Japan gas now seen three quarters of either contraction or no economic growth

Today is another example where we need to look East as this was released by the Cabinet Office earlier.

Gross domestic product contracted at an annualized pace of 2% in the three months through March, the Cabinet Office said Thursday. Economists had forecast a contraction of 1.2% ( The Japan Times)

Not only was the first quarter of this year weak the past was revised lower too leaving the situation like this.

The report showed that the economy has failed to grow since last spring, as updated figures for the last quarter of 2023 were revised to show the economy flat-lining after slumping in the summer. ( The Japan Times)

Putting that in numerical terms the Japanese economy has gone -0.9% then 0% and now -0.5% as we would count it in the last three quarters. This is all rather different to the strong growth we saw as 2022 moved into 2023. Indeed the year on year rate of GDP growth is now negative at -0.2% and the figures for this quarter will have to replace strong growth (1%) at this time last year.

There are a couple of excuses.

The result reflects the negative impact of a New Year’s Day earthquake northwest of Tokyo and disruptions to auto production and sales after a certification scandal blew up at Daihatsu Motor, a subsidiary of Toyota Motor.

The Problem that is Inflation

Regular readers will be aware of my theme that inflation is bad for economic output. This not only clashes with economics 101 ( people buy now to avoid higher prices later) but also the whole concept of Abenomics where zero inflation was supposed to be replaced by 2% per annum creating some sort of economic nirvana. How is that going?

While those factors can be discounted as temporary, the continuing impact of the strongest inflation in generations is a more enduring problem. Household spending keeps falling as workers contending with persistent declines in real wages tighten their budgets. Personal consumption has now declined for four consecutive quarters, the longest stretch of retreats since the global financial crisis. ( The Japan Times)

The bit I have emphasised is essentially my theme in a nutshell. The figures for private consumption have gone -0.7%, -0.3%,-0.4% and now -0.7%.That means the annual rate of growth is now 1.9%. This reinforces the message from last week when we looked at another decline in real wages. This contrasts strongly with the rhetoric and promises.

The first quarter saw companies emerge from annual negotiations with unions pledging the largest wage hikes in three decades.

This takes me back to what I pointed out on the 9th of this month.

Japan’s latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth. ( Bloomberg

The latest annual rate of fall is 2.5% adding to 2 years of falls and yet there is supposedly a “deeper trend”. Perhaps Bloomberg journalists should be paid like that and see what they think then! Putting it another way let me take you back to my thoughts on April 28th last year.

I hope that we will see some higher rises in the spring pay rounds, but so far there is little sign of any culture shift.

Moving away from this blog I came under fire for such views from some on social media, but I have not heard from any of them since then. Maybe we will get some improvements this year but any growth first has to offset the existing losses. Or if you prefer we are back to wages being a lagging indicator. In terms of the impact Kyodo News has put it like this.

The  Mizuho Research & Technologies Ltd. institute estimates that Japanese households will pay an additional 106,000 yen ($690) or more in the current business year to March due to inflation caused by rising crude oil prices, a weak yen and other factors.

We can also see why the present government is so unpopular. From The Japan Times

In March, Kishida said preventing deflation from recurring is the purpose of his administration’s existence.

So far he has made workers and consumers worse off with inflation and real wage falls. Now he has a shrinking economy too.

Trade

In the detail were some pretty awful trade figures. Exports fell at an annualised rate of 18.7% and imports by 12.7%. No doubt there is a Daihatsu effect but even so people will be worried.

Japanese Yen

This rallied quite strongly to 153.60 in response to the GDP release but then faded to 154.40 as people wondered about this?

Financial markets expect the central bank to raise interest rates again later this year as pressure could mount on the BOJ to counter the yen’s weakness, a byproduct of its dovish stance. ( Kyodo News)

Raising interest-rates into a declining economy would be brave and perhaps even courageous. Although care is needed as the expected changes are minor. But there has been a significant change as the thirty-year yield is around 2% these days as opposed to the 1.2% of a year ago.That in Japanese terms is significant.

Debt Costs

Japan in line with the above is getting worried about the cost of its debt.

TOKYO, Feb 2 (Reuters) – Japan faces more than a two-fold increase in annual interest payments on government debt to 24.8 trillion yen ($169 billion) over the next decade, draft government estimates seen by Reuters showed on Friday……versus 9.83 trillion yen for the fiscal year ending in March 2025, the draft estimate showed.

As to total national debt the St.Louis Fed did some number crunching at the end of last year.

Notice that for Japan, the net debt-to-GDP ratio (government bonds-to-GDP ratio) found in the consolidated balance sheet is only 114%, which is much smaller than the debt-to-GDP ratio reported earlier (226% in the second quarter of 2022)…….. For example, the Bank of Japan’s holdings of Japanese government debt is equivalent to around 100% of GDP.

As you can see Japan has indulged in quite a merry go round with its national debt. But there are now two factors in play. Debt is now more expensive. Plus the balance sheet of the Bank of Japan is weaker and one way of looking at that is via the Japanese Government Bond future. This peaked above 155 in Covid times and is now 144. That may not seem a lot but when you owe so many of them it is. Also you may recall me reviewing Governor Ueda’s rather complacent speech on the subject last autumn. Well the future is now 4 points lower and he has raised his own cost of borrowing.

Comment

This is another phase of the Lost Decade crisis. How does that go with my pointing out earlier this year that Japan Inc will be happy? It stands up because the record highs in the Nikkei 225 equity index and the much weaker Japanese Yen are good news for them. Plus there is this.

Corporate profits have improved and business sentiment has stayed at a favorable level. ( Bank of Japan)

But the Japanese worker and consumer will be unhappy as the weaker Yen has helped drive the inflation which has made them poorer. If we look back this was the original critique of Abenomics that Japan Inc would win but most would lose.

Then there is the issue of the Bank of Japan. Yes as the media have been reporting it has large equity market profits. Curiously they skip the issue of the reality that anyone else would be in jail for market rigging. But more to the point taking them requires a “cunning plan” as actual sales would torpedo the profits. But on the other side of the coin the enormous bond holdings are singing along with Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

 

 

 

 

 

The answer to Euro area economic problems is not more of the same policies (which got it into its present malaise)

The recent economic debate about the Euro area has concentrated on its under performance compared to the United States. For example back on the 17th of February I looked at the analysis of Dr.Isabel Schnabel on how it had fallen behind the US on productivity and AI.So it was intriguing to see the Financial Times open its analysis with this.

Claus Romanowsky reckons those who claim Europe’s economy is falling technologically behind are out of touch. The chatbot developed by his team at German engineering company Siemens will soon let factory workers anywhere talk to robots and machines without needing to know any code — potentially reaping massive gains in productivity.

This is traditional Financial Times fare of supporting the Euro area but you may note the “potentially”as opposed to the reality in the US. Indeed suddenly things look rather bad.

If more European companies harnessed artificial intelligence in this way, it might help to address some of the deep-seated problems in the region’s economy, which is lagging behind the rip-roaring growth of the US. Europe remains badly behind in AI innovation and adoption.

Indeed we get something of a reverse ferret from the Financial Times which has long argued that the Euro area provides economic growth.

Europe’s economic underperformance has long worried policymakers. But it has surged to the top of their agenda now that the growth gap with the US has become even wider.

Plus it is hard to know where to start with the previous sacred cows of Financial Times analysis which get thrown under the bus here.

