Confusion, conflict and contradictions….

Monday 1st August 2016

In this issue of Money Truths….

  • An unanticipated spurt of growth….
  • The unfathomable jigsaw puzzle….
  • The gloomy and the glum….
  • Reasons to be cheerful….
  • Sometimes we expect too much of information….

An unanticipated spurt of growth….

The really big news last week came on Wednesday when the Office for National Statistics reported that Britain’s Gross Domestic Product (GDP) had grown 0.6% during the second quarter of 2016 – the three month period up to June.

GDP is a measure of economic activity and represents the total value of goods and services produced and consumed during the period in question.

Analysts expressed surprise that the economy had grown as much as it had. Prior to last week’s announcement they’d been talking down expectations.

City of London economists – the real top-drawer & top-dollar prognosticators – had predicted Q2 growth of no more than 0.4%, in line with growth in the first quarter of the year.

The fact that these well-funded, well-resourced and well-paid seers into the future fell short with their clairvoyance is neither here nor there. Getting it wrong is what they do at least half of the time.

The important thing is that unanticipated spurt of growth. That’s good news, right? The economy is growing, right?

It certainly is. Not at the rate of China’s, for example. But it is not in negative territory either – like the economies of Greece or Brazil.

The patient might be pretty much flat on his back – like a drunk hit by a bus. But there is a pulse. There are vital signs. There is no need to rush out and order the coffin and the headstone just yet….

The unfathomable jigsaw puzzle….

But nothing is straightforward in the financial world. Nothing is simple.

Trying to make sense of it is like trying to put together a jigsaw puzzle when the picture on the front of the box changes every time you turn your back.

A lot of the time the pieces don’t seem to fit together at all. It’s as though some clown has mixed up a whole load of different puzzles, re-boxed them and sent them out into the world simply to confuse and confound.

Here’s a bit of blue sky. This bit looks like a fragment of the Earth as observed from outer space. This bit looks like it could be part of a tree. These bits fit together to reveal the wheel of a train. These other bits form the wing of a butterfly. And there are six corner pieces. What kind of a jigsaw puzzle is this?

You get the picture. Or not….

Last week’s financial news was a bit like one of those puzzles. It was hard to form a coherent picture….

The gloomy and the glum….

There were plenty of black clouds gathering overhead….

The Smith & Williamson Enterprise Index revealed that small and medium-sized businesses are not very optimistic about their prospects. Optimism levels fell 27% from Q1 to Q2. That’s a lot of lost optimism….

UK manufacturers are not feeling particularly chipper either. The Confederation of British Industry measures business optimism among manufacturers on a quarterly basis. Numbers released last week tell us optimism last quarter plummeted to levels not seen since January 2009 when the global financial crisis was in full swing….

The retailers are moping about too. Official figures released last Thursday tell us that British retail sales suffered their sharpest monthly fall in six months in June. Volumes in the five weeks to 2nd July dropped by 0.9 percent, the largest fall this year. And clothing stores reported the sharpest annual drop in quarterly sales in 25 years….

The bankers are gloomy. The British Bankers’ Association reported that UK mortgage approvals fell to a 15-month low in June and that business borrowing dropped for the first time 2016….

The mood amongst the builders is blackening. The Royal Institution of Chartered Surveyors warned that whilst construction workloads are increasing they are doing so at a reduced pace….

And news from the Trade Union Congress is enough to give everybody a long face. They say UK wages have dropped by over 10% in real terms since the 2007/08 economic downturn. Of the 34 countries in the Organization for Economic Cooperation and Development (OECD) only the Greeks have kept pace with the British decline….

With that last bit of news, is it any wonder that the British consumer is taking to his bed? The latest figures from YouGov and the Centre for Economics and Business Research say that UK consumer confidence has plummeted to its lowest level for three years….

GfK, the market research firm, go further. Their latest ‘confidence barometer’ reading says that consumer confidence is falling at its fastest rate in 25 years….

In the financial press last week it was like a lament for the dead. Misery was piled on misery. We could smell lilies. We could hear the women weeping….

Reasons to be cheerful?

But in amongst the low notes of the dirge the odd higher note could be picked out too. The financial journalists might have written their pieces wearing black. They might be preparing to bury the deceased. But it seems the deceased isn’t quite dead yet….

The GDP figures were a welcome surprise – like a shaft of bright and unexpected sunlight breaking through the storm clouds….

And the Office for National Statistics weighed in with the news that unemployment was at an 11-year-low with just 5% of the workforce sat at home watching Jeremy Kyle in their pyjamas….

Manufacturers might well be feeling gloomy but they had something to smile about too. Despite the prevailing mood it cannot be ignored that output actually increased over the second quarter. Total orders in the three months to July rose to the highest levels in a year and well above the historical average….

Car manufacturers were particularly cock-a-hoop. The Society of Motor Manufacturers and Traders reported that UK car makers enjoyed their 11th consecutive month of growth in June. Production grew 10.4%, the highest level for the month since 1998, and contributed to the industry’s best first half session for 16 years….

The Bank of England reports that in June lending to consumers expanded at the fastest pace in almost 11 years….

The mortgage lenders are happy enough. According to Halifax, the number of first time buyers increased by an estimated 10% in the first six months of 2016 compared with the same period in 2015….

So too home-owners. According to data from the Nationwide House Price Index UK house prices increased by 0.5% month on month in July….

Landlords are also clicking their heels (but not their tenants). The Office for National Statistics found that private rents grew by 2.4% across the UK in the 12 months leading up to June….

And Lloyds Bank – in direct opposition to other data released last week – suggest that business confidence in Britain is growing. The Lloyds’ Business Barometer shows a rise in both economic optimism and business prospects….

Sometimes we expect too much of information….

So how is the UK? Based on all this evidence, is the prognosis good, bad or ugly?

Who knows? Your guess is as good as mine.

Sometimes the mind boggles. We have all this ‘information’ but what do we really ‘know’?

Read the financial press day on day and what you find is that there is no consistent through line. Conflicting facts, figures and opinions fly from all directions – simultaneously.

You can read and watch it all and be none the wiser for the exercise – just more confused and less sure of anything than you were before you started.

And that’s assuming you can actually trust what you read in the first place…. that you’re getting the full story…. that it’s been reported in the appropriate context…. that it’s not been massaged, framed or ‘spun’ to serve the needs of some vested interest….

But that’s the nature of the beast. And it is consistent with the one thing that we know for sure in the world of finance and economics – that nobody really knows anything. Not for certain.

The facts are confused. They are complex. They are contradictory. Often in direct conflict with one another. And at any time the mainstream financial press only supplies a fleeting snapshot – a picture that changes again the next time the wind blows.

Perhaps there is no one through line. Perhaps the world and the economy is much too complex for a one-size fits all situation report.

At any one time there is negative and positive sentiment. There are ups and downs. There are bright spots and dark patches. There is ebb and flow. There are peaks and troughs. There is bull and bear. There are winners and losers.

Right now in the UK economy nobody knows for sure what the post-Brexit fallout is really going to consist of. There are complex issues to be figured out and complex situations to play out. So much is unknown and unpredictable….

In such a climate maybe confused and contradictory information and signals are exactly what we should expect.

Maybe sometimes we expect too much of information. We continually look to it to tell us what will be or what to do. We look at it as a tool of prediction or as a tool of remedy. Maybe really all information can do sometimes is tell us what the picture is right now.

Right now the confused information reflects a confused economy. Confusion reigns. No more and no less. We will only know more as time and events advance….

That’s a money truth….

I’ll be back with more next Monday.

All the best,

Dave Gibson

Dave Gibson

Money Truths