What next for the world of negative interest-rates?

There were supposed to be two main general economic issues for 2017. The first was the return of inflation as the price of crude oil stopped being a strong disinflationary force. The second was that we would see a rise in interest-rates and bond yields as we saw an economic recovery combined with the aforementioned inflation. This was described as the “reflation” scenario and the financial trade based on it was to be short bonds. However we have seen a rise in inflation to above target in the UK and US and to just below it in the Euro area but the bond market and interest-rate move has been really rather different.

Negative Official Interest-Rates

Euro area

These are still around particularly in Europe where the main player is the European Central Bank. This plays out in three main areas as it has an official deposit rate of -0.4%, it also has its long-term refinancing operations where banks have been able to borrow out to the early 2020s at an interest-rate that can also be as low as -0.4% plus of course purchasing sovereign bonds at negative yields. So whilst the rate of monthly bond purchases has fallen to 60 billion Euros a month the envelope of negative interest-rates is still large in spite of the economic recovery described earlier this week by ECB President Draghi.

As a result, the euro area is now witnessing an increasingly solid recovery driven largely by a virtuous circle of employment and consumption, although underlying inflation pressures remain subdued. The convergence of credit conditions across countries has also contributed to the upswing becoming more broad-based across sectors and countries. Euro area GDP growth is currently 1.7%, and surveys point to continued resilience in the coming quarters.

Indeed the economic optimism was turned up another notch by the Markit PMI business surveys on Tuesday.

The PMI data indicate that eurozone growth remained impressively strong in May. Business activity is expanding at its fastest rate for six years so far in the second quarter, consistent with 0.6- 0.7% GDP growth. The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic………

That is better than “resilience” I think.

Sweden

This is one of the high fortresses of negative interest-rates as you can see from the latest announcement.

The Executive Board decided to extend the purchases of government bonds by SEK 15 billion during the second half of 2017 and to hold the repo rate unchanged at −0.50 per cent. The repo rate is now not expected to be raised until mid-2018, which is slightly later than in the previous forecast.

As you can see a move away from the world of negative interest-rates seems to have moved further into the distance rather than get nearer. If you look at the economic situation then you may quite reasonably wonder what is going on here?

Swedish economic activity is good and is expected to strengthen further over the next few years. Confidence indicators show that households and companies are optimistic and demand for exports is strong. The economic upturn means that the demand for labour is still strong.

We do not have the numbers for the first quarter but we do know that GDP ( Gross Domestic Product) increased by 1% in the last quarter of 2016. If you read the statement below then it gets ever harder to justify the current official interest-rate.

Rising mortgage debt is a serious threat to Sweden’s economy while regulators need to introduce tougher measures to strengthen banks against future shocks, the central bank said in its semi-annual stability report, published on Wednesday………Swedish house prices have doubled over the last decade. Apartment prices have tripled. Household debt levels – in relation to disposable income – are among the highest in Europe.

Switzerland

The Swiss National Bank feels trapped by the pressure on the Swiss Franc.

The Swiss franc is still significantly overvalued. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are necessary and appropriate to ease pressure on the Swiss franc. Negative interest has at least partially restored the traditional interest rate differential against other countries.

You may note that they are pointing the blame pretty much at the ECB and the Euro for the need to have an interest-rate of -0.75% ( strictly a range between -0.25% and -1.25%).

Denmark

As you can see Denmark’s Nationalbank has not moved this year either.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

The 2016 move left it a little exposed when the ECB cut again later than year but it remains firmly in negative interest-rate territory.

Japan

Until now we have been looking at issues surrounding the Euro both geographically and economically but we need to go a lot further east to see the -0.1% interest-rate of the Bank of Japan. Added to that is its policy of bond purchases where it aims to keep the ten-year yield at approximately 0%. So there is no great sign of a change here either.

 

The United States

Here of course we have seen an effort to move interest-rates to a move positive level but so far we have not seen that much and it has not been followed by any of the other major central banks. Indeed one central bank which is normally synchronised with it is the Bank of England but it cut interest-rates and expanded its balance sheet last August so it has headed in the opposite direction this time around.

This theme has been reflected in the US bond market where we saw a rise in yields when President Trump was elected but I note now that not much has happened since. The ten-year Treasury Note now yields around 2.25% which is pretty much where it was back then. We did see a rise to above 2.6% but that faded away as events moved on. Even the prospect of a beginning of an unwinding of all of the bond holdings of the Federal Reserve does not seem to have had much impact. That seems extraordinarily sanguine to me but there are two further factors which are at play. One is that investors do not believe this will happen on any great scale and also that there is no rule book or indeed much experience of how bond markets behave when a central bank looks for the exit.

How much?

There was a time when we were regularly updated on the size of the negative yielding bond universe whereas that has faded but there is this from Fitch Ratings in early March.

Rising long-term sovereign bond yields across the eurozone contributed to a decline in outstanding negative yielding sovereign debt to $8.6 trillion as of March 1 from $9.1 trillion near year-end 2016.

The fall such as it was seemed to be in longer dated maturities.

The total of negative-yielding sovereign debt with remaining maturities of greater than seven years fell significantly to $0.5 trillion as of Mar. 1 from over $2.6 trillion on June 27 2016.

Since then German bond yields have moved only a little so the general picture looks not to be much different.

