UK unemployment rises above 7% and towards 10%

There are many different ways of gaining an insight into an economy and the labour market is one of the most significant. The credit crunch posed a challenge for earnings numbers in particular and we have seen that the pandemic and in particular the official response of the government via the furlough scheme has heavily affected the unemployment numbers. This is in many ways a good thing as it has helped prevent an unemployment surge but at the cost of making the number below useless as much of a guide to anything. However nobody seems to have told the BBC economics editor Faisal Islam.

While the main rate of unemployment has reached 5% for the first time in nearly five years, and this morning’s numbers saw the largest increase in the numbers unemployed since the financial crisis, the chancellor must now be tempted to extend the furlough scheme to co-ordinate with the rollout of the post-vaccination reopening of the economy.

He is in such a rush to make his point he forgets something which does appear later.

Though a significant rise over the past few pandemic-afflicted months, unemployment at 5% is still low by international standards and is being kept in check by the government’s job retention furlough scheme.

If we now switch to the actual numbers we are told this.

The UK unemployment rate, in the three months to November 2020, was estimated at 5.0%, 1.2 percentage points higher than a year earlier and 0.6 percentage points higher than the previous quarter.

But we see if we go through the numbers that some 1.6 million or so are being kept in employment by the furlough scheme.

Prior to the coronavirus (COVID-19) pandemic there were on average 2 to 2.5 million people temporarily away from work. Experimental estimates based on returns for individual weeks show that the number of people temporarily away from work rose to around 7.9 million people in April 2020 but has fallen to around 4.1 million people in November 2020.

This is a very broad brush measure but it compares to this.

For September to November 2020, an estimated 1.72 million people were unemployed, up 418,000 on the same period the previous year and up 202,000 on the quarter.

So nearly double and if I was being harsh I would add in 400,000 from the number below too.

There were also around 278,000 people away from work because of the pandemic and receiving no pay in November 2020; this has fallen from around 658,000 in April 2020.

That is how the unemployment rate could be as high as 10%.

Hours Worked

This gives a much better guide to what is going on and let me open with the good part.

Between June to August 2020 and September to November 2020, total actual weekly hours worked in the UK saw an increase of 89.0 million, or 10.0%, to 979.9 million hours.

Average actual weekly hours worked saw an increase of 2.8 hours on the quarter to 30.1 hours.

We are not given a direct comparison so let me help out. At the start of the year we were at just over 1,052 million hours so there has been a fall of around 7%. This confirms our view about the unreliability of the unemployment rate.


Here the situation is a little simpler.

Since February 2020, the number of payroll employees has fallen by 828,000; however, the larger falls were seen at the start of the coronavirus (COVID-19) pandemic.

The next number provides some perspective on the overall situation.

The UK employment rate, in the three months to November 2020, was estimated at 75.2%, 1.1 percentage points lower than a year earlier and 0.4 percentage points lower than the previous quarter.

If we get a little more up to date and look at December we see that in fact it is pretty similar to November.

Early estimates for December 2020 indicate that the number of payrolled employees fell by 2.7% compared with December 2019, which is a fall of 793,000 employees; since February 2020, 828,000 fewer people were in payrolled employment.

If we look back we see that previously the UK was creating jobs and so we have come to the end for now at least to something which was a ray of sunshine in difficult times.

Estimates for September to November 2020 show 32.50 million people aged 16 years and over in employment, 398,000 fewer than a year earlier. This was the largest annual decrease since December 2009 to February 2010. Employment decreased by 88,000 on the quarter.

Care is needed because the furlough scheme will impact here too.Also the obvious changes in the economy are muddying the waters. According to our Deputy National Statistician Jonathan Athow a couple of things have changed.

Some people report being in work, but away from work for Covid reasons and not being paid. They count as employment for LFS but don’t show up on payrolls. There are about 250k of them in recent months……….the employee-s/e split in LFS seems to be a little odd at the moment, and we think this is a change in how people report themselves. So likely 500k fall overstates things at moment, and shouldn’t be added to 800k payrolls.

This was in response to calculations which showed that in fact the number of jobs lost was 1.3 million. So in reality it is a bit more than the 800,000 or so officially reported but we do not know how much.

Average Earnings

This is from Kate Andrews who is economics correspondent of the Spectator.

Earnings growth is back to pre-pandemic levels. But it’s a selective recovery: ‘impacted upwards’ says the ONS ‘by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus pandemic’ i.e. people in low-paid work have lost their jobs.

Is earnings growth back to pre-pandemic levels no?! In fact if you believe them they are above such levels.

Growth in average total pay (including bonuses) among employees for the three months September to November 2020 increased to 3.6%, and growth in regular pay (excluding bonuses) also increased to 3.6%.

Feel free to have a good laugh at that. The explanation is something of a generic as the same themes are in play in the United States for example.

Current average pay growth rates are being impacted upwards by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus (Covid-19) pandemic; it is estimated that underlying wage growth – if the effect of this change in profile of jobs is removed – is likely to be under 2%.

Actually I do not believe that either as we see a series that is collapsing under the strain of the pandemic. We can look at the different sectors via the numbers below.

 The finance and business services sector saw the highest estimated growth in total pay, at 5.4%. Negative growth was seen in the construction sector, estimated at negative 1.1%. The wholesaling, retailing, hotels and restaurants sector, estimated at 3.1%, and manufacturing, estimated at 0.8%, were positive.

Perhaps there has been a good bonus season but does a 5.4% growth in finance pay pass the sense check? I do not think so. Frankly reporting 3.1% pay growth in the hospitality sector is a joke. Is anyone still there for a start? Looking at the numbers there have been some bigger bonus payments reported in the finance sector which may be skewing the numbers. As to the hospitality numbers I can only suspect that the wholesale sector includes things like Amazon which have been booming. It is a low pay sector at £376 per week in November so even a minor shift can skew the numbers.

I am leaving out real pay as frankly they are beyond a joke.


We have seen over the past 24 hours how a loose understanding of statistics can lead to trouble as 8% of the people being over 65 in the AstraZeneca covid vaccine sample got reported as an 8% efficacy rate. I am being polite saying loose understanding as darker forces look to be at play. This in another form is what is happening with the reporting of a 5% unemployment rate which is clearly wrong but gets reported anyway. It looks to be somewhere north of 7% and up to around 10% but we cannot say with any precision.

The situation is even worse when we shift to earnings. Regular readers will be aware that I have been a frequent critic of the way the numbers omit important sectors such as the self-employed and in fact any business with less than ten employees. But right now the structure of it ( approved back in the day by a familiar figure Dr.Martin Weale) means the numbers are worse than useless in my opinion.

In fact things are so bad that a number criticised in 1983 by Yes Prime Minister “nobody believes the unemployment numbers” is in fact more on the mark. I am referring here to the claimant count.

The Claimant Count increased slightly in December 2020, to 2.6 million; this includes both those working with low income or hours and those who are not working.

It would give us an unemployment rate of the order of 7.6%.

As to wages well the actual numbers seem to be showing a fall.

This is particularly important to consider at present because both of the two main sources of information about number of employee paid through payroll (HM Revenue and Custom’s Pay As You Earn Real Time Information, and Office for National Statistics’ Monthly Wages and Salaries Survey) identify a year-on-year fall of close to 3%.

The Green central banking of Christine Lagarde and digital coins

The mood music around central banks has changed quite a bit in recent months. The Covid-19 brought an answer to the question are their monetary policies “maxxed out” ( hat tip Mark Carney)? We saw more interest-rate cuts and much more QE bond buying. But now things have gone much quieter in that area as last week’s frequent announcements by central banks proved. What we are now seeing is a concentration on other areas which in one case has nothing to do with inflation targeting at all and in the other has a dark secret.