The combination of high European energy costs, now well above those in the US, and the attractive subsidies offered by Washington for green energy and semiconductor projects built in the country is tempting large numbers of European companies to shift activities there.

But things continue as one of those who has led the Euro area into this mess ( think “Draghi Laws” and the later collapse of many Italian banks) is apparently cast as a saviour.

The EU has asked Mario Draghi, Italy’s former prime minister and ex-head of the ECB, to come up with ways of boosting the bloc’s competitiveness.

He will of course recommend even more Euro plans. But this article exposes a real problem with that as the hits keep coming. You see before the Euro began the economies in it were doing really rather well.

Europe’s economy was riding high in the early 1990s, enjoying a boost from deepening the EU’s single market before expanding it eastward following the end of the cold war.

But since the Euro started they have done badly.

But since then, the combined economies of the 27 countries that make up the EU today have steadily lost ground to the US, hit by a series of setbacks, particularly the Eurozone debt crisis a decade ago. More recently, the Covid-19 pandemic and Russia’s war in Ukraine have both inflicted more economic damage to Europe than to the US.

You may note the rather long list of excuses being used as a smokescreen. In fact the answer is apparently more of the policies which have contributed to the mess.

Paolo Gentiloni, the EU’s economy commissioner, says the question now is how to address the need for critical investments in areas such as the green transition and defence given the sluggish backdrop.

There is quite a conceptual problem here. I do not know about you but if I was looking for people to solve an economic crisis I would not start with 2 members of Italy’s political caste after all the years of trouble there. That is reinforced by the fact that a change of government to outside the caste ( Meloni) has so far seen Italy’s economy improve.

House Prices

The analysis then takes the advice of Lewis Carroll at the “Drink me!” stage for Alice as we see the claimed cause of the economic problems.

House prices have fallen in many countries and governments are reining in spending.

Yes it is lack of wealth effects that are at play.

“There are negative wealth effects in Europe,” says Ana Boata, an economist at German insurer Allianz Trade. “If you don’t expect to get more from public welfare or pension systems, you are likely to save more and spend less. Then you add in the uncertainty from wars and you have doom and gloom.”

That will of course be news to first-time buyers in the Euro area who would rather not pay ever higher prices for housing. You may note that these “wealth effects” have a loser which is the person paying that price! This is why I have long argued that you need some combination of house prices and mortgage rates in any proper cost of living measure.

Also the claim that house prices have fallen is rather disingenuous. Yes they fell recently.

House prices down by 1.1 % in the euro area and up by 0.3 % in the European Union in the fourth quarter of 2023, compared with the same quarter of 2022.

But if you look back you see that the impact of negative interest-rates and mass QE did lead to a change. The Euro area house price index passed 110 in late 2017 after struggles and then the beginnings of a recovery. But from then it went to 150 and some of the surge was really rather extraordinary post Covid and clearly driven by the negative interest-rates and bond yields. Except where were the economic gains from these wealth effects?

So many of the arguments are circular here as US investors have done better out of their equity market partly because their economy has done better.

US households have also benefited from investing more in equity markets, which have risen sharply in recent years.

Next up is a claim that seems to forget that US unemployment rate at 3.9% is much lower than the Euro area average of 6.5%.

US productivity was boosted by the temporary surge in unemployment after the pandemic hit in 2020, which reshuffled people into new and more productive roles once activity picked back up. Europe instead chose to protect jobs with massive furlough schemes. “We froze our labour market,” says Boata at Allianz, adding that this resulted in “zombified jobs”.

Comment

Let me bring this up to date via a reference in this piece.

“[It] is not a new issue for Europe and not a new issue for the Netherlands: growth has not been spectacular,” says Steven van Weyenberg, the Dutch finance minister.

This morning has seen the latest numbers from Netherlands Statistics.

The Netherland’s economy fell by 0.1% on quarter in the first quarter of 2024, returning into contraction after a 0.4% expansion in the previous period, a preliminary estimate showed……The Gross Domestic Product (GDP) in Netherlands contracted 0.70 percent in the first quarter of 2024 over the same quarter of the previous year.

I can put it another way via the European Commission spring forecasts.

This Spring Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area. This is a slight uptick from the Winter 2024 interim Forecast for the EU, but unchanged for the euro area. EU GDP growth is forecast to improve to 1.6% in 2025, a downward revision of 0.1 pps. from winter. In the euro area, GDP growth in 2025 is projected to be slightly lower, at 1.4% – also marginally revised down.

So at best not much. Yet apparently according to those in charge of the Euro area and those writing for the Financial Times the solution is more of the same people and policies that have led it down this road.

The Bank of England should welcome the rise in real wages rather than punish it

This morning has brought a reminder of the sometimes contrary nature of economic statistics. The UK has just experienced a quarter of what even in past times would have been regarded as decent GDP growth at 0.6% for the first quarter. But we see employment doing this.

The UK employment rate for January to March 2024 (74.5%) remains below estimates of a year ago (January to March 2023), and decreased in the latest quarter.

On the upside it does suggest a rise in productivity which is an issue that has attracted the attention of the chattering classes, which is usually a sign of a change ahead in itself. But on a basic level we have a mismatch so let us look deeper.

The annual decrease was largely because of part-time workers, while the quarterly decrease was largely because of part-time workers and the full-time self-employed. Full-time employees increased both on the quarter and on the year.

So part-time work has been falling and there may be a switch to full-time. As the release avoids the actual numbers let me help out. Employment is 33 million and it fell by 178,000 in the latest quarter making it some 204,000 lower than a year ago. For perspective that leaves the number some 93,000 lower than pre pandemic. However it is also true that all of these changes are smaller than the confidence interval of 268,000.

Hours Worked

The issue of what do the numbers really tell us moves on as we look at what has been a better guide to the economic state of play.

In the latest period (January to March 2024), total actual weekly hours worked increased on the quarter to 1.06 billion hours and are above the level a year ago (January to March 2023). Both men’s and women’s hours worked increased on the quarter.

The rises here are small of 9.7 million hours on the quarter and 1.1 million on the year. But we get a reinforcement at least of the idea of a switch from part to full-time work. At least in this arena we get actual numbers as the definition in the survey is rather wishy-washy. Overall we still have a productivity improvement.

Unemployment

It is not necessarily true that lower employment leads to higher unemployment as there is also inactivity. But this time it did.

In the latest quarter, the unemployment rate increased.

As that is rather vague it rose to 4,3% which is up 0.5% this quarter and 0.3% on a year ago with the detail below.

In January to March 2024, those unemployed for up to 6 months increased, and remain above levels a year ago (January to March 2023). Those unemployed for over 6 and up to 12 months and those unemployed for over 12 months also increased in the latest quarter following falls in the second half of 2023, and are above estimates of a year ago.

Wages

The numbers here were much more welcome in my opinion.

Annual growth in regular earnings (excluding bonuses) was 6.0%, and annual growth in employees’ average total earnings (including bonuses) was 5.7%.

So wage growth has been pretty consistent as total pay is up 0.1% on last time. Also the consistency theme continues below.

Annual average regular earnings growth for the public sector remains strong at 6.3%; for the private sector, this was 5.9%, with growth last lower than this in April to June 2022 (5.4%).

Bonuses were strong too.

Total bonuses in March 2024 were slightly higher than in March 2023 and are the highest on record.

