The Currency Wars are now besieging Switzerland as it imposes negative interest-rates

The world is an incongruous place right now and a clear example of this has been given to us by the central planners over the past 24 hours. It was only yesterday that I was discussing the machinations and activities of the Bank of Russia. Since then there has been an extraordinary rally in Russian assets ahead of the speech by President Putin which is just starting as I type this. For example 59 Roubles buy one US Dollar though by the time you read this it could be almost anywhere but how long can Russia keep this up? However the real incongruity has come from the central banks of the United States and Switzerland.

The US Federal Reserve

The statement last night contained something of a change.

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.

This was backed up by the way that the current phase of lower oil prices was treated and the emphasis is mine.

The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

At this point the message was looking surprisingly hawkish as if you really believe the oil price effect is temporary you might look through it and raise interest-rates. I found this odd when earlier in the day we had been told this.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 percent in November on a seasonally adjusted basis.

Whilst the Federal Reserve does not target this index there is a hint in the fall in the annual rate to 1.3% and of course if oil stays at current levels more is to come.

Then in her press conference Janet Yellen moved us away from the expectations the statement had created.

This new language does not represent a change in our policy intentions………..unlikely to begin the normalization progress for at least the next couple of meetings.

Accordingly I was left with the impression that the Federal Reserve wants people to think that it will raise US interest-rates in the middle of 2015 but wants to have pre-planned excuses ready should it not do so. We may find that interest-rate rises remain just over the horizon as time passes, especially if consumer inflation heads lower.

But let us move on remembering that the US Federal Reserve wants us to think it is planning to raise interest-rates in 2015.


Completely the opposite view has come this morning from the Swiss National Bank.

The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative

Negative interest will be charged as of 22 January 2015 until further notice.

Negative interest is charged only on the portion of the sight deposit account balance which exceeds a certain threshold.
The exemption threshold applies to each individual account holder and shall be at least CHF 10 million.

So if you wish to deposit larger sums with the SNB you will soon have to pay to do so. You may note how interest-rate cuts have a specific date for introduction whilst interest-rate rises are invariably just around the corner. In the press conference we were left in no doubt whether the SNB intended this to spread to the banking-sector or not?

H/T expects banks to pass on negative rates to big consumers

As King Theoden says in the Lord of the Rings

And so it begins….

The press conference also gave us hints that the measure could be strengthened in terms of the size of funds subject to negative interest-rates and the rate itself.

What has been the cause of this?

The SNB has revealed this morning that in recent times it has found itself having to intervene to reduce the upwards pressure on the Swiss Franc. For those unaware of the state of play the SNB put a cap on the level of the Swiss Franc against the Euro back in September 2011 which is referred too below.

The SNB reaffirms its commitment to the minimum exchange rate of CHF 1.20 per euro, and will continue to enforce it with the utmost determination.

It has promised “unlimited intervention” which makes me wonder how many Swiss Francs it has found itself selling recently? If it had only undertaken minor interventions why take the plunge into negative interest-rates?

 Against this background, we were obliged to ensure the minimum exchange rate of CHF 1.20 per euro by
intervening on the foreign exchange market

The statement was a little vague as to the cause but the press conference then told us what I am sure that many of you were expecting to read and the emphasis is mine.

Over the past few days, a number of factors have prompted increased demand for safe investments.

Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.

The number of factor seemed to have shrunk to just one! I had already been using Twitter to disseminate this message.

I think that we can safely assume from the actions of the that Rubles were pouring into Swiss Francs don’t you? .

Just a thought about timing!

January the 22nd 2015 is the date of the next European Central Bank policy meeting. An interesting day to choose don’t you think?!

How did we get here?

This has been a long road involving the carry trade and foreign currency mortgages in Eastern Europe in the vein of oh what a tangled web and all that. Just under four years ago I explained the state of play.

Switzerland has been struggling with these issues ever since as various countries in Eastern Europe and beyond look over its shoulder. Not only are those with foreign currency borrowings in Hungary,Poland and beyond justifiably nervous right now but taxpayers in places like Austria and Italy should be nervous about their banks which lent much of the money.

Added to this dish has come a side plate of Russian crisis.


This has been a very bad 24 hours for the central planners as crisis after crisis shows them up as inflexible monoliths just as flexibility is required. I believe that the hype from the US Federal Reserve about higher interest-rates was exposed extremely quickly by the imposition of negative interest-rates by the SNB. It is quite noticeable that up involves talk and down involves reality and action for interest-rates.

Also the pronunciations from central bankers about a “lower bound” for interest-rates are being exposed. The most extreme case of this has been Bank of England Governor Mark Carney who keeps repeating a mantra that 0.5% Base Rates are a lower bound. That looked silly as the ECB imposed a negative interest-rate and looks even sillier as the SNB has undercut it and gone to -0.25%.

Meanwhile back in the UK we see that disinflation and deflation do not have to come together if I may borrow the lyrics of John Lennon.

In November 2014, the quantity bought increased by 6.4% compared with November 2013. This was the highest year-on-year increase since May 2004 when it grew by 6.9%.

Average store prices fell by 2.0% in November 2014 compared with November 2013, this was the largest fall since August 2002 when prices also fell by 2.0%

I will be on Share Radio after the 1pm news to discuss these matters and anything else which pops up between now and then.