Comment

I wanted to point out today the fact that whilst it feels like the economic world has moved on in 2017 in fact the negative interest-rate and yield story has changed a lot less than we might have thought. It has fallen out of the media spotlight and perceptions but it has remained as a large iceberg floating around.

One of my themes has been that we will find out more about the economic effects of negative interest-rates as more time passes. Accordingly I noted this from VoxEU yesterday.

Banks throughout the Eurozone are reluctant to cut retail deposit rates below zero, wary of possible client reactions

That has remained true as time has passed and it seems ever clearer that the banking sector is afraid of a type of deposit flight should they offer less than 0% on ordinary retail savings. That distinguishes it from institutional or pension markets where as we have discussed before there have been lots of negative yields and interest-rates. Also if we look at average deposit rates there remain quite large differences in the circumstances.

For example, the average rate on Belgian deposits has dropped to 0.03%. If Belgians took their money across the border, they could get almost ten times that in the Netherlands (0.28%). In France even, rates average 0.43%.

If we move to household borrowing rates we see that there are much wider discrepancies as we wonder if at this level we can in fact call this one monetary policy?

The Finns borrow against 1.8%, the Irish pay 3.6%

Some of the differences are down to different preferences but as the Irish borrowing is more likely to be secured ( mortgages) you might reasonably expect them to be paying less. Oh and as a final point as we move to borrowing we note that rates are a fair distance from the official ones meaning that the banks yet again have a pretty solid margin in their favour, which is somewhat contrary to what we keep being told.

The possible road to another Bank of England Bank Rate cut

This morning has brought some disappointing news about the UK economy. From the Office for National Statistics.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017.

As the official release goes on to tell us this is slightly worse than the preliminary estimate.

UK GDP growth in Quarter 1 2017 has been revised down by 0.1 percentage points from the preliminary estimate published on 28 April 2017; mainly due to broad-based downward revisions within the services sector.

Whilst this was disappointing it was far from a complete surprise as there have been hints that the services sector had struggled in that quarter. Of course it makes up the vast majority of the UK economy these days leaving not much scope to regain the ground elsewhere.

The detail

It turns out that all sectors of the UK economy grew it is just that they did not do so by much.

In Quarter 1 2017, all four sectors show positive growth; agriculture increased by 0.3%, total production increased by 0.1% and construction and total services both increased by 0.2%.

If we look at the services sector we see that in football terms it was in a way a story of two halves.

The growth was focused in the business services and finance, and government and other services industrial groups, but there was a slow-down in growth in consumer-focused industries, such as retail sales and accommodation. Within the services industries, two of the four main sectors decreased in Quarter 1 2017; distribution, hotels and restaurants, and transport, storage and communications.

The area responsible for today’s downwards revision has ironically been a strength for the UK economy in recent quarters.

Services contributed 0.06 percentage points to the downward revision to UK GDP, the biggest contributor. Within services, the largest contributor to the downward revision is business services and finance. However, within this section, at the more detailed level, the revisions are small and broad-based, primarily reflecting late survey returns.

We can really drill down to see the state of play here.

Total services output rose by 0.2% in Quarter 1 (Jan to Mar) 2017, driven by 0.6% growth in business services and finance, and 0.4% growth in government and other services (Figure 3). Meanwhile, distribution, hotels and restaurants, and transport, storage and communication both recorded negative quarterly growth – falling by 0.6% and 0.2% respectively. This is the first negative quarter-on-quarter growth rate in each series since Quarter 4 (Oct to Dec) 2012 and Quarter 3 (July to Sep) 2013.

What about the individual experience?

The aggregate levels above do not allow for changes in the population so for example a growing population would normally lead to higher economic output and GDP, but that higher GDP would not necessarily indicate people being better off. This often gets ignored by politicians and much of the media because it has shown that we are not doing as well as the headline number would suggest.

In Quarter 1 (Jan to Mar) 2017, gross domestic product (GDP) per head was flat compared with Quarter 4 (Oct to Dec) 2016. GDP per head is now 1.7% above the GDP pre-downturn peak in Quarter 1 2008, having surpassed it in Quarter 4 2015.

That compares with us being some 8.7% higher on the headline number and the gap has just widened even further as we were on a road to nowhere on an individual basis at the start to 2017.

GDP per head in volume terms was flat between Quarter 4 2016 and Quarter 1 2017.

If the trend from the migration data also released today continues then the numbers may be pulled back closer together.

Net long-term international migration was estimated to be +248,000 in 2016, down 84,000 from 2015 (statistically significant); immigration was estimated to be 588,000 and emigration 339,000.

The catch is that these numbers are probably even more unreliable than the GDP ones.

Nominal GDP

This is the number that will attract the interest of Mark Carney and the Bank of England.

GDP in current prices increased by 0.7% between Quarter 4 2016 and Quarter 1 2017.

This is because on an economy wide level it is a measure of how we can deal with the debt issues that exist. Mostly we pay these in nominal rather than real terms. Although they avoid putting it in these terms this is why central banks target a positive rate of inflation ( mostly 2% per annum) because it is in effect a subsidy for debtors as their debts get deflated in real terms. This is also why there are regular suggestions that the target rate of inflation should be raised to either 3% or 4% so that debts can be inflated away even more quickly.

So in terms of debt worries they will be pleased to see the effect of inflation on the GDP numbers so that real growth of 0.2% becomes nominal growth of 0.7%. You may note that the period when we had solid economic growth but around 0% inflation would be pretty much indistinguishable in these terms. Of course we as workers are worse off as this from today’s monthly commentary makes clear.