It is hard not to have a wry smile at the numbers below as the finance sector is so often the leader of the pack ( in spite of many promises of change)

Both the manufacturing sector and the finance and business services sector saw the largest annual regular growth rate at 6.8%.

Also we can review the two numbers above as a rare triumph of government policy as the caps on bankers bonuses were lifted around 6 months ago. Indeed if we look deeper via the single month figures we see that it looks to be going further as total pay for the finance sector rose at an annual rate of 8.4% in the single month of March.

Overall though total pay growth has been between 5.5% and 5.8% for the past five months which is very consistent for this series. With inflation on the decline this means we are in a better and better phase for real pay.

Using CPI real earnings, in January to March 2024, total pay was 2.1%.

Should wage growth continue on its present path then there will be a welcome rise in real pay and maybe we may reverse a decent part of what has been a nuclear winter for it. The credit crunch era falls were added to by the pandemic and sadly our official series misses this as they never fully adjusted for the issue that led me to report the earnings figures to the Office for Statistics Responsibility back in February 2021.

https://osr.statisticsauthority.gov.uk/correspondence/response-from-ed-humpherson-to-shaun-richards-ons-average-earnings-figures/

Bank of England Chief Economist Huw Pill

We can now look at the UK labour market via a speech given this morning by the Bank of England’s Chief Economist. Newer readers might like to know that Huw Pill has so far in his tenure managed the quite remarkable feat of being wrong about everything. That continues the wages theme of consistency although not in a good way.

In his presentation, Pill said official data published earlier on Tuesday were consistent with a small further decline in the pace of private sector regular pay growth in the first three months of 2024.

But he cautioned against reading too much into other signs of a weakening of the inflationary heat in the jobs market.

“There has been an easing of the labour market but it still remains pretty tight by historical standards,” he said. ( Reuters)

My first thought is why is he swerving to regular rather than total pay? But anyway the theme there gets rather torpedoed by this extra piece of data.

Early estimates for April 2024 indicate that median monthly pay was £2,381, an increase of 6.9% compared with the same period of the previous year.

That represents a 0.5% rise in the annual rate on last time. There are reasons to discount this via the large rise in the National Living Wage, so we will need more data for the smoke to clear. But this presented an excellent opportunity for Chief Economist Pill to explain the different wages numbers and what they mean. Admittedly someone would have had to explain this to him first. But it would have been much more useful than what he has actually said which is rather non-commital.

Comment

Today’s release reminds us of the leads and lags in official data. As all other estimates show a better economic performance in 2024 so far the fall in employment seen in today’s release relates to 2023. Even the hours worked numbers hint at this. We can take that further to the Bank of England where to my mind it has confused leading and lagging issues so much that it is trying to control something which happened as much as 2 years ago. What I mean by that is that the rise in the National Living Wage is a response to PAST inflation as are many wage rises right now.

So the Bank of England thinks the labour market is tight because it failed to move promptly to deal with inflation and thus is suppressing a symptom of it rather than a cause. Also if we take the establishment in the round it is also the loosening of bankers bonuses which has boosted wages so that we have one arm of government trying to control pay as another gives it a push. How did we let such fools govern us?

 

China seeks to solve its economic problems with the same old policies

It is time again to look East but this time not to Japan but China. Although the news suggests that China is rather aping its Pacific economic neighbour.

Chinese authorities have kicked off plans to sell Rmb1tn ($140bn) of long-dated bonds, as Beijing raises spending to stimulate the economy. The People’s Bank of China has asked brokers for advice on pricing the sale of the first batch of the sovereign bonds, according to two people who received requests. ( Financial Times)

So we can start with two main issues. Firstly the Chinese aithourities have finally caught up with our two-tear theme that their economy is struggling.Secondly they are copying one of the tricks of the western capitalist imperialists by pumping up the borrowing. Indeed there is another version of Turning Japanese here as we see the Chinese state making sure that the bond issuance is cheap in perhaps its version of QE.

The sale comes after China’s regional banks piled into long-dated sovereign bonds in the first quarter of this year — driving the cost of government borrowing to record lows — as they sought a haven from volatility in China’s equity and property markets.

So they have driven bond yields lower following the QE playbook and we see why they are checking the market? They are worried bond yields are now too low to attract other investors.The yields are below.

China’s 30-year bond yield, which moves inversely to prices, has steadied at about 2.5-2.6 per cent, its lowest level in decades, after a sharp drop from more than 3 per cent last year.

In terms of general debt management longer-dated bonds are sensible ( especially at these yields).

Most will have 30-year maturities but there will also be some 50-year bonds, they said.

The overall position seems to have the FT in a spin as China drives yields lower then warns about them.

The PBoC has repeatedly warned this year of the dangers of crowded trades in long-dated bonds, which could leave smaller banks that piled in to bonds this year more vulnerable to interest rate fluctuations, potentially leading to a Silicon Valley Bank-style meltdown.

But also suggests some western style QE is on its way.

The PBoC hinted in April that it would also consider buying these bonds on the secondary market when the time is appropriate, which “will give it better control of interbank rates”, Zhi Xiaojia, head of Asia research at Crédit Agricole, said.

That sounds like nonsense as it has nothing to do with interbank rates. Also I have to question this bit.

The new bonds differ from normal government bonds in that the money raised is for targeted purposes.

After all it was targeted before.

China is trying to move the economy away from a growth model fuelled by investment in property and infrastructure, which has caused the debts held by local governments to balloon.

In fact in isolation it was a triumph as money poured into the sector but as bust followed boom we saw local governments start to struggle.

House Price Pumping

Those wondering if the claims of change might in fact be a return to house price pumping might like to note this from Yuan Talks last week.

Two major Chinese cities removed all home purchase restrictions to shore up the sluggish real estate markets, bolstering expectation that other big cities will follow suit…..Hangzhou, capital of east China’s Zhejiang province, and Xi’an, capital of northwest China’s Shaanxi province, will no longer review the eligibility of home buyers,

Regular readers will be aware that we have seen something of a hokey-cokey style of central planning here of mostly pumping it up but occassionally slamming on the brakes. The problem now is summarised by someone who seems to have accepted one of my themes.

“Except for the biggest cities of Beijing and Shanghai, easing the purchase restrictions in other cities are only symbolic,” said Zhang Dawei, analyst at Centaline Property

“What really affects demand is that people expect house prices to fall, there is no investment value, and they can’t make money, so few would buy property whether or not there are purchase restrictions,” he said.

The psychology has changed and we have moved from party to hangover. Or as Michael Pettis points out.

Caixin: “Reducing inventories solely through market forces is extremely challenging when the overall trend is downward. The inventory absorption period for new residential properties was 25.3 months as of March, significantly longer than the industry’s historical range of 12 to 14 months.”

Inflation

The official consumer inflation numbers suggest that essentially there isn’t any.

On average from January to April , the national consumer price increased by 0.1% compared with the same period last year . ( National Bureau of Statistics)

Chinese consumers will be pleased that unlike in much of the West food prices have fallen in the year to April.

Among foods, the price of eggs fell by 10.6% , affecting the CPI to fall by about 0.07 percentage points; the price of fresh fruits fell by 9.7% , affecting the CPI to fall by about 0.22 percentage points; the price of livestock meat fell by 3.2% , affecting the CPI to fall by about 0.10 percentage points, among which the price of pork

Also if we look further up the inflation chain we see that there is downwards pressure pretty much everywhere you look.