Let us start with the European Central Bank which presently is in a mess on two counts. There was not a lot to say on Thursday but even so Christine Lagarde managed to confuse both herself and everyone else.

 So, those are really, I’d like to think in terms of this, the compass and the anchor and the two of them interact in order to assess whether or not we need to adjust and calibrate our purchases of any period. Because don’t forget that PEPP is intended to preserve the financing conditions, is earmarked by flexibility, and that flexibility, you’ve heard me say before, is flexibility along time sequences, flexibility in asset classes, flexibility in countries.

This is not helped by the fact that Chief Economist Phillip Lane seems to keep making some more equal than others.

The bilateral calls with ECB watchers, including chief economists and research directors, took place within this
framework and were fully disclosed via the regular publication of diaries…… ( A letter to an MEP from Christine Lagarde)

Again language is a casualty as briefing some privately is described as being “fully transparent”

Green Policies

When you are under fire, one route out is to try to do something you think is popular. Hence this from Christine Lagarde at the World Economic Forum this morning.

It is with this history in mind that I want to talk about the role of central banks in addressing climate change.

One similar feature to monetary policy is there which is the counterfactual.

Yet the transition to carbon neutral is not so much a risk as an opportunity for the world to avoid the far more disruptive outcome that would eventually result from governmental and societal inaction.

Indeed it is time to note the reference to “Be afraid! Be very afraid!” from the film The Fly as we recall how the scenarios for monetary policy have gone.

Scenarios show that the economic and financial risks of an orderly transition can be contained.

Are those like the scenarios which showed Greece growing at 2% per annum from 2012 onwards? Anyway don’t worry if they are wrong (again) because it doesn’t really matter.

Even a disorderly scenario, where the economic and financial impacts are potentially substantial, represents a much better overall outcome in the long run than the disastrous impact of the transition not occurring at all.

Still it is a growth area for ECB officials.

At the ECB, we are now launching a new climate change centre to bring together more efficiently the different expertise and strands of work on climate across the Bank. Climate change affects all of our policy areas. The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.

Is this an example of re-invention in the way that former Bank of England Governor Mark Carney has morphed into a fearless climate change warrior? It seems that Christine Lagarde is on her own road to Damascus.

Climate change is one of the greatest challenges faced by mankind this century, and there is now broad agreement that we should act. But that agreement needs to be translated more urgently into concrete measures. The ECB will contribute to this effort within its mandate, acting in tandem with those responsible for climate policy.

Oh and let me refine my view that this has nothing to do with inflation targeting. Because they can use it as a way of raising inflation to 2% per annum although it would make everyone worse off. Perhaps that is why it has to come with such apocalyptic imagery.

The effective price of carbon is expected to rise if the EU’s targets for reducing emissions are to be reached. Modelling by the OECD and the European Commission[7] suggests that an effective carbon price between €40-60[8] is currently needed, depending on how stringent other regulations are.

The heat is on across many countries as this from Reuters  over the weekend highlights.

The House of Commons’ Environmental Audit Committee – which looks at public bodies’ impact on global warming – said buying bonds from firms such as energy companies with high carbon emissions contravened government goals to reduce global warming.

“The Bank must begin a process of aligning its corporate bond purchasing programme with Paris Agreement goals as a matter of urgency,” the committee’s chairman, Philip Dunne, wrote in a letter to BoE Governor Andrew Bailey.

Just in case you thought that the corporate bond purchase programme could not be more of a shambles. Indeed as it has found itself buying the bonds of European companies as it is could we see it and the ECB in a race to buy green bonds and thus bidding up the prices?

Central Bank Digital Coins

These are also back in the news and some of it is misleading. Here is Benoit Coeure formerly of the ECB.

If banknotes keep declining, a world without CBDC is one where financial institutions, but not citizens, can access the central bank balance sheet. Is it safe? Does it support trust in the currency? Is it politically acceptable?

This is to say the least curious and some may consider it an outright lie. If we look at the latest numbers for currency in circulation for last November we see that in the last three months it has risen by 9 billion Euros, then 8 billion and then 13 billion. So they are rising rather than falling and if anything growth has risen. Indeed the annual rate of growth is now 11.1%! The only possible thing you can say is that it is slower than overall narrow money growth (M1) at 14.5% but seeing as they have been throwing the kitchen sink at that and frankly the bathroom sink too that is no surprise.

I guess next they will return to claiming that the growth they claim doesn’t exist is all down to criminal activity.


It is revealing that these days central bankers want to talk about anything but monetary policy these days. Well at least in public because they seem keen on doing so in private to a select crew and maybe their future employers. After all they can afford it.

BOSTON (Reuters) – The world’s 20 best-performing hedge funds earned $63.5 billion for clients in 2020, setting a record for the last 10 years during a chaotic time when technology oriented stocks led a dramatic rebound from a pandemic induced sell-off, LCH Investments data show.

If we return to climate change then regular readers might like to recall my regular refrain that you should never believe anything until it is officially denied.

 This is not “mission creep”, it is simply acknowledging reality.  ( Christine Lagarde )

Next comes the issue of central bank digital coins or CBDC. To my mind the real rationale now is the fact that they would help enable increasingly negative interest-rates. Or as Sweet informed us many years ago.

Does anyone know the way, did we hear someone say
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way
To Block Buster



UK Retail Sales growth has been boosted by the large fiscal stimulus

As we look at the UK economy some numbers are drivers and others are followers. Or as the Frenchman puts it in the Matrix series of films there is the concept of “cause and effect”.So let us look at the UK retail sales and public finances data released today in the manner. In which case we start with these two numbers.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £34.1 billion in December 2020, £28.2 billion more than in December 2019, which is both the highest December borrowing and the third-highest borrowing in any month since monthly records began in 1993.

As you can see December saw an extraordinary fiscal stimulus which continued what has been happening since last spring.

Public sector net borrowing (PSNB ex) in the first nine months of this financial year (April to December 2020) is estimated to have been £270.8 billion, £212.7 billion more than in the same period last year and the highest public sector borrowing in any April to December period since records began in 1993.

So our story starts with what has been what one day will be in the economics text books as an example of fiscal policy. That is our first link into the retail sales numbers as it creates a more positive foundation for them than otherwise. The main schemes are listed below.

  • COVID-19 Corporate Financing Facility
  • Coronavirus Job Retention Scheme (CJRS)
  • Self-employment Income Support Scheme (SEISS)
  • Eat Out to Help Out
  • miscellaneous subsidies paid out to businesses

Of these the first does not involve the public finances at this stage as the Bank of England has lent some £12.3 billion in the CFF. It may appear if there are losses on the scheme but as we stand we see simply some implicit support for retail sales.

The next two categories will have been a direct support for retail sales and the latest estimates are below. I say estimates because they are particularly exposed to the prospect of revision so it is best to take them as a broad brush.

Of this additional expenditure, £67.6 billion was paid as a part of the job furlough schemes, with £48.8 billion on the Coronavirus Job Retention Scheme (CJRS) and £18.8 billion on the Self Employment Income Support Scheme (SEISS).

Far from ever penny will have gone into retail sales but clearly they have been quite a support. If we look at Eat Out To Help Out it will have provided a boost but that is now over as for a start the places it helped are presently mostly shut, to sit-down business anyway.

UK Retail Sales

It is in the light of all of the above that we see this.

In December 2020, retail sales volumes increased by 0.3% when compared with November 2020, resulting in an increase of 2.7% when compared with February’s pre-lockdown level.

So we saw growth in December which helped numbers to be higher than pre pandemic and in a more conventional metric higher than a year before.

The year-on-year growth rate in the volume of retail sales increased by 2.9% when compared with December 2019; non-store retailers reported the largest year-on-year growth at 43.5% while food stores also saw strong annual growth of 4.4%.

