The U.K. state’s seemingly never ending obsession with funnelling ever more capital into resi real estate is extraordinary. U.K. resi worth 3x UK equities. US 1x. And we wonder why we have sluggish productivity…
I am a big fan of
@ONS
& recent improvements but as
@ChrisGiles_
has flagged this AM the entire UK economic narrative - post pandemic - has just been revised away. Every "UK not back at pre-CV-19 level" headline now obsolete. "UK bottom of the G7" no longer true. Extraordinary
The U.K. media are either v silly, or economically illiterate. Argentina inflation rate is 124% (U.K. 6.8%), unemployment rate 6.9% (U.K. 4.3%) & per capita GDP ~70% lower than the UK. This type of reporting frames perceptions, cost of capital & activity.
The UK equity market discount has now moved to its widest on record vs Rest of the World, after a small reversal in 2021/22. Remarkable to think that prior to the Brexit vote UK equities traded at a valuation premium to the RoW. Higher cost of equity capital for UK plcs is one of
My head hurts. So we have an acute affordability problem in UK housing and the solution is to pour more state-backed equity in to chase prices higher?! Economic advice at the heart of government is either intellectually bankrupt, or being ignored.
We are in 2 week run-in to U.K. Budget where each day there is a new tax/spending story based on “ministers are looking at”. It has real world impacts on chilling investment/decision-making. Special Advisers “socialising” stuff with their media mates has real world -ve impacts 😡
I personally prefer my former Bank Governors to be apolitical out of office - commensurate with the delicate political environment their former employer operates in. Don't think Carney endorsing Reeves fits that mould.
@Simon_Nixon
Good piece Simon. This is the chart that continues to undermine those who say Brexit has done no damage to UK capital markets. 45ppt swing in the valuation gap for UK public companies.
The UK’s
#Brexit
debate has come back into focus with Swiss-style deal rumours, polling showing increased “Bregret” & signs of supply side frictions over & above pandemic legacy. A longish 🧵 on what, objectively, we see in data & some thoughts on impact to economic growth (1/n)
There is a secret hiding in plain sight - the UK household sector currently has its healthiest balance sheet in modern history. £1.8tn of debt; £1.8tn of cash - net debt zero. Was -£700bn as recently as 2008. Deleveraging helps explain UK’s underwhelming recent growth.
Every major pension industry in develop world is hugely overweight its domestic equity market - by an average of 2089%. The UK is 41% underweight its own. Even eliminating the anti-home bias would be constructive. And we wonder why we have an investment & productivity problem
Latest bid for Wincanton plc at a huge 103% premium to pre-bid share price. A further illustration of public equity discount in UK markets (& higher cost of equity capital) due to UK pensions industry being only one in the world underweight its own market
Almost every UK economist concludes that the tax take will have to go up in the next Parliament (2024-29) - from what is already a 70Y high. And yet no mainstream politician in the general election campaign wants to acknowledge that. Simply raging that politicians aren’t telling
This has to be one of the most depressing charts for the UK economy. Share price returns for the 50% most domestically-orientated companies on the FTSE All Share have flatlined since Brexit; for internationally-orientated plcs returns kept increasing. Not the case 2010-2016
My thoughts on UK
#minibudget2022
in
@thetimes
. 3 main thoughts. First, every fiscal event attracts partisan comment - the advantage of financial markets’ reaction is it is dispassionate. There were uncomfortable signs of investors losing faith in recent U.K. economic governance
I may be biased but this deserves to lead every UK economic/business story today - to provide symmetry to the coverage that the sluggish post-pandemic recovery that has shaped investor/business/household sentiment.
Reading the
#Truss
essay I’m struck by how little she understands role of key UK economic institutions (namely the OBR, BoE & Treasury). And it’s not a failure to understand from operational & advisory standpoint - but these institutions as a signal of UK competence/independence
"UK is £490bn poorer" a classic example of danger of misinterpreting balance sheet headlines. Q2 revision is just 2.3% of total UK assets & liabilities (£21.4tn). Not transformative for Sterling/ Gilts outlook. Net liabilities (£101bn) actually four times lower than in Q4 2014
This is what is, for some observers, most frustrating about Trussonomics. It has elements of great ideas - tax simplification, reducing the cost & burden of planning/childcare regulation - but it is also tone deaf on “how” to get these things done & ignores the trade-offs (1/2)
💰**EXCLUSIVE**💰
A ‘flat tax’ where every worker pays only 20% of their income to the Treasury was considered for Liz Truss’s mini-Budget
Would have cost £41bn - the biggest measure by far. Was dubbed going ‘full Estonia’ (that nation has a flat tax)
I’m no fan of Liz Truss’s grasp of economics - but this MPs take is absolute twaddle. The idea that current mortgage rates are in any way related to a quickly reversed fiscal event almost 18months ago is nonsense.