In April 2024 , the national ex-factory price of industrial producers fell by 2.5% year-on-year , and the purchasing price of industrial producers fell by 3.0% year-on-year. The decline was narrowed by 0.3 and 0.5 percentage points respectively from the previous month; Decreased 0.2% and 0.3% respectively . On average from January to April , the ex-factory price of industrial producers fell by 2.7% compared with the same period last year , and the purchasing price of industrial producers fell by 3.3% .

Electric Vehicles

The People’s Daily assures us that tractor production, sorry I mean EV production is going really well.

BEIJING, May 11 (Xinhua) — New industry data reveals a significant surge in the production and sales of new energy vehicles (NEVs) in China for the month of April.

Data from the China Association of Automobile Manufacturers (CAAM) showed on Saturday that last month’s NEV production hit 870,000 units and sales reached 850,000 units, up by 35.9 percent and 33.5 percent year on year, respectively.

Just in time for everybody to want one! Or something like that. From our point of view the next issue is can China export these cars to the west? Plus will it follow the traditional pattern of price dumping to drive out competition.

Xinhua: “China exported a total of 504,000 automobiles in April, marking a significant year-on-year growth of 34 percent. The cumulative export figures for the first four months of the year are equally impressive. With a total of 1.827 million units exported, the auto industry has seen a year-on-year rise of 33.4 percent.” ( Michael Pettis)

It is not only EVs where China is in on the game.

Cheap Chinese and used phones are gaining major market share. ( @paulhodges1)

Comment

As I look at the developments in China they look awfully familiar. Or as The Who put it.

Yeah
Meet the new boss
Same as the old boss

We have an attempt to fire up the housing market again combined with either more state borrowing or an adjustment to it. Maybe a version of QE as well either explicitly via the People’s Bank of China or implicitly via encouraging the banks to do it. From Yuan Talks ;last week

China likely to cut RRR in Q2 – state media

Plus we have a new manufacturing and export drive which again is out of the same old playbook. Next up is this.

China is probing a hedge fund firm with stellar returns after it stopped repaying investors, following tightening scrutiny on the $760 billion industry. ( @markets)

An area that does not seem to get much of a mention is the way that Japan has depreciated its currency versus the Yuan over the past year. It now buys 22 Yen for a 12% change.

Podcast

 

Strong UK GDP growth rather embarrasses the Bank of England

This morning the UK has received some economic news which fits with the recent sunny and warmer weather.

UK gross domestic product (GDP) is estimated to have increased by 0.6% in Quarter 1 (Jan to Mar) 2024, following declines of 0.3% in Quarter 4 (Oct to Dec) and 0.1% in Quarter 3 (July to Sept) 2023.

That is an outright good number and even our national broadcaster is reporting that.

The 0.6% rise in GDP means that the economy grew at the fastest rate for two years, according to the ONS.

It is the best growth since the first three months of 2022 when Russia invaded Ukraine, sparking an energy crisis, soaring food prices and general inflationary chaos.

We have wiped out the recession although to my mind if you recall the wild swings in retail sales ( a collapse in December and a surge in January) I think some of the fall then rise was a statistical anomaly. The adjustments have not kept up with the changes in the times.But returning to the figures our growth was such we have something we have not had for a while.

Real GDP per head is estimated to have increased by 0.4% in Quarter 1 2024, following seven consecutive quarters without positive growth.

We can drill down into the numbers and see that services were the biggest contributor but not the fastest growth area.

In output terms, services grew by 0.7% on the quarter with widespread growth across the sector; elsewhere the production sector grew by 0.8% while the construction sector fell by 0.9%.

Services

In fact we saw growth in each of the individual months and it was pretty broad.

Services increased in all three months of the quarter: January (0.4%), February (0.3%) and March (0.5%), as explained in our monthly GDP release…….There was widespread growth in the services sector, with 11 out of 14 subsectors increasing in Quarter 1 2024,

The leader of the pack is below.

The largest contributor to the growth in service output was a 3.7% increase in the transport and storage subsector. This was largely driven by growth of 6.4% in land transport services via pipelines (excluding rail transport). This industry saw its highest quarterly growth rate since Quarter 3 2020.

Actually whilst there was growth in that sector some of it was via a reshuffling of the statistical cards.

 there was strong growth in February 2024 where Monthly Business Survey (MBS) data showed strength in the land transport services industry. A reclassification of a company into this industry, previously allocated in the wholesale trade excluding motor vehicles and motorcycles industry, also contributed to the strong growth.

Regular readers may recall the way that the construction numbers were distorted by something similar back in the day. It is one of the reasons (large revisions are another) why I lack confidence in them. As to the next area I think most would prefer it to be science rather than legal although of course the concept of science has been devalued by abuse of it.

Professional, scientific and technical activities increased 1.3% in the latest quarter and was the second-largest positive contributor. The growth in this subsector was driven mostly by legal activities, and scientific research and development.

I mentioned the swings in the retail sector earlier which were worse on a monthly basis at the turn of the year.

Overall, consumer-facing services grew by 0.6% in Quarter 1 2024, following a fall of 0.4% in Quarter 4 2023, and this was largely driven by Retail trade, except of motor vehicles and motorcycles.

Not every area grew and there was an interesting quirk which I have highlighted as is this another consequence of working from home?

Elsewhere there were falls in accommodation and food service activities (0.2%), and activities of households as employers; undifferentiated goods and services activities of households for own use (3.4%).

Production

Growth here was negative in January followed by a strong rally.

This reflects a fall of 0.5% in January 2024 followed by growths of 1.0% and 0.2% in February and March, respectively.

It was particularly welcome to see a recovery in manufacturing.

Manufacturing output is estimated to have increased by 1.4% in Quarter 1 2024 following a fall of 1.0% in Quarter 4 2023. The largest positive contributor was a 5.7% increase in the manufacture of transport equipment, which has grown for six consecutive quarters.

The breakdown has an interesting swing as I winder whether the decline in the textiles sector is due to the high inflation we saw in the clothing and footwear numbers?

Manufacture of basic metals and metal products grew 3.1% and manufacture of food products, beverages and tobacco showed growth of 1.5%. However, this was partially offset by a fall of 3.6% in the manufacture of textiles, wearing apparel and leather, which fell for the sixth consecutive quarter.

At the end of the report there are a couple of numbers which deserve more highlighting. With the problems in the water sector and Thames Water in particular the fall should be looked at more. Also in the midst of an energy crisis the fall in mining ( think oil and gas) reflects the disastrous policies our political class has imposed on us.

However, the growth in this sector and manufacturing was partially offset by a fall of 2.4% in water supply; sewerage, waste management and remediation activities, and a fall of 2.2% in mining and quarrying across the quarter.

As it happens their emphasis on renewables had a simply awful night especially for those who have been busy claiming that the wind always blows in the UK.

A proud moment for British ‘Wind Power’ As after 30 years of being papmpered and cossetted and subsidised big time, it can’t even manage to make 1% of our electricity tonight. Not 1/500th of our total energy needs

An absolute disgrace! ( @latimeralder)

Construction

As I stated earlier these numbers are rather unreliable.

Construction output is shown to have fallen by 0.9% in Quarter 1 2024 following a decline of 0.9% in the previous quarter. The level of construction output in Quarter 1 2024 was 0.7% lower than the same quarter a year ago.

