Policy Research in Macroeconomics

The UK economy is booming but what about the trade deficit and house prices?

Tucked away in the official statistics on the UK economy on Friday was further evidence that the UK mini-boom remains at full steam ahead. This came from an update on the largest sector of the UK economy which is services.

The Index of Services increased by 3.2% in January 2014 compared with January 2013.

If we look at a shorter time comparison, the numbers indicated an acceleration in what was already a substantial rate of growth.

The latest Index of Services estimates show that output increased by 0.4% between December 2013 and January 2014, following an increase of 0.3% between November 2013 and December 2013.

If we look into the detail we see that the improvement has been broad based with all of the four main categories rising. The strongest category is highlighted below.

The index of distribution, hotels & restaurants increased by 5.8% in January 2014 compared with January 2013. (The strongest sector here was): wholesale, retail trade & repair of motor vehicles & motorcycles, which rose by 14.3%;

If we move to the underlying picture for the services sector which represents some 77.8% of the official output of the UK economy we see that it is at 106.6 where 2010=100. It has also retraced all the losses of the credit crunch era.

Growth in the Index of Services since 2010 has reversed the decline seen in 2008 and 2009; in August 2013, the Index of Services surpassed its previous peak level recorded in February 2008.

So in short the services sector of the UK economy is in tune with the season springing forwards and is powering ahead.

Details details

As ever we note that austerity does confuse the concepts of up and down.

government & other services increased by 1.7%; (annually)……; government & other services increased by 0.3%; (monthly)

Also in the latest two months you will not be surprised to read that real estate activities rose by 0.8% in December and by 0.3% in January hinting at a possible charge.

The terrible twins

In the UK’s economic history such dashes for growth have invariably come a cropper when faced with the development of a house price bubble and overheating and/or a problem with the balance of payments. These twin deficit imbalances then involve the brakes having to be slammed on to prevent a crisis. Usually this involved sharp rises in interest rates which would be a complete contrast to the current near zero official interest rate policy or ZIRP.

UK house prices

The Hometrack survey has told us this morning that prices rose by 0.6% in March leaving them some 5.7% higher than a year before. This comes on the back of Friday’s release from the UK Land Registry which provides the most authoritative if delayed data on house prices.

The February data shows a monthly price change of 0.7 per cent. The annual price change now stands at 5.3 per cent, bringing the average house price in England and Wales to £170,000.

Whilst the house price rises are spreading ever wider in the country there is one spot which is plainly overheating.

At 13.8 per cent, the annual change for London is considerably higher than other regions.

The exception is the North-East England where prices fell by 1.4% in February which meant that it also fell in annual terms. I would be interested to hear readers thoughts on why it is different?


If we move to the volume side of the ledger we see that that taps appear to be open. From the Bank of England this morning.

Total lending to individuals increased by £2.3 billion in February, compared to the average monthly increase of £2.0 billion over the previous six months.

Lending secured on dwellings increased by £1.7 billion in February, compared to the average monthly increase of £1.3 billion over the previous six months.

Also I note that net lending on mortgages has turned substantially positive as before recent efforts whilst there was plenty of lending there were often greater repayments.

Gross lending secured on dwellings was £17.8 billion and repayments were £15.6 billion.

If we look ahead we see that future demand looks firm if not quite as strong as January.

The number of loan approvals for house purchase was 70,309 in February, compared to the average of 69,563 over the previous six months.

Consumer credit is pushing forwards too and the emphasis is mine.

Consumer credit increased by £0.6 billion in February, compared to the average monthly increase of £0.7 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.5% and 4.8% respectively.

Here we have a nuance which is that these numbers are in net terms lower than those which preceded the credit crunch bust. The catch is that those numbers by definition were too high and should not be treated as normal.

Business lending

By contrast banks have not spread such largesse to our business sector especially smaller ones or SMEs (Small and Medium Enterprises).

Net lending to SMEs was £0.0 billion in February.

