The Swedish economic experiment of negative interest -rates in a boom goes on

Today opens with relative calm in world financial markets although a little care is need as many central bankers are gathered at the annual symposium in Jackson Hole. After all we know that “loose talk costs lives” from the wartime warning. A subject that may well come up in private discussions is the monetary policy being deployed by the Riksbank in Sweden although it will be in its absence as I do not believe its representatives are in attendance. As an undercut to the discussions about promises and hints made by the Bank of England (Governor Carney is present) and the US Federal Reserve about interest-rate rises the reality of the Riksbank cutting interest-rates into negative territory in response to favourable economic conditions is an actual ying to their promised yang.

Indeed the whole concept of an exit strategy from “extraordinary monetary conditions” has in many ways been converted to an entry strategy by the Swedes. Perhaps they have been listening to too much Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
All the things I could do
If I had a little money
It’s a rich man’s world

What is the Riksbank up to?

First Deputy Governor Kerstin af Jochnick lets us know. She tells us that Sweden is a small open economy dependent on outside events. So what is happening there?

The assessment was thus that there are several factors pointing towards a favourable development in the global economy going forward,

Okay and what about Sweden itself?

Domestic demand is expected to continue growing relatively fast, partly due to relatively strong private consumption. The rising wealth level in the household sector and the low interest rates create scope for relatively high growth in consumption…… All in all, the increasingly strong demand, both domestic and international, means that GDP growth will be higher than the historical average over the coming years,

So the outlook is bright which is where we get to the crux of the matter because into this outlook the Riksbank did this in July.

We therefore decided to cut the repo rate by 0.1 percentage points to -0.35 per cent. We also resolved to extend the purchases of government bonds by a further SEK 45 billion until the end of the year.

An interest-rate cut and more QE into an expected boom? Actually there is more to it than that when we look at the scale of the operation. There is a lot of news about the European Central Bank QE but in relative terms it is dwarfed by the Swedish effort on one measure and similar on another.

This corresponds to around 20 per cent of the outstanding stock of nominal government bonds and around 4 per cent of GDP. If the ECB continues to buy government bonds at the same rate as so far, their purchases at the end of the year will correspond to around 7 per cent of the stock and, there too, to 4 per cent of GDP.

As the ECB started QE to help end a crisis there is a real question for apparently successful Sweden which has also had a boon from a weaker currency.

The weakening of the Swedish krona over the past year has meant that imports of goods and services has become more expensive, which tends to increase consumer prices.

As a central banker no doubt she is enthusiastic about that although Swedish workers and consumers are likely to have a different view.

The Problems

Debt and housing

The low interest rates contribute to household debt as a percentage of disposable income continuing to increase and to housing prices continuing to rise……It is therefore important that household debts do not continue to increase.

Yesterday we had new data on this front so how is that going?

The growth rate of housing loans increased by 0.3 percentage points and had an annual growth rate of 7.7 percent in July.

Thus we see that housing loans are booming which according to the Deputy Governor poses a problem if we consider this.

Their debts have increased more than their disposable incomes since the middle of the 1990s and the debt ratio is now at just over 170 per cent, which is a record-high level

Unless disposable incomes are increasing at an annual rate of 7%+ then we can say that was a record high but is no longer! Also whilst lending to business and companies is growing at a relatively paltry 3% there seems to be a boom in one familiar area.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral. In July, these loans amounted to SEK 611 billion.

Indeed it may well be lending to the household sector under another name.

Loans to tenant-owner associations, which are considered non-financial corporations, amounted to SEK 377 billion.

There were quite a few questions to me about this happening in the UK under the new version of Funding for Lending so if we are copying the Swedes then perhaps it is!

What are the interest-rates?

In a ZIRP or excuse me NIRP (Negative Interest-Rates Policy) world I often get asked about mortgage and savings rates so here they are.

The average interest rate for housing loans for new agreements was 1.61 percent in July…….The average interest rate for new deposits by households in bank accounts was 0.10 percent in July,

The banks are still apparently making a nice spread aren’t they? So fears about their demise in a NIRP world were overdone and the Deputy Governor went out of her way to point out that the “precious” was doing okay.

I can also note that the four major Swedish banks made profits of almost SEK 44 billion during the first half of the year.

House Prices

These are surging and I pointed out back on the 4th of this month what was taking place here.

Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”.

The official numbers are running at more like 9%.

The solution

This is supposed to be macroprudential style policies but even the good Deputy Governor seems doubtful about them.