Monthly Numbers

Each month showed economic growth and after the upwards revision to February it is pretty consistent for the monthly series.

GDP is estimated to have increased by 0.4% in March, following growth of 0.2% in February (revised up from 0.1% growth), and an unrevised increase of 0.3% in January 2024.

Bank of England

When I said that the numbers were welcome the Bank of England forecasting department may not be quite so keen after telling is this only yesterday.

Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1

Even worse news is that they have used it for another of their theoretical brain farts.

 Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter,

Comment

It is nice to be able to review and analyse some much better economic numbers from the UK. It is hard not to have a wry smile at those who have been tweeting Brexit Disaster this week just in time for our quarterly economic growth to be double the Euro area’s. Buy whilst the number itself is good and hopefully sets the tone for 2024 the annual number shows that 2023 was a troubled one.

Compared with the same quarter a year ago, GDP is estimated to have increased by 0.2% in Quarter 1 2024.

If we move from quarterly to monthly picture improves.

GDP is estimated to have grown by 0.7% in March 2024 compared with the same month last year

We have improved from shrinking ( the last annual number for Q4 was -0.2%) so the direction of travel is good and looks set to pick-up. But it is also true that 0.2% is not very much and within the margin of error.

Also another hopeful sign is that the GDP inflation measure is declining.

The implied price of GDP rose by 0.6% in Quarter 1 2024, where the increase is primarily driven by higher prices in household consumption and gross capital formation. Compared with the same quarter a year ago, the GDP implied deflator further eased to 4.0%

 

Japan discovers that a lower Yen and surges in equity markets can come with falling real wages.

Overnight has brought more news on one of both the main causes and features of the Lost Decade period in Japan. But before we get to that we can look at one of the symptoms which is the ongoing weakness in the Japanese Yen. Here is the Japanese owned Financial Times from last Friday.

When Japanese authorities deployed tens of billions of dollars to try to prop up the weakening yen this week, it was partly with an eye on the growing grumbles from people such as Keiko Shimoharaguchi. The 60-year-old retired in March looking forward to a foreign trip. But Japan’s tumbling currency is pushing her dream trip out of reach.

We can look at this another way via Bloomberg which seems to have discovered the Pacific currency war we have been looking at for around a year.

As the yen plumbs new lows, some investors are pondering an almost unthinkable scenario in a region busy bolstering falling exchange rates — a series of competitive devaluations that starts a new Asian currency war.

I guess that “almost unthinkable” needs to go into my financial lexicon for these times as on the 30th of June last year we were thinking it.

Are China and Japan the new currency devaluers?

But the essential problem in the latest crisis came here.

The decline accelerated after BoJ governor Kazuo Ueda appeared to play down the risks of a weaker yen when the central bank kept interest rates near zero last week. ( Financial Times)

Those familiar with the children’s game Ker-Plunk will know what happens when you are the one who removes the straw that leads to collapse, which is what Ueda-san found himself doing. The Yen fell below 160 to the US Dollar and we then saw this.

Over the course of four days, Japan is suspected of carrying out two market interventions, which the authorities have not officially acknowledged but traders estimated at a combined value of roughly ¥9tn ($59bn). ( FT)

The problem now is that like The Terminator currency weakness is back. A rally towards 152 before last weekend on hopes/fears of a coordinated response has become 155.80 today. Investors are showing no signs of being bothered by the possibility of more intervention.

The Economic Boost is not what it was

Regular readers may recall that the Japanese response to the problems of the Carry Trade and the strong Yen was to send manufacturing abroad. It did not start that well due to the floods in Thailand and now means this.

But the benefits of the weaker yen have also declined as Japanese manufacturers shift production overseas to reduce their exposure to currency volatility since being punished by its strength in the wake of the 2008 global financial crisis. With fewer goods produced in Japan, the boost to exports has become more limited.

It is hard to put in terms of our culture how bad this is in the Japanese one.Basically their long-term planning which they think makes them better than us has headed in the wrong direction. Even worse it has come because of their central planning with negative interest-rates and all the QE (QQE in Japan) although it may be too painful for them to think of it like that.

Real Wages

For newer readers a main driver of the Lost Decade period has been the falls in real wages. It is a factor also in the Financial Times story about oversea travel being more expensive as the Japanese are poorer in Yen terms before we get to the currency effect. There is an international link because since the credit crunch and more particularly the post Covid cost of living crisis many of us have seen a touch of The Vapors.

I’m turning Japanese, I think I’m turning Japanese
I really think so
Turning Japanese, I think I’m turning Japanese
I really think so

There has been another feature over a bit more than a decade where the MSM has continually assured us that this is about to change. It began with support for Abenomics where one of the arrows was claimed to be this although wherever that arrow went it was not into higher real wages. More recently last year and this year’s Shunto wage negotiations were claimed to show that things had really changed. How is that going?

Japan’s latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth. ( Bloomberg)

As you can see the wage growth pumping line has reached such a level of desperation at Bloomberg they seem to think that Japanese workers will be fooled by talk of a “deeper trend”.

Real wages fell 2.5% from a year earlier in March, marking the deepest drop in four months and running the streak of declines to exactly 24 months, the labor ministry reported Thursday. The consensus estimate was for a 1.4% decrease. Growth in nominal cash earnings for workers slowed to 0.6%, also missing forecasts.

Apparently if you only count the things that have gone up the situation is just fine.

Data for full-time workers that avoid sampling problems and exclude bonuses and overtime pay grew by 2.3%. This index, which is watched closely by the Bank of Japan, remained at or above the 2% threshold for a seventh month, in a sign of steady underlying salary growth.

I am sure that Japanese workers will be grateful that whilst their wages buy ever less the “underlying” situation shows growth. Perhaps the only cure will be to link the wages of Bloomberg journalists to this.

Meanwhile at the turn of the year Governor Ueda mentioned the real deeper trend

Wages and prices in Japan continued to rise, albeit slightly, until around the mid-1990s. In the late 1990s, the
year-on-year rates of change turned 0 or negative.

Real wages have been falling all this century and for all the rhetoric in his speech his chart shows that post Covid things have got worse rather than better. The annual figures are below.

2020 -1.2%

2021 0.6%

2022 -1%

2023 -2.5%

It is the latter number which is a particular concern because 2023 was supposed to be the year of changes in wages. Of course it was, but in the opposite direction. This has continued into 2024. So now even a good Shunto season will do well to get real wages back to there they started although I doubt it will be reported like that.

Comment

Earlier this year I pointed out that Japan Inc would be happy with the way it has kept interest-rates in negative territory for so long. In a way that was symbolised by the return to one of 0.1% at a time of Japan’s choosing. That gave it a more competitive Yen and a Nikkei 225 equity index finally hitting new all-time highs and going above 40,000.

The problem with all that was always the issue of central planning and control which as we have recently seen has torpedoed the Yen. But there is more as the central planning of the Nikkei 225 has issues too. From Toby Nangle in the Financial Times.

The Bank of Japan has, over 14 years, acquired exchange traded funds containing stocks equivalent to about 7 per cent of listed Japanese companies. In March, BoJ governor Kazuo Ueda called time on this aspect of the central bank’s extraordinary monetary easing programme. The bank has yet to announce what it will do with its half-a-trillion-dollar stock portfolio…….The ¥37tn of cumulative stock purchases have ballooned in value to be worth an estimated ¥77tn today, according to some estimates.