The economy of Russia is exhibiting some of the signs of hyperinflation

Just when ordinarily markets would begin shutting up shop for Christmas and the New Year, at least in the western world, another crisis has hit financial markets. A side effect of the falling oil price if we add in a soupcon of other issues has seen a financial crisis rage in Russia. One impact of this illustrates something which I have discussed since the beginning of this blog which is that so much of modern life depends on the ability to know or at least estimate a price for a good or service. In this instance it was not the consumer in difficulties but the produced as PC Advisor explains.

On Monday, the price of a 16GB iPhone 6 on the Russian Apple store was equivalent to $688 at the day’s exchange rate. On Tuesday, that same smartphone was going for the equivalent of just $574, a 17% decline for Apple.

Apple had already tried to deal with the falling ruble by boosting the price of the iPhone 6 by 25% last month, from 31,900 rubles to 39,900 rubles for the 16GB model.

In response to such volatility of price Apple closed its online store in Russia yesterday. It is not really something that we expect in the modern era is it? We have some to expect technology and its variance appliances to be on tap whenever we want them to be.

Russian shoppers

These have been acting logically if you think about it and for once some part of what is known as economics 101 is coming true.

According to press reports, Russian consumers Tuesday rushed to purchase high-ticket goods, particularly appliances, before the value of the ruble fell even further or prices were boosted to compensate, hoping to have something tangible in hand in case the currency collapsed.

Technology as an apparent or perceived store of value gives us plenty of food for thought. After all it says something about the perceived value of (Rouble) money in Russia that a relatively fast depreciating product is preferred to it does it not?

Indeed another sign of turmoil has been indicated by the Wall Street Journal.

’Lanta Bank, a midsize Moscow lender, said its foreign counterparts would be unable to send foreign currency Wednesday as aircraft that typically transport cash are full.

What got us into this mess?

It was only last Thursday that I pointed out that the Russian economy was facing a grim 2015 and since then plenty of things have changed sadly almost entirely for the worse. The oil price was then US $63.42 (Brent Crude) and the level of the Rouble was already at crisis levels.

This morning it has fallen to yet another new low of 57.7 Roubles to the US Dollar.

The Rouble continued to fall and on Monday night the Central Bank of Russia released an extraordinary statement which I would say was full of machismo if the Governor was not a woman.

From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.

You would not want a tracker mortgage there would you? If you did have one your mortgage rate has gone up by more (6.5%) than the vast majority pay in the UK in total. You may note that the statement mentions the R(o)uble depreciation risks first when previously we have been told that the interest-rate rises were to limit the march of inflation.

This reminded me of the crisis days at the Bank of England in 1992 when it announced interest-rate rises totalling 5% on a single day. However the latter part of 3% never actually happened as before the next day the UK had been forced out of the Exchange Rate Mechanism. There was a difference here as the Bank of Russia made the move.

Currency Turmoil

There was a brief half-life for the resultant rally in the Rouble which saw it push back up to 58 versus the US Dollar or to where it had been only a few days before. However after at best a couple of hours it started to fall again and my did it fall! Some found it significant as it moved into the 60s and passed the oil price (Brent Crude), other remarked on it passing Vladimir Putin’s age and then on “When I’m 64″ by the Beatles. Then as the downwards spiral continued the opportunity was provided by the Connells to sing along with this.

I was the one who let you know
I was your sorry ever after ’74-’75
Giving me more and I’ll defy
‘Cause you’re really only after ’74-’75

At one point within a two-minute period I saw people reporting that the exchange rate was at 72 and 80 respectively. That is what you call a fast market! Of course it is also a wide market and I would imagine that they had been asked which way they wanted to trade?!

So an extraordinary adrenalin rush took place combined with a lot of unease and confusion. Russians may well have been putting Genesis on their existing I-Pods but not new ones….

There’s too many men
Too many people
Making too many problems
And not much love to go round
Can’t you see
This is a land of confusion.

The braver ones might have associated this line with their leader.

Ooh Superman where are you now?

Meanwhile the Bank of Russia was presumably counting its losses on its currency intervention which had been just shy of US $2 billion on Monday alone. So far this month estimates of its total expenditure are of the order of US $10 billion.


The Bank of Russia or its later ego the Ministry of Finance has had another go at ramping the price of the Rouble. It started the day at around 70 to the US Dollar then retreated to 72 followed by a sharp rise to 63 but has now fallen back to 68. There are now various threats around a possible introduction of capital controls which seems a bit late don’t you think? Also there is a promised enquiry into exchange-rate manipulation. By the Bank of Russia? Oh hang on…


If we step back from the wild gyrations of this week which are remarkable considering it is only Wednesday there is much to ponder. If we just look at Russia itself we see that foreign goods right now do not have a price, or to be more specific only have one until existing supplies run out. The next price will be much higher. This will be true to a lesser extent for Russian goods too if they rely on imported goods and services. As time goes by even primarily domestic goods are being impacted more and more by inflation. No wonder Russian have mobbed their shops and presumably places like Apple’s online store whilst they could anyway!