Adjusted for consumer price inflation including owner occupiers’ housing costs (CPIH), average weekly earnings increased by 0.1% including bonuses, but fell by 0.2% excluding bonuses, compared with a year earlier. This is the first decline in real earnings (excluding bonuses) since the 3 months to September 2014.

There are hints that consumers are beginning to feel some of the pinch of higher inflation as well.

The slowdown in Quarter 1 2017 compared with Quarter 4 2016 reflected a decline in output from consumer focused industries, including the retail industry. As a result, private consumption was a smaller contributor to GDP growth than in recent periods, adding 0.2 percentage points.

Trade

This is something of a problem that it a hardy perennial for the UK economy and GDP. It has been at play yet again.

the total trade deficit widened by £5.7 billion to £10.5 billion between Quarter 4 2016 and Quarter 1 2017. Both the monthly and quarterly widening of the trade deficit were mainly due to increased imports of oil, chemicals, mechanical machinery and cars.

More specifically it did this.

The negative contribution to GDP came from net trade, which contributed a negative 1.4 percentage points.

So over the last two quarters it has given us a large boost and now taken it away. If we look back it has taken 1.4% away, given us 1.7% and now taken 1.4% away over the past 3 quarters. An unlikely sequence which reminds us how volatile and unreliable the trade numbers are especially for the most important sector which is the services one.

Comment

Let me open with some optimistic thoughts. Firstly this is now exactly the same rate of economic growth we had at the opening of 2016 and very little below that in 2015. So we may have a systemic problem similar to the one which has affected the United States for a while. Also we are simply not able to measure GDP to 0.1% even when all the data is in as opposed to the 80% or so we have now. If investment is any guide companies seem to be planning hopefully which coincides with the latest business surveys.

For Quarter 1 2017, the largest positive contribution to GDP came from gross capital formation, which contributed 1.2 percentage points.

However the GDP growth number has just been revised lower by 0.1% and the danger for the rest of 2017 is that the higher trajectory for inflation subtracts from economic growth. Let me leave you with a thought that I expressed to TipTV Finance which is that in any sustained slow down the Bank of England would be likely to ease monetary policy again.

http://tiptv.co.uk/uk-election-manifestos-holes-swiss-cheese-not-yes-man-economics/

 

 

 

 

 

China faces up to a ratings downgrade

This morning we have received news about the world’s second largest economy. The Ratings Agency Moodys issued this statement.

Moodys Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook from negative to stable.

As you can see from the statement this was not a complete surprise as the outlook had been negative although in some ways the timing was as not so long ago the IMF had told us this. From Reuters on the 18th of April.

The IMF upgraded its estimate for China’s 2017 growth to 6.6 percent from 6.5 percent, which it made in January. It also raised its forecast for growth next year to 6.2 percent from the previous 6.0 percent.

This added to the upgrade it has given China in January when it had raised the economic growth forecast for 2017 from 6.2%. In fact only on the 9th if this month the IMF had repeated this message.

In China, the region’s biggest and the world’s second largest economy, policy stimulus is expected to keep supporting demand. Although still robust with 2017 first quarter growth slightly stronger than expected, growth is projected to decelerate to 6.6 percent in 2017 and 6.2 in 2018.

 

This slowdown is predicated on a cooling housing market, partly reflecting recent tightening measures, weaker wage and consumption growth, and a stable fiscal deficit.

Although whilst it was relatively upbeat the IMF has warned about credit expansion.

Why did Moodys act?

As the quote from the Financial Times below shows Moodys are concerned about the financial system in China.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” Marie Diron, the agency’s associate managing director for sovereign risk, wrote in an announcement on Wednesday.

Indeed if we look at the statement they expect China to go along at least part of the journey that us westerners have travelled.

While China’s GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus.

Of course their economic growth is officially recorded at higher levels than ours but it looks like the Chinese will have to accept a sort of new normal where economic growth is lower just like we have.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016.

If we look at the situation in terms of the national debt to GDP ratio we have looked at for Greece and the UK this week already then it looks as if China is currently in a lot better place.

Moody’s expects China’s direct fiscal debt to reach 40 per cent of gross domestic product by the end of next year and 45 per cent by 2020. ( Financial Times).

However in a development which is very familiar just like us Westerners the Chinese do all they can to keep what is public-sector debt off the official books.

In addition, it notes that China’s reliance on disguised fiscal spending through off-budget special purpose vehicles owned by local governments is likely to persist. The Financial Times reported this month on a confidential World Bank assessment warning of risks from so-called local government financing vehicles.

Moodys are expecting further growth in this area.

Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

Let us look at the wider debt burden in China which is something I looked at back on January 5th.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

Moodys thinks that this will happen going forwards.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors.

I would counsel caution about the use of averages here as not only can they be misleading without an idea of dispersion it could be signalling a group going over the cliff together.

Debt and Demographics

Should debt continue to rise then China will share a problem that is affecting more than a few of the evil western capitalist imperialists. From my article on January 5th.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

Commodity prices

Mining.com updates us on the trends for Iron Ore.

The Northern China import price for 62% Fe iron ore fines was $61.90 a tonne on Monday, down more than 20% year-to-date on growing fears of an oversupplied market.