The detail from the numbers above also puts us on notice that there have been plenty of changes. The growth in food store sales for example has no doubt been at least partly in response to the restrictions on the restaurant sector. Indeed as we look further some of the exchanges and changes have been like a rally in a game of tennis.

Clothing retailers saw the largest monthly growth in December 2020 of 21.5%, rebounding from the monthly fall of 19.6% reported in November where the sector was affected by widespread store closures. Food stores reported a monthly fall of 3.4% in December, which can be partly be attributed to a fall back from the 2.8% growth in November. In November, supermarkets benefitted from the closure of the hospitality industries and other non-essential retail sectors in some parts of the country.


We can learn more in several respects from looking at the clothing sector. It has been the sector affected the most by the pandemic in terms of numbers and sadly in terms of impact on the high street both now and in any likely future.

The clothing sector has been one of the worst affected by the restrictions to non-essential retail during the coronavirus (COVID-19) pandemic period. Sales declined rapidly in March and April 2020, with consecutive monthly falls of 35.7% and 49.3% before the first signs of a recovery began in May with a monthly growth of 17.5%.

The swings became much smaller with this before lockdown 2.0 in November.

There then followed four months of continuous growth before a small decline of 1.2% in October 2020,

However the overall picture for this sector is grim.

Despite the monthly recovery, sales in the sector are still 14.2% lower than December 2019 and continue to remain at a lower level than before the pandemic struck.

If we stay with the swings it must be very difficult for out statisticians trying to deal with these swings. This relates to an area I have been dealing with since 2012 ( Eeek!), which has as a sub component the problems of fashion clothing where values change quickly with fashion. A dress for £50 if it goes out of fashion may be cleared for £25 say. But whilst it is objectively the same dress subjectively it is not. Sadly the Office for National Statistics has turned its blind eye to this issue and never produced the research which was done which leads me to conclude it favoured the Retail Price Index. But the inflation issue is for another day except we have an area where out official statistics office has a disappointing track record.

Annual Figures

I have seen these reported without context so let me show them and then give the context.

In 2020 as a whole, estimates of the quantity bought decreased by 1.9% when compared with 2019, the largest year-on-year fall on record.

One context is the swings between sectors which we have been looking at today.

Clothing stores (negative 25.1%), fuel stores (negative 22.2%), “other stores” (negative 11.6%) and department stores (negative 5.2%) all recorded record annual declines in sales volumes in 2020 when compared with 2019, non-store retailing, however, saw a record annual increase of 32.0% for 2020.

Another is that we are essentially reporting again the falls in March and April. They mattered at the time but now matter as a overall concept for 2020, but also tell us nothing about where we are now and little or nothing about prospects for 2021.


The simple view of the UK retail sales data is that it is an extraordinary amount of growth in the circumstances. Not many depression sized falls in economic output lead to higher retail sales! But as we have already noted today there has been a large fiscal stimulus which has both directly and indirectly boosted the retail sales numbers. To that extent the fiscal stimulus has been a success although it does pose questions.

Another factor is that gross numbers for the whole economy hide groups affected in the opposite direction. A clear example of that came yesterday. Up to now we have seen savings surged which has been confirmed by the rises in bank deposits in the money supply data. But that gross figure hides this.

By December 2020, nearly 9 million people had to borrow more money than usual, with the proportion borrowing £1,000 or more increasing since June 2020…….At the end of June 2020, 10.8% of adults reported borrowing money, rising to 17.4% in December 2020. Of those, the proportion borrowing more than £1,000 increased from 34.7% to 45.1% in the same period.

So it has been a success but a nuanced success.

Number Crunching

We have noted the way that changes in the numbers have led to it being reported that the UK has a national debt or more than 100% of GDP. So with us again borrowing around £30 billion it must be more right? Er no….

 Public sector net debt (excluding public sector banks) at the end of December 2020 was equivalent to 99.4% of GDP.

This number will bounce around like a rubber ball if you use monthly GDP. In addition some of it is not debt because some Bank of England activities are counted as debt when they are not. Rather bizarrely that includes recorded profits on its QE bond purchases.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of December 2020 would reduce by £231.8 billion (or 10.8 percentage points of GDP) to £1,900.0 billion (or 88.6% of GDP).

What can the ECB and Christine Lagarde do next?

Today is a policy meeting day for the European Central Bank and it has a lot to think about. One way of reflecting on this is just to simply note where it presently stands in terms of policy.

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

The operative rate for the banks was in fact not mentioned last time around,perhaps it is considered too embarrassing at -1%. But it looks increasingly permanent.

Third, the Governing Council decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations (TLTRO III). Specifically, it decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022. Three additional operations will also be conducted between June and December 2021.

So rather than further interest-rate cuts the mood music has shifted towards keeping them where they are for longer. It is a relief that they do not seem to be looking at the “Micro-Cuts” hinted at yesterday by the Bank of Canada. After all the interest-rate cuts we have seen does anyone sensible actually believe another 0.1% would make any difference?

Next comes the issue of bond buying or the manipulation of longer-term interest-rates or bond yields. Here we have a rather extraordinary situation where the ECB is running two programmes at the same time! The main one was extended in both size and time at the last meeting.

Second, the Governing Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022.

There was a time when 500 billion Euros seemed a lot but no longer in this context. Also the previous programme appears as something of an after thought these days which is revealing.

Sixth, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion

The other part that is revealing is the way it now fits with our “Too Infinity! And Beyond!” theme.

The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Euro

There has been a little relief here for the ECB as the Euro has weakened a little recently. It is a bit over 1.21 versus the US Dollar and the UK Pound £ has rallied above 1.13 this morning. However the ECB started its open mouth operations versus the Euro some months ago at 1.18 versus the US Dollar so it has lost ground.

The real issue here is a more conceptual one as the ability of a central bank to influence its currency has changed in the credit crunch era. It is hard for an interest-rate cut to have much of an impact when interest-rates are so low in so many places. The issue of QE is the same except it is hard for more of it to have an impact. There was a time when the extra 500 billion Euros announced last time would depress the currency but in fact it was expected and over that period the Euro rose. That leaves intervention against a strong currency but as the Swiss have discovered although in theory it should work, in practice even promising unlimited intervention has achieved nothing much. At best it has stopped the Swiss Franc going even higher, but that is almost impossible to quantify.

The other tactic is open mouth operations and there the ECB does have a strength in Christine Lagarde as she can be relied upon to say something stupid. Who can forget the claim that the ECB was not their to “close bond spreads” last year which torpedoed the Italian bond market? Also there was her claim that the Greek bailout was “shock and awe” although to be fair that was partly true as the economy collapsed and went into a depression from which it has never recovered. Maybe they could add something to the script she reads from at the press conference.

The Economy

The problem here is that we were supposed to be in the recovery now whereas economies will contract again this quarter. The central banking response is simply to push the recovery back in time.

Nevertheless, real GDP will recover only gradually, reaching the 2019 pre-crisis level by mid-2022 and exceeding it by 2½% in 2023.

Essentially they took 1% off growth this year as reality forced them too but rather than learn from that they simply added it to 2022! But there is a catch because we will be weaker for longer with the implication for debt and people’s incomes as well as business survival.

I would say the forecasts are a random number generator but I think that is unfair on random number generators. Once the restrictions ease we know the economy will bounce back and in the third quarter of last year it did so more strongly than people thought. But we do not yet know when they will be over and we do not know how the economy will then grow? We came into the pandemic with a Euro area that already was struggling for economic growth. This has been a credit crunch era issue.