Accordingly if we move to wider economic and financial aggregates where do we and they stand? It will be extraordinarily hard to have any idea of what inflation is in Russia and therefore economic output is virtually impossible to measure in such turmoil. Trade values will vary markedly depending on which currency you use to price/value them. In other words this week in Russia has seen many of the features of a hyperinflationary episode just as so many were telling us such an event was impossible in these times.

That is before we look at the wider implications of such events. If your business involves trade with Russia what can you do except insist on payment in another currency? At the moment many may not be so keen on being paid in oil. If we look beyond the economics there are clear dangers in prodding the Russian bear this way.

Even the inflation nation that is the UK is now seeing disinflation

A major theme of 2014 has been the declining rates of consumer and indeed all types of inflation. Although not quite everywhere as the Four Season’s song “Oh What a Night!” got an airing as the plummet of the Rouble saw the Bank of Russia raise interest-rates to 17% earlier. However the Rouble has reached all-time lows again today, after a rally with virtually no half-life, and is at 66 to the US Dollar as I type this meaning that inflation will cruise into double-digits in annual terms. However the majority of places are being influenced by oil and commodity prices which have fallen in some cases substantially.Even an inflation prone nation like the UK has seen consistent falls in its official rate of consumer inflation which was 2% in December 2013 but now is on its way to below 1%.

Oil and Commodity Prices

We have had a move this morning which will delight the headline writers as they can now say that the price of a barrel of Brent Crude Oil has fallen below US $60 per barrel. Indeed buyers seem to be facing a continuing “catch a falling piano” situation as it has fallen another 3% already today to US $59.27. That is now a fall of 46% since a year ago and the annual rate has been considerably higher as the fall began in June. Of course for headline writers this is a double whammy as the price of WTI (West Texas Intermediate) Crude Oil fell below the US $60 level last week.

Added to this commodity prices in general have fallen with the Commodity Research Bureau index dropping from over 504 in early May to 448 yesterday. An 11% decline seems quite minor when compared to the oil price fall but some individual constituents of the index such as Iron Ore prices have fallen heavily too. Not every constituent has of course fallen but I gather there is a seasonal gain in that the cost of a traditional Christmas dinner will this year be lower than last year. It makes a change!

Oh and according to JKempEnergy we have some intriguing prices now.

Brent crude now selling for ~40% less than bottled mineral water in Britain’s supermarkets (20% less excluding VAT):

UK Inflation Shocker

Well perhaps not for regular readers of this blog or for followers of my Twitter feed but today’s data release will put le chat avec les oiseaux in the media at least.

The Consumer Prices Index (CPI) grew by 1.0% in the year to November 2014, down from 1.3% in October.

Downwards moves like this are invariably presented as a “shock” even though the reasons were well-known.

In the year to November 2014, food prices fell by 1.7% and prices of motor fuels fell by 5.9%………. The food and motor fuels product groups in total reduced the CPI 12-month rate by approximately 0.4 percentage points……..Historically, these prices have been among the main causes of inflation,

This will be very welcome to UK consumers and some groups in particular of which more later. For now I have another example of genuine outright disinflation in the UK.

The CPI all goods index annual rate is -0.2%, down from 0.3% last month.

Indeed in an example of for once where up is indeed the new down we see that price levels in the UK have fallen.

The all items CPI is 128.2, down from 128.5 in October

The CPI all goods index is 121.3, down from 121.7 in October

The CPI all services index is 136.9, down from 137.2 in October.

It is the fall in the services price level which particularly catches the eye as it is the one place where inflation in overall terms currently exists in the UK economy.

What is coming down the UK inflation chain?

Well it would appear that the band can strike up “More,More,More” by Andrea True Connection.

The price of goods bought and sold by UK manufacturers, as estimated by the Producer Price Index, continued to fall in November 2014. This was due to falling prices for crude oil, petroleum and food products.

Indeed the heavy hitter in this area is shown below.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 8.8% in the year to November, compared with a fall of 8.4% in the year to October.

So there remains downwards pressure on future UK consumer inflation and of course we can add to that the further falls in the oil price which have happened since these numbers were compiled. The oil price in essence fell towards US $70 (Brent Crude) in November. Please do not misunderstand me I do not expect negative inflation of 8.8%! Merely that this sector of our economy has and indeed still is putting a firm brake on any inflation momentum.

What is the impact of this?

If if I may channel some more lyrics from the song I quoted then my answer is that yes I do.

How do you like it?
How do you like it?
How do you like it?

This has been reinforced by the new research by the Office for National Statistics on the impact of inflation on different income groups. Take a look at this bit.

On our preferred measure, among the lowest-spending households experienced average annual inflation of 3.3% between 2003 and 2013, compared with 2.3% for among the highest spending households.

These differences compound over this period, and consequently the prices of products purchased by the former group have risen by 45.5%, compared with just 31.2% for the latter.

So not only do we see that income equality is on the march in these times we see that this is exacerbated by inflation inequality. For once we are seeing trends which will help with the inflation inequality as the price of essentials like food and energy declines. This is not something which brings central bankers any credit as they of course prefer to ignore such matters by concentrating on core measures of inflation which exclude this.

What about house prices?

Even the official numbers are now showing signs that a top is in place.

