline of North Sea oil and gas production and this is something likely to be a continuing factor. I guess the UK government is probably regretting raising the level of taxation on this industry right now and I wonder if the claimed revenue increase might turn out to be a decline in reality in an interesting application of the laffer curve.
Also there was something giving food for thought tucked away in the numbers as energy output fell by 9.3% in the year on year comparison in January. Remember when cold weather was blamed for output falls well now warmer weather can take its share of the blame. Perhaps someone could track down Goldilocks and as her what winter weather is not too hot and not too cold!
Wasn’t industrial production supposed to be expanding?
Here we get to the Markit purchasing managers survey for January which recorded 52 for manufacturing and 51.4 for manufacturing. This had looked hopeful but from the official numbers we see that manufacturing did edge forwards by not by enough to help the overall picture by much.
The seasonally adjusted Index of Manufacturing rose by 0.1 per cent between December 2011 and January 2012.
Actually on a year on year basis the growth rate was only 0.3%. For those who like the overall numbers on a scale where 2008=100 UK manufacturing is now at 95.8 and the overall industrial production figure is even worse at 90.2.
What does the National Institute for Economic and Social Research (NIESR) say?
They provided a little cheer but as you can see only a little.
Our monthly estimates of GDP suggest that output grew by 0.1 per cent in the three months ending in February after a contraction of 0.2 per cent in the three months ending in January 2012.
So we have a picture which has an improvement but a fair way short of what we might have hoped for. Indeed if we look at the NIESR’s graph of past recessions we see an even more troubling picture. The “Great Depression” of 1930-34 would have been over by now and we would be solidly into a recovery as would the 1979-83 recession whereas we are left weaker than when the credit crunch started and even worse the last 18 months have shown no sign of any sustained improvement. I will leave you with the thought below.
Weren’t we supposed to have learnt from the past and accordingly responded in a more effective fashion this time around? Those who are rightly critical of 1930s economic policy have now to face up to the prospect that our generation has done little better and may have done worse.
Inflation is dead isn’t it?
Producer Price Inflation
Here we saw a considerable pick-up which the headline rise for the output number from 4 to 4.1% did not give full justice too as underlying this we saw.
Between January and February the output index for home sales of manufactured products rose 0.6 per cent.
Oh well this is just a glitch/freak is it not? Not if you look further down the chain at input prices.
In the year to February 2012 the total input price index rose 7.3 per cent, compared with a rise of 6.6 per cent last month.
Between January and February the total input price index rose 2.1 per cent.
If we look to the detail of the numbers we see that for the output figures the rising price of oil was a factor but that tobacco and alcohol and other manufactured products were bigger ones. If we look at the input numbers we see the price of oil/fuel as the strongest factor but there were others too. So we are left with the view that the rising price of oil has exacerbated an existing problem.
As we peer through the gloom and try to see where we are going we see that the purchasing manager numbers for February weakened compared to January. That does not leave a lot of hope for industrial output in the first quarter of 2012. Accordingly we need to hope that the numbers for the service sector are accurate. We saw 56 in January and 53.8 in February and we have to hope that this is backed up by real developments in the largest part of our economy.
If we peer further ahead I worry about the impact of the oil price but of course there is much uncertainty about where it will be and some of that is political as what happens to Iran is a big factor. But another market worries me and it is the perennial UK problem area the housing market. We are seeing more and more lenders annouce increases in mortgage rates for 2012. The largest move was by Bank of Ireland which plans to increase in standard variable rate in two steps from 2.99% to 4.49% by the autumn and the latest was by the subsidiaries of National Australia Bank (Clydesdale and Yorkshire). This added to the Royal Bank of Scotland,Halifax and Santander.
Whilst this is bad enough on competition grounds (as it is prima facie evidence of a banking cartel in operation) it will also be a brake on UK economic activity as 2012 progresses. It also shows another widening gap between political rhetoric, “low interest-rates” and the reality of higher mortgage-rates for an increasing number of borrowers.
High loan to value mortgages are a bad thing aren’t they?
Back in 2008 UK politicians queued up to criticise the low level of many mortgage deposits and blaming them for the credit crunch. Move forwards some four years and we see the UK government announcing this.
95% percent mortgages will be made available to existing homeowners as well as first-time buyers (FTBs) on new-build properties (houses and flats) worth up to £500,000.
And the UK taxpayer will be backing this as should the 5% deposit be used up then the builder will provide 3.5% and the UK taxpayer 5.5%. In a sustained fall in the housing market what would happen to house builders? Yes in another “surprise” the UK taxpayer would no doubt find itself bailing out the house builders 3.5% as well as paying its own share of 5.5% making 9% in total.
Why taxpayers who cannot afford to buy a house should subsidise others to do so is beyond me. It is also breath-taking that we have forgotten one of the lessons of the credit crunch so quickly. Furthermore as it will lead to upward pressure on house prices it will make them even less affordable for first time buyers particularly if real wages continue to fall.
According to the Council of Mortgage Lenders the buyers will be “creditworthy” and in response to my reply that the saving of a deposit was one of the demonstrations of creditworthiness they replied that saving a 5% deposit was evidence. Shame that last time round in the housing boom banks would give out personal loans to pay the deposit and as we know bank behaviour has changed not one jot.
The UK and its banks
1. We give them cheap money and lots of it.
2. We bail them out if inspite of this they become insolvent ignoring that they caused the insolvency.
3. Now the banks raise mortgage rates to ensure a profit
4. We add to it by guaranteeing loans so that they can make low risk profits.
This is one of the most one-sided deals in history is it not?