🟥POLITICS WITHOUT THE BORING BITS
Tory MP
@twocitiesnickie
:
“I’m remortgaging at the moment… thanks Liz!”
How much more are you paying as a result of Liz Truss?
“A couple of hundred pounds a month.”
🎧LISTEN
The last twenty years has seen growth of just 0.7% in UK GDP per head - 70% lower than the rate of the previous four decades. By contrast average GDP growth is down by half.
This is the real story today.:
GDP per Head in UK is 1.1% LOWER than before COVID (Q3 2019)
It’s 2.7% higher in EU
And 6% higher in US - why is UK doing so badly?
Growing the economy by growing the population leaves no one better off.
One of the attractions of the U.K. to live, invest & grow businesses is the stability of domestic institutions & respect for international standards & frameworks. Seven years of this type of melodramatic stuff has unfortunately diluted/clouded that attraction.
Last 24 hrs we have had Nuclear funding, Dividend Tax, CGT rates, fiscal drag all generating headlines. This Sunday there will be a slug more. And we wonder why business investment has stalled…
Interesting to hear the PM talk about a £5bn overspend by end July to OBR March forecast - on top of the £22bn "black hole". The gap in 2024 (£4.7bn) is nothing unusual to the normal forecast variance at this stage of the financial year. Average of an absolute £7.1bn over last
What an utterly ridiculous tweet. I am no fan of “no deal” but the civil servants working on this are executing the wishes of the government of the day, entirely consistent with the CS code. They deserve our respect - not passive aggressive threats.
I value an impartial civil service - but I doubt I would employ anyone in future who had been a part of planning for Brexit, particularly those engaged in ‘no deal’ preparations who are literally wrecking jobs & businesses in pursuit of an immoral & illegitimate policy
There has been a surge of M&A activity in the U.K. equity market in recent days. What does this tell us about the health of U.K. capital markets, and what is driving this activity. A longish 🧵 focusing on U.K. public company valuations…. (1/n)
GDP grew 0.6% in Quarter 1 (Jan to Mar) 2024 after two quarters of declines.
• Services grew by 0.7%
• Production grew 0.8%
• Construction fell 0.9%
Read more ➡️
Good news for UK government liability under Energy Price Guarantee. Estimated mark-to-market liability has fallen by ~40% since policy announced on 8 Sept. If realised (a big if) then translates to ~£60bn less Gilt issuance over next 2Y than market anticipated on policy inception
Some thoughts on the latest events in UK public equity markets after another week of bids - most notably for Darktrace & Anglo American. There are many more in the pipeline. A long🧵(1/15),,,,
Terrific illustration from Next plc on the slowdown in price inflation that has been “faster than we expected” & “throughout the entire supply chain”. Part of the body of data, alongside official statistics, for the MPC to consider today. Next plc RNS’ remain best in class.
Those arguing over summer that the UK was on a sustained & higher inflation path to the rest of the developed world starting to look a bit daft. It was clear in the data that the timing of the energy cost passthrough was central to the UK decoupling. Outsized disinflation in H2
UK CPI inflation down to +3.9% in November (+4.6% prev.) - now just 60bp higher than the G20 average, having been +440bp at its height in the Spring. Encouraging recoupling & consistent with UK macro data looking less of an outlier to comparable developed economies in Q4 (1/2)
If you plan on making a big play of "no GDP growth in the UK during April" stop and look at this series. Just incredibly volatile and events (bank holidays, funerals, weather) causing material volatility in the monthly series either side of zero. What the data does tell you is
Respectfully disagree. Despite the soft retail data the UK’s economic outlook has improved markedly over the last twelve months. Benchmarking its economic momentum against other major European economies, the UK has moved up from 8th of 9 last January, to 3rd of 9 currently.
The
@FT
on the
#UK
’s disappointing retail sales numbers.
They come at the end of a week in which the data confirmed that, relative to most other advanced economies, Britain faces one of the trickiest outlooks on account of both more sticky inflation and less robust domestic
@truemagic68
I know you are not. The depressing element is the UK economy is on track to be only 0.3% larger than pre-COVID during 2024. Whilst the Eurozone is expected to be 4% larger, and US 7% larger. The higher risk premium on UK assets is somewhat rational given this backdrop.