UK house prices increased by 10.4% in the year to October 2014, down from 12.1% in the year to September 2014.

This can be added to by the fact that they do not seem to have yet realised that prices in London have topped and are now falling.

House prices continue to increase strongly across the UK, with prices in London again showing the highest growth.

Sadly first-time buyers are still being heavily punished.

In October 2014, prices paid by first-time buyers were 12.0% higher on average than in October 2013.

How does this appear in the inflation numbers?

It does not in the headline number and even the version it was supposed to be in called CPIH was nobbled by the UK establishment before it began.

The OOH component annual rate is 1.0%, unchanged from last month.

I see that this national disgrace seems to have regained its national statistics status which is another in a long sequence of embarrassments. However the Eurostat cavalry has finally arrived and it uses house prices. When I rang up to ask about it I had been the only caller! It had UK housing costs rising at an annual rate of 4.07% in the third quarter of this year with the dwellings section rising by 5.02%. Much better! I imagine that is why it has been released to what might be called the sound of silence.


On a lighter note I decided to offer the Bank of England some help earlier today on Twitter.

Dear Bank of England If Mark Carney does not have a fountain pen I have one that he can borrow!

He only just escaped having to write a letter explaining why official inflation had fallen to below 1% today. As last year December saw price rises of 0.4% on a monthly basis we can see that the heat is on and as we look forwards a ready supply of ink should be kept available. Oh and a space in the diary each month to write the letter. Maybe January will provide a break as prices fell considerably last year.

I have avoided the deflation word as the UK economy continues to expand and it was nice to see Mark Carney confirm the impact of the oil price in his press conference earlier. From the Guardian Business Live.

Oil is still a net positive development, Carney replies.

The 40% plus drop in the oil price will flow quite quickly to consumers, it will boost disposable income.

So deflation will have to wait if it comes at all.


The rate of inflation depends on how you measure it. I would just like to remind everyone that our perception of it would be different if we had remained with the Retail Price Index.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.0%, down from 2.4% last month.

What is the state of play regarding Zero Hours Contracts in the UK?

This morning has begun with a rather unseasonal message as the Trades Union Congress (TUC) has published some research on wages and conditions for those who are on Zero Hours Contracts in the UK. This is an area which has been pretty much  ignored by our official statisticians until recently in spite of the fact that the existence of such contracts stretches back at least to the beginnings of this century. So let us first examine the official data.

What is a Zero Hours Contract?

The phrase gets bandied about fairly regularly in the media so let me present you with the official definition.

where a person is not contracted to work a set number of hours, and is only paid for the number of hours that they actually work

How many people are on Zero Hours Contracts?

Back in August the Office for National Statistics used its Labour Market Survey for the spring of this year. First they asked workers if they felt they were subject to a Zero Hours Contract.

The latest Labour Force Survey (LFS) estimate of the number of people in employment on zero hours
contracts is 622,000 for the period April to June 2014.

A substantial number but we were reminded that even a survey of this size (100,000) has a variance for error.

For the April to June 2014 figure, it is estimated that the true figure is likely to lie between 558,000 and 686,000.

If we look at the analysis then some matters stand out from the numbers. For example women are disproportionately affected as are younger people.

37% of people on zero-hours contracts are aged 16 to 24, compared with 12% for those employed who are not on zero-hours contracts.

Also part-time workers are disproportionately affected.

64% of people on zero-hours contracts reported that they worked part time, compared with just over a quarter (27%) of those employed who are not on zero-hours contracts.

Also one particular sector contains many Zero Hours Contracts.

Accommodation ; Food Services or Health ; Social Work.

The effect on what is considered to be a normal working week is as follows.

The average actual weekly hours worked by people in employment who report being on a zero hours
contract is 22 hours compared with 32 hours for all workers. The average usual weekly hours is higher at 24 hours (37 hours for all workers).

However even such relatively thorough analysis was questioned ironically from another part of the same Labour Force Survey.

For the ONS business survey, there were 1.4 million employee contracts that did not guarantee a minimum number of hours, which provided work in the survey reference period.

So more than double. Ouch! We can erase a little of the difference by considering that some workers will have more than one Zero Hours Contract but a large gap remains. Also the lower employee number is only for those who have a Zero Hours Contract in their main job.

The TUC Research

The TUC seems to have no doubts about the differences between the two methods of calculating the number of people on Zero Hours Contracts.

In April 2014 ONS published new research which estimated that there are at least 1.4 m zero-hours contracts in use in the UK.

At least? Rather oddly it then mentions the 558,000 number which last time I checked is not at least 1.4 million!

However the main thrust of the research is on pay and conditions. It finds a similar state of play in terms of occupations where Zero Hours Contracts are widespread to the official data.

Skills for Care, the workforce development body for adult social care in England, estimates that 307,000 adult social care workers in England were employed on zero-hours contracts in May 2013, representing at least one in five of all workers in the sector.

The numbers in terms of hourly pay show quite a drop as we move from permanent work, to temporary work and then to Zero Hours.

Average gross hourly pay for employees is £13.30 for permanent employees, £11.28 for temporary workers and £8.46 for zero-hours contract workers.

So there is quite a gap on hourly rates which gets worse if we look at weekly wages due to the fact that those on permanent and even temporary contracts work more hours.