There is quite a bit going on as the Chinese increasingly use scrap iron in production but it is hard not to think of the Iron Ore which was used as collateral in financial deals as we looked at some time back.How much of that is in today’s 5% fall in the price of Iron Ore futures is hard to say. Dr.Copper rallied at the end of 2016 after several years of decline but seems to have mostly flat lined in 2017 at around US $2.50.

The outlook

This month’s business surveys recorded something of a slow down.

The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a further slowdown in growth momentum at the start of the second quarter. This was highlighted by the Composite Output Index posting 51.2 in April, down from 52.1 in March, and the lowest reading for ten months.

The ratio between the numbers here and official levels of economic growth are very different to what we see in the west but any slow down will not be welcome.

Comment

There are a few things to consider here. Firstly we are unlikely to see much of a fall in bond prices and rises in yields in response to this as used to happen. The Chinese bond market is almost entirely ( ~ 96% ) domestically owned making it rather like Japan meaning that any selling by foreign investors is not that likely to be significant. Also these days central banks mostly intervene to stop such things don’t they?

Moving onto the economy we see that monetary conditions are the issue and for this to end well the Chinese will have to make a much better job of dealing with a credit boom than we did in the west. Will they be able to continue to tighten policy if economic growth slows further? As to outflows of money we are regularly assured these days that they have pretty much stopped but to my mind there is a worrying signal which is the continuing rise in the price of bitcoin.

The average price of Bitcoin across all exchanges is 2326.72 USD ( @bitcoinprice )

Finally these things are not the same without an official denial are they? From Xinhua News.

China’s Finance Ministry on Wednesday dismissed a decision by international rating agency Moody’s to downgrade China’s long-term local currency and foreign currency issuer ratings.

 

The General Election and its impact on the UK Public Finances

Firstly let me start today by expressing my deepest sympathies to those affected by last night’s dreadful attack at Manchester Arena. I do understand some of the feelings of those affected as I was just around the corner from the IRA Bishopgate bomb in the City many years ago. This time around though things are even worse with the apparent targeting of children at a music concert.

Today I wish to do a different form of travelling in time as it will be helpful to remind ourselves of the state of play some 7 years ago as we approached a General Election. From April 29th 2010.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So is the standard of debate, manifesto and honesty any better this time around? In terms of scale maybe a little as we see the woeful efforts from back then.

The worst offender is the Liberal Democrats who have not explained where they will find £79 billion of spending cuts which is 5.4% of national income.The Conservatives plan spending cuts but have not explained where they will find £71 billion of them which is 4.8% of national income. Labour plan spending cuts but have not explained. Labour have £59 billion of spending cuts which they have not explained which is 4.1% of national income.

What about now?

We can permit ourselves an opening sigh of relief as the numbers are much lower now as this is what we thought was the situation back then.

Our fiscal deficit for the last year was £163 billion which is 11.6% of our economic output (Gross Domestic Product or GDP).

That compares with £48.7 billion last year. So we have in fact made quite a lot of progress although much more slowly than promised as we were supposed to be in surplus by now. Oh and in a sign of how reality changes over time we now think we borrowed £151 billion in the peak year.

As to the situation post election there is more smoke than clarity but I think whoever wins the Institute of Fiscal Studies have this right.

A balanced budget can apparently now wait until the middle of the next decade.

In political terms that is beyond the furthest star! As to the detail here is the IFS again.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

The “room for manoeuvre” has been at least partly used over the issue of social care and what has become called the Dementia Tax.Which is currently unchanged or very changed and was always intended to have a cap or has a new one depending on your point of view. Personally I think the official denials of any change are the clearest guide. As to Labour there are clear plans to spend more of which an example from its Manifesto is below.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

This sounds rather like the Juncker Plan from the Euro area but we do not know how much public borrowing there will be or why private sector capital is not supporting such investment already? There are also plans for rail and water nationalisation which as the Guardian points out would work if the UK was/is a hedge fund.

At Severn Trent, for example, the dividend yield is 3.4% at the current share price. Borrowing at 1.5% to buy an asset yielding 3.4% is not the worst trade in the world. And the state, if it wanted to act like a supercharged private equity house, would be able to juice up returns by refinancing the companies’ debt at a lower rate.

In case some of you read the piece the author was somewhat confused about UK Gilt yields but somehow ended up near the right answer. We can presently borrow at 1.6% for fifty years ( for some reason they looked at 10 years) so the doubt in the issue is whether the public sector could get the same rate of return as the private sector. But the elephant in the room is the £60 billion or so required to buy the companies in the first place. They could of course just take them but that would presumably scupper the private capital for the National Investment Bank.

As to the NHS then there seems to be little variety about.

While precise comparisons are hard, there is strikingly little difference between Labour and the Conservatives in their funding promises for the NHS.

The Conservatives are promising a real increase of £8 billion over the next five years. That sounds like a lot but it won’t go far. Nor will Labour’s only slightly less modest offering.

Although the Liberal Democrats do offer something of an alternative.

Increasing spending on the NHS and social care, using the proceeds of a 1p rise in Income Tax.

Actually in a groundhog style way the latter part of that sentence does take us back our 7 years again as the musical theme for whoever is in government next comes from the Beatles.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Today’s data

Let us open with the good news.