We can take that forwards and give ourselves some perspective by simply asking when the ECB will raise interest-rates. On growth grounds that looks awkward to say the least as the economy is still shrinking and the ground that will hopefully eventually be regained merely takes the ECB back to a place where it felt things were bad enough to ease policy. Inflation could rise towards and indeed above target as we note the way the oil price has risen with Brent Crude Oil around US $56 per barrel and other factors such as shipping costs rising.

But there is a rub as Shakespeare would put it. That is that all the extra debt taken on by the weaker countries has been oiled by the low bond yields we see. Indeed as a result of the ECB’s policy many are negative even in places you might not expect. As countries borrow ever more due to the longer lasting nature of the pandemic the amount of debt taken on will make it ever harder to raise interest-rates and bond yields. We got some news on this front from Eurostat earlier.

Compared with the third quarter of 2019, the government debt to GDP ratio rose in both the euro area
(from 85.8% to 97.3%) and the EU (from 79.2% to 89.8%): the increases are due to two factors – government debt
increasing considerably, and GDP decreasing.

If we look ahead to the bounceback then we can (hopefully) omit the “GDP decreasing” impact but the Euro area had in the year to then added approximately I trillion Euros of extra debt. That will be continuing last quarter and this. As an aside Greece was just on the edge of 200% relative to GDP (199.9%).

Another way of looking at this is that once you deploy monetary policy on this scale you become a subsidiary of fiscal policy and QE becomes something sung about by Queen.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me

It is also going to get ever harder to explain another consequence of all this to first-time buyers.

In the third quarter of 2020, house prices, as measured by the House Price Index, rose by 4.9% in the euro area
and by 5.2% in the EU compared with the same quarter of the previous year


The UK has an inflation problem which it is trying to hide

I thought that I would give you today a different perspective on the UK inflation numbers. I doubt you will see it elsewhere much if at all as you have to read quite a way through the numbers to find it.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.9% last month. The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 2.0% last month.

This gives quite a different perspective to the headline number that the Bank of England looks at. I remember the days when the Bank of England and especially Adam Posen used to quote them quite frequently. What is it about them being higher rather than lower which has meant they have got ignored this time around? Instead they prefer to concentrate on this,

The all items CPI is 109.2, up from 108.9 in November……..
The all items CPI annual rate is 0.6%, up from 0.3% in November

So the picture as they put it is one of low inflation which allows them to do this.

 The MPC voted unanimously to maintain Bank Rate at 0.1%………The Committee voted unanimously for the Bank of England to continue with the programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also to commence the previously announced programme of £150 billion of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

That is quite a wedge isn’t it? There will be another £1.48 billion of bond purchases or QE this afternoon in fact. In theory it is supposed to raise inflation but even the “independent” review published last week can see trouble.

But a decade on from its introduction in the UK, QE has become bigger, broader and more persistent than expected.

So they did not know what they were/are doing? After all we spotted that some years ago. It even admits they do not really know what they are doing and the emphasis below is mine.

 And as the size and persistence of QE has grown, so has the importance of learning about how it works, ensuring its robust implementation and building public understanding of the tool.

These are strong criticisms when you note that the Bank of England has been able to mark its own homework.

The Bank’s researchers made a valuable contribution to the growing literature on the effects of QE – especially in the early stages.

Is an independent evaluation of an independent body independence squared or taking us for fools?

Puppy Inflation

You may have noted reports of the price of puppies soaring during the pandemic. On a personal level I can vouch for the trend to some extent as friends and neighbours ( one more this week alone) have joined the pack. So much higher prices ( doubling and some) combined with much higher volumes. I enquired officially as to how this will be treated?

It is very difficult to collect the price of larger pets, like dogs and cats, as they are not readily available to buy and they are not necessarily available throughout the year (breeders tend to have a limited number of litters per year). For these reasons, to represent the cost of pets, we collect the price of small mammals (e.g. hamster, gerbils, guinea pigs, rabbits, etc.) which can be purchased directly from pet stores.

Curious as my neighbours and friends seem to have little trouble with them being “readily available”! On this road we end up with a doubling being recorded like this.

Prices increased by 2.7% in the year to November 2020.

But they did manage to find price cuts earlier in the year.

However, earlier in the year with impending store closures at the start of lockdown, there was evidence of price reductions, where some pet stores tried to quickly find their pets homes.

This adds to another issue I raised during this pandemic period over the issue of face masks, sanitiser and cleaning products.

Expenditure on products such as face coverings and hand sanitisers has inarguably increased over the last 7 months. However, based on the scanner data we have been receiving we believe that, as a proportion of total expenditure, it remains below the levels that price movements would have any discernible impact on our figures – essentially these products would receive a 0% weight in an index.

One has to be careful about this and it is the difference between a cost of living index and a macroeconomic measure like CPI. Our statisticians may be right in the latter case although I increasingly doubt that as for example the increased enforcement of the use of face masks will lead to more use. But in the former case this is an increase in the cost  of living and should definitely be counted. I doubt the supermarkets are giving over so much space to products which do not have a “discernible impact” on their sales and trust them more than the Office for National Statistics.

House Prices

Here is something else which does not have a discernible impact on the inflation numbers because CPI plays the three wise monkeys on the issue and CPIH makes up its own numbers based on rents which do not exist.

UK average house prices increased by 7.6% over the year to November 2020, up from 5.9% in October 2020, to stand at a record high of £250,000; this is the highest annual growth rate the UK has seen since June 2016.

There have also been some structural changes in the market and guess who lives in a flat?

In our UK HPI data, we have seen the average price of detached properties increase by 8.5% in the year to November, in comparison with flats and maisonettes increasing by 5.4% over the same period.

Also there are regional differences.

Average house prices increased over the year in England to £267,000 (7.6%), Wales to £180,000 (7.0%), Scotland to £166,000 (8.6%) and Northern Ireland to £143,000 (2.4%).

So even more of a surge in Scotland but by contrast very little in Northern Ireland which has recovered very little from the credit crunch. Speaking of slow recoveries I would imagine that a special Bank of England squad is on its way to the North-East right now.

The North East is the final English region to surpass its pre-economic downturn average house price peak of July 2007, to now stand at £140,000.

Also the theme of people fleeing London that has been pushed by the BBC and the Financial Times seems to be having trouble with reality.

London’s average house price surpassed £500,000 for the first time in November 2020.

Meanwhile the officially approved measure tells us this.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2020, unchanged since October 2020.

Can you see how it got to be officially approved?


There are always issues with inflation measurement as who is the typical household? But you can make a decent fist of it if you try. But sadly back in 2002/03 the UK decided to join the European trend in ignoring owner occupied housing costs. This is a great swerve for civil servants as it means they can claim wealth effects but the reality of higher house prices is inflation especially for first time buyers. There is always a weasel word and the one here is consumption because you see assets are not part of consumption whereas if we switch to the consumer then even the ECB admits up to a third of income is spent on housing.

There are efforts to improve this such as the Household Costs Index but sadly the same trend of it being manipulated is in play. Last week there was an official Zoom seminar on the subject given by Dr.Martin Weale who use to be at the Bank of England. To give you a clue I still remember him trying to explain to me how the UK house price rises should be recorded as negative inflation. That is why the establishment push his views in spite of the mess he made of the average earnings numbers.

If we now move to puppy costs and what we might call consumer PPE I have sympathy with the Office for National Statistics as it is a fast moving situation. But their failures here are symbolic of an organisation which only 2/3 years ago spurned the chance to set up a really good inflation measure. Instead they are throwing away what little credibility they have left.

The Bank of Japan has endgamed itself

This week is one where the main news is coming from the East and the Orient. Indeed today we will be looking at so many of our themes being in play that it is hard not raise a wry smile. So let me start with the apparent news that an institution which is one of the world’s biggest control freaks is considering some ch-ch-changes.