Now it is possible, as ONS note, that similar revisions will happen across G7 & UK is first out of the traps. But as macro guy who has had to talk to international investors why Gilts/ UK equities do/dont deserve a discount, this has cast huge doubt on recent investor conclusions
2024 UK gas prices now averaging 61p across the forward curve. September 2021 was the last time that option prices were that low in nominal terms for 2024 delivery. Energy price cap at the time was £1,084 - today it is £1,928. Still a lot of UK disinflation to feed through.
Quietly UK natural gas prices have pulled back from more than 500p/therm in early March to close to 200p/therm today. Taking the fwd curve, the October price cap increase would be ~+13% rather than +50% speculated. This is backdrop to policy intervention: a v fast moving target!
Ignore the LFS wage data this morning - we knew this was going to be hot based on the UK payroll data last month - it’s the new data from July payroll data that is new info for the BoE. Significant pullback in wage inflation from almost 10% to 7.8%
It is not just on growth where the IMF appear to have gone rogue with its latest UK economic forecast. Looking at the CPI forecast for 2024 there is a huge delta with the domestic CB forecast that is not apparent in the other country estimates. 🧵
I’ll add that forecasting assumptions closed on 25th Sept for IMF’s WEO - 4 days after MPC that brought U.K. peak <5.5%. And revised U.K. GDP data was released on 1st Sept (although quarterly not till last week). TL;DR IMF forecasts for U.K. economy woefully lacking latest data
Job done by
#Cummings
. Even if the No.10 advert recruits absolutely no-one the whole exercise will be deemed a success if it reinforces a narrative that this administration is a firebreak from 2010-2019 period. In rebranding terms DC plays the commentariat like violins...
My thoughts in
@thetimes
on the economic costs of the govt overdoing the “worst inheritance” & “things will get worse” narrative. It makes political sense but, paradoxically, will make things harder if it discourages consumer spending & investment A🧵…
The thing that troubles me with GS estimate (& I do think Brexit has had a -ve impact on UK GDP) is that it would take the UK "doppelganger" growth to v close to US which has had huge fiscal stimulus, balanced energy market, & less stringent CV-19 restrictions over the period
Only one month on from the last BoE economic forecasts but already ALL conditioning assumptions used in the Nov forecast (that saw no GDP growth in 2024) are, mark-to-market, too pessimistic. If these hold till Feb there will be more criticism heading the Bank's way. A🧵... (1/n)
The average interest rate on outstanding U.K. mortgages is 2.7% (having bottomed at 2.0% in late 2021). The full effect of rising interest rates won’t be until refi cycle has played out (best guess 2-3 years) and this mortgage stock is on 4%-5% rates. Whilst it is tempting to
good comment piece from
@faisalislam
on the economic inheritance. No-one credible thinks the UK economic inheritance is the worst since WW2. Albeit it is not a good one either. Crowding in private investment & triggering ⬆️ consumer spending hinges on
Absolutely true as a political judgement. But as economic judgement rejoining Single Market would reduce inflation, enhance labour market flexibility & trade density/productivity. Elwood’s economic argument - albeit at margin as inflation is high globally - is sound, not wrong
Hidden away within today's UK price data was the mortgage interest component of RPI. Up >60% YoY for the first time since July 1989. Whilst absolute changes in interest rates are lower, this rate of change (& hence the shock to homeowner budgeting) is on a par with that period
A combination of post-covid working patterns, highest mortgage rates in 15Y & poor supply dynamics is driving up rents. Population growth will be contributing - but even a cursory look at rent inflation in other major economies suggests citing this as the major force is nonsense
Important UK bellwether. The divergence now between what a wide range of UK-based companies are saying about current economic conditions (largely upbeat, extended orders, stable spending) - and the general level of economic commentary (bearish, recessionary) is striking
NatWest CEO Alison Rose says she is seeing strong demand for mortgages and no signs of stress in the bank's home loan book. She is also open to acquisitions, pointing to the credit card market and wealth management
FTSE 100 on track to close at its 11th all time high of the last month. Only once since 1984 has it the UK large cap index achieved 12 all time highs in a rolling one month period. Will have seven trading days to match, or break that record.
@John_Stepek
What is remarkable about UK resi prices is actually how stable in real terms (CPI, RPI, GDP per head adjusted) they have been in almost 20Y. No sustained change in real terms prices since the 1998-2007 ramp up....