Since the previous bulletin, the provisional estimate of central government net borrowing for the full financial year ending March 2017 has been revised down by £3.5 billion

Much of this was from higher tax receipts which particularly in the case of VAT may hint we did a little better than previously thought.

current receipts were revised upwards by £2.4 billion; VAT receipts were revised up by £1.7 billion between January and March 2017, largely due to higher than forecast cash receipts in April 2017; and Income Tax and National insurance contributions received in March were revised upwards by £0.5 billion and £0.3 billion respectively

As to April itself it was not so good.

Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016;

Tax receipts were higher but in a potentially worrying signal it was debt costs which moved the numbers as we spent an extra £2.1 billion in this area this April. We are not told why but I expect it to be the rise in inflation and in particular the rise in index or inflation linked Gilts driving this especially as they are linked to the Retail Price Index.

Comment

As we look back that is much that is familiar about the UK Public Finances in a General Election campaign. The reality is that our politicians do not think we are not capable of accepting or dealing with the truth so we get presented with what they think we will take rather than what they think might happen. There are more holes in the various manifestoes than in a Swiss cheese!

However since the 2010 election we have made a fair bit of progress in reducing the level of annual borrowing although the concept of balance or a surplus was a mirage at best. This means that you might like to sit down as you read the change in another set of numbers. First back then it was £1.03 trillion or 65.7% of GDP. And now.

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of April 2017, which equates to 86.0% of the value of all the goods & services currently produced by the UK economy in a year (or gross domestic product (GDP)).

We should be grateful that the cost of borrowing is so low as this has provided an enormous windfall over the period to our public finances. Odd that the Bank of England does not explicitly present that as a gain from its £435 billion of Gilt purchases is it not?

Greece, how long can it keep going like this?

Today’s topic reminds me of the famous quote by Karl Marx.

History repeats itself, first as tragedy, second as farce.

Sadly Karl did not tell us what to do on the 4th,5th and 6th occasions of the same thing as I note the news from Reuters on Friday.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

This sounds so so familiar doesn’t it which of course poses its own problem in the circumstances. This continues if we look at the detail.

The income tax exemption is reduced to 5,600-5,700 euros from 8,600 euros to generate revenues of about 1.9 billion euros. The lower threshold will mean an increased tax burden of about 650 euros for taxpayers.

Up to 18 percent cuts in main and supplementary pensions and freezing of benefits thereafter until 2022. The cuts will result in savings of 2.3 billion euros.

I do not know about you but if I was raising taxes in Greece I would not be raising them on the poorest as lowering the lower income tax threshold will hit them disproportionately. After all it was the very rich who helped precipitate this crisis by not paying tax not the poor. But the underlying principle’s are pretty much what we have seen since the spring of 2010 especially if we add in this part.

Sale of stakes in railways, Thessaloniki port, Athens International Airport, Hellenic Petroleum and real estate assets to generate targeted privatization revenue of 2.15 billion euros this year and 2.07 billion euros in 2018.

This reminds me of the original target which was for 50 billion Euros of revenue from privatisations by 2015. As you can see the objectives are much smaller now after all the failures in this area and of course these days assets in Greece have a much lower price due to the economic depression which has raged for the last 7 years. Back then for example the General Index at the Athens Stock Exchange was around 1500 as opposed to just below 800 now suggesting that this is yet another area where Greek finances are chasing their tail.

The same result?

Last week saw yet more sad economic news from Greece.

The available seasonally adjusted data indicate that in the 1 st quarter of 2017 the Gross Domestic Product (GDP) in volume terms decreased by 0.1% in comparison with the 4 th quarter of 2016, while it decreased by 0.5% in comparison with the 1 st quarter of 2016. ( Greece Statistics).

This meant that yet another recession had begun which will be a feature of the ongoing economic depression. Another feature of this era has been the official denials an example of which from the 8th of March is below.

Greece’s Prime Minister Alexis Tsipras was confident that the times of recession were over and that “Greece has returned back to growth” as he told his cabinet ministers……..After seven years of recession, Greece has returned to positive growth rates he underlined.

He was not alone as European Commissioner Pierre Moscovici was regularly telling us that the Greek economy had recovered. This means that as we look at the period of austerity where such people have regularly trumpeted success the reality is that the Greek economy has collapsed. The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

What is astonishing is that even after all the mishaps of 2015 with the bank run and monetary crisis there has been no recovery so far. The downwards cycle of austerity, economic collapse and then more austerity continues in a type of Status Quo.

Again again again again, again again again again

The Time Problem

The problem here is simply how long this has gone on for added to the fact that things are still getting worse or at best holding station in economic output terms. This means that numbers like those below have become long-term issues.

The seasonally adjusted unemployment rate in February 2017 was 23.2% compared to 23.9% in February 2016 and the downward revised 23.3% in January 2017.

It is nice to see a fall but falls at the rate of 0.9% per annum would mean the unemployment rate would still be around 20% at the end of the decade following the “rescue” programme which I sincerely hope is not the “shock and awe” that Christine Lagarde proclaimed back then. If we move to the individual level there must be a large group of people who now are completely out of touch with what it means to work. I see a sign of this in the 25-34 age group where unemployment was 30.4% in February compared to 29.3% in the same month in 2012. This looks like a consequence of the young unemployed ( rate still 47.9%) simply getting older. As the female unemployment rate is higher I dread to think what the situation is for young women.

Meanwhile tractor production continues its rise apparently according to the German Finance Minister.