The BOJ will also consider loosening its grip on yield curve control (YCC) to allow super-long interest rates to rise more, as its dominance in the market keeps yields in an extremely tight range, they said.  ( Reuters)

I have no idea where the journalist thinks they are going with the reference to “super-long” but anyway here is a reminder of what Bank of Japan yield curve control is.

With this in mind, yield curve control, in which the Bank seeks a decline in real interest rates by controlling short-term and long-term interest rates, has been placed at the core of the new policy framework.

So control-freakery as we note the more precise details below.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.2

They have bought just under 534 trillion Yen of them which I think is a new record in terms of large numbers for us. So we can mull “the yields may move upward and downward to some extent ” because if you wish to buy a Japanese Government Bond you do so at a yield and price which the BOJ has decided. Just in case that point was not rammed home you may note I have left point 2 in above. What does it say?

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

So yields may move up or down just not up! Indeed as I have been pointing out for a while not down either. This is because the purchases are at or very close to 0% for the ten-year yield which keeps it there when otherwise it would have gone much lower. Otherwise it may well have been more like Germany with its benchmark yield more like -0.5%, so this has been a shambles which most have ignored. It was supposed to cap yields and instead put a floor under them.

What can the Bank of Japan do? Blame the markets as they can’t really complain because they do not exist anymore.

“Prolonged easing has made markets rigid and complacent, so the BOJ needs to change that,” one of the sources said.

“The key is to heighten flexibility in the BOJ’s policy so it can respond to any big shock effectively,” the source said on condition of anonymity, a view echoed by four other sources. ( Reuters)

So the open mouth operation is to blame somebody else which the journalist has fallen for.

The Tokyo Whale

We can now switch to the 35 trillion Yen of purchases of equities which have helped drive the Nikkei 225 index above 28,000. Indeed it was up another 391 points at 26,833 overnight. Whenever there is a down day the Bank of Japan buys providing a put option and acquiring the moniker of The Tokyo Whale.

TOKYO, Jan 18 (Reuters) – The Bank of Japan will discuss ways to scale back a controversial programme that buys massive amounts of exchange traded funds without stoking market fears of a full-fledged retreat from ultra-loose policy, sources say.

Again we are back to the concept of “market fears” when policy has been to destroy the market. So we are in a blame game. In this instance the market has not be a neutered as the bond market bit there is an issue.

The programme will come up in the BOJ’s March policy review, largely because of policymakers’ concerns over the ballooning size of the central bank’s stock exchange-traded funds (ETF) holdings which, at 35 trillion yen ($337 billion), account for roughly 80% of Japan’s ETF market, said five sources familiar with the BOJ’s thinking. ( Reuters )

Have you noticed that however much the BOJ increases its purchases it still apparently only holds 80% of the ETF market? Regular readers will find something familiar about the next bit from Reuters.

It also pledges to buy ETFs at an annual pace of up to 12 trillion yen, although actual purchases have slowed well below this level in recent months as Tokyo stock prices rally.

Remember 2/3 years ago when we were told by the media that the BOJ was going to taper its ETF purchases? Well that was from 6 trillion whereas now it is 12 trillion. Up was the new down. The next bit is rather revealing as why is it buying at all when markets are calm?

The BOJ will also look at ways to more flexibly slow ETF buying when markets are calm, the sources said.


So is The Tokyo Whale getting cold feet? I do not think so. Central banks indulge in so much PR these days or what we have come to call “Open Mouth Operations”. This often suggests a reduction in policy as an intention but as I have noted with the ETF tapering plan an intention to taper from 6 trillion Yen a year morphed into buying 12 trillion Yen a year. Indeed even the Reuters leak hints at this sort of thing.

While replacing the numerical guidance on the pace of ETF buying is among options being discussed at the BOJ, some are cautious for fear of triggering a market sell-off, they said.

The last thing the BOJ wants is a communication mishap that jolts markets at a time many Japanese firms close their books at the March fiscal year-end.

When you force a market to a particular level as the Bank of Japan has done there is no reason for it to stay there should you depart. We are back to Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

If investors wanted to buy the Nikkei 225 at 28,000+ they would have bought it but the BOJ would not wait. Even worse for it many will have bought learning on its purchases and thus may sell if it exits. So it can talk as much as it likes but unless the world suddenly has a lust for Japanese equities how can it even stop buying without the market dropping? Let alone ever sell.

The bond market one is different because the BOJ completely misfired here and in price terms rather than keeping it up it has prevented it from rising as I explained earlier. With the Japanese concept of “face” it cannot admit this but it could buy at different levels which might mean letting the “market” rise and yields fall. Awkward.

With Japan’s large national debt and fiscal deficits it has to keep buying in some form as the government’s position would deteriorate quickly should bond yields rise.

So in summary the BOJ is in a mess of its own central planning making. If we switch to the objective of inflation at 2% per annum all I see is utter failure.

  The consumer price index for Japan in November 2020 was 101.3 (2015=100), down 0.9% over the year before seasonal adjustment, and down 0.4% from the previous month on a seasonally adjusted basis.

All that effort for prices to go nowhere. The truth is that the bond purchases oil the wheels of government spending and the equity ones give profits to those owning equities. So some gain but remember others lose as for example any long-term saving at these levels looks expensive at best.

Also there is no real market or price discovery. In response to this news the Japanese bond future dropped 30 ticks from 151.88 which is not much and then closed at 151.72 as people realised a reality where the BOJ is trapped.

Oh, oh I’m trapped
Like a fool I’m in a cage
I can’t get out
You see I’m trapped
Can’t you see I’m so confused?
I can’t get out ( Colonel Abrams)

There is some inflation around as Platts noted last week but best of luck with telling Japanese consumers it will make them better off.

 In Japan, day-ahead power prices breached Yen 220/kWh, or $618/MMBtu on Jan. 12, Japan Electric Power Exchange data showed. This compares to around Yen 100/kWh a week earlier and single digit price levels in December, indicating a surge of more than 40 times.



China’s GDP grows but at what price?

This morning has brought us up to date on the official view on the Chinese economy. They put one over on the western capitalist imperialists by producing their economic output numbers so quickly, or at least they think they do. So here is the National Bureau of Statistics.

According to preliminary estimates, the gross domestic product (GDP) was 101,598.6 billion yuan in 2020, an increase of 2.3 percent over last year at comparable prices. The year-on-year GDP for the first quarter went down by 6.8 percent, up by 3.2 percent for the second quarter, 4.9 percent for the third quarter and 6.5 percent for the fourth quarter.

We see that the pattern for China is different due to the rest of the world initially as a result of the Covid-19 pandemic starting in Wuhan meaning its economy was hit hard this time last year. Also it has not recorded any subsequent dips such as the one in November in the UK which we looked at only on Friday. It has been singing along with Jackie Wilson ever since.

You know your love (your love keeps lifting me)
Keep on lifting (love keeps lifting me)
Higher (lifting me)
Higher and higher (higher)

We are told that this excellent result is due to this.

the strong leadership of the Central Committee of the Communist Party of China with Comrade Xi Jinping as the core………and the main goals and tasks of economic and social development were accomplished better than expectation.

The Detail

It opens with a positive reference to a troubled area.

The Grain Output Reached Another High and Production of Pigs Sustained a Fast Recovery.

Later we get some more detail.

 At the end of 2020, pigs and breeding sows registered in stock were up by 31.0 percent and 35.1 percent respectively over that at the end of 2019.

But I also note this.

and pork, 41.13 million tons, down by 3.3 percent.

There was a surge in demand for US pork which faded a bit in November according to National Hog Farmer.

November exports to China/Hong Kong were 3% below the previous year’s large volume at 83,396 mt and fell 5% in value to $193.8 million. However, through November, exports to the region were still up 72% at 955,008 mt and value was up 85% at $2.18 billion.