It is then of course essential that one also ensures that Finansinspektionen is equipped with the most efficient tools possible to be able to manage its task in a good way. And if one later discovers that there are doubts regarding some parts of the mandate,

Of course macroprudential policies have been tried and found wanting in the past which reminds me of this from one of the Star Trek films.

Kirk: “Names, Lieutenant!”
Valeris: “I do not remember.”
Spock: “A lie?”
Valeris: “A choice.”

Retail Sales

With the narrow money measure rising at an annual rate shown below and there being very little consumer inflation it is no surprise that retail sales have boomed.

The annual growth rate for the narrow monetary aggregate M1 increased in July and amounted to 15.3 percent.

Here they are in detail.

The retail trade sales volume increased by 5.9 percent in July compared with the same month last year. Retail sales for consumables decreased by 1.7 percent while retail sales for durables increased by 12.6 percent. Durable goods showed its single strongest sales month since July 2007.

As Rihanna might say “boom, boom, boom” or if we dip back in time to Shirley Bassey.

Hey big spender
Hey big spender
Hey big spender
Spend a little time with me

And if we look forwards

Retail confidence increased to 111 in August, which is considerably stronger than normal.


This version of expansionary monetary policy into a boom is pretty much unique I think and I have often wondered how much of the new central bankers text-book is being revealed to us by the Riksbank. You might think that  booming house prices and strong retail sales would lead it to rein back its efforts but if you look at the way that a lead indicator of inflation is developing they could go again.

Producer prices in total decreased 1.1 percent between June and July…..A stronger Swedish krona also contributed to the downturn.

Should that happen well there is only on song for that.

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

The Inflationary World Of UK Premiership football bubbles on

If we look at ordinary life in the UK we see that there are quite a few disinflationary pressures right now. Many of these have been driven by the fall in the oil price represented by the fact that even after this morning’s bounce the price of a barrel of Brent Crude Oil at US $44.39 is down some 56% on a year ago. This has led us to a situation where consumer inflation is described thus by our official statisticians.

The prices households pay for the goods and services they buy remain largely unchanged on a year ago. The Consumer Prices Index (CPI) – which measures these changes – shows that prices increased by 0.1% (or 10p on a £100 shop) in the year to July 2015. Annual inflation (the overall rate at which prices have increased over the last year) has been at or around 0% for the last 6 months.

Perhaps “noflation” would be the bets description of our official consumer inflation experience although of course other measures (RPI and RPIJ) do record low inflation.

The world of UK football transfers

A completely different situation emerges however if we now look at the world of Premiership football where the numbers are rising with dizzying speed! If we go back to July then the lights were flashing amber if not red. From the Guardian.

Raheem Sterling will undertake a medical at Manchester City on Monday after the deposed Premier League champions finally agreed a fee with Liverpool that could potentially rise as high as £49m for the England forward….Agreement was eventually struck on Sunday afternoon on a deal which will cost City an initial £44m, with a further £5m due in add-ons.

This represented quite a rise on the £600,000 that Liverpool paid for him back in 2010 as we mull how much he has improved as a player, although an add-on clause will have raised that towards £10 million now. It is also true that British players tend to be more expensive than foreign ones which is one of the reasons why premiership football has so many foreign players in it.

But we found ourselves reviewing the most expensive player under-21 and also the most expensive English player ever.

How did we get here?

Back on the 4th of June I suggested that we could see this.

A spending splurge this summer?


So a lack of world-class players has led to a Champions League slump for premiership clubs. The same clubs are now in this situation of having ever more money and a stronger currency meaning that Pink Floyd may be playing.


Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team.

Let us be clear that the boom in terms of money for premiership football goes on and on and on.

England’s top division has passed the £3 billion revenue mark for the first time and widened the gap to its nearest rival, the Bundesliga, to over £1 billion. The Premier League now generates more revenue than La Liga and Serie A combined.

Not only has it surged but it is about to again.

The next deals will commence in the 2016/17 season, with the value of the live domestic element already confirmed to be 70% higher than the current deal.

What happened next?

If we progress in Question of Sport style we have already noted the Raheem Sterling transfer but that was gazumped by the same club last night as reports began to filter out of this. From the Guardian.

Manchester City are confident they have finally agreed a deal to sign Kevin De Bruyne from Wolfsburg for an initial €74m (£54m)……which could eventually be worth more than €80m (£58.5m) with performance-related bonuses, goes through.

There is still the question of the medical and a supposed matching bid from Paris St.Germain but we do have some numbers to mull. This is because De Bruyne was bought by Chelsea for £7 million (January 2012) and then sold to Wolfsburg (January 2014) for £18 million in what seemed to be a really good piece of business. Indeed I note some 20/20 hindsight trading going on as some bemoan the lack of a sell-on clause!

