The Telegraph has reported that
Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.
In the context of that my claim that UK national income accounting is CRAp (which stands for completely rubbish approximations) looks to be wholly justified.
The revision appears to come from three reappraisals. One is of corporate profitability overseas. The second is of the nature of flows from overseas. And the third is of FDI where it is noted that:
Making matters worse, foreign direct investment (FDI) by companies is plummeting. It fell from a £120bn surplus in the first half 2016 to a £25bn deficit over the same period of this year.
The apparent resilience of FDI flows shortly after Brexit was an illusion: the spending that took place in late 2016 had already been committed earlier.
The Bank of New York Mellon, the world's biggest custodial institution with $31 tn (£23 tn) under purview, says its flow data shows a marked deterioration over recent weeks in purchases of sterling assets by “real money” players such as pension funds and sovereign wealth funds.
“The outflows from the UK began in mid-August,” said Simon Derrick, the bank's currency strategist, “the big buyers are disappearing”.
The first appropriate reaction is to say that this is logical: of course the UK should be suffering because of its plan to leave the EU: nothing else would make sense.
Second, the reaction is not to panic: this largely relates to corporate profits. The claim that this need impact the gilt market as the Telegraph claims need not be true: gilts are an option for a government and not a necessity, and so there need be no impact at all.
Third, the importance of investing in national statistics becomes ever more clear. I wish they would start with their absolutely appalling website. If people could find data it would be useful.
Fourth, then it is time to reappraise where the UK is. It's not pretty, at all. The need for a Brexit deal is overwhelming. But who knows if it is on the cards.
And then, start asking questions. Perhaps the most compelling is of the sectoral balances, because if the foreign sector is not supplying the support it was then the obvious question is who is substituting for them? This, right now, might be the biggest question of all. The foreign sector has been UK savers. If it isn't any more and the government position is correctly stated what is happening in the UK domestic market? That's not clear.
And that makes this half a story, at best. But it makes the budget and the Office for Budget Responsibility data that comes with it even more important than usual, especially when it is already apparent that Philip Hammond thinks himself boxed in, whether that is the case, or not.
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Don’t panic. Don’t panic. Hammond can ask the IMF for a loan. IMF says the condition of the loan is to cancel Brexit. Brexit is cancelled, loan is repaid – and some wonder whether it is all just a game 😉
We will never know, unless as you say, there is better data.
🙂
Game? or just a bad dream, Charles?
Am I looking forward to breakfast. 🙂
I like CRAp. Better than guesstimate.
But seeing the UK’s trade deficit hasn’t magically reduced in the last couple of years, what changes have foreign exporters made regarding their Sterling holdings?
There are only three things that they can do with it anyway:
1) Spend it on UK goods or assets – real or financial,
2) Pay off Sterling debt, or UK taxes, with it,
3) Exchange it for another currency with another party – who has the same three choices…
So is it option 2 that has increased, because I don’t see how you can just lose £490bn of Sterling otherwise? It’s not like the FTSE, or the UK property market, has collapsed (yet!).
I agree – and this is what is be using about this report
This whole thing seems to be remarkably unclear as you suggest. I tried reading the first Telegraph article that you had linked and ran into some sort of pseudo paywall half-way through. The 2nd one was all full of ludicrously ill-conceived patriotism and (as noted) has now been proven wrong.
According to one of the Telegraph’s quoted claims the suddenly missing billions are “equivalent to 25pc of GDP”. Really? One can only wonder how we got by without it and whether we would have noticed if no one had told us.
The Telegraph also seem to have an “its all good” attitude to Foreign Direct Investment that puzzles me. Does that “investment” add to capacity, does it represent an increase in foreign ownership of existing British assets or is it merely financial market flows of no lasting consequence? All of those things have very different implications. I think that I will simply accept your reassurance about “corporate profits”, forget about this and see what (if anything) comes of it later.
I think your point about if we had not been told would we know may well be the correct one
[…] Oops: ÂÅ490 billion has gone AWOL http://www.taxresearch.org.uk/Blog/2017/10/16/oops-490-billion-has-done-awol/ […]
These sort of figures leave me bemused and confused, but not surprised.
I have no confidence that our government is in touch with economic reality. In fact I suspect few, if any, of its members know what economic reality is.
Having thought a little more deeply about I have decided that half a trill one way or another is neither here nor there.
Semper in excretum est….etc. The depth is of little consequence once it gets above the nostrils.
[…] http://www.taxresearch.org.uk/Blog/2017/10/16/oops-490-billion-has-done-awol/ […]
The need for a Brexit deal is overwhelming… no. Not at all. The need for someone to say that Brexit is bloody madness and to call a halt – now that genuinely is overwhelming.
James, I have some sympathy with this line of reasoning.
How do we know this £490bn figure is correct? Might there be other missing billions – maybe we are in unknown unknowns territory.
As yet we don’t….
It seems a touch implausible to me
But worth questioning – which is why I drew attention to it
Who would have thought that the Tories – the party of ‘inward investment’ would have presided over a steep decline in it?
Not I.
I only hope that by continuing to do so, the case for people’s/green QE grows stronger.
But wow! I don’t think this country has ever looked so stupid as it does now.
Surely more than just half a story that the promised upside of significant post-referendum sterling devaluation (i.e., rush of foreign investors itching for bargains) has disappeared in a poof of smoke?
Just like just about every other claim those chumps make.
I reckon they could give Houdini a run for his money…
Houdini’s money may have been fake too.
The swiftness of the hand defeating the eye and all that….
PS I just love the ‘Poof’ of smoke.
I have an image of the wonderful Noel Coward with a very long cigarette holder. 🙂
Just imagine how much worse off Little England will now be once Scotland – as it inevitably will – departs with its assets and resources.