Also if we come more up to date the Chinese strategic pork reserve – the existence of which is revealing in itself-  has been deployed this month.

BEIJING, Jan 12 (Reuters) – China will sell 30,000 tonnes of frozen pork from its state reserves on Jan. 15, according to a notice published by the China Merchandise Reserve Management Center on Tuesday.

China has released several batches of pork from its reserves in the past weeks to boost supply ahead of a jump in consumption over the approaching Lunar New Year holiday in February. ( Nasdaq)

The African Swine Fever issue has not gone away and there are more than a few who doubt the Chinese claims. There also seem to be issues across other meats as the demand for protein switches.

Industrial Production

This was solid overall.

The total value added of industrial enterprises above the designated size increased by 2.8 percent over last year.

Also we are guided towards high-tech manufacturing.

manufacturing up by 3.4 percent……….The value added of the high-tech manufacturing and equipment manufacturing went  up by 7.1 percent and 6.6 percent respectively over last year, or 4.3 percentage points and 3.8 percentage points higher than that of the industrial enterprises above the designated size. Specifically, the production of industrial robots, new energy vehicles, integrated circuits and micro computer equipment grew by 19.1 percent, 17.3 percent, 16.2 percent and 12.7 percent year on year respectively.


We start with a familiar pattern of services being the hardest hit area.

In 2020, the Index of Services Production was the same as that of last year.

That is much better than elsewhere presumably because some areas surged.

The value added of the information transmission, software and information technology services and that of financial services grew by 16.9 percent and 7.0 percent year on year respectively, 14.8 percentage points and 4.9 percentage points higher than that of the tertiary industry.

Therefore somewhere must have shrunk, but there is no mention of this in the official release.

Trade Grows Too

As you can see apparently there has been quite a triumph here.

In 2020, the total value of imports and exports of goods was 32,155.7 billion yuan, an increase of 1.9 percent over last year. The total value of exports was 17,932.6 billion yuan, up by 4.0 percent; the total value of imports was 14,223.1 billion yuan, down by 0.7 percent. The trade balance was 3,709.6 billion yuan in surplus.

Indeed as the year progressed things got even better.

In December, the total value of imports and exports of goods was 3,200.5 billion yuan, up by 5.9 percent year on year. Specifically, the total value of exports was 1,858.7 billion yuan, up by 10.9 percent; the total value of imports was 1,341.9 billion yuan, down by 0.2 percent. The trade balance was 516.8 billion yuan in surplus.

The one area that you might have thought would have expanded ( PPE) does not get a mention. So we are left wondering what is being exported and to whom?


I have doubts about what the numbers are really telling us and they are driven mostly by this.

In 2020, the total retail sales of consumer goods reached 39,198.1 billion yuan, down by 3.9 percent over last year.

So in an economy growing by 2.3% we saw retail sales fall by 3.9%? Indeed that sort of pattern continued as 2020 progressed.

In the fourth quarter, the total retail sales of consumer goods grew by 4.6 percent year on year, 3.7 percentage points higher than that in the third quarter. In December, the total retail sales of consumer goods grew by 4.6 percent year on year, or 1.24 percent month on month.

So economic growth of 6.5% exceeded retail sales growth by 1.9% in the fourth quarter and I note that December showed no improvement. At this stage China is the doppelganger of the UK as we have retail sales growth but a shrunken economy. However there is one area where we are alike.

Specifically, the investment in infrastructure was up by 0.9 percent, manufacturing down by 2.2 percent and real estate development up by 7.0 percent. The floor space of commercial buildings sold reached 1,760.86 million square meters, up by 2.6 percent. The total sales of commercial buildings were 17,361.3 billion yuan, up by 8.7 percent.

If we return to the issue of consumption I also note this warning from the trade figures we looked at earlier.

 the total value of imports was 14,223.1 billion yuan, down by 0.7 percent.  (for 2020)……..the total value of imports was 1,341.9 billion yuan, down by 0.2 percent. ( for December)

So the economy grew but imports fell? Putting it another way China has managed to increase recorded GDP but at the cost of apparently making its citizen worse off.

Also one of the credit crunch issues was the trade surplus of China which we have just been told has got even bigger.

The Chinese way
Who knows what they know
The Chinese legend grows ( Level 42)


UK GDP contracts again but there are reasons to be cheerful

2020 was a contrary year and this morning has brought another example. When it began I would not have thought that one might present a decline as being a good thing but November brought an example of it for the UK. This is because the expectations of the November lockdown were for a decline in the UK economy ( between -5% and -6%) much more like the March one than what you can see below.

Following six consecutive monthly increases, including an upwardly revised 0.6% increase in October, real gross domestic product (GDP) fell by 2.6% in November 2020. Restrictions were in place to varying degrees across all four nations of the UK during November.

Actually the decline was from a much better position than you might think. This is because the revision to October is welcome but 0.2% on the monthly numbers is relatively small. But for the sharper-eyed there has been quite a fundamental revision to the initial impact of the pandemic as April has been revised up by 0.7% and May by 0.5% with other smaller monthly revisions. This means that the annual picture was also much better than the expected 12% decline.

November GDP fell back to 8.5% below the levels seen in February 2020 compared with 6.1% below in October 2020. GDP fell by 8.9% in the 12 months to November 2020, compared with an annual decline of 6.8% to October.

There is a further nuance to this which changes the pattern of the decline we have seen. So far this has been reported as mostly being a services driven phase but the upwards revisions I referred to above were essentially a services change. If we add up the monthly increases in GDP we get to 1.7% of which 1.6% was due to the services sector.


Also another of our themes and one I only mentioned yesterday in reference to Germany was in play as well. It relates to the problems experienced in measuring construction output. This has proved to be quite a problem even in normal times and take a look at this.

 it is worth noting that there has been a comparatively larger revision to the construction sector in 2020. Construction output in October is now estimated to be 1.3% below its February 2020 level, compared with the previously published 6.4% below. In addition, October 2020 is open to revision to incorporate latest data.

So a very large revision and they post a warning about October too. Whilst one should make an allowance for the period we have been in a 5% revision does question what use the figures are? On a grander scale ( total GDP) the impact is relatively small but welcome.

Monthly construction output grew by 1.9% in November 2020 compared with October 2020, rising to £14,014 million……..All work construction output in November 2020 recovered above its pre-pandemic level for the first time, at 0.6% (£80 million) above the February 2020 level. While construction output is slightly above the February 2020 level it is still down by 0.3% (£40 million) on the level of output in January 2020 because of February being impacted by adverse weather.


If we start with the November fall we see that it was indeed the lockdown which affected the numbers.

There was a fall of 3.4% in the Index of Services between October 2020 and November 2020; the largest contribution to monthly growth was accommodation and food service activities, falling by 44.0%.

As you can see the hospitality industry was butchered again, although other areas were hit too.

Across services, the monthly fall was widespread but driven by accommodation and food and beverage services, wholesale, retail and motor trades, other service activities, and arts, entertainment and recreation.

Indeed some things really did grind to a halt.

At a more detailed level, there were notable increases in business reporting no turnover with the proportion in hair and beauty (within personal services) growing from 2.5% in October to 24.4% in November. Similar data for pubs showed an increase from 9.0% to 27.4%.

I think more places escaped a 0 simply because the November restrictions started a few days into the month in England at least.

If we take a deeper perspective we see this.

In November 2020, 8 of the 51 lower level services industries surpassed their level of output compared with February 2020, led by postal and courier services. In contrast, six services industries remain below 50% of their February 2020 level, with air transport and travel agents performing the weakest.

It is hardly a surprise that postal and courier services have risen which keys in with the numbers we have had for online sales from the retail sales data. On a personal level it also fits with the delivery van outside right now and the regular sight of workers pulling what looks like large bags on wheels on the streets.

