The Saturday Economist, UK Economics News and Updates including a review of UK GDP Q2 data.

1. The Saturday Economist johnashcroft.co.uk
GDP falls by 0.7% in second quarter Saturday, 28 July, 2012
Output fell by 0.7% in the OTHER NEWS
second quarter according Construction
to the preliminary estimate Construction output fell by
from the ONS. 10% compared to Q2 2011.
-------------------------------
Manufacturing
Consensus estimates were for a
Manufacturing output fell by
fall of 0.2% already a set back
3%
to The Chancellor’s policy for
growth. -------------------------------
Service Sector growth
A reduction in construction output Service sector growth
down 10% year on year plus a drop increased by just 0.7%
in manufacturing output of some ------------------------------
3% compounded the problem. Government spending -
the highest growth sector with
Rain and the Queen’s jubilee week output up by 1.3% year on
end take the blame. Euroland year.
also takes some flak but the real
problem is domestic demand. Construction output down by 10% --------------------------------
year on year. PLUS Where did the job
growth come from?
Is the Chancellor really in control?
Closing : FTSE : 5,627; 10 Year Gilts 1.54%, Oil Brent Crude $106.47; Gold $1,613; $ 1.575; € 1.278

2. The Saturday Economist johnashcroft.co.uk
GDP figures shock policy makers Saturday, 28 July, 2012
The prelimnary estimate for Service sector output was
GDP in the second quarter up by 0.7%. Distribution,
surprised all analysts. hotels, restaurants,
The consensus forecast was pubs, clubs, transport,
for a fall of 0.2% quarter on communication were pretty
quarter and year on year. flat.
The NIESR monthly GDP Bright spots in the gloom
estimate was for a slightly were business and financial
higher fall of 0.3%. services up by 0.8%.
Construction output was Government and other
down by almost 10% year services - the highest
on year. Manufacturing growth sector up by 1.3%.
output fell by 3%,
extractives (mining) fell Overall GDP fell by 0.8%
by 12%. Despite a surge compared to the second The promise of a classic “A classic recovery
in utilities growth of 5%, quarter of 2011. The trend recovery from the depths of
overall production (IOP) is heading in the wrong hits the skids as policy
2009 has been dashed by an
was down by 3.2%. direction. ill conceived domestic policy. founders”

3. The Saturday Economist johnashcroft.co.uk
So what happened to construction? Saturday, 28 July, 2012
Construction output fell by into the first quarter of 2013 by a significant
9.7% compared to the second unless activity increases shortfall in public
quarter of 2011. significantly. sector activity
including housing,
There has been a great deal It is worth bearing in mind infrastructure and
of scepticism surrounding the overall weighting of other investment
the data on the construction construction in GDP is just 68 projects ( down
sector, not least the strength / 1000, less than 7% of total 20%).
of the recovery in 2011 when output. In a recession every
growth appeared to be up by little helps including activity Private sector
over 12% in the third quarter in housing and infrastructure. investment in
of 2010. commercial and
One third of construction industrial property
Nevertheless, the latest activity is repair and is steady compared
data suggest output fell maintenance, the balance in to 2011.
in the second quarter by new work including housing,
10% year on year. This in infrastructure, commercial, The prospects for
effect means construction industrial and government the rest of the year
output has returned to the investment projects. and into the first
levels of recession in 2009. quarter of 2013 are
Furthermore, the 10% In the second quarter, the for the 10% drop to
shortfall is likely to persist drop in output is explained continue.

4. The Saturday Economist johnashcroft.co.uk
Does the GDP drop make sense? Saturday, 28 July, 2012
For many analysts, the Since the end of 2011, the
fall in GDP output does economy appears to have
not correlate with the slowed but the claimant
trends in employment and count does not reflect the
unemployment. slow down.
The claimaint count for Indeed the unemplpyment
example provides a very data is more consistent
good co-incident index of with an economy growing
growth and recession. at a modest rate of around
1%.
In 2009, the quarterly
change in unemployment So how do we explain
increased by over 250,000 the separation of the data
as GDP fell by over 6%. series? Some argue that
There are some who assume Either way, the GDP data
labour hoarding explains the separation reflects a lower does not look correct. But if
As the economy recovered in part the difference but level of productivity in the negative growth means more
in 2010 the claimant this is not reflected in the economy as a whole. Perhaps jobs in the new paradigm,
count began to fall before data since new jobs are explained by growth in the why worry about it over
the recovery petered out being created in the private self employed sector. much, wait for the inevitable
through 2011. sector. revisions to the information.