This
@FT
piece suggesting a 13.4% real terms decline in UK house prices tallies with our forecast from Sept 2022 that refinancing cycle would knock 29% off real terms prices over three years. IMHO we are less than half the way through the price adjustment
Personal view is no. The UK economy is not as weak as widely suggested, nor as strong as the “world beating” pretext often given to sectors/ initiatives. UK economy is dealing with sclerosis of old age, and unable to politically chart the trade offs. It is not alone in that.
Is the Government “gaslighting” the country over the state of the UK economy (i.e presenting it as being healthier than it really is)?
🇬🇧💵📈📉❓
Thread... 🧵1/9
So part of repair job to this 3% (& growing) hit to GDP starts with honesty over the economic impact of the Brexit vote. Yes, the betrayal narrative is forceful, but so is judgement of key economic actors when (as now) guardians of U.K. policy fail to acknowledge reality /END
The U.K. energy bailout package & tax cuts will both be funded by additional borrowing. This is affordable, albeit will ⬆️ inflation (eventually - the pain is only deferred) & ⬆️ Gilt spreads, but the scale of these costs depend on a wider set of factors. My thoughts in
@thetimes
Latest UK public sector productivity data out this morning remains underwhelming. Down 0.6% YoY in Q1 2024, and level still below that achieved in 1997. All the (v well documented) public sector spending challenges are harder if this trend remains unchanged.
A lot of Sterling and Gilt yield sell offs in recent months have in fact been sympathy trades with dollar strength, sovereign fixed income moves. Not today. UK being picked on for tearing up its macroeconomic framework and not having a coherent alternative.
Another strong month for U.K. labour market with >200k new jobs, a record 1.1m vacancies, further drops in inactivity (21.1%) & unemployment (4.5%). The third leg of the stagflation stool is rising unemployment. Very little in the release to suggest U.K. is anywhere near that
Robert, this is probably because the latest available data on company profitability in the UK does not suggest the same
#profit
dynamics as in the Eurozone. Gross margins are comfortably at an all-time high in the Eurozone - whilst they are close to their pandemic & GFC lows in
The route to lower inflation is for companies to cut their profit margins, the IMF's deputy director
@GitaGopinath
said yesterday. "If inflation is to fall quickly, firms must allow their profit margins—which have shot up during the past two years—to decline and absorb some of
Single month UK jobs data even stronger than the headline (4.3%) with the unemployment rate down to 3.9% in September - lower than at the start of the pandemic. Whatever problems the UK economy has, creating employment is not one of them!
Excellent interview by
@lizzzburden
- There is a difference between precise accuracy (all forecasts are imprecise) and a directional impulse. If U.K. trade secretary genuinely thinks, directionally, that trade frictions are not a -ve impulse to output then we have a problem
Just had a worrying conversation with UK Trade Secretary Kemi Badenoch.
I asked whether, given the
@OBR_UK
's forecast on the impact of Brexit, to grow the economy the government needs to negotiate closer ties with the EU.
She said the OBR’s forecasts were never “quite right”.
2021 U.K. GDP growth of +7.5% does indeed make it fastest growing economy in G7. But two caveats that will get drowned out: At -9.4% the U.K. had the largest 2020 GDP fall so had furthest to rebound. Also at ~1% QoQ in Q3 & Q4 the current GDP “run rate” is mid-range for the G7
Interesting trend emerging in U.K. labour force data with older workers beginning to leave inactivity. Negative wealth effect of falling house prices combining with real income squeeze? Or long COVID impacts easing? Key to how much spare capacity remains in U.K. economy
Two stories emerging on UKI Pound $GBP - wrapped up as a single emergent Sterling crisis. Sharp recent devaluation vs US Dollar is painfully inflationary for dollar-denominated imports - but decline in the 80% of the broad basket that is non-USD is rather less stark (chart below)
Having a single starting threshold for paying income tax, NICs - across working age, state pension age, employment & self employment was one of this govts most welcome tax simplifications. Whatever the other merits of this policy, this begins to unpick that.