Average gross weekly pay for employees on permanent contracts is £476.26 compared with £296.06 for temporary workers.

This compares with £188.19 per week for those on Zero Hours Contracts according to the TUC. Quite some gap isn’t it?

What about other work benefits?

This is an area where those on Zero Hours Contracts are likely to miss out too. By this I mean primarily pensions and holiday and sick-pay although of course some employers provide other benefits as well.

Of course for some on Zero Hours Contracts there are what we might label as negative benefits. What I mean by this is that uncertain work hours and pay do not go well with the certainty of most people’s bills for necessities and the basics of life.

Misery loves company

This was on my mind as I noted this release on inflation trends earlier.

The rate of inflation experienced by lower-spending households has averaged 3.3% per year over this period, compared with 2.3% per year for the higher-spending households.

So even the official data appears to be noticing that falls in real wages at the bottom end of the wage spectrum have been more than they have previously told us. I will cover the full details tomorrow as we have the monthly inflation report but I would make each member of the Bank of England sign that report under a statement which says that they have read it and understand the implications.


There is much to consider about Zero Hours Contracts and the pay and conditions that they bring. Firstly we need to note that they tend to be in lower paying occupations so that we need to apply something of a filter to the differences above. What I mean by this is that in the official data the median weekly wage for those in the caring,leisure and service sector was £335 per week compared to £518 for the whole economy. So some of the gap discussed by the TUC is down to the sector in which Zero Hours Contracts are most prevalent.

But there is a clear gap even allowing for this and to the question what do we do about it we have a clear issue? The world is changing and there is severe pressure on employment conditions which the UK has mostly taken in the wages area since the credit crunch began but France for example, as I discussed on Thursday has taken it in unemployment. Neither is especially pretty or welcome are they? What troubles me is the fact that we have one group who seem to receive more workers rights as time goes by and one group which seems to barely have any. We could do with a rethink and some sharing as it is a horrible image of one group in effect preying on the other to some extent which comes to mind. If you think of my theme of the UK’s propensity to institutionalised inflation and the impact of this on our poorer citizens you will get my point. I am also reminded of the breakdown of the recent ASHE (Annual Survey of Hours and Earnings?) survey where for 70% the credit crunch had not changed things much but 30% had been badly affected. In the end it all comes down to what sort of society we want. We are increasingly unwilling to punish those in authority but sadly also turn our eyes away from the fact that the price is often paid by those least able to afford it.

Russia and its economy are facing a grim 2015

The latter part of 2014 has seen a major change in the economic landscape. The oil price which was previously connected by a Star Trek style tractor beam to the US $108 level for a barrel of Brent Crude Oil turned south and has undergone quite a fall. This has been embarassing to say the least for those pundits who were signing along to this from Yazz.

The only way is up baby

So far this morning the price has fallen again and it is at US $63.42 as I type this piece. Which leaves the price some 42% lower than a year ago and in fact as the fall has taken place since late June the pace of the move has been astounding. I used to work with a colleague who used bowl theory for this sort of fall where the fall accelerates until the chart breaks the shape of a bowl which is then followed by a short-covering rally which is invariably sharp and short.

That style of forecast is for the future but for the present the economic world mostly benefits from this change via lower prices and a reflationary impact. This is of course not true for the oil producers and today I wish to look at the economic turmoil that is being inflicted on Russia by this.

The Rouble

It was only on the second of this month that I looked at the state of play and observed that it now took 51.7 Roubles to buy a single US Dollar. That was already quite a change on the 34 it took only last summer. This morning it has fallen to yet another new low of 57.7 Roubles to the US Dollar. So whilst its fall has coincided with the oil price fall the scale of the fall has been even faster. For people holding Roubles there has only been one song playing on the radio and it is from Aloe Blacc.

I need a dollar dollar, a dollar is what I need
hey hey
Well I need a dollar dollar, a dollar is what I need
Well I don’t know if I’m walking on solid ground
Cause everything around me is falling down

As a first move as the Rouble has fallen faster than the oil price it will appear that Russia is better off. In terms of Roubles per barrel of oil produced that is so but that is only a brief step one in the situation. The catch comes when Russians try to buy anything from abroad as in Rouble terms the prices will have shot higher and then as time passes more and more of this will feed into domestic prices in Russia. So the money illusion will fairly swiftly turn into a much grimmer reality.

What about inflation?

Here is something which is heading in the opposite direction to the disinflationary mantra of these times. From the Bank of Russia yesterday.

In November — early December, inflation continued to accelerate. According to the estimates as of the 8 of December, annual consumer prices growth rate was equal to 9.4%. Core inflation rose to 8.9% in November 2014.

Amid accelerated consumer prices growth, households’ and businesses’ inflation expectations continued to surge imposing additional pressure on prices. According to the Bank of Russia estimates, end of the year inflation will be around 10%.

The Bank of Russia believes that around half of the present rate of inflation is due to the current extraordinary situation including the Rouble fall and the restrictions on some imports. This compares to an inflation target of 4% although you will not be surprised to read that the date the Bank of Russia expects to achieve this is receeding fast into the distance.


