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Bull and bear: December’s hiccup

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Hard data and at least one projection from a highly respected economic forecasting group suggest December may not have been quite as good as was previously thought in either the UK or the US. On the other hand, at least the UK downturn is now very close to ending. Just to remind you, the recent Purchasing Managers’ Indices from Markit/CIPS were really very good indeed. Okay, they were down slightly in December, but only from an exceptionally high level. But, the latest hard data is… well it’s disappointing. The recovery is not on hold, but if the numbers are right, the acceleration in recovery is at best on hold, at worst it’s off.


The UK story

Just to remind you, according to Markit, the PMIs are consistent with quarterly growth of at least 1 per cent in Q4. Capital Economics went one step further, and said they were consistent with growth of 1.5 per cent. These are not positive projections; they are projections that are practically off the chart. It is a long time since the UK grew at 1.5 per cent quarter on quarter.

Alas the hard data is not as promising. The ONS is responsible for spoiling the celebratory mood, with data out on Friday on industrial production and construction, following equally disappointing data and a survey the day before – from the ONS again and the British Retail Consortium.

UK industrial production grew at zero per cent in December, as did manufacturing. Seasonally adjusted UK construction contracted by 4.0 per cent in November. Here is the story of the numbers, plus a recap on trade data:

Percentage growth UK industrial production, manufacturing and construction in November, source: ONS
  Monthly Quarter on quarter Year on year
Industrial Production 0.0 0.3 2.5
Manufacturing 0.0 0.6 2.7
Construction Minus 4 0.7 2.2
Exports 1.2 Minus 2.5  
Imports 0.6 Minus 0.3  
  November 2012 October 2013 November 2013
Balance of trade in £ billion Minus 2.9 Minus 3.5 Minus 3.2

Just to remind you, the British Retail Consortium has like for like sales rising 0.4 per cent in December.

So far then December has been a tad disappointing.

It comes down to services, can they save the day?

So what does all this mean?

In both Q2 and Q3 of last year, the UK economy expanded by 0.8 per cent quarter on quarter, or so says the ONS. The latest data on industrial production, construction, trade and retail sales suggest Q4 was no better than Q3, and maybe a little worse.

Capital Economics still thinks growth will come in at 0.8 per cent in Q4, but the National Institute of Economics and Social Research (NIESR) reckons growth slowed in the three months to December to 0.7 per cent, from 0.8 per cent in the three months to November.

The downturn is ending

NIESR did have some good news, however. You may recall that it has been keeping a monthly record of how total GDP compares with the 2008 peak. For as long as total GDP is less than peak, it says we are in a downturn or, worse than that, a depression. This downturn is now approaching its 70th month, easily the longest ever recorded, with data going back to the beginning of the 20th century. But NIESR reckons that in December GDP was 1.2 per cent less than peak. Not so long ago, it was forecasting an end to the downturn in 2015, now it looks like Q2 of this year is when it will end.

Forecasters get the bullish habit

And then the 3 per cent barrier was broken; at least it is going to be in the minds of a growing number of forecasters.

Bear in mind that not so long ago, a growth rate of 3 per cent plus in 2014 for the UK economy seemed absurdly optimistic. And, while you are at it, just bear in mind that one of the first columns to predict growth in excess of 3 per cent this year was this one. This is a potential problem, however, because thanks to that bit of boasting, bull is struggling to get his head through the door.

So while Bull is stuck in the land of show-offs, let’s allow others to do the talking.

Michael Saunders at Citi is now forecasting 3.2 per cent growth in 2014. The ‘Sunday Times’ quoted him as saying: “Economists are conditioned for disappointment, but if anything, the risks to the forecasts being wrong are on the high side, and there is an outside chance that UK GDP could hit 4 per cent growth year on year.”

Meanwhile, Capital Economics has forecast 3.0 per cent growth in 2014 and 2015.

The consultancy said: “One worry is that the recovery has so far been largely driven by household spending, raising fears of another unsustainable consumer/housing boom. But a recovery in real income growth as inflation continues to fall should provide some rather more solid support for spending this year and next.”

It continued: “The one missing piece of the puzzle is likely to be a strong pick-up in net exports. With the euro-zone still in the doldrums, overseas demand for UK goods will remain subdued. And the recent appreciation of the pound won’t help either. Meanwhile, solid consumer spending will pull in imports.”

Some commentators have suggested that the rapid improvement in growth may lead to the Bank of England upping rates too soon, and killing off recovery. This is an odd argument. It is essentially saying there is a risk that too much growth will mean growth may fall. It’s like dreading a holiday because you know that when it is over you will have to go back to work.

There are reasons to think rates will not rise that fast, even if growth is 3 per cent plus. For one thing, inflation seems to be set to fall below the Bank of England’s target. For another thing, deflation is a fear in the Eurozone, meaning monetary policy in that region may be set to weaken. If the Bank of England upped rates while the ECB loosened, the pound may soar relative to the euro – it is already at a near 12 month high.

US job data disappoints, but then it was very cold

If you have watched the TV series ‘Game of Thrones’ or indeed read the book, you may get the next comment, otherwise the next comment may mean nothing. But it appears the Starks were right: winter was indeed coming.

The number of non-farm payroll increased by 74,000 in December, the lowest increase since 2012. This was less than half the consensus estimate of 197,000.

But then again the data for November was revised upwards from 203,000 to 241,000.

So why the small increase? Well, the answer to that it appears lies with the bitterly cold weather in the US. In fact, the US household survey reported that no less than 273,000 people were unable to work in December, because of the cold weather. It is tempting to add: you try freelancing, it is amazing how rarely you find you are unable to work.

The US unemployment rate, on the other hand, fell to just 6.7 per cent, which was the lowest level of US unemployment since 2008. This fall was largely explained by a 347,000 fall in the size of the US workforce.

The Fed has said it may be increasing rates when US unemployment fall to 6.5 per cent.

Bear:     But why the fall in the work force? Is it that more Americans are just giving up? Falling US unemployment may seem good, but this number has been distorted by changes in the workforce, and the data may be hiding an altogether less positive story.

Car industry in biggest wave of disruption ever

Today’s ‘FT’ said: “Investment in new technologies to make cars more efficient, more interactive, run on new fuels and even begin to drive themselves is growing faster than sales and revenue, amid a period of technological disruption not seen in the industry since the birth of the internal combustion engine.” See: Big Auto revs up R&D to record levels 

According to research from Boston Consulting Group, R&D spending has increased by 8 per cent over the past four years, which is nearly three times higher than the increase seen between 2001 and 2012.

So what is going on? Well it’s about new material, microprocessors, and a whole lot of other new technologies, such as sensors, GPS, and the “internet of things”.

But why does the ‘FT’ say: “a period of technological disruption not seen in the industry since the birth of the internal combustion engine?” Surely, the invention of the internal combustion engine didn’t really disrupt the car industry, it created it. Surely we are seeing the biggest wave of disruption in the industry ever. Watch Apple and Google in this space. See also: Thought for the Day January 2 Disruptive technology in 2014 and a bit further on 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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