Any Truss era write-up that follows today’s speech as “disastrous/misguided” risks missing bigger picture of how someone with >10Y of Cabinet experience could be naive on implementation. Surely that was learning of Brexit - “how” is not an inconvenient sideshow - it is everything
My column in today’s
@TimesBusiness
covers
#Brexit
, 6 years on. Three clear costs have emerged (business investment, cost of finance & decreased trade density) but these costs are not inevitable and choices still remain on alignment vs divergence (1/4)
PICK YOUR HEADLINE: UK Retail Sales either smashed record in May (+12.0% MoM) or down a huge 13.1% YoY. Reverse into your pre-prepared narrative on the shape of the recovery. Overall, data is coming in ahead of OBR/BoE scenarios & closer to single figure output decline in 2020
This is one of the things that undermines investor confidence in the U.K. economy - which otherwise is recovering well from the pandemic/Brexit disruption. Lawmakers lying with impunity about international agreements they voted for. Will raise the cost of capital for U.K. economy
…Bernard Jenkin tells
@BBCNewsnight
the UK signed the NI protocol at a time when the UK government was “incredibly weak” and the EU ”was taking advantage of that”
#newsnight
I wouldn't read too much into the fall in the YoY growth rate (June '23 was a hard comp) and overall the monthly data is little better than a random walk. Stepping back though the UK economy has entered a period of steady growth - now steadily ahead of Eurozone benchmarks.
Today’s
@thetimes
column takes a look at risk and how it is approached across the economy: In many pockets extreme risk aversion and risk decoupling from reward has made for an impediment to growth. How has risk got such a bad name?
At present we have ministers (government & shadow) openly denying this largely non-contentious economic evaluation - hiding behind factors such as measurement/modelling error, COVID or EU intransigence. Example here from the excellent
@lizzzburden
Just had a worrying conversation with UK Trade Secretary Kemi Badenoch.
I asked whether, given the
@OBR_UK
's forecast on the impact of Brexit, to grow the economy the government needs to negotiate closer ties with the EU.
She said the OBR’s forecasts were never “quite right”.
How do
@Conservatives
build on the crumbled remains of the
#RedWall
following
#GE2019
? - a thread. There is a compelling economic case for moving the majority of gov depts, wholesale, out of London. For the 1st time in a generation the politics & fiscal pivot could support it /1
Dubious economics here. A general (rather than partial) equilibrium model wld recognise not ONE, but FOUR freedoms are being transitioned. Higher nominal wages due to labour frictions count for little if consumption & capital costs rise. Since 2016 both have...faster than wages
V important argument from
@KwasiKwarteng
about ministers attitude to current disruption.
The economy is in a “transition” after brexit away from the “low wage high immigration economy”, some sectors like haulage are resisting and government must “tough it out”
Someone is going to be on the defensive come the end of the week. The Bank of England had +0.1% growth slated for Q1 24 in Feb MPR, and analyst consensus is for 0.4% (growth the Bank hadn't seen until late 2026). The BoE updates on Thursday; GDP first release is on Friday (1/2)
There are a couple of editorials today from the Wall Street Journal - &
@Telegraph
that suggest financial markets do not understand the policy pivot now being undertaken in the U.K. A 🧵from someone who actually writes sell side economics research (1/n)
There are so few Cabinet Ministers with proper project management expertise. The PPE/ThinkTank/SpAd route that so many follow amplifies ability to curate clever policy. But without strong ability to think about delivery, technology, sequencing & risk management these ideas fail
Personal news klaxon: First day back in the office after paternity leave & many generous gifts from friends & colleagues - thank you all! This one in particular made me smile. No expectations on baby Georgina then 😅
Price caps are a very bad idea. If the market for staples is anti competitive then the CMA should intervene (as they are fully prepared to do given MSFT/Activision decision), or it is not in which case increase transfer payments to those in poverty
Big downside misses across the board on UK inflation, with a large drop in core inflation (+6.2% vs 6.9% prev.) as we had expected (August 2022 core was hot). Very important data for the MPC's deliberations and holding rates this week looks now a materially under-priced outcome.
Taking stock of yesterday’s U.K. interest rate decision. Three things stand out for me. Firstly, the U.K. is “back in the pack” of monetary policymaking - matching the decisions of the Fed, SNB, RBA & BoC (amongst others) to pause & take stock of the tightening so far (1/5)
Better known as Gilts. Hypothecated liabilities (including potential Green Gilts) are PR-washing standard government financing methods. Unless there is any evidence of a feedback loop to lower cost of capital/ more efficient allocation then not sure the value here.
Kier Starmer announces he would launch a "British Recovery Bond" if Prime Minister, which would raise billions from UK savers to invest in the economic recovery from Covid.
That screeching you can hear is all the GDP response notes written last night. Expect plenty of “uk escapes recession” and “sluggish UK growth” where the actual data is a rather awkward add in!!
UK inflation at 2.3% now undershooting the G20 average - which it will for the rest of the summer - but the symbolism of being above 2% will delay some of the more shrill political calls for cuts for a month or two. Services inflation at 5.9% YoY the most important data in the