I suppose this is at least better than the falls we have been seeing but one might hope for more of an upturn. The banks did lend an extra £200 million but it was matched by repayments of past loans. If we look for some perspective the pattern has been grim for a while now for loans to SMEs.

The twelve-month growth rate was -2.5%.

If we move to larger businesses then the February picture was not exactly bright either.

 Net lending – defined as gross lending minus repayments – to large businesses was -£1.1 billion in February.

So the UK growth spurt does not seem to have inspired UK businesses to look for bank credit as a way of financing it. Let us hope it has found another source. I am doing my (little) bit with some peer to peer lending to smaller businesses and I will let you know how that develops over time.

This appears to be a ZIRLP or Zero Interest Rate Lending Policy for businesses by UK banks and by zero I mean official interest-rates which disconnected long ago from actual ones.

Someone is getting lower interest-rates

Savers will rue another month of lower interest-rates for them.

The effective rate paid on households’ outstanding time deposits decreased by 15bps to 2.21% in February and the rate for households’ new time deposits decreased by 3bps to 1.52%.

Over the credit crunch era the reduction in savings interest-rates must have taken a fair bit of demand out of the UK economy. This rarely gets the attention it deserves as it has been a factor in our struggle to recover.

(Im)Balance of Payments

As I mentioned on Friday the update on UK trade would be a shocker if it had not been sadly familiar. So much for those who have trumpeted “re-balancing” after the 2007-08 depreciation of the value of the pound as we observe this.

The United Kingdom’s (UK) current account deficit was £22.4 billion in Quarter 4 2013, down from a revised deficit of £22.8 billion in Quarter 3 2013. The deficit in Quarter 4 2013 equated to 5.4% of GDP at current market prices, down from 5.6% in Quarter 3 2013.

In 2013, the UK’s current account deficit was £71.1 billion.

You may note how we start with a “down” as we see that we are perhaps the victims of an up is the new down  news spinning operation. If we convert to percentages we get more of an idea about the problem.

In 2013, the current account deficit equated to 4.4% of GDP at current market prices, compared with 3.8% in 2012.

So as we observe that it is high and rising can we argue that it is an exception? Nope…

The UK has run a combined current and capital account deficit in every year since 1983 and every quarter since Quarter 1 2008.

Whilst trade flows are very inaccurately measured I think that a thirty year set of data is impossible to argue against! We seem to be heading for a burst of deja vu so we should cross our fingers for more of this.

The trade in services surplus was £21.1 billion in Quarter 4 2013, an increase of £1.4 billion from Quarter 3 2013. Exports were £1.0 billion higher than Quarter 3 2013 at £51.2 billion,


There is much about the numbers above which signal what has become a traditional pre-election boom for the UK. We have rising house prices and credit pushed by official policy and we have the “old familiar” of a balance of payments problem. Sadly lending to small businesses is nothing like as healthy and savers are facing very low interest rates. So the danger is that bust follows the boom after the election in a familiar pattern.

We are supposed to have guardians against this but the Monetary Policy Committee has been driving it and the Financial Policy Committee decided on what Sir Humphrey Appleby called “masterly inaction” last week as they sang along to Diana Ross.

Ah, if there’s a cure for this I don’t want it Don’t want it If there’s a remedy I’ll run from it, from it

Although some may consider this part of the statement to be the most relevant and indicative.

The Record of the Committee’s meeting will be published on 1 April.

This article is cross-posted from the website of Mindful Money, for which Shaun Richards is independent economist.

6 responses

  1. On Germany, and Spain etc. this would not be a problem if we actually had a properly functioning European state, of the kind Nick Clegg should have argued for against Farage, but can’t because he is left having to argue the case for British Capital’s interests.
    With a properly functioning European state, with a single set of taxes and benefits, as well as a single currency and debt management office, it would be possible to simply recirculate surpluses within the state, as well as directing investment to those areas where its needed rather than relying on the inefficient means of the market to attract investment only on the back of decimated populations and collapsed living standards.

