UK GDP shows us heading for stagflation

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.

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