The annual comparison is below.

The services sector is now 9.9% below the level of February 2020.

That is worse than the overall position as we are left mulling whether the decline this time around in November will be revised higher later.

Production and Manufacturing

The November restrictions had much less of an effect on this area.

Production fell marginally by 0.1% in November 2020 as three out of the four sub-sectors fell.

Indeed manufacturing grew driven by a surprising area.

Elsewhere in production, the manufacturing sector grew by 0.7%, with 8 out of its 13 sub-sectors increasing. The largest contribution came from the manufacture of motor vehicles industry, which grew 5.7% in November 2020. This is a result of growth from large businesses to meet increased demand, and this industry is now 1.3% above its February 2020 level.

However there is a catch revealed by looking at the three-monthly data.

Most notably, the manufacture of transport equipment grew by 18.9%, however, it is still 15.3% below its pre-pandemic level. Despite the recovery in manufacture of motor vehicles industry (as noted in the previous paragraph), the manufacture of air and spacecraft in this sub-sector has struggled to regain output and remains 35.5% below the February level.


2020 has brought all sorts of different perspectives so let me start with the positive ones. The UK economy has plainly adapted to the lockdowns and restrictions, for example construction saw heavy falls in the spring restrictions but actually grew in the November ones. One area has been left behind which is economic forecasting which got it wrong again although one of my main themes was confirmed as the first rule of OBR Club hit the ball for six yet again.

That includes the UK, where GDP is set to fall by 11 per cent this year – the largest drop in annual output since the Great Frost of 1709.

Also it has not been as long as since the Great Frost of 1709 but an annual trade surplus is a rare beast indeed for the UK.

In the 12 months to November 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £40.0 billion to a surplus of £7.8 billion.

Looking ahead there are two other pieces of good news. The vaccine roll out is going well with over 3 million doses now having been injected. Also in spite of the media rhetoric we do have economic strengths.

London has cemented its role as Europe’s leading tech hub in after a near-record year of investment as overseas investors circle in on the capital’s best firms.

Global tech investors are piling into the capital with a total $10.5bn (£7.7bn) investment recorded in 2020, a quarter of Europe’s whole VC investment for the year.  ( City-AM).

So Ian Dury had a point and may not have been a blockhead.

Reasons to be cheerful part three
Reasons to be cheerful part three
Reasons to be cheerful part three
Reasons to be cheerful part three
One, two, three

The dangers are clear which are more lockdowns and the risk of a virus mutation undoing the good work on the vaccine front. Also we have a lot of ground to catch back up.



What are the prospects for the economy of Germany?

One of the issues in economics is that we sometimes do not know what has just happened let alone where we are going. It was once explained to me as like driving a car with the front and side windows blacked out. Well maybe Germany has on this occasion provided a chink of light from one of the rear side windows.

WIESBADEN – According to first calculations of the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 5.0% lower in 2020 than in the previous year. After a ten-year growth period, the German economy suffered a deep recession in 2020, the year of the corona, a situation similar to that of the 2008-2009 financial and economic crisis. However, the economic downturn on the whole was less serious in 2020 than in 2009 (-5.7%), according to provisional calculations.

We can look at this in several ways of which the first is that this is likely to be a relatively good performance even though care is needed as this is an average for 2020 rather than where the economy is now. Next comes the issue of whether this is an ongoing depression including the credit crunch? In Germany’s case the answer is no as it is still above the previous peak in output terms. It has been a weak period overall but there was some progress most of it in the initial rebound of 4% in both 2010 and 11. As to the comparison with 2009 the numbers get a lot tighter in calendar adjusted terms as 2009 was -5.6% as opposed to the number below.

In calendar adjusted terms, the GDP declined by 5.3% in 2020, as the number of working days was higher than in 2019.

Breaking it down

I doubt many of you will be surprised to learn which was the worst affected area.

In industry (excluding construction), which accounts for just over one quarter of the total economy, the price adjusted economic performance declined by 9.7% on 2019, in manufacturing even by 10.4%. Industry was affected by the consequences of the corona pandemic especially in the first half of 2020, for instance, due to temporary interruptions in the global supply chains.

That of course came on the back of a 2019 which was influenced by the “trade war”.

The services sector was also hard hit.

The economic slump was particularly strong in the service sector where decreases were partly as severe as never before. Examples include trade, transport, accommodation and food services where the price adjusted economic performance declined by 6.3% compared with 2019.

Although as we have seen in so many places there were large shifts within the services sector.

However, opposite trends were also recorded: online trade increased markedly, while permanent retail trade in part declined substantially. The tight restrictions in accommodation, restaurant and similar services led to an outstanding decline in accommodation and food services.

Maybe they have similar problems to the UK in measuring construction as I am unsure how it could have risen but the official number is below.

A sector that could sustain its position in the crisis was construction: price adjusted gross value added even increased by 1.4% year on year.

Domestic Demand

You will not be surprised to read that private consumption headed south.

 In contrast to the financial and economic crisis, when the economy was supported by all components of consumption expenditure, household final consumption expenditure in 2020 fell a price adjusted 6.0% year on year, which was an unprecedented decrease.

Nor that government spending boosted things.

 Government final consumption expenditure saw a price adjusted 3.4% increase and had a stabilising effect even in the corona pandemic. This was, among other things, based on the acquisition of protective equipment and hospital services.

You may note a quite different treatment to the UK official statistics as Germany measures a much higher input rather than peering into theoretical declines in output in health (and education).


This area highlights one of the problems with Gross Domestic Product numbers as GDP falls to allow for the fact that there are losers on both sides of trade.

The corona pandemic also had a massive impact on foreign trade. Exports and imports of goods and services in 2020 decreased for the first time since 2009, that is, exports by a price adjusted 9.9% and imports by 8.6%. The decline was particularly large for imports of services; this was mainly due to the high proportion of tourism, for which a sharp fall was recorded.

Whilst exporters lose 9.9% and importers 8.6% the GDP numbers only show the subtraction which is calculated as a 1.1% fall. There is another twist as in terms of the nominal numbers the statisticians then found some imported inflation to reduce the import decline to below the exports number. I wonder where that was as we are do often told there is no inflation and the Euro was strong overall in 2020?

Labour Market

There are several ways of looking at this. Even the favourable one shows us this.

On an annual average in 2020, the economic performance was achieved by 44.8 million persons in employment whose place of employment was in Germany. That was a decrease of 477,000, or 1.1%, on 2019. Due to the corona pandemic, the upward trend in employment ended, which had lasted for over 14 years

Fair play to them for pointing out an inequality that has developed.

This affected especially marginally employed people and self-employed, whereas the number of employees subject to social insurance remained stable.

Also the sentence below is doing a lot of heavy-lifting.

Dismissals seem to have been avoided especially by the extended regulations regarding short-time work.

This has also been added to by the furlough scheme in Germany.

Germany`s «Kurzarbeit» Program spent EUR22.1bn last year subsidizing payroll for companies working at reduced levels ( @acenaxx)

Some 1.95 million were still being supported in the final quarter of the year which provides quite an appendix to the employment numbers we looked at above.

Fiscal Policy

You could argue that Germany is finally applying some logic. As you can see their statisticians have got quite excited by it.

General government budgets recorded a financial deficit (net borrowing) of 158.2 billion euros at the end of 2020, according to provisional calculations. It was the first deficit since 2011 and the second highest deficit since German reunification and was exceeded only by the record deficit in 1995 when the debt of the Treuhand agency were integrated in the general government budget.

The reason I mention the logic point is that Germany is being paid to borrow, so why not do some? For most of 2020 ( from March) that applied to even the 30-year maturity which fell to nearly -0.5% in the March pandemic panic. There is an irony in Germany’s safe haven status as it moved away from one definition of a safe haven but then that was 2020 in a nutshell.