Regular readers will be aware that the Bank of Russia has established a policy where the interest-rate needs to be above the consumer inflation rate. Accordingly it responded yesterday to the situation.

On 11 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia to 10.5 percent per annum.

So we see that it is not only inflation which is out of kilter with the economic world but interest-rates too. Of course the two situations do tend to arrive as a job lot and the interest-rate situation extends up the yield or maturity curve. The ten-year government bond yield has risen to 12.67% which does look really out of place in these times. That is reinforced by the fact that it is well above the 8.71% of Greece which is in a new crisis and quite how one compares it to the new price highs and yield lows of Germany today is something of an issue to say the least. More than 12% higher per year in terms of yield is quite a gap.

You can argue as to whether the real cause of the latest interest-rate hike was the inflation situation or the currency situation but of course it does not matter greatly right now as they are progressing hand in glove.

What about a credit crunch?

Well according to the Bank of Russia one is on its way.

According to the estimates as of the 1 of December 2014, annual money supply (M2) growth rate decreased to 4.8% from 14.6% a year earlier………. Given the decision made today and time lags of the influence of the interest rate decisions made by the Bank of Russia earlier, on the economy, this process will continue.

Looking at numbers such as those makes me think “and the rest” as I read this part of its statement.

During the next three-year period, economic growth will be lower than previously projected in the baseline scenario due to persistently lower oil prices.

Adding to the credit crunch will be the issue of the foreign currency denominated debt which I discussed on the second of this month.

According to the central bank, banks and other companies have $614bn in external debt, with $31bn of it due for redemption in December and another $98bn before the end of 2015.

We wait to see what Russia will do to protect its banks from such dangers and of course how the west will decide to play this. After all bank losses are usually socialised and passed onto the taxpayer these days.


The last few weeks have seen various downgrades to expectations for economic growth in Russia in 2015. The official view is that we will see a mild recession but reality is looking a lot grimmer than that. With some much of Russia’s economic output being oil and gas based there are obvious issues in a much lower oil price. Added to this is the fact that any  positive response to the Rouble fall by Russia’s manufacturers and other businesses is restricted by their relative size in the economy and the impact of economic sanctions. Accordingly we can not expect much from them. In a way the current position here is symbolised by the news that Google plans to pull out of Russia although I am sure that it is not only economics that is behind this move.

Russia can respond by intervening to support its currency as it has done this morning but that only provides a short-term rally and often does not survive that day. More interesting is the way that it is trying to arrange non-western trade deals and arrangements. From Power Engineering.

Russia and India have agreed to jointly build at least 10 new Indian nuclear reactors by 2035.

At a press briefing on Thursday, Indian prime minister Narendra Modi and Russian president Vladimir Putin (pictured) announced that their nations aim to strengthen what Putin called a “privileged strategic partnership”.

Oh and as to the behaviour of the Rouble well these is this from Paul Simon.

I’m afraid that I will disappear
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

How near to deflation and disinflation is the economy of France?

One of the themes of this blog for a while now is that the economy of France is struggling and that the country is in danger of a relapse. The post credit crunch recovery that France saw was strong and far exceeded the performance of the UK but then like it was circling the “supermassive black hole” sung about by the band Muse the economy got sucked back downwards again. The annual growth rates of 1.7% in 2010 and 2% in 2011 found themselves replaced by the 0% of 2012 and the 0.2% of 2013 as the Euro crisis added to the credit crunch impact.

The latest GDP (Gross Domestic Product) numbers were a little better.

In Q3 2014, GDP in volume terms* increased by 0.3%, after a slight decline in Q2 (–0.1%).

However so far they have gone 0%,-0.1% and now 0.3% in 2014 which is weak at best and the fastest growing component was this.

General government expenditure increased by 0.8% in the last quarter (after +0.5%).

How that fits in with the official government mantra of more austerity is anybody’s guess!

Employment and Unemployment

This has been a running sore for both the French economy and the French people as unlike its neighbour across La Manche the unemployment rate has remained persistently high. Last week brought more bad news on this front.

In Q3 2014, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.4%, after 10.1% in Q2 2014. In metropolitan France only, with 2.8 million people, 9.9% of the active population was unemployed. The unemployment rate increased by 0.2 percentage points q-o-q in metropolitan France, and returned back to its Q3 2013 level.

We also got bad news if we widen our employment definition to include for example those forced to work fewer hours or underemployment.

In Q3 2014, 6.5% of the persons employed were underemployed, increasing by 0.3 percentage points.

Slack work stood at 0.5% of the persons employed. It rose by 0.2 percentage points over the quarter.

All in all a pretty grim picture but we know that this is essentially a backwards looking measure and that a more forwards looking measure is to look at employment numbers. Yesterday the official data told us this.

In Q3 2014, payroll employment in principally market sectors decreased sharply by 0.3% q-o-q (-55,200 jobs), after a slight increase in the previous quarter. Excluding temporary work, employment dropped in Q3 2014 (-33,400 jobs). Services collapsed this quarter (-0.3% after +0.3%).

The unemployment data had hinted at employment falls and as you can see this is what took place in the third quarter of 2014. This is particularly weak when we consider that there it experienced what was a better rate of economic growth. However we note that we may be seeing the gap between the private and public-sectors again as this report is for “principally market sectors”. Oh and I do not know about you but I imagine a French bureaucrat be instructed to write “I must not use the word collapse” a thousand times in the manner of Bart Simpson.