Is that another form of inflation? Real wages have fallen by enough without adding that in too.

The Riksbank of Sweden leads the charge to lower interest-rates

This morning has brought another example of the contrary times in which we live. After yesterday’s news from the Reserve Bank of Australia which may be mulling another interest-rate rise we received this from the world’s oldest central bank.

Inflation is approaching the target while economic activity is weak. The Riksbank can therefore ease monetary policy. The Executive Board has decided to cut the policy rate by 0.25 percentage points to 3.75 per cent.

Our first perspective is that they have kept their word as they suggested a rate cut was in the offing for May or June. In fact they have also added that they are not done for 2024 which as they are backing words with action has credibility.

If the outlook for inflation still holds, the policy rate is expected to be cut two more times during the second half of the year.

The next instant perspective is that this is a risk for the currency the Krona and many other central banks ( ECB and Bank of England for example) will be watching to see what happens next. An initial response is below.

EURO JUMPS VS SWEDISH CROWN AFTER RIKSBANK CUTS RATES; LAST UP 0.4% AT 11.725 CROWNS ( @FirstSquawk)

Actually the monetary policy report keeps coming back to the main issue here.

The strength of the US economy has led to higher interest rates globally….

The US economy has continued to perform strongly….

The strong economic performance is affecting inflation in the United States

Fewer policy rate cuts are expected abroad going forward…

The dollar has appreciated against other currencies.

We get the idea.

Inflation

If we switch to the inflation target we see the Riksbank slapping itself on the back.

Monetary policy and fading supply shocks have contributed to inflation now being close to the target. In March, CPIF inflation was 2.2 per cent, which was lower than the Riksbank’s forecast. CPIF inflation excluding energy was 2.9 per cent, which was also lower than expected.

Did the lower March number spook them into firing the starting gun on interest-rate cuts? That would be bad policy. Oh and according to the central bankers inflation expectations were anchored as inflation itself soared.

Inflation expectations are firmly anchored and wage increases are moderate. Information received since the Monetary Policy Report in March reinforces the outlook for inflation remaining close to target also in the
longer term.

However they are being a little disingenuous in their report by omitting this.Or if you prefer more of a guide to the actual cost of living.

The inflation rate according to the CPI was 4.1 percent in March 2024, down from 4.5 percent in February. On a monthly basis, the CPI index increased by 0.1 percent from February to March.

The difference is down to an area which is one of my major themes,housing costs.

The interest rates for household’s mortgages rose and contributed with 2.1 percentage points to the annual inflation rate according to CPI.

Whilst the central bank should not target this ( as by changing interest-rates it has raised it) it should also take note of what citizens are experiencing.

Anyway we then see that it is not as sure about inflation as its earlier words suggested.

However, the outlook for inflation is uncertain. As inflation now falls from very high levels, there is uncertainty on both the upside and downside.

Yes the “two-handed economist” has returned.

The Economic Situation

This has been weak for a while now in Sweden.

Swedish GDP growth has been weak but is expected to rise gradually. The GDP indicator points to low growth in the first quarter, in line with the March forecast. However, growth is expected to strengthen going forward.

I am not quite sure where they are going with the “low growth” line when Statistics Sweden has already told us this.

Sweden’s GDP contracted 0.3 percent in March, seasonally adjusted and compared with the previous month, as shown by the preliminary compilation of the GDP indicator. For the first quarter as a whole GDP contracted with 0.1 percent compared with the preceding quarter.

Indeed whilst the Riksbank sings along with the Beatles.

I’ve got to admit it’s getting better (better)
A little better all the time (it can’t get no worse)
I have to admit it’s getting better (better)
It’s getting better

Statistics Sweden are much less convinced.

“Swedish economic activity continued to weaken in the first quarter of 2024 with contractions in the months of February and March. This is the fourth consecutive quarter with negative growth.” says Mattias Kain Wyatt, economist at Statistics Sweden.

In fact they are suggesting it can get worse. This was reinforced by this on Monday.

Just as we thought that the Swedish economy was sending pro-cyclical signals, the Services PMI crashes back to contraction territory this morning ( @AndreasSteno)

Zawya provides more detail on this.

Activity in Sweden’s services sector fell to 48.1 in April from an upwardly revised 54.1 the previous month, compilers Silf/Swedbank said on Monday.

It was the first time since November last year the index has dropped below 50 points, seen as the dividing line between expansion and contraction in the sector.

The composite index of the service and manufacturing sectors decreased to 49.0 points from 53.0 points the previous month.

That is quite a lurch and takes Sweden in the opposite direction from the UK and Euro area who have both shown signs of a pick-up so far in 2024.

As to the background it has not only been a recession but perhaps also a depression.

 Both the month of March and the quarter as a whole had GDP-levels 1.1 percent lower than in their respective corresponding periods of 2023. ( Sweden Statistics)

House Prices

Another factor likely to cause central banks to cut interest-rates is lower house prices and Statistics Sweden posted the latest this morning.

Prices according to the Real Estate Price Index for one- or two-dwelling buildings fell by almost 1 percent at national level in the first quarter 2024 compared with the previous quarter.

Over the past year they have done this.

 On an annual basis compared with the first quarter of 2023, prices fell by more than 2 percent for one-or two dwelling buildings at the national level.

If you are wondering how much?

At the national level, the average price for one- or two-dwelling buildings was more than SEK 3.7 million in the first quarter of 2024.

Comment

As you can see this was in fact the central bank equivalent of the stars aligning. We have inflation galling back towards target, a weak economy and maybe most crucially another fall in house prices. Whilst they claim to be positive about there must be fears about the way it looks to be under performing the Euro area and UK.

Both the ECB and Bank of England will have their binoculars on the Krona to see what effect an interest-rate cut has? At the time of typing this it has fallen by 0.5% to 10.9 versus the US Dollar making the change over the past year 7,5%. Although perhaps a better idea comes from the fall of around 9% so far this year as expectations around interest-rates changed. It is a risk.

Swedish Krona near all-time lows vs USD at 10.94 (@akcakmak)

Fingers crossed for plenty of tourist spending for Eurovision in Malmo.

 

 

 

Should Australia have raised interest-rates today?

As the UK returns after its May Day break we find the economic news being set in a land down under.

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.

That is from the Reserve Bank of Australia and gives us our first perspective which is that the expected interest-rate cuts for 2024 have not yet materialised. Indeed there has been talk in some circles of another rise down under. Let us look deeper via the inflation numbers.

Recent information indicates that inflation continues to moderate, but is declining more slowly than expected. The CPI grew by 3.6 per cent over the year to the March quarter, down from 4.1 per cent over the year to December. Underlying inflation was higher than headline inflation and declined by less. This was due in large part to services inflation, which remains high and is moderating only gradually.

As you can see the central bankers continue their obsession with core inflation although there is perhaps a sign of how badly things have gone for it by the rebadging as underlying inflation. But there is a much bigger issue of perspective here which I shall illustrate by jumping into the TARDIS of Dt.Who and taking us back to February 2022.

Inflation has picked up more quickly than the RBA had expected, but remains lower than in many other countries. The headline CPI inflation rate is 3.5 per cent and is being affected by higher petrol prices, higher prices for newly constructed homes and the disruptions to global supply chains.

So inflation was pretty much the same as now but expected to rise. So interest-rates were what 5% or more?

At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent. It also decided to cease further purchases under the bond purchase program, with the final purchases to take place on 10 February.