Schaeuble: Reforms Agreed By Greece Are Remarkable, Goal Is To Get Greece Competitive, It Is Not There Yet ( @LiveSquawk )

It reminds me of last summer’s hit song “7 Years” but after all this time if we had seen reform things would be better. The fact is that there has been so little of it. Putting it another way the IMF ( International Monetary Fund) has completely failed in what used to be its objective which was helping with Balance of Payments crises. Even after all the economic pain described above the Bank of Greece has reported this today.

Mar C/A deficit at €1.32 bln from €772.4 mln last year, 3-month C/A deficit at €2.53 bln from €2.37 bln last year ( h/t Macropolis )

QE for Greece

This is being presented as a type of solution but there are more than a few issues here. Firstly the reform one discussed above as Greece does not qualify. But also there is little gain for a country where its debt is so substantially in official hands anyway and the bodies involved ( ESM, EFSF) let Greece borrow so cheaply for so long. In fact ever more cheaply and ever longer as each debt crunch arrives. It would likely end up paying more for its debt in a QE world where it issues on its own and the ECB buys it later! So it could be proclaimed as a political triumph but quickly turn into a financial disaster especially as the ECB is likely to continue to taper the programme.

Also people seem to have forgotten that the ECB did buy a lot of Greek debt but more recently has been offloading it to other Euro area bodies who have treated Greece better than it did. One set of possible winners is holders of Greek government bonds right now who have had a good 2017 as prices have risen and yields fallen and good luck to them. But the media which trumpets this seems to have forgotten the bigger picture here and that if the hedge funds sell these at large profits to the ECB then the taxpayer has provided them with profits one more time.

Comment

So we arrive at yet another Eurogroup meeting on Greece and its problems. It is rather familiar that the economy is shrinking and the debt has grown again to 326.5 billion Euros in the first quarter of this year. There will be the usual proclamations of help and assistance but at the next meeting things are invariably worse. Is there any hope?

Well there is this from Greek Reporter.

The size of Greece’s underground economy — where transactions take place out of the radar of tax authorities — is estimated to be about one quarter of the country’s official GDP, according to University of Macedonia Professor Vassilis Vlachos….. Among the main factors contributing to the shadow economy increase, according to Vlachos, is the citizens’ sense that the tax burden is not distributed fairly and that there is a poor return in term of public services, as well as inadequate tax inspections……Based on the findings of the survey, participation in the shadow economy is at 60 percent for the general population and rises to 71.6 percent among the unemployed.

If he is correct then this is of course yet another fail for the Troika/Institutions. As to the official data there are some flickers of hope such as the recent industry figures and retail sales so let us cross our fingers.

 

Brazil has its very own currency war

This week has been one where the political topic of impeachment has affected financial markets. Like so many things these days it started with the Donald but then as the week developed headed south to the sound of samba music. From the BBC.

Brazilian President Michel Temer says he will not quit, amid allegations he authorised paying bribes to silence a witness in a huge corruption scandal……….Opposition parties have been demanding snap elections and his impeachment.

This would add to the impeachment of the previous President Dilma Rousseff in what must now seem something of a conveyor belt to ordinary Brazilians.

The Real

As events unfolded I was reminded of the famous statement from Brazil’s Finance Minister from September 2010.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies. ( Financial Times)

Back then he was complaining mostly about the US Dollar which had fallen by around 25% against the Brazilian Real as the US Federal Reserve expanded its balance sheet after large interest-rate cuts. Well presumably he would have been happier with what happened yesterday although probably not the cause.

The real tumbled 8 per cent to 3.38 against the US dollar, wiping out all of this year’s gains and taking the currency back to its level of last December. The real had been trading below 3.10 to the dollar as recently as Wednesday.

If we look back we see that Finance Minister Mantega has in more recent years much to cheer if he was a fan of a lower currency. Back in September 2010 when he made his speech some 1.7 Reals purchased a single US Dollar so approximately half the current rate. In fact the Real had been even lower as it had fallen to more than 4 versus the US Dollar in late 2015 and early 2016. In more recent times it has rallied as foreign investors purchased Brazilian assets in the hope that the reforms of the current President would improve the economy.

You may like to note that the currency fall took place in spite of the fact that Brazil has interest rates that seem rather extraordinary from our continent of near zero and indeed negative official ones.

the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.

Although as you can see they have been easing policy in 2017.

Equity markets and leverage

These plunged as well and led to a moment which will have Snoopy from the Peanuts cartoons back on the roof of his kennel wailing “When,when,when will I ever learn……?”

The 3x Brazil ETF ends the day down 48.2%, the largest single day decline for an ETF in history. Maravilhoso.  ( @charliebilello ).

Ouch! Although someone did suggest there has been a worse decline.

Not quite. There was a certain Europe listed 5x Swiss Franc ETF that did worse on a certain Jan day in 2015. ( @garobhai)

What was that about sorrows coming in battalions rather than single spies?

An economic depression

I have looked at the economic woes of Brazil before and note the central banker euphemisms of the Central Bank of Brazil.

The economy continues to operate with a high level of economic slack, reflected in the low industrial capacity utilization indices and, mainly, in the unemployment rate.

Yesterday the Brazilian statistics office released its latest unemployment data.