What about inflation?

In the past commentators used to construct what was called a Misery Index which added the rates of unemployment and inflation together. That has fallen into disuse mostly because a u-turn has been performed and apparently high and low inflation is bad for us! Poor Goldilocks would be wondering at this point if her porridge will ever be the right temperature again. It is in the light of this that we advance on this morning’s data release.

In November 2014, the Consumer Prices Index (CPI) decreased by 0.2% after it stayed steady during the previous month. Seasonally adjusted, it went down by 0.1% in November 2014. Year-on-year, the CPI grew by 0.3%, down from 0.5% in October 2014.

A major factor in this was the energy and petroleum sector as you might expect. Energy prices fell by 0.6% on a monthly basis and petroleum prices fell by 2.7%. We know that since then the oil price has been signing along to Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’

I keep on

Number Crunching

The latest ECB (European Central Bank) monthly report has published its estimates of how falling oil prices affect inflation in the Euro area. As you might imagine I crunched the numbers and they are an initial effect downwards of 1.4% on consumer prices followed by a secondary effect of 0.7%. This is comparing today with a year ago and is the total fall so some of the move is already in the numbers but a reasonable amount is yet to come.

There are issues with such numbers as a spot measure may not apply to a larger fall for example so please take them as a broad conceptual brush.

But if we return to France we see that consumer inflation rate looks set to go lower and at current oil prices could easily see some negative prints. However on the official Euro area measure of HICP there is a little more room to breathe as the annual rate is 0.4%.

Is this deflation?

The media have latched onto one of the numbers released this morning as evidence of this.

In November 2014, the core inflation indicator (ISJ) declined by 0.1% compared with October 2014 and by 0.2% compared with November 2013. It is the first time that the core inflation is negative since this indicator has been measured (computed from 1990).


The fact that this is the first time this series (from 1990) has gone negative is certainly eye-catching but we can do better than scanning every possible number and then screaming deflation on any negative print.

True deflation involves both falling aggregate demand and falling prices. If we look at the labour market figures quoted earlier then they are suggesting falling private-sector demand at least. We know that we are also near falling prices. So as we mull the phrase “even a blind squirrel occasionally finds a nut” we see that this time they may be onto something.

If we move to output then even the serial optimists at the Bank of France are predicting a near miss.

GDP is expected to increase by 0,1 % in the fourth quarter of 2014 (second estimate, unchanged).


What about production?

As you can see it turned downwards in October.

Manufacturing output of the last three months diminished slightly compared to the same months of previous year (–0.3% y-o-y). Industrial output decreased as well (–0.6% y-o-y).


That was after a more hopeful September.

The business surveys

The essential detail is to be found below.

The latest PMI data show a deepening downturn in
the French service sector during November. With
manufacturing also continuing to struggle, the private
sector looks set to act as a drag on GDP during the
fourth quarter.



The picture in terms of domestic data looks unremittedly gloomy as we see that if we use labour market and consumer inflation data then France looks to be tottering on the edge of a deflationary phase. The business surveys offer little hope.

Against this there is the reflationary impact of the falling oil price on France. As France imports an estimated 1.7 million barrels of oil a day (US EIA) then it will benefit substantially from the falling oil price and similar if smaller gains will be made via gas imports. So the boost to the economy as we move forwards through 2015 should help to pull France out of any deflationary spiral but we are uncertain of the timing. How much France will be affected by the fact that its large nuclear and green energy production will be comparatively over-priced is hard to say.

Monetary policy is theoretically expansionary in Europe but we have seen before that central banking activity does not reach the real economy that often. In the spirit of that then my view of today’s 130 billion Euro TLTRO (Targeted Long-Term Refinancing Operation) was given some time ago by Newt in the film Aliens.

It won’t make any difference

The UK trade and current account deficits continue to disappoint

A long-term feature of the UK economy has been its struggles with the issue of trade. It is not that the UK lacks volume in its trade as we are a trading nation with the stereotype that we depend on the seas to carry the trade still being true. However for a very long time we have had both a persistent trade deficit and current account deficit. If we look back we see that the UK economy has had what might be called two lost decades in this area as we have had a current account deficit since 1987 every year except for 1997 which is revised above and below zero regularly and is currently a small positive.

We are a trading nation

If we use what is called the Pink Book for UK trade statistics we are provided with both the enormous size of trade flows in and out of the UK but also the problem which is our propensity to import. In 2013 we put on a large export performance where we exported some £306.8 billion worth of goods. This makes us an exporting nation but when we note that our economy was expanding then but exports were only a smidgeon above that for 2012 and below that for 2011’s £309.2 billion we advance on the import numbers with some trepidation.

It turns out that we were right to do so as our recent phase of economic growth has seen our import volumes rise from £405.7 billion in 2011 to £419.4 billion in 2013. With exports lower and imports higher then we have a double whammy effect on our trade deficit which sees the £96.5 billion of 2011 rise to £112.6 billion in 2013. If you think of that as an outflow of cash from the UK then you see several things. Firstly the scale of the problem for us in the UK but also that in trade terms we are good global citizens as we provide plenty of demand for the goods of other countries.