  2. Agreeing with Jeremy, it basically comes down to the point made by Joan Robinson many years ago that there is a huge difference between a country that borrows to invest, and a country that borrows to consume!
    In the 19th century economists like James Mill and David Ricardo, denied the possibility of a generalised overproduction because they based themselves on Say’s Law that Supply creates its own demand. Marx demonstrated this was nonsense, because Say’s Law only applies under conditions of barter. If I sell my commodity X for £10 to A, there is no reason why I will spend this £10 buying commodity Y from A, so they may well be left with an unsold commodity with a value of £10, whilst I continue to hold £10 in money.

    In trying to justify their argument Mill and Ricardo etc. argued that the problem was not overproduction by Britain, but under-consumption, and therefore, under production to fund that consumption by China etc. If only China would produce more of the commodities that Britain wanted in exchange for the Opium and textiles we were dumping on their markets, then everything would be fine. In the meantime, we could force them to take our credit so as to be able to keep consuming these commodities, and keep British factories churning out the commodities. Sound familiar?

    That was all good then, until it wasn’t, and no matter how much credit was pumped out, there was still no market for the over produced commodities.

  3. Replying to Neil, I disagree with your general dismissal of the idea that current account deficits are never of no importance. The classic answer (which I do not disagree with) is, “it depends…”, for reasons e.g. summarised in this quote from Michael Pettis (http://www.economist.com/economics/by-invitation/guest-contributions/deficit-driven-excess-consumption-must-eventually-revers )
    “TRADE deficits, or more concretely current account deficits, have to be financed by net capital inflows, and it is really the cause of the deficit and the nature of the financing that determines whether or not persistent trade deficits are harmful. If a country is running a trade deficit mainly because domestic investment levels are very high, the high investment levels should generate enough growth in the economy that the costs of servicing the foreign capital inflow can easily be covered. In that case many years of trade deficits are unlikely to be a problem.

    If a country is running large and persistent trade deficits, however, because a surge in domestic credit has boosted consumption levels excessively and so reduced savings levels, then the resulting increase in debt is clearly unsustainable and will have eventually to be resolved by a reversal in the trade deficit. This is the problem countries like Spain are facing. What is often not recognised is that the credit-fueled consumer boom in Spain was actually caused as much by consumption-repressing policies in Germany as by domestic distortions, and so without a reversal in German polices (and surplus countries historically never accept their responsibility for having created trade distortions), the only way Spain can resolve the persistent trade deficits is via default, devaluation, or very high levels of unemployment for many years. This is a classic kind of “bad” persistent trade deficit.”

    So which kind of c/a deficit does the UK have? Not the good kind, so far. We are “trading” short-term consumer booms against sales of assets, with some positive FDI impact but also loss of control over our future as assets migrate to overseas ownership.

    Sustained imbalanced trade is dangerous, which is why the Bretton Woods system wanted to control surpluses as well as deficits. And why the Germany-Eurozone (surplus/deficit) country relationship is so fraught. Export-led nations have other political/economic options than to remain such over the long term.

    It also raises longer-term political issues about the nature of our society. The British establishment thinks it is fine to sell off any and all assets however strategic, as it has swallowed the ideology of the free market hook line and sinker – and this because the finance sector and the City of London control our economic and political life – to the detriment of the nation as a whole including longer term security and resilience. It seems to me no other larger economy acts in the way we do in this regard.

    Moreover, there is a growing need for states to be able to control capital flows in the teeth of absurd levels of short-term-oriented financialisation – which is becoming grudgingly agreed by IMF et al, at least in certain circumstances. Long-term large c/a deficits diminish our future policy discretion.

  4. The other interesting point is that according to the Land Registry, the average UK house price is £170,000 (based on selling prices). But, according to the estate agents and others who put out indexes based on asking prices the avergae house price is around £250,000 or more.
    A couple of years ago, The BBC had an interesting article on their website on this point. It demonstrates the chasm between asking prices and selling prices, and just how meaningless the asking price indices are. For one thing, estate agents put houses up for sale at ridiculous asking prices, which then go into the indices produced by people like Rightmove, but when the following month, the price is reduced, this reduced price is not reflected in the figures, because the indices are only indices of newly listed properties.