In terms of ratios we are told this.

Measured as a percentage of nominal GDP, this was a 4.8% deficit ratio of general government for 2020.

In relative terms this is low but does represent quite a shift on the previous surplus policy.


It is interesting that Germany has provided us with an update including the final quarter over a fortnight before it considers sensible to produce them. However as things stand the picture is in the circumstances good. As to the future there are two perspectives and let us start with the business survey or PMI.

Though down on its level between July and
October, the Germany Composite Output Index ticked up from November’s five-month low of 51.7 to 52.0.

If Germany’s Q4 GDP was indeed flat as seems likely from today’s number that has already not gone so well for the PMI. Now there are the lockdowns which seem set to last until the spring and issues with the supply of vaccines.

Angela Merkel admits Germany faces wait for Covid jabs … Germany is facing a Covid-19 vaccine shortage and may not be able to secure sufficient stocks until July, Angela Merkel privately told her MPs ( @TradingFloorAudio)

On that basis expectations that Germany will be back to pre pandemic levels at the end of this year look very optimistic.



Portugal is feeling the economic effects of the pandemic

It has been too long since we took a look at the economic state of play in Portugal, which is a delightful country. For newer readers Portugal was in the bad boys/girls club at the time of the Euro area crisis symbolised by the way that its national debt to economic output ratio ( GDP) went over the 120% level set as a signal by the Euro area. That was a particular irony as that level was set to avoid embarrassing Portugal and indeed Italy. But after that phase Portugal went into favoured child status as its economy improved and it followed Euro area instructions.

But now things are really rather different as the Euro area boom of 2017/18 was in modern language like over before the Covid-19 pandemic arrived. There were even issues for the successful motor sector.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. The automobile sector is responsible for 11% of total exportations. Portuguese technical skills in this field, the highly competitive set up and running costs and our great logistic infrastructures have been a driving force in this sector. ( PortugalIN)

This is because some of the gains came at the expense of France and Spain and also because if you head south for cheaper production you might carry on doing so and end up in Algeria and Tunisia.

What about now?

Yesterday the Portuguese statistics office updated us on the services sector.

Services turnover index, in nominal terms and adjusted for calendar and seasonal effects, presented a year-on-year
change rate of -15.3% in November (-12.1% in October).
The year-on-year change rates of the indices of employment, wages and salaries and number of hours worked adjusted of calendar effects were -8.4%, -4.1% and -11.4%, respectively (-8.3%, -6.2% and -12.7% in October, by the same order).

There are two main contexts here. The first is the scale of the decline in output and next is the way that hours worked looks to be the best measure of the impact on employment. Also we get a hint of the scale of government aid and furlough as we note that wages/salaries are only 4.1% lower.

The peak for this series was the 121 of January last year ad the nadir was the 74 of April. Whereas the 100 of November means that all the gains since 2015 had faded away, hopefully temporarily.

This morning has brought a reminder of the industrial production data as Eurostat catches up. It shows an average across the Euro area of an annual fall of 0.6% so Portugal under performed here.

The Industrial Production Index (IPI) registered a year-on-year rate of change of -3.6% in November (0.4% in the previous month)……Of the Major Industrial Groupings, only Intermediate goods showed a positive year-on-year rate of change: 1.1%. Energy registered the most
negative rate of change (-10.3%), followed by Investment goods (-8.2%) and Consumer goods (-1.9%).

I guess few will be surprised about what has happened to tourism.

In November 2020, the tourist accommodation sector should have registered 416,000 guests and 950,000 overnight stays, corresponding to year-on-year
rates of change of -76.3% and -76.7% respectively (-59.7% and -63.3% in October, in the same order).



Portugal does not feature regularly in the PMI business surveys but this from the statistics office on Monday offered some clues for prospects.

The perspectives of the exporting enterprises of goods point to a nominal increase of 4.9% in exports in 2021 vis-à-vis
the previous year. Although these figures represent an improvement compared to the perspectives indicated by
enterprises for 2020 according to the preceding forecast (-13.0% ), they still not allow a recovery to values close to
those recorded before the pandemic.
In fact, should these perspectives be confirmed, the exports of goods in 2021 will correspond to a level 12.8% lower
than the total exports of goods recorded in 2019.

This survey has proved reliable in the past. So we should take the idea of an improvement but still quite a decline on pre pandemic levels seriously. In the meantime there is the likelihood of at least a one month lockdown.

The transport sector I highlighted earlier has particular problems as it was one of the worst affected areas.

It stood out the categories Transport Equipment and parts and accessories thereof (with the highest decrease expected for 2020, corresponding to -20.3%).

But not much of an expected recovery this year.

Transport equipment and parts and accessories thereof (+4.7%), mainly for Intra-EU markets (+6.8%,
+5.7% and +5.1%, respectively).

Financial Markets and Finances

There is something of a ying and yang here. If we start with the currency then Portugal will have been affected by the stronger Euro which I note has got a mention from the ECB today.

ECB’s Villeroy: We Will Keep Favourable Monetary Conditions As Long As Necessary -We Are Closely Following The Negative Effects Of The Euro Exchange Rate ( @LiveSquawk)

Although I guess it does help with the international position in one area.

At the end of the third quarter of 2020, the Portuguese economy had a net financial position vis-à-vis the rest of the world of -101.9 per cent of GDP (Chart 2), compared to -101.3 per cent of GDP at the end of the same quarter of 2019. ( Bank of Portugal)

If we switch to debt metrics then the Portuguese government is in relative terms running a tight fiscal ship.

This result reflects the net borrowing of general government and non-financial corporations (4.0 and 2.3 per cent of GDP respectively)

The latest national debt figures are running to the same tune.

In November 2020 public debt stood at €267.1 billion , a €1.1 billion decrease from the end of October. This was mainly driven by a decrease in debt securities (€1.2 billion)

General government deposits decreased by €2.0 billion, with public debt net of deposits increasing by €0.9 billion from the previous month, to a total of €244.7 billion.

These days the public debt burden is less of a debated issue because of the way that Portugal can borrow so cheaply.In fact it can borrow for ten years for effectively nothing (0.01%). As this feeds in the Bank of Portugal projects this.

The implicit interest rate on public debt is expected to fall over the projection horizon, from 2.6% in 2019 to 1.8% in 2023, which reflects the assumption that interest rates on new issues will remain low.


There are two main themes here. The first is that the Euro area crisis seems now like it is from a place “far,far away.” Back then solvency fears sent the benchmark bond yield into the teens for a while and if I remember correctly briefly as high as 21% as opposed to the present 0%. Although there does seem to be a hangover from those days as Portugal is being relatively rather restrained in its use of fiscal policy.

The next theme is that the December projections of the Bank of Portugal look rather optimistic now.

Accordingly, an 8.1% decline in GDP is projected in 2020, followed by growth of 3.9% in 2021, 4.5% in
2022 and 2.4% in 2023 . Activity will return to pre-pandemic levels at the end of 2022.

The V-shapers have proved to be rather panglossian and even that only had Portugal back to pre pandemic levels at the end of 2022. One curiosity I find is that those concerned with “output gaps” and the like seem to have disappeared. Anyway the first half of 2021 will be grim again and will follow on from a decline at the end of last year.

Let me finish with a metric that will be announced to cheers from the Frankfurt towers of the ECB.

In the 3rd quarter of 2020, the House Price Index (HPI) grew by 7.1% when compared with the same period of 2019……On a quarter-to-quarter basis, the HPI increased by 0.5% (0.8% in the 2nd quarter of 2020). By category, the existing dwellings prices increased by 0.6%, above that observed for new dwellings (0.1%).

First-time buyers will need a process of re-education before they understand how good this is for them…….