UK GDP shows us heading for stagflation

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by Shaun Richards

This morning and these days it is early in the morning since the switch to the 7 am announcement, brought a minor dose of bad news for the UK.

Monthly real gross domestic product (GDP) growth slowed in July 2021, growing by 0.1% compared with 1.0% growth in June 2021. This is the sixth consecutive month of GDP growth, as coronavirus (COVID-19) restrictions continued to ease to varying degrees in EnglandScotland and Wales.

Part of the reason I say minor is that with our stagflation theme we were concerned about a slow down and we had already seen the fall in Retail Sales. In addition there was the NHS app pingdemic from back then.

However it was another bad month for the expectations of the Markit PMI as shown by fxstreet.

The UK services sector activity expanded more than expected in July, the final report from IHS Markit confirmed this Monday.

The seasonally adjusted IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) was revised up to 59.6 in July versus 57.8 expected and a 57.8 – last month’s flash reading.

So quite a surging rate of growth and the overall one for the economy was 59.2 so strong growth. It would appear those who forecast 0.6% growth for the UK economy this morning were asleep on its previous misfires and followed it.

Breaking it down

Let us start with the apparently rampaging services sector.

Monthly services output remained flat at 0.0% between June 2021 and July 2021

As you can see that is quite a fail for the PMI and as it is around 80% of the UK economy we are well on our way to explaining the July result. Perhaps it looks at these areas.

Information and communication was the main contributor to services, mainly because of a 2.8% growth in computer programming, consultancy and related activities. Financial services also contributed positively to services, mainly because of a 2.1% growth in financial service activities (not including insurance and pensions).

But not so much at these.

Professional, scientific and technical activities fell by 2.3% in July 2021 and was the largest negative contributor to growth in services. Five of its eight sub-industries contracted in July 2021, with output in advertising and market research falling by 7.3% after an exceptionally strong June 2021, and a fall of 7.3% in legal activities.

I guess you have already figured out the reason for the fall in legal services.

The drop in legal activities and real estate activities on a fee or contract basis (which fell by 10.4%) reflects the partial end to the Stamp Duty holiday period in England and Northern Ireland from 1 July 2021.

Also there was the fall in Retail Sales plus I note there is quite a bit going on in this sector.

Output in consumer-facing services fell by 0.3% in July 2021, its first fall since January 2021 when it fell by 8.3%. Most of this fall is because of a 2.5% fall in retail trade (mainly because of a fall in food and fuel sales), partially offset by a 72.5% growth in travel agency, tour operator and other related reservation services (growing from historically low levels), and a 15.1% growth in sports activities, amusement and recreation activities.

As you can see there have been some wild swings which actually bring the total into question. When you have sub-sectors moving by 15% let alone 72.5% then a total which only moves by 0.1% has to be not only within the margin of error but well within it That theme continues if we look at the other side of the coin.

Arts, entertainment and recreation activities saw strong growth in July 2021 of 9.0%.

Production

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By contrast this put in a strong performance both in relative and absolute terms.

Production output increased by 1.2% in July 2021, with mixed growth across the four sectors. This follows a fall in production of 0.7% in June 2021.

We can now look at another story of two halves with the good bit being the end of a maintenance period in the North Sea.

Mining and quarrying contributed most to production’s increase, as it grew by 21.9% in July 2021. This strong growth mainly reflects the reopening of an oil field production site, which was previously temporarily closed for planned maintenance.

However it is still well below last year.

Despite this growth, output in the extraction of crude petroleum and natural gas remains low by historical standards, with July 2021 output 19.1% below its July 2020 level.

I thought I would take more of perspective and here is spglobal looking at the data up until May.

UK crude production has been recovering since 2014, but remains below half of levels at the turn of the millennium.

If the record gas prices continue then North Sea Gas is going to look a lot more attractive. Obviously if it is in the UK sector but also if it is in friendly Norway. I realise this is not official policy but at some point governments will be forced to come down from their present fantasies.

Manufacturing

This was quiet which in some respects is a result after fears about the car industry.

The manufacturing sector remained broadly flat in July 2021, after five consecutive months of growth, with anecdotal evidence from businesses responding to the Monthly Business Survey suggesting staff shortages (including COVID-19 self-isolation requirements) as a challenge to production.

So the NHS pingdemic was in play here and probably elsewhere. Also you may be surprised to see the strongest sector which is from a low base.

The largest positive contribution to manufacturing growth came from the manufacture of motor vehicles, trailers and semi-trailers, which grew by 11.4% as reports of microchip shortages disrupting car production eased in July 2021.

Also with what has been going on I wonder if these numbers have come from a land of confusion.

but electricity and gas is now 4.4% above its February 2020 level,

Oh and the Markit PMI was completely wrong again.

Construction

Regular readers will know I have had serious doubts about the construction data for some time but the swings do not help.

Construction output fell for a fourth consecutive month in July 2021, by 1.6%. Construction output recently peaked at 1.8% above its pre-coronavirus (COVID-19) pandemic level (February 2020) in March 2021 but, in July 2021, is now 1.8% below that February 2020 level.

Maybe the NHS pingdemic was in play here is it is a labour intensive industry.

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Trade

There are a lot of misconceptions around here and social media has been full of them over the last couple of days. The official data has told a different story. So let us look at trade with the European Union. Here is Professor Thomas Sampson of the LSE.

TCA has led to a dramatic fall in UK imports from EU,

New ONS trade data for July shows EU imports down about 20% compared to non-EU imports since start of year Importantly, drop appears to be persistent not transitory.

So the UK appears to be shifting away from European imports. Next comes the picture for exports.

By contrast, after the initial collapse in January, UK exports to EU have recovered strongly. No sign of a persistent decline in EU relative to non-EU exports so far this year.

Some have used the figures released by Germany which even at the time contradicted those from France which they either did not know or chose to ignore.

Anyway as ever I would like more detail on this component as it is quite a while since I made that point to the Charles Bean Review.

In the three months to July 2021, the trade in services surplus increased by £0.4 billion to £28.5 billion. Imports fell by £0.3 billion and exports remained flat.

Comment

If we step back from these figures and allow for the “pingdemic” then let us say the underlying figure was 0.3% or so. Or of course we could wait for the August numbers when it should start to wash back in. That still represents quite a slowing and brings us back to our stagflation theme as I am expecting inflation to push higher next week. I do not know about you but this does not seem the time to introduce a major tax increase that is something of the order of 0.5% of GDP.

Moving onto trade the numbers with the EU are intriguing but in terms of GDP they have only an implicit link. This is because they are not in the output series which is what we have been looking at today. I know that is different to what many claim but whilst they are implicitly there via say a car being produced for export it only counts as production so imports have a much more tenuous link. In practice they get added in later sort of….

Also let me link this to the ongoing energy problem. Here it is right now.

GB Grid: #Wind is generating 1.61GW (4.92%) out of 32.70GW

11 am is too early for solar to help much so we import more power via the interconnectors. Also we use more gas and coal. So it is stagflation in another form with prices higher but domestic output lower.

Sport

Let me finish off by wishing Emma Raducanu good luck in the US Open final. Also as an athletics fan let me congratulate Keely Hodgkinson for being the Diamond League winner in the women’s 800m/

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