Friday, July 23, 2010

UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at:

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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