Yes they dealt with a much worse inflation situation with an interest-rate of 0.1% and now think 4.35% is appropriate. I do not think they get enough criticism for this. I added the second sentence in the quote above because they were also actively trying to feed inflation via more QE bond purchases until that day. As the nutty boys put it.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain

In fact their deep technical expert analysis based on underlying inflation was that things were going to turn out just fine.

 In underlying terms, inflation is 2.6 per cent. The central forecast is for underlying inflation to increase further in coming quarters to around 3¼ per cent, before declining to around 2¾ per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise.

Yet a year later they were forced to say this.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected.

Back to today

This morning the RBA persisted with its argument that what is in fact a lagging indicator is a leading one.

The persistence of services inflation is a key uncertainty. It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate. Growth in unit labour costs also remains very high.

The reality here is that the rise in goods prices made real wages fall and services buy less for the same amount so we are seeing a realigning. Also there are signs that an adjustment is taking place.

At the same time, household consumption growth has been particularly weak as high inflation and the earlier rises in interest rates have affected real disposable income.

We have discussed on other occasions what have higher interest-rates achieved? Well here we see an example of them working although as you can see things get worse before they get better. But again our central bankers just seem confused.

Growth has slowed considerably over 2023 – driven by weak growth in the household sector. This is helping to bring the level of demand back into balance with supply. However, our assessment is that demand remained above the economy’s ability to supply goods and services without putting upward pressure on inflation.

Full Employment

Australia has more than full employment according to the central bankers.

Both the unemployment rate and the broader hours-based underutilisation rate remain lower than estimates of rates that are consistent with full employment, resulting in negative ‘gaps’

The actual levels are below.

The unemployment rate was 3.8 per cent in March, slightly above its 50-year low of 3.5 per cent in late 2022, and remains below estimates of the rate consistent with full employment.

So let me explain what “full employment” means. Sadly it is not that everyone has a job. It assumes that some are always going to be changing jobs so there is a type of base level for unemployment. Back pre credit crunch it was assumed to be around 4.5%. Actually a lot of theoretical economic numbers were 4.5% but that is another story. Putting it another way real wages should be rising as we have more than full employment.

But there are all sorts of problems with this if we return to the real world. I have just hinted at one.

Real disposable incomes have declined sharply over the past 18 months (Graph 2.10). Strong growth in nominal incomes has been offset by high inflation,

Real wages have in fact fallen and at 4.2% wages growth does not seem high to me if you allow for the inflationary surge just seen.

Also there is the issue highlighted in my home country the UK by the problems with the labour force survey. Can we trust the unemployment numbers?

Next up is the weak consumption numbers we looked at earlier.

Finally there is the whole issue of using equilibrium unemployment as a measure. Again returning to the UK it was a disaster ad became a laughing stock during the tenure of the “unreliable boyfriend” Mark Carney as Bank of England Governor.

Comment

The economic situation in Australia is complex. The RBA does not mention the money supply in its release but its last chart pack showed broad money growth to be around 5%. Bringing it up to date I note that in March broad money went above US $3 trillion for the first time. But more applicable for our purposes the annual rate of growth is 4.9% having seen monthly rises of 0.7% in February and 0.3% in March. On this basis  there is little or no scope for interest-rate cuts.

There are other signs that the economy may still be running hot.

Australia’s property market is showing no signs of slowing down, with data from CoreLogic showing property prices increased by 0.6 per cent in April.

It’s the 15th month in a row that Australia’s property prices have increased, with the national median dwelling value now $779,819. ( ABC)

Plus someone seems to have lit a light under rents.

Capital city advertised rents have grown by nearly 10 per cent over the past year, with growth broadly based across cities; growth in actual rents paid by new tenants has been a little higher than this over the past year but growth has now slowed to be closer to that of advertised rents.  ( RBA)

So whilst others are contemplating interest-rate cuts Australia may yet see another rise.

The Bank of England should take note of the money supply and abandon QT bond sales

On the surface this has been a quiet week for the Bank of England along the lines of the Norges Bank of Norway which has just voted to keep interest-rates at 4.5%. But as I pointed out yesterday its QE and now QT efforts have left it singing along with Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
The thought of all the stupid things I’ve done

Plus there has been another development which turns the screw on it and it comes from an unusual source which is former Governor Mervyn King. Former Governors tend not to bite the hand which gave them a generous RPI linked pension plus the title of Baron King of Lothbury and Most Noble Order of the Garter. But as the Financial Times points out he has drawn his sword.

The Bank of England’s failure to forestall the post-pandemic surge in inflation was the result of collective amnesia in the economics profession about the role of money supply, according to a former governor.

He is of course correct about this and then he gently debunks the claim by Ben Bernanke that there was no group think at the Bank of England.

Lord Mervyn King, who led the UK’s central bank between 2003 and 2013, said on Thursday it was “troubling” that when prices began to rise in 2020 and 2021, there had been “no dissenting voices to challenge the view that inflation was transitory” among policymakers on either side of the Atlantic.

He then built up steam on the money supply issue whilst taking a swipe at academia as well.

“Too much money chasing too few goods is and always has been a recipe for inflation,” he said, calling it “foolish” for central banks to rely on forecasting models that ignored the role of money entirely.
“The academic economics profession has essentially jettisoned the idea that one might ask what the growth of broad money [a measure of the amount of money circulating in the economy] was telling us,” King said, adding that this consensus had “led to the problems we are now too familiar with”.

As an aside this raises another issue which has troubled me. These days students pay ( well borrow) a lot of money to get an economics degree and this is not matched in any way by much of the teaching. Also I see he was quite damning of the Bernanke Review as you can see below where he is accusing it of missing the main issues.

“The mistakes of 2020 and 2021 were not the result of presentation. The Bank might have used fan charts, the Fed used dot plots. It didn’t make any difference. They both made the same misjudgement,” said King. “What really matters are judgments about the state of the economy and the way monetary policy works.”

QT Bond Sales

These have been somewhere between a shambles and a disaster for the Bank of England. I did not mention them in yesterday’s post to avoid double-counting but another consequence of the rise in interest-rates is that the Bank of England is effectively capitalising its losses at the bottom of the market. You do not have to know much about markets to realise that buying at the top ( indeed creating the top) and then selling at the bottom is a bad idea.

Thus this from Bloomberg overnight rather caught my eye.

Demand for cash from the Bank of England jumped to a record £12.2 billion ($15.3 billion) on Thursday, the latest in a string of increases that may spur policy makers to ease financial conditions through the bond market within months, analysts say.
The BOE will opt to end its weekly bond sales later this year, which will act in tandem with interest-rate cuts to loosen monetary policy, according to Deutsche Bank AG and NatWest Markets.

Actually until recently many at the Bank of England will have welcomed the extra demand for cash as it tightened policy.

The clamor has already driven up a short term money market rate to 5.35%, above the BOE’s benchmark rate. That has the effect of tightening financial conditions, just as the Monetary Policy Committee is considering easing policy by cutting interest rates.

Frankly I think that they should stop the QT bond sales now. The main reduction in the balance sheet has come when bond holdings mature and making the cost of UK debt higher for subsequent generations is yet another policy error.

The Economy

Whilst the Bank of England is rather enmeshed in its own problems the UK economy looks to be experiencing something of a spring bounce.