  5. “The exception is the North-East England where prices fell by 1.4% in February which meant that it also fell in annual terms. I would be interested to hear readers thoughts on why it is different?”
    The reality is that its not just the North-East. If you look at house prices as an income multiple against the actual local average incomes, you find that they are in just as much of a bubble in most places as in London. For example, here in Stoke the average wage is closer to £15,000 a year than the national average of £25,000. That means that with an average house price of £150,000 (less than the £170,000 average of the Land Registry) you have a price to income multiple of around 10 similar to London.

    That is why in reality, despite headline figures in the media about rising house prices, this only relates to the highly fictitious “Asking Prices” used by estate agents, building societies and others in their indices. The reality, is that in places like Stoke, actual selling prices have continued to fall for the last 4-5 years. I sold my house at the start of 2010 for £150,000. A couple of weeks ago I saw an identical house, in the same road sold for just £114,000.

    I now rent a very nice place in a very expensive village. In the 4 years I’ve been here four houses have been sold. The house next door but one to me was advertised at £550,000, and sold fairly quickly in 2010. The identical semi attached to it, was put up for sale in 2012 at £450,000, after several reductions, it eventually sold a couple of months ago for £340,000. Another house in the village was put up for sale at the same time at £500,000, and sold only this Christmas for £405,000. The third house was also originally advertised at £450,000 back in 2011, and sold in 2012, for £340,000.

    These are large detached houses with around an acre of land with them. Its not that they are unattractive houses. In fact, that kind of 25-30% reduction in selling price to asking price is common. There are quite a few houses nearby that were advertised for over a million pounds, and fell by these kinds of amount. Every day, we get e-mails from agents with lots of properties that have been reduced.

    What Help To Buy, does seem to be doing in an area like Stoke, is that its creating some demand for houses not quite at the lowest price levels. The cheapest houses are being bought up by speculators. Whenever I’ve been looking at such houses recently (I’m considering buying a cheap house in Britain as a bolthole, whilst buying a much better value house in Spain as my main residence), the agent always asks are you buying to live in, or as an investment? Yet, even many of these houses are being bought on mortgages. I was amazed in selling my cousin’s house, that all of the “investors” who showed an interest said they would need a mortgage rather than paying cash, even though it was only £50,000.

    The estate agent told me that with help to buy, people buying houses to live in were not longer showing an interest in terraced houses up to this kind of price, because with £5,000, they could now with Help To Buy, buy a fairly new semi for around £90,000 – £100,000.

    As global interest rates are rising, and as the three year business cycle is likely to slow activity again in the second half of this year, I suspect this is heading for serious trouble. I was thinking about the figures for people in serious debt. At around 9 million people, that accounts for about half of the most economically active part of the population. That can’t continue. When people say “this time its different” with the property market that’s what has been heard with every bubble, and doesn’t explain why then in 2008, prices dropped 20%, before the slashing of mortgage rates stemmed the flow.

  6. “nd we have the “old familiar” of a balance of payments problem.”
    Except that it’s not a problem, but for those who cling to old and outdated ideas and refuse to accept that they have the causality reversed.

    Everything is in perfect balance. For the imports to exist, the Sterling saving has to happen at the same time. Everybody is happy with what they have got. Fair exchange is no robbery.

    Sterling is at about the same place on the index as it was in the mid 1990s.

    It is time to start looking at this issue from the other side’s point of view. Export-led nations need somewhere to send their stuff. And there isn’t anywhere else.

    Yes we need to get our domestic resource back to work at maximum output, by ensuring they have jobs and something to do.

    But ranting about BoP problems is so 1970s and smacks of the same desperation as the Hyperinflationistas and Gold Bugs. Who were also wrong in their assessment of imminent disaster.

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