In the 1st quarter of 2017, the compound labor underutilization rate (which aggregates the unemployed persons, time-related underemployed persons and potential workforce) stood at 24.1%, which represents 26.5 million persons. In the 4th quarter 2016, for , this rate was of 22.2% and, in the 1st quarter of 2016, it was 19.3%.

Well played to them in having an underemployment rate rather than an unemployment one. Unfortunately it is not only high it is rising quite sharply and as an aside it reminds us that Brazil has a large population. It is not quite so easy to find the unemployment rate itself but I did finally spot it.

The unemployment rate ( 13.7%) advanced in all Major Regions in the 1st quarter of 2017 in relation to 4th quarter of 2016.

If the double-digit rate of unemployment is to fall then Brazil will need some economic growth but last Friday’s service data showed the reverse.

In March, the services sector recorded decrease of 2.3% in the volume of sales over the previous month (seasonally-adjusted series), after having recorded a growth of 0.4% in February (reviewed) and 0.0% in January (reviewed). This is the highest decrease of the series initiated in 2012….

Compared to a year ago there has in fact been a sharp decline.

In the non-adjusted series, in the comparison with March 2016, the sector posted decrease of 5.0%, following the downward trend of 5.3% in February (reviewed) and 3.5% in January. With such results, the cumulative rate in the year stood at -4.6% and, in 12 months, at -5.0%.

The retail sales sector is not helping either.

In the seasonally-adjusted series, the extended retail trade – which includes retail plus the activities of vehicles, motorcycles, parts and pieces and of construction material – once again registered a negative change in volume of sales over the immediately previous month (-2.0%)…….Compared with March 2016, the extended retail trade retreated 2.7% in volume of sales (34th consecutive negative rate) and -1.2% in nominal revenue.

34 months of declining retail sales is yet another depressionary signal is it not?

What about inflation?

The picture had been improving although the level is high for these times.

The Extended National Consumer Price Index (IPCA) of April recorded a change of 0.14%……..In the last twelve months, the index was down to 4.08%, below the 4.57% result of the previous month, becoming the lower rate in 12 months since July 2007, when it was at 3.74%

The fall was mostly due to something of a shambles on the electricity front although of course Brazil is far from alone in that.

The 6.39% drop in the item electricity represented discounts over bills, as a result of the decision of the Brazilian Electricity Regulatory Agency (Aneel), so as to make up for the overcharge, in 2016, of the so-called Reserve Energy Charge (EER) destined to pay the Angra III power plant.

The price of chocolate went up by 10.23% on an annual basis which is yet another country that does not reflect falls in the price of cocoa.

Comment

So far I have avoided looking at the economic depression in growth or Gross Domestic Product terms so let us now catch up with that.

In 2016, the GDP fell 3.6% in relation to the previous year, slightly lower than the 2015 result, when it had been 3.8%. There were drops in Agriculture (-6.6%), Industry (-3.8%) and Services (-2.7%). The GDP totaled R$ 6,266.9 billion in 2016.

The GPD fell 0.9% in the 4th quarter of 2016 against the 3rd quarter, considering the seasonally adjusted series. It is the eighth consecutive negative result in this kind of comparison. Agriculture grew 1.0%, whereas Industry (-0.7%) and Services (-0.8%) fell.

The only real ripple of good news I can find is that wheat production has been strong in 2017 so far so maybe agriculture will continue to grow. I note that the central bank was not especially optimistic in its April report and neither was the Markit manufacturing survey from earlier this month although it did not expect a further decline.

However, rising from 49.6 in March to 50.1 in April, the latest reading was indicative of broadly unchanged business conditions facing goods producers.

So the political and financial crisis as so often is hitting an economy when it is already down. I also note that when a shock hits even interest-rates of 11.25% do not protect a currency which is a lesson that has been taught many times before. Although for buyers of the Real at current levels there are likely to be fewer interest-rate cuts in 2017 now for obvious reasons. For s start the lower currency if sustained will lead to higher inflation.

As to quality of life even the recent Olympics has been seen to have a dark side. From the Guardian yesterday.

The area where most of our homes once stood is now a large concrete car park that is usually empty and insufferably hot. It is sad. There used to be 650 families here. Today, there are 20……..Hosting was a mistake. When the Games were over, those that already had money and investments – the hotel owners, businessmen, building companies, tourist agents and government officials – were better off, while the country and the people were left with the bill.

UK consumers leap out of their supposed grave yet again

Today we advance on the UK Retail Sales data which has various factors at play. Firstly the general theme is one of a fading of the growth we saw in 2016 as the growth in real wages also fades. On the subject of real wages I note that Sky News last night was comparing growth in March regular pay ( 2.1%) with April CPI inflation (2.7%) to presumably reinforce its point although of course there is a clear flaw there. Actually in March total pay growth (2.4%) was slightly higher than inflation ( 2.3%) as I pointed out yesterday but for some reason our official statistician’s use regular pay for real wages. I do wonder if they think Pound’s earned as bonuses are somehow marked in people’s pockets and bank accounts and treated differently.

Secondly there is the influence of the timing of Easter which was later this year and whether the seasonal adjustment allowed for that properly. The Confederation of British Industry or CBI certainly thinks that growth picked up.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)……37% of respondents expect sales volumes to increase next month, with 21% expecting a decrease, giving a balance of +16%

Indeed there was something rather familiar from last year so if it is the same let me say thank you ladies one more time. Your devotion to this area of the economy is hugely impressive.

Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%).

The details of this particular survey are as follows.