Orlando Quarmby,
(Now there’s a name to conjure with ! If it’s yours by right I’m jealous; and if you made it up I take my hat off to you for your creative imagination. I might have been tempted to try my hand at writing a novel if I’d been able to think of names for the characters.)
There is a vast amount of (possibly deliberate) obfuscation about the economic balance of benefit between Scotland and the rest of the UK. Both ‘sides’ claim they are getting ripped off and shoring up the other. The English seem to say this rather patronisingly, and the Scots tend to say it with rancour. Both sides are guessing at the figures as Richard has been at pains to point out.
An Independent Scotland should not have serious negative implications for the UK economy in it’s separate parts. If it does then it just underlines how badly it is being managed currently.
The elephant in this equation as I see it is not economic but political and relates entirely to the English nuclear deterrent. Scotland (albeit not unanimously) is prepared to do away with it and England isn’t, but ‘they’ rather like having it a long way from London. Just in case (?)
Financial considerations aside, I would anticipate considerable discontent arising in any area of England promised the economic privilege of hosting a nuclear arsenal.
I don’t see any other rational (fundamental) objections for separating the affairs of Scotland from the UK as a whole. It is a nonsense to imagine that there would suddenly be no trade across the border just as it is impossible to imagine that a non-EU member UK would cease to trade in Europe. For that sort of scenario to play out would represent the ultimate expression of ‘cutting off ones nose to spite the face’.
Panic? Indeed, no.
But the drop in overseas investment is cause for some alarm.
Some of that will be ‘hot money’ – property speculation, mostly, and if we regard the purchase of rents as a net deduction from the real economy, this draw-down is all too the good – but I know that some of this reversal represents cancelled investment and active disinvestment from the UK automotive industry.
Other sectors of the real economy will show the same effect, whether I bother to look up the numbers or not.
The possibility that this is real was why this was worth reporting
Indeed, and you are right to use the term ‘possibility’ because these flow-based estimates need to be treated with caution.
Nevertheless, the ratings agencies will treat this as real; so, too, will both the FX and Fixed-Income markets.
BMW’s recent choices are as real as it gets in economics; and the banks’ relocation plans haven’t shown up in the statistics yet, despite being visible from where I sit.
We are entering a period of sweeping change with a poor, and deteriorating, quality of official statistics; and we are steered by a political class with a very poor grasp of what the numbers mean, and a deteriorating willingness to ground their policies in reality.
Agreed
Shares you view on stats:
https://notayesmanseconomics.wordpress.com/2017/10/16/has-the-uk-just-lost-490-billion-as-claimed-in-the-daily-telegraph/
Surely it’s not just “a deal” that is required but one that would nullify the worst effects of a no-deal Brexit. Assuming we accept that Brexit is going to happen, what do you think the should be the key targets should be for the UK negotiators, Richard?
Or is the real story here really that statistics emanating from the ONS have such a huge “margin of error” that they are effectively useless at informing us of the current state of the UK economy? If it is true then it is very worrying because the ONS is one of the most important sources of research for organisations like the OBR, Centre for Policy Studies, Adam Smith Institute, the Bow Group etc. Can we believe anything that these organisations predict?
All statistics are wrong
How wrong they are matters
But more important still is what and what is not measured
And who decides that
But Richard, if what they DO measure/estimate is wrong by nearly half a trillion quid then “what and what is not measured” becomes a bit irrelevant.
For example, does the fact that Scotland’s “share” of the £490 billion is about £40 billion in any way undermine the GERS “prediction” that an independent Scotland would be about £13 billion as GERS is so reliant on ONS statistics?
I know this new “adjustment” and an assumed Scottish deficit are not directly related but when do we get to the point when we just say that none of this stuff is worth the paper it’s written on?
It certainly adds to the perception that what we’re witnessing is what I call completely rubbish approximations (Crap)
I, as a lay person, initially gasped in horror at the Telegraph headline “£490bn gone missing!! How?” After the expletives and general ranting died down, I began thinking rationally…. can this actually be true? surely not!… investigate: step 1 – tweet Richard > response “wait for more detail” step 2 – keep checking Richard’s blog > ah hah! read through blog (above) step 3 – research a bit more now I have a little understanding of the fact it is actually ‘lost’, it’s a re-estimate on pre-estimated data that is basically a guestimate…. Am I right? So, I searched and found this: https://notayesmanseconomics.wordpress.com/2017/10/16/has-the-uk-just-lost-490-billion-as-claimed-in-the-daily-telegraph/
1. Has this affected the BoE Asset Purchase Facility?
2.Comments would be most welcome, especially if they can clarify whether “money” has “gone” or not.
3. Is my opinion that the Telegraph is scaremongering, to try and make people think we should support a No Deal Brexit, cut and run, pay nothing (now there is nothing)?
Thank you.
It us curious that we have heard nothing more……
Just curious then…does this mean that the deficit as a percentage of GDP…something the Conservatives have been boasting about as proof of their ‘strong’ hand on the national finances has to be recalulated? So what is it now? As much as 2010? Higher? Lower? I am not a mathmatician…I know you are good with figures Mr Murphy. I suspect their boasting could now bite them on the behind!
The questions I asked reveal they do not K us the answer and as far as I can see soar they have not said
I am presuming this will not be apparent until we get new OBR forecasts
But if anyone has found an answer, please share
I haven’t found an answer exactly, but…..
I reckon since this money doesn’t in any real sense actually exist it doesn’t matter a toss.
I’m not going to lose sleep over it. And if mislaying it causes the government embarrassment because they’ve spent years persuading us it is real, but they are incapable of looking after it …well that’s fine with me.
Hoist by their own petard I reckon.