What about services?

These are the bright spot of the UK trade picture as we are strong exporters in this area and we have been seeing growth in them too. For example we exported some £190.3 billion in 2011 but a much larger £204.5 billion in 2013. Imports of services rose too but more slowly in overall terms meaning that our services surplus rose from £72.7 billion in 2011 to £78.1 billion in 2013. Hooray!

The nagging worry in the services area is how well these numbers are collected and calculated. Let me give you an example from the series for our financial sector which only fell by 4.2% in export terms as 2007 moved to 2008 and has grown every year since. As it was the sector hardest hit it is hard to believe that the impact was so small. Also after recently reviewing the speech about declining world banking flows by Kristin Forbes of the Bank of England can we say with any great confidence that we believe our official figures that we export more financial services now than we did pre credit crunch? To do that we have to believe that our accident prone banks have put in a stunning performance and is against the trend of a piece of news a friend sent me earlier today.

RBS has decided to exit the Japanese fixed-income business, slashing 200 jobs, and surrendering its primary bond dealership.

We get a lot more detail on trade flows than we do on services flows. The services numbers for 2013 include some £50 billion of exports for “other businesses” which could not be more vague. If it was in the trade section it would be analysed for both composition and geographical nature.

The Current Account

At this point we have a total deficit of £32.1 billion in 2013 but the numbers do not stop there. Our government sends money abroad including the rather topic issue of payments to the European Union where the UK is a net contributor. Oh how we wish we paid on net trade flows! If we add in aid flows and the suchlike we see that around £23 billion was added by our own government.

The net area is the income account which if we exclude the government influence provided the final push which left our current account deficit at £72.4 billion. Sadly our income account (which represents what we receive from oversea investments less what foreigners receive from UK investments) has been deteriorating too in recent years. This means that if we put everything together we had a current account deficit of 4.2% of our GDP (Gross Domestic Product) in 2013. It was 1.7% in 2011 and 3.7% in 2012.

Accordingly we see that the UK’s current account was worsening before the current boom phase and that the boom has added to this. It is hard to argue with Taylor Swift’s summary of the situation.

Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

Even the UK political establishment is aware of this

This has been such a long lasting problem that our government has a plan. This is from the Financial Times last December.

Lord Livingston said the government must “change the pace” of export growth and push more medium-sized companies into overseas markets if it is to have any hope of hitting its target of doubling exports to £1tn by 2020.

Sadly that looks like something that would be advised by the apochryphal civil servant Sir Humphrey Appleby of Yes Minister fame. Quote a large number a fair distance into the future as by then you will not be in that job/role!

Today’s data

This morning’s data release is pretty much “same as it ever was” to quote Talking Heads with a few nuances.

In the three months ending October 2014, the trade in goods deficit narrowed by £1.3 billion to £30.3 billion. Exports decreased by £0.6 billion to £71.7 billion. Imports decreased by £1.9 billion to £102.0 billion.

This looks good news until we apply some thought to it. If we multiply it by four then we get a bigger deficit than last years. I also note that exports have fallen. It is also rather odd to see imports supposedly falling whilst we are booming and many of our trading partners are not. Perhaps the statistical bulletin has a sense of humour when it puts two thirds of this down to erratic items!

There is some cheer to be found from the services sector.

The surplus on trade in services for October 2014 was estimated at £7.6 billion, a fall of £0.1 billion from £7.7 billion in September 2014. Export and import levels both increased by £0.1 billion to £17.7 billion and £10.1 billion respectively.

I do realise that this shows a monthly fall but the bigger picture show a rise from not so long ago when we were told the monthly surplus was £6.5 billion and then £7 billion.

Also the disinflation we so often discuss seems entrenched in the UK trade sector.

In the three months ending October 2014, when compared with the previous three months, export prices decreased by 1.2% and import prices decreased by 0.8%. Excluding the oil price effect, export prices decreased by 0.1% and import prices increased by 0.4%.

Also we are much better Europeans that we ever get credit for.

In the three months ending October 2014, the deficit on trade in goods with EU countries narrowed by £0.2 billion to £18.9 billion.


There are many economists these days who argue that trade and current account deficits do not matter. I often wonder if they are the same group who told us that the imbalances which built up pre credit crunch did not matter! Many of the same crew seem to have returned to media prominence as if it never happened. On the other side of the coin the obsession with trade that financial markets had in the early part of my career was overdone if nothing else because the numbers they were reacting too were wrong and were often revised substantially.

To my mind there is a middle ground where a problem can build and build and then explode and that is the danger with the UK’s situation. After all we cannot provide cash to the rest of the world as Buzz Lightyear put it.

Too Infinity! And beyond!

Some argue that in a world of floating exchange rates the issue is non-existent. As the value of the pound has headed downwards over time then there is a cost which in theoretical terms would involve it going “Down,down” as Status Quo put it, into the future. But we know from the 2007/08 depreciation, where our trade weighted currency fell from 103.7 to aound 80 in subsequent years, that this was far from a magic wand, otherwise we would not be where we are now.

Should we be able to fix it then we would be in a situation summarised by Ariana Grande earlier this year.

One less problem without ya!