The seasonally adjusted S&P Global UK PMI Composite
Output Index* registered 54.1 in April, up from 52.8 in March and in positive territory for the sixth consecutive month. Moreover, the latest reading signalled the fastest expansion of private sector business activity since April 2023.

It has been as so often for the UK economy services driven.

Stronger output growth was driven by a robust and
accelerated upturn in the service economy. Manufacturing
production meanwhile returned to contraction, although
the decline was only marginal. There was a similar pattern
for order books, with service providers reporting a faster rise while goods producers experienced a renewed downturn.

I am not sure where S&P are going with this though as the previous lower readings were supposed to give this level of growth.

The latest survey results are consistent
with the UK economy growing at a quarterly rate of 0.4% and therefore pulling further out of last year’s shallow recession.

Even what seems a minor statement like “shallow recession” will produce itchy shirt collars at the Bank of England. After all their forecast was for a deep recession with economic output falling by 2%

Comment

As you can see the Bank of England has dug several holes for itself with its policies. One could reasonably argue that over the past few years it has made the UK’s economic performance worse rather than better. It fed then ignored an inflationary boom and in return for an orgy of QE bond buying and interest-rate cuts we got very little economic growth. In an way I think that this from the Office for National Statistics earlier rather sums up the state of play.

Public service productivity in Quarter 4 2023 is estimated to be 6.8% below its pre-coronavirus (COVID-19) pandemic peak (Quarter 4 2019) but has remained relatively stable since Quarter 2 (Apr to June) 2021 through the post-pandemic period.

But fortunately the economy looks as though it is recovering in spite of their meddling. Although that does rely on the PMI release to some extent other numbers have been consistent with it.

 

More and more problems are emerging with the QE programme the Bank of England presented as a triumph

Last night brought some bad news for the QE programmes employed by the world’s central banks and ironically it came from the world’s main central bank.

The Federal Reserve has signalled that US borrowing costs are likely to remain higher for longer, as it wrestles with persistent inflation across the world’s biggest economy. ( Financial Times)

Actually I think that “higher for longer” was in fact used simply for PR so there is rather in an irony in it becoming true. But where this causes a problem is in the nature of QE (Quantitative Easing) bond buying.

1. You invest at a fixed interest rate or coupon
2. You pay for it at a variable interest-rate ( Bank Rate in the UK)

Another way of looking at the rises in interest-rates to deal with the inflationary surge is that it raised the cost base for QE. Remember this was considered at the time to be an establishment triumph as the central banks made a carry profit out of this.We can look at that world via the Bank of Japan which still lives in it.

First, the Bank’s income has been on an increasing trend. Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs.

That is my part 1 above and now let me bring in part 2

 in line with the developments on the asset side, there was a substantial rise in current deposits on the liability side, in the form of an increase in financial institutions’ excess reserves. In order to control short-term interest rates at the target level in the presence of such large excess reserves, it became necessary to apply interest rates on excess reserves. ( Governor Ueda Swptember 2023)

That policy has led to costs in other areas as last night’s intervention to support the Yne shows. But in terms of QE the Bank of Japan is still in the financial masters of the universe phase. Let me now bring that back to the Bank of England. Having set a Bank Rate of 0.1% they were willing and able to charge into the UK government bond market. I argued at the time they acted like headless chickens and it was their own 0.1% Bank Rate which made them think that buying the benchmark UK bond at 0.5% was a stroke of genius.

Group Think

Back in August 2020 Bank of England Governor Andrew Bailey gave himself a big slap on the back at Jackson Hole.

But, if this result proves robust, it suggests that “going
big and fast” with QE is particularly effective in these conditions.

It did not occur to him to wonder why no-one had done it before.

For many central banks, the main
tool to date has been further Quantitative Easing, in unprecedented scale and pace of purchases.

Later in the speech once the trumpet blowing was over we were told that reversing it (QT) would be a mere detail.

The MPC has considered its prospective approach to QE unwind in recent years, and in June 2018 set out
that the balance sheet would be unwound at a gradual and predictable pace, allowing reserves to fall back to
a level demanded by banks through their participation in regular repo operations, and once the Bank Rate
had risen to around 1.5%, thus creating more headroom for the future use of Bank Rate both up and down.

I would like to draw your attention to the Bank Rate quoted and this is where the group think comes in. Central bankers were unable or unwilling to think of any scenario where QE would go wrong and leave them with egg on their faces. In my opinion 1.5% was not chosen out of any view on what was likely for interest-rates but because it was a level where the Bank of England was expected to start making losses.

Yet even even what in Dune terms might be described as a “Golden Path” was dismissed by Governor Bailey.

The MPC keeps this approach under review, though I should make clear that it does not seem like an
imminent issue in current conditions.

The reality is that Bank Rate is now 5.25% and the trumpet blowing now looks like a combination of hubris and incompetence.

The Precious! The Precious!

One of the themes of the credit crunch era has been the extraordinary efforts made on behalf of the banks. Now let me continue the saga above via a report from the Treasury Select Committee which shows another example of this. The emphasis is mine.

Under quantitative easing, the Bank of England created £895 billion of new money in the form of central bank reserves held by commercial banks, of which around £700 billion remains in circulation. The Bank pays interest on those reserves at Bank Rate, currently 5.25%. This has generated considerable income for banks as a result of the sharp increase in interest rates since 2021. The Treasury is ultimately liable for these payments as it indemnifies the QE programme.

We can look at that in more detail.

Information about our interest income is published in Barclays Bank UK Annual Report.
Recently published figures associated with interest generated from cash held at the central
bank are £819m (2022) and £1,878m (2023).

NatWest earned approximately £2.85bn (2023) and £1.64bn (2022) interest income on
its central bank reserves net of TFSME interest payments to the Bank of England.

The Financial Times has added up the numbers as shown below.

NatWest, Barclays, Lloyds and Santander collectively received £9.23bn in interest on deposits held by the central bank in 2023, more than double what they had earned the previous year, according to figures published by the House of Commons Treasury select committee.

Some seem to be treating that as a total which rather forgets HSBC and all the other banks.

Comment

As you can see the claimed triumph of QE is leading to more and more problems. One way of looking at it comes from the fact that we are still mired in an era of low/no economic growth in return for all the borrowing and central bank largesse. Many will consider themselves to be worse off after the severe cost of living crisis we have been experiencing.

Personally I think that the numbers quoted by the banks above are an understatement and let me show why. The current stock of bonds is £704 billion and at a Bank Rate of 5.25% that suggests the gross payments on the Asset Purchase Facility are around £37 billion per year. One route the numbers were massaged above was the way Nat West deducted payments under the Term Funding Scheme.

Another way of looking at this comes via the public finances.

The borrowing of both subsectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last twelve months under its Asset Purchase Facility Fund (APF) indemnity agreement.

Care is needed as profits of £120 billion were booked, but as you can see they are disappearing pretty quickly.

The group think madness continued an issue some of you may recall. Back in the days of Dame Minouche Shafik the Bank of England considered interest-rates of 0.5% and 1% to be significant for QT. You may recall also that she was so incompetent that she was moved on before the end of her term to save further embarrassment. So we have the interest-rate madness as well as the way that these people just move on. Guess where she is now? It has been in the news rather a lot.

Nemat (Minouche) Shafik became the 20^th president of Columbia University on July 1, 2023. President Shafik is a distinguished economist who for more than three decades has served in senior leadership roles across a range of prominent international and academic institutions.