I am not the only person considering the issue of inflation here as I note these comments on Twitter from Paul Hayward.

Kevin De Bruyne’s price rose faster than a cup of coffee in the Weimar Republic.

Kevin De Bruyne left England in 2014 for £18m and is coming back in 2015 for £54m. He’s hyperinflation on legs.

Of course even the £54 million will probably be too low but it is treble the £18 million Wolfsburg paid as we mull quite an inflationary burst. I think I am being generous in saying that the £11 million profit they gave Chelsea was due to a skill improvement although I am sure that readers will have their own thoughts. Measuring output and quality is somewhat intangible.

What we can say is that Wolfsburg are certainly not distress sellers as they are owned by Volkswagen but it would appear that even they could not turn down such a sum of money which in the normal world of pretty much zero inflation you could buy quite a lot with.

The ever inflating Stones

As we review the issue of the quality and output of a young man who has played for England then a wry smile passed my lips as BBC Radio 5 live reported this last night.

Stones, back at his first club, was not his usual composed self and made an error of judgement when Winnall gave the home side the lead, inexplicably stepping over his goalbound shot.

Actually this is more favourable than the radio broadcast which blamed him for two goals. Let us make an allowance for what Hard Fi described below and move on.

Pressure, pressure, pressure pressure pressure
Feel the pressure
Pressure, pressure, pressure pressure pressure

Living for the weekend [x8]

However I note that the opening bid of £20 million was more than the £18 million paid by Leeds United for Rio Ferdinand some years ago and of course it has been replaced by £26 million and then £30 million. On the other side of the coin it did appear that around £34/5 million would be sufficient but that now seems to have been replaced by £40 million. In fact even that may be old hat as I listened to Danny Mills on BBC Radio 5 Live last night going £42,3,4 million.

If we believe the hype then there may be another launch forwards. From the Daily Star.

Chelsea are in talks with Juventus about signing Paul Pogba and are prepared to make a £73m bid for the midfielder.

What about the wages?

In the normal world there was some welcome news today especially for employees of Sainsburys. From the BBC.

Sainsbury’s has given its shop workers a 4% pay rise, the highest increase in more than a decade, to take staff wages to just above average for the sector.

It says 137,000 of its workers will see their pay rise from £7.08 an hour to £7.36 from the end of this month.

Putting it another way if Raheem Sterling is getting £200,000 a week then if all 137,000 worked for an hour they could pay him for five weeks and if Kevin De Bruyne is getting £250,000 per week then they could pay him for four weeks or so.


For those who are not football fans I guess the way that it hits the headlines at this time of year has them singing along with Green Day.

Summer has come and passed
The innocent can never last
Wake me up when September ends

For the rest of us we see a world where there is clear disinflation in commodities and oil and fears of deflation as the Chinese bubble bursts. However as soon as we try to apply any quality and output measure we see that there is an extraordinary bubble going on particularly in Premiership football. Ironically it will mostly be recorded as economic growth as I doubt there is a football deflator which will do the job. So just like any other economic bubble really, what could go wrong? Not even membership of the House of Lords is growing this fast.






Why has world trade declined in 2015 so far?

The last few days have seen various shock waves pass through word financial markets. We have seen equity markets fall and currencies gyrate at a speed not seen for a while as we reach a stage where fear is more powerful than greed. However if we look below the surface there is a factor which has developed in 2015 which is troubling. Let me open this section with the thought that one of the accepted axioms had become that world trade expanded at a faster rate that world economic growth. Why? Well it can be summed up in one word which is globalisation. This is supposed to bring all sorts of benefits such as lower costs and increased efficiency as well as more choice.

World Trade Monitor

This undertakes monthly surveys of the state of play and the latest one is reviewed by the Financial Times thus.

The volume of global trade fell 0.5 per cent in the three months to June compared with the first quarter, the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor, said on Tuesday.

Okay so if trade growth exceeds output growth then we have a problem so let us look deeper.

Economists there also revised down their result for the first quarter to a 1.5 per cent contraction, making the first half of 2015 the worst recorded since the 2009 collapse in global trade that followed the crisis.

So we are going from bad to worse or as Madonna might say “Deeper and Deeper”. The Financial Times points out that this does have implications for world economic output.

In the three months to June, global trade grew just 1.1 per cent from the same quarter of 2014, according to the new Dutch figures. The International Monetary Fund expects the global economy to grow 3.5 per cent this year.