5. The Saturday Economist johnashcroft.co.uk
Where did the jobs come from? Saturday, 28 July, 2012
Over the last two years Wholesale, retail
approximately 800, 000 and distribution,
new jobs have been created accomodation,
in the private sector. hotels and the
information sector
The public sector has shed particularly strong.
jobs in administration and
education. Financial,
professional,
The construction sector sciences,
has also shed jobs with the healthcare, arts,
labour force down by 2%, and other services
a drop of 40,000. have also shown
growth.
Manufacturing
employment has also
Two thirds of the new jobs “Overall employment Is this evidence of re
have been employee jobs
continued to fall, in line growth has been in balancing, of course not.
the balance have been in
with long term trends.
self employment. the service sector”. Economic growth and
job creation is a function
So where have the new of domestic demand and
jobs come from? service sector growth.

6. The Saturday Economist johnashcroft.co.uk
What happened in the world this week Saturday, 28 July, 2012
US growth in the second Speaking at a conference Ten year bond rates hit
quarter up by 2.1% year in London, Mario Draghi 7.75% in Madrid prior
on year. said that the ECB would to the Draghi statement.
do “whatever it takes” News - the reality of a
to support the single bail out of the Spanish
currency. “Believe me, it economy could cost €385
will be enough,” he said billion. So what!
emphatically.
US Growth slows
Gross domestic product,
“The euro is like a
grew at a weak 1.5% bumblebee. This is
annual rate, the Commerce Euro hopes rally : a mystery of nature
Department said Friday -- a Mario Draghi - the because it shouldn’t
sharp slowing from the first President of the European
quarter’s 2% pace and the fly but it does” Mario
Central Bank triggered a
fourth quarter’s 4.1%. rally on global markets Draghi.
after hinting that it could
OK but as we overlay our intervene to quell soaring Just as well as Spain
preferred year on year borrowing costs in the entered the ring with the
rate growth chart, the US eurozone periphery. Matador’s collecting bowl.
recovery looks pretty solid.

7. The Saturday Economist johnashcroft.co.uk
Markets : FTSE 5,627 : DOW 13,076 : Nasdaq 2,950 : DAX 6,600 Saturday, 28 July, 2012
FTSE 5,627 £:$ 1.575
DJIA 13,076 £:€ 1.278
NASDAQ 2,950 $:€ 1.232
DAX 6,600
$:¥ 78.74
CAC 3,250
Base Rate 0.50%
Nikkei
10 yr UK 1.54%
Hang Seng 19,250
10 yr US 1.54%
10 yr Euro 1.43%
Brent Crude $ 106.47
Copper 343
WTI Crude $ 90.26
Corn 798
Gold $ 1.613.4
Wheat 898
Silver 5000 $ 2,743.1
Platinum $ 1,411.5

8. The Saturday Economist johnashcroft.co.uk
Growth Inflation Unemployment Government Borrowing
GDP in the second quarter Inflation CPI basis fell to Claimant count in June In the first four months to
fell by 0.8% year on year as 2.4% in June. Inflation RPI increased slightly by 6,000 to June, Government was up
the recovery of 2010 petered and RPIX fell to 2.8% from a level of just over 1.6 million by £4.5 billion. Borrowing
out in 2011. 3.1%. and a rate of 4.9%. is likely to exceed the levels
achieved in 2011/12.
Growth in Q1 fell by 02%. In Manufacturing price inflation The LFS count fell slightly
2011 UK growth was up by fell to 2.3% in June, latest (three months to May) to a
0.8% and 1.8% in 2010 . earnings up by 1.8% in May. level of 2.58 million. 8.1%

9. The Saturday Economist johnashcroft.co.uk
Indicator Period Latest Notes Source
Inflation CPI June 2.4% ONS
Inflation RPI June 2.8% .. ONS
Inflation RPIX June 2.8% .. ONS
Earnings May 1.8% ONS
Retail Sales volume June 1.6% ONS
Retail Sales value June 1.8% ONS
Unemployment May 2.58 LFS Million trailing 3 months ONS
Unemployment % May 8.1% LFS % trailing 3 month ONS
Claimant count June 1.604m Million ONS
PPIs output June 2.3% Manufacturing prices (output) ONS
PPIs input June -2.3% Manufacturing prices ( input) ONS
GDP growth Q2 2012 -0.8% year on year comparison ONS
Manufacturing May -1.7% year on year growth ONS

10. The Saturday Economist johnashcroft.co.uk
The Saturday Economist is a round up of the The publication of this document should not be
week’s economics news for the UK published construed as the giving of investment advice.
on the web site johnashcroft.co.uk.
Forecasting is subject to frequent revision
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download. of the Office for National Statistics which may,
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11. The Saturday Economist johnashcroft.co.uk