The survey of 112 firms, of which 57 were retailers, showed that the volume of sales grew at the fastest pace since September 2015 in the year to April, with orders placed on suppliers rising at the strongest rate for a year-and-a-half.

Today’s data

It would appear that my argument about problems with the seasonal adjustment concerning Easter gets another tick in its box.

In April 2017, the quantity bought in the retail industry increased by 2.3% compared with March 2017 and by 4.0% compared with April 2016.

This was a strong monthly performance and even got a little support in a way from my argument about the effect of inflation.

Average prices slowed slightly in April 2017, falling from 3.3% in March to 3.1% in April.

Slightly lower prices helping the performance? Maybe a bit and I also note that the measure of inflation in the retail sector seems to provide more backing for RPI data than CPI or CPIH.

If we look into the detail we see that they have a completely different view to the CBI.

Compared with March 2017, April 2017 has shown increases in the quantity bought and amount spent across all store types except department stores and textile, clothing and footwear stores.

I am not sure how a 97% rise for the CBI goes with an official data fall but there you have it! Meanwhile the march towards consuming online continues.

average weekly spending online was £1.0 billion; an increase of 19% compared with April 2016…….the amount spent online accounted for 15.6% of all retail spending, excluding automotive fuel, compared with 14% in April 2016.

Taking a perspective

If we look back we see that the figures for March which were so troubling at the time were revised from monthly growth of 1.7% to 2%. So they were not quite as bad, however even this month’s better performance is not so impressive on a quarterly basis.

The underlying pattern, as measured by the 3 month on 3 month estimate, showed a slight increase in April 2017 following a short period of contraction, increasing by 0.3%.

Thus it would be realistic to say that the surge of 2016 has gone and we are in a period  of little or marginal growth.

Looking Ahead

One area that is not going to be boosting Retail Sales is the buy to let industry if yesterday’s data from the Council of Mortgage Lenders is any guide.

Gross buy-to-let saw quarter-on-quarter decreases, down 2% by value and 1% by volume. Compared to the first quarter 2016, the number of loans decreased 39% and the amount borrowed decreased by 40%.

Of course that is comparing to the pre Stamp Duty increase peak but even the CML does not look especially optimistic.

The number of loans for buy-to-let house purchase advanced in March remained low compared to activity seen before the change on stamp duty on second properties introduced in April last year.

Also more general housing activity seems to have faded somewhat.

On a quarterly basis, house purchase activity was at its weakest for two years since the first quarter of 2015.

Although ever cheaper mortgage interest-rates did have an impact on existing borrowers.

By contrast, the number of remortgage loans advanced to borrowers was at its highest since the first quarter of 2009.

The only growth was seen in first time buyers which I have to say is not easy to explain.

Moving onto other factors I note that Markit’s latest survey has a two-way pull.

Higher living costs resulted in one of the sharpest falls in cash available to spend for two-and-a-half years in May. Survey respondents also indicated that their need for extra unsecured borrowing continued to rebound from the lows seen in 2016.

Of course regular readers of my work will realise that the UK has been on a bit of an unsecured borrowing binge recently. So perhaps more of the same is on its way. Somewhat oddly the surge in unsecured borrowing seems to have passed Markit’s economists by.

The survey measure which tracks people’s need to take on additional unsecured borrowing has rebounded so far this year, which marks an end to the steadily improved trend seen since late-2011

For newer readers the growth in UK unsecured credit has been of the order of 10% per annum for around a year now according to the Bank of England.

Car Finance

This seems to be continuing its rise and rise.

New figures released today by the Finance & Leasing Association (FLA) show that new business in the point of sale (POS) consumer new car finance market grew 13% by value and 5% by volume in March, compared with the same month in 2016. In Q1 2017, new business was up 10% by value and 3% by volume, compared with the same quarter in 2016.

Whilst we do not know that the cars bought were the same as last year there is a clear hint of higher inflation there than in the official figures if we look at the gap between value and volume. Also the word “bought” needs some review as these days we essentially lease or rent them.

The percentage of private new car sales financed by FLA members through the POS was 86.5% in the twelve months to March, unchanged compared with the same period to February.

The demand does however suggest that Gary Numan may have been prescient all those years ago.

Here in my car
I feel safest of all
I can lock all my doors
It’s the only way to live
In cars

Comment

Economics is a very contrary science if it is a science at all. We should welcome today’s better numbers for the UK and indeed they go with the business surveys which suggested an economic pick-up in April. Let us hope that continues. However we see yet more problems for our official statisticians as the seasonal adjustment for the timing of Easter misfires yet again. I am afraid that blaming that old staple the weather simply does not cut it. From the BBC.

Warmer weather helped retail sales to rise by more than expected last month, according to official data.

The actual picture is complex as growth fades and frankly after last year’s surge it had to at some point. The rise in inflation has reduced real wage growth although the situation is as ever in flux as in response to today’s numbers the UK Pound £ has pushed above US $1.30 which would help trim future inflation rises if we stay there. The ying to the upbeat yang is however that as so often in the past we look like we are borrowing on tick to spend.

If we move to financial markets this week has taught us one more time that crowded trades are the worst place to be as @NicTrades reminds us.

Reuters said this week biggest trade in the world was shorting VIX via leveraged ETFs millions selling vol at 7.8% VIX is now 16%

ETF stands for Exchange Traded fund.