So the falls in 2015 have dragged the growth rate down but official bodies continue on with a rose-tinted view.

“We have had a miserable first six months of 2015,” said Robert Koopman, chief economist of the World Trade Organisation, which has forecast 3.3 per cent growth in the volume of global trade this year but is likely to revise that estimate down in coming weeks.

Have we seen that sort of thing elsewhere at all as official bodies sing along to “Reality was once a friend of mine?”

If we look at the data we see that world trade peaked at 139.5 last December and that compares to 2005=100 but it fell to 136.8 in June. In fact June was a relatively strong month but the overall trend was down as we wonder what happened in July and so far in August. The areas driving this are Emerging Asia (-5%) which is in tune with the theme of these times and Central and Eastern Europe (-13%) which is much more of a surprise as it was down by 4% up to the end of May.

In case you are wondering why the Dutch are recording this then think of the amount of trade which flows through Rotterdam. I wrote a piece when I was on Mindful Money on the subject of the “Rotterdam Effect” where there is in my opinion some double-counting which flatters their economy.

Also I think that the FT is going a little far with the emphasis on 3-D printing.

The slowdown in global trade has led some to proclaim that globalisation has peaked with technological innovations such as 3D printing creating more disruptions.

What about shipping?

This is another way of looking at trade trends as we get a clue from the cost of shipping or the demand for transportation. Earlier this month there were diverging views on the subject. From the Australian Daily Reckoning.

Tanking Baltic Dry Index Foreshadows a Global Recession

But only a day later there was this from The Economic Times of India.

The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry bulk commodities, rose to a new 2015 high on Monday thanks to strong demand for capesize vessels

Ah so it was simultaneously rising and not only falling but tanking?! If we look at it now then we see that it is at 942 which is some 11% lower than this time last year and has seen quite a fall since the 1222 of the 5th of this month. In current circumstances the latter move is no surprise but it remains a fair bit higher than the drop towards 500 it saw in February as the impact of falling oil and commodity prices hit it with full force. So there was quite a rally which has now reversed.


Another measure is the Harpex Index from Harper Peterson which is another amalgamation of freight shipping rates. It too rose in 2015 and reached a peak of 646 in mid-June but since then the situation has deteriorated and the reading on the 22nd of this month was 550 for a fall of 15% from that peak.

For perspective the Harpex is up on a year ago (411) but a long way short of the peak of wait for it 1649 which preceded the credit crunch.

Latest News

We do get occasional up to date snapshots and there is this from Platts yesterday.

Freight rates for Panamaxes loading in the UK Continent are currently at the lowest level since late 2013 due to weak regional demand for the vessels in the Baltic and UKC, as well as an unsupportive Panamax environment in the Caribbean.

Although shippers are at least able to load up with fuel that is cheaper than it has been for quite some time.

Ex-wharf Singapore 380 CST bunker fuel plunged to its lowest level in more than 10 years, tracking plunging crude and fuel oil Monday.

The grade was assessed at $208/mt Monday, down $19/mt from Friday. It was last assessed any lower at $207.50/mt on March 2, 2005, data showed.


The new data suggests that world trade growth went into reverse in the first half of 2015. If we look at what shipping rates have done since then we see that both bulk dry (BDI) and container (Harpex) rates have fallen sharply in August. Thus we have a hint that the decline in world trade may have not only continued but grown. It does not prove that world economic output has also dropped but in terms of the Starship Enterprise it does put us on Yellow Alert and it also provides a theoretical backdrop to some extent to what has unsettled financial markets so much.

It is not only physical trade which has issues as we have the ongoing issue of banking deleverage or shrinking and I am reminded of a speech on this subject given by Kristin Forbes of the Bank of England last November.

International capital flows are sharply lower than before the crisis, and international financial exposures are somewhat lower. Home bias is greater. This recent financial deglobalization is driven by a massive contraction in international banking flows – in which the UK plays a critical role. Not only have UK resident banks withdrawn more cross-border lending than any other banking system, but other countries’ banks have reduced their cross-border lending exposure to the UK on a scale that is large even when measured relative to the scope of the UK economy.

Has that finally impacted on financial markets?

Forward Guidance

It would appear that Mark Carney’s promises and hints of an interest-rate rise have had an impact. From the UK BBA.

“These figures show that thousands of us managed to tear ourselves away from the Ashes series to remortgage during July.

“This was a 29% surge on 12 months before and the highest figure we’ve seen for four years. Savvy homeowners are snapping up competitive deals before an expected increase in interest rates.

How is that going Mark?

How would a country with negative interest-rates like Denmark respond to a financial crash?

As the world finds itself enmeshed in something of a financial crisis as a butterfly flutters its wings in China thoughts turns to what might be called International Rescue. There has been call after call from investors for central banks to “do something” and presumably they are not asking the US Fed and the Bank of England to deliver on their promises of interest-rate hikes! However there are issues over what central banks have left in their toolkits especially in places like Denmark which have already plunged into an icy cold world for their official interest-rates.

Effective from 6 February 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.25 percentage point to -0.75 per cent.

Thus we are heading for nearly 7 months at such a level and in fact just under a year of continuous negative interest-rates as it was in early September last year that rates were cut to -0.05%. This added to the policy of negative interest-rates which began in July 2012 and which Denmark had tried to escape before plunging back into them. The Danish Nationalbank crossed quite a Rubicon back then.

For the first time in its nearly 200-year history, one of Danmarks Nationalbank’s interest rates is negative.

The cause of all of this as so often is the Euro as Denmark faces the cost of being a small country trying to float next to a behemoth.

The negative rate of interest on certificates of deposit was set solely with consideration to maintaining Denmark’s fixed-exchange-rate policy. The fixed-exchange-rate policy entails that monetary policy is laid down with a view to stabilising the krone against the euro.

So we note that should we see a further crash then for Denmark a repeat of the 9/11 response or the response to the 2007/08 crash would mean it going ever more negative in terms of interest-rates.

The Euro

One of the problems of pegging yourself to a currency is that you inherit its problems. After a period of cutting interest-rates in response to a weak Euro Denmark has over the last few days faced a stronger one. The calls for the Euro to fall to parity against the US Dollar have been replaced by a reality of a rise to 1.16 or so versus it. Rather ironically we saw the main two QE (Quantitative Easing) central banks facing stronger currencies as the Yen surged too and at one point the two currencies values against the US Dollar crossed over which was rather extraordinary.

By EU reckoning 6% appreciation in TWI has same eco effect as a 100bp interest rate hike

That has happened since mid-April and does not fit the lower Euro theme at all. It also shows a cost of pegging your currency especially to a currency bloc with a list of troubles. The situation is worse if you use the Bank of England rule of thumb as it would consider the recent currency appreciation to be equivalent to a 1.5% interest-rate increase.

So they cut interest-rates to prevent a currency rise and then got one anyway by default! Time for some Fleetwood Mac.

Oh well

Now, when I talked to God I knew he’d understand
He said, “Stick by my side and I’ll be your guiding hand
But don’t ask me what I think of you
I might not give the answer that you want me to

The real economy

The official view is that things are going rather well or “on track” as you might say.

The upswing is expected to gain strength in the coming years. Growth in real GDP is forecast at 2.0 per cent this year and 2.1 per cent next year. A slightly lower growth rate of 1.8 per cent is expected in 2017, when the economy reaches its normal capacity.

Ah yet more output gap theory. It persists in so many places which shows that reality is often not a friend of official views. However the new Danish government has just announced numbers which are not quite so optimistic. From Bloomberg.

The Liberal government of Prime Minister Lars Loekke Rasmussen sees gross domestic product expanding 1.5 percent this year, compared with 1.7 percent estimated by the Social Democrat-led coalition that was ousted in June elections. GDP will expand 1.9 percent in 2016, also less than the 2 percent previously foreseen, the Finance Ministry said.

Splitting hairs maybe but it has had more of an impact on the expected public finances.

The Finance Ministry in Copenhagen said the budget deficit in 2015 will be more than twice as big as previously estimated, mostly due to a slump in taxes from Danish pension assets.

That seems somewhat odd as Danish equity markets are still up on the year so perhaps we are seeing an effect of negative interest-rates, as I have expected them to hit pension funds and other longer-term contracts, but the new numbers are shown below.

The budget deficit was revised to 2.7 percent of GDP this year, more than twice the 1.3 percent previously estimated. The gap will widen to 2.8 percent next year, the Finance Ministry said.

Oh and readers of my post on the 4th of this month will not be surprised to see that I noted this bit too.

House prices will rise 6.5 percent this year and 4 percent in 2016, according to the Finance Ministry. Prices rose 3.4 percent in 2014.

Good news or not?

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…

One ominous feature of these times is to be top of en economic table and on that score I present this from John Kay in the Financial Times from late June.

For foreign policy experts, America is number one. But, from an economic perspective, the Danes win….. The wealth of Denmark is instead built on exporting bacon and drugs to control diabetes — an appropriate combination — around the world.


It is dangerous to be top of an economic league table in these times as calamity is often hiding around the corner. But we see that like the UK situation any financial meltdown will be transmitted to the real economy to a large degree by the housing market. This is awkward to say the least when it is not only official interest-rates which are negative. From the Danish Federation of Mortgage Lenders.

Some of the approaches where negative interest rates pass through to borrowers are being put to use.

Rather than returning actual cash they are mostly reducing the capital owed. Oh and what could go wrong?

The Danish mortgage model is regarded as being one of the best of its kind in the world. It contains a unique balance principle and a market-based repayment system. Hence, the Danish mortgage credit market is characterised by transparency, competition and stability.

A financial crash would challenge this for obvious reasons in a world where the Danish mortgage banks apparently think that the new Basel regulations should not apply to them. But if we move to my subject of the day which is how would Denmark respond? I would expect them to cut interest-rates even further especially if the Euro were to follow the pattern this time around and rally. At which point the famous words of William Shakespeare might then be heard one more time.

Something is rotten in the state of Denmark.

How will the current financial market turmoil affect the UK economy?

At the moment all eyes are on China as it faces yet more stock market turmoil. My subject of Friday looked into the chaos theory view of the impact of a butterfly fluttering its wings and this morning they have certainly fluttered with the Shanghai Composite falling some 8.7% to 3211. Markets across the Pacific too fell and the Abenomics policy of Japan will not be pleased to see the Nikkei 225 equity index falling 895 points to 18540 as part of it is based on the wealth effects of higher equity prices. Also of course the Bank of Japan has been buying Japanese shares via ETFs (Exchange Traded Funds). My theme of today is to look at the impact on the UK and to have as a sub-plot the impact of falling equity markets on economies and in this case sharply falling ones. This is of course the reverse of modern central banking theory as it is an antithesis of QE (Quantitative Easing) policies being deployed by many central banks around the world which are relying on higher asset prices.

Up Up and Away

Whilst it is in some ways reassuring to be reminded that in Star Wars terms there is indeed a place which is “far,far,away” maybe the UK CBI (Confederation of British Industry) shouldn’t be living there!

The UK’s leading business group is forecasting 2.6% GDP growth for 2015, up from 2.4% in June, and 2.8% in 2016, up from 2.5%.

An interesting time to release that you might reasonably think and also there is the issue of them feeling they can forecast the UK GDP to an accuracy of 0.1%. If only! But let us examine what underlies their positive view of the UK economy.

The upgrade is due to a combination of factors, including signs of recovering productivity in the first half of this year feeding through to stronger wage growth. Combined with continued low inflation from falling commodity prices, this gives a welcome boost to household spending.

Okay so far so reasonable what else?

Furthermore, business investment is also likely to remain healthy, with our surveys indicating robust plans for capital spending.

At this point Goldilocks porridge is looking “just right” as consumption and investment expand together although to be perfect we would hope for more exports.

net trade looks set to drag on GDP growth in both 2015 and 2016.

The underlying message here should be played with the Outhere Brothers on the CBI tannoy.

I say, boom boom boom now let me hear you say wayoh

Or to be more specific.

As a result, we expect decent quarterly GDP growth ahead: we anticipate growth to average 0.7% a quarter until the end of 2016, in line with the expansion seen in Q2 2015.

So we move on from a universe where all is happy and bright and rather than continually promising to raise interest-rates the Bank of England has already done so!

UK Retail Sales

Last week’s data reminded us of this.

Year-on-year estimates of the quantity bought in the retail industry grew for the 28th consecutive month in July 2015, increasing by 4.2% compared with July 2014.

And also the reason why it has happened.

Average store prices (including petrol stations) fell by 3.0% in July 2015 compared with July 2014; the 13th consecutive month of year-on-year price falls. All store types except textile, clothing and footwear stores reported decreases.

So the growth is being driven by lower prices and backs up the CBI argument above. Indeed with the price of a barrel of Brent Crude Oil falling towards US $44 this morning we can expect more of it should it remain at such levels. Regular readers will be aware that I was making this point when the headlines were screaming “deflation” as a bad thing. From January 29th.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

UK House Prices

If we think of one UK asset price falling then minds naturally turn to wonder what UK house prices will do next. A troubling view which brings many themes of this blog together has been suggested by the Financial Times today.

Companies that bought properties after the credit crunch that ended in 2009 have cashed in £3.4bn of London property — pocketing £870m in profits — in the past two years, according to analysis by property advisers Cushman & Wakefield.

Also the numbers show an extraordinary volume level.

Total investment volumes in the central London market hit a record £24.6bn last year, Cushman & Wakefield’s figures show — topping previous record deal volumes in 2013.

So we are left wondering if the smart money has now been and gone to some extent and also if the newer investors or ones with short time spans meaning that the situation just got more precarious. That is an issue in itself but is also one which may topple over into a least part of the residential housing market.

Nine Elms, is seeing a wave of “flat-flipping” as investors try to sell unbuilt properties amid fears the capital faces a glut of expensive homes.

Oh dear so much for the property boom just up the road from me! I do hope we still get the Tube link it has been promised for the 20 years I have lived there. I also note a comment which provides some perspective from an FT article from 6 months ago.

“About 54,000 homes are either planned or already under construction in the priciest areas of the capital…”

“Most of these homes will be priced at close to or above £1m. However, just 3,900 homes worth more than £1m were sold in these areas in 2014…”

So if the current turmoil continues it will not be only equity prices which are falling in London. Can a bubble burst safely?

Currency Wars

Much is happening here as we see some currencies devalue and depreciate as others rise. I note that Canadian investors have been buying London commercial property and for them the rise of the UK Pound £ versus the Loonie will be welcome and last week there was the devaluation from Kazakhstan added to today by the UK Pound now buying 109 Roubles.

However on the other side of the coin the Euro has strengthened again in a move one might not have expected in the midst of the ECB’s continuing QE program. At nearly 1.15 versus the US Dollar it has pushed us below 1.37.


Back in July 2012 the Bank of England told us this.

In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

Which in its view contributed to this.

it is important to remember that without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. More companies would have gone out of business.

They estimated that the wealth gain could have been £600 billion or £10,000 each if distributed evenly. Of course the distribution is far from even as the concept of the 0.1% demonstrates. The Bank of England then somewhat contradicted its hype by started the Funding for Lending Scheme to subsidise banks via pumping up house prices as a result of lower mortgage rates.

So we see that the Bank of England was not as convinced of the beneficial wealth effects from a rising equity market as it claimed as otherwise it would not have started FLS. With the FTSE 100 at 6050 some of the beneficial effects have gone and that is before we consider what may have happened to margin traders on the drop. Also there is the fact that falls like this have a different impact to a sustained rise as China is about to find out.

However the real driver for the UK economy in an asset price sense is the housing market and house prices. If we move from what the Bank of England says to what it did (FLS) we know that it agrees. So if the UK economy is to be affected we need not only to look at other economies such as China but also keep a close eye on the property market.

What happens when an economic butterfly flaps its wings in China?

One of the accepted truisms of the modern era is that the economic world is shifting eastwards to the Pacific. The emerging vibrant nations there will push forwards and eclipse the old sclerotic developed nations in the west. Well out of that it is true that the western world has looked sclerotic but 2015 has not been especially kind to economies in the Pacific region. It was only on Wednesday that I analysed the problems and travails of the Japanese economy the same problems and travails that so many told us would be cured by the Abenomics arrows of the current government.

But there is an even bigger story in the Pacific region right now and that is the emerging crisis in China. This morning has seen disappointing news from the business survey about its important manufacturing sector.

Flash China General Manufacturing PMI™ at 47.1 in August (47.8 in July). 77-month low.

Eyes will immediately turn to the 77 month low part if the number which takes us back towards the beginning of the credit crunch and we all know what happened then. As to the number then officially 50 is the benchmark for contraction expansion but even if we use 49/51 to allow for uncertainty we can see that Chinese manufacturing is slowing according to this measure.

If we look into the detail I note that output is dropping as are orders and stocks/inventories are rising which suggest further trouble ahead. Thus the accompanying notes from Dr. He Fan, Chief Economist at Caixin Insight Group indicate someone who has either drunk too much Kool-Aid or took the Matrix style red pill.

But overall, the likelihood of a systemic risk remains under control and the structure of the economy is still improving…… This will lead the market to confidence and renew the vigour of the economy.

This means that there is now quite a gap between this survey and the official one as we wonder if fear stops companies from reporting the truth to officials

Unemployment in China

There has long been doubt over China’s economic statistics and The Economist has pointed out some obvious issues.

The registered urban jobless rate is just 4.1% now. This would seem to point to economic vigour, but the problem is that it has sat at that precise level, without moving, since late 2010. And it has stayed within an absurdly narrow range of 4.0-4.3% since 2002, even at the depths of the global financial crisis.

It adds some research from the National Bureau of Economic Research which uses other survey data.

They find that China’s unemployment rate averaged 10.9% from 2002-2009, nearly seven percentage points higher than the registered jobless rate over that period.

There are issues actually with both approaches and some now consider this to be better.

Another alternative is a surveyed unemployment rate that in its methodology more closely resembles the unemployment rates reported by developed economies. According to this, China’s jobless rate is now 5.1%

Now unemployment statistics have their flaws wherever we look as I am again reminded of Yes Minister telling us that manipulation of them was a common theme in the UK back in 1983. But we move on realising that we have evidence China is slowing but that the picture is far from crystal clear.

Commodity Prices

These are another potential signal for slow down signs in China and the price of crude oil has been very weak again this week. As I type this WTI (West Texas Intermediate) has dropped below US $41 and Brent Crude is in the low US $46s. Whilst there was a rally yesterday Dr.Copper’s price is 27% lower than a year ago. Iron Ore has been more stable  recently at US $55.60 according to The Australian but I note that this is for delivery to Tianjin and I think most would not be especially keen to visit there right now. From CNN.

Chinese emergency workers were working to extinguish four fires Friday that broke out at the site of last week’s fatal blasts in the northern city of Tianjin, the state-run Xinhua News Agency reported.

This is in addition to the millions of dead fish which have washed up on local shores.

Although of course fans of the economics of Paul Krugman will see this as a boost to GDP.

Underlying all this are fears for the western corner of the South China Territories who at least had a better day in the Ashes cricket at the Oval yesterday.

Currency Wars

The recent devaluations which I discussed on August 11th have stopped with the Yuan  stable for now at 6.39 to the US Dollar. However there have been impacts ricocheting around the emerging markets or EM complex. From RANsquawk.

Deutsche Bank note that 17 countries have seen their currencies depreciate by >3% since devalued the last monday

We also have the complex issue of the petro-currency nations hitting trouble which is interrelated. Yesterday saw Kazakhstan devalue as the currency world swings its axis but I would like to point out that this is a zero-sum game and ironically a recent riser has been the Euro as it nudges 1.12 to the US Dollar. The UK Pound £ has been strong for the past couple of years something that you get to write relatively rarely.

Equity Markets

These generate headlines but underlying the situation is modern central banking theory which operates to boost asset prices often explicitly. We have plenty of countries offering implicit support via QE policies but more than a few offering explicit support such as Japan,Switzerland and now China. From The Australian.

the more than $US90 billion the Beijing government has earmarked to rescue its stock market.

Today it has not gone so well as the Shanghai Composite Index fell by 4.2% to 3510. However there was a lot of speculation that The Plunge Protection Team did appear at the close. From Lim Chee Tiong.

ALERT: Here comes plunge protection team … spike

Although whilst a close above 3500 was achieved the PPT was unable to keep the market above various averages which chartists consider important. So watch this space! Although markets of course can spin on a sixpence.


Sometimes things are not as you might think at least for short periods and on this front I bring you this from Simon Rabinovitch.

So much for mini-stimulus. China to try mini-recession: will shut 10000 factories, 9000 construction sites week before Sep 3 military parade.

Although rumours are already swirling of more stimulus and monetary easing. From Live Squawk.

Speculation surrounds PBoC RRR cut could come this weekend, last cut was 50bp on Sat June 27, the third in 5 months.

Like all weekend moves it would have the advantage of catching the lazy western capitalist imperialists on the hope as they take time off to relax. Although it would appear that an old enemy is already on the case. From The Japan Times.

Finance Minister Taro Aso said Friday that recent moves by China to allow its currency to depreciate are a concern and could pose problems for Tokyo.

Yet another deadline day arrives and passes for Greece

The Greek saga has certainly seen inflation in the number of deadline days it faces! Nobody in authority in the Euro area seem to think through the consequences of this on economic expectations and prospects for the Greek economy. The effect can only be a bad one. Today’s has been driven by a piece of can-kicking which took place early in the Greek crisis. This was when under the “shock and awe” program so beloved of Christine Lagarde the European Central Bank was instructed to buy Greek government bonds. The plan if you can call it that was to stabilise the Greek bond market amongst others and then to sell the bonds back to private investors later. The program time span was supposed to be 3 years as according to the forecast Greece would be on the road to recovery rather than as it turned out the road to nowhere.

Back in June 2010 ECB Executive Board member Jose Manuel Gonzalez-Paramo told us this.

Even though the non-standard measures have served the economy well, we are fully aware that keeping them for longer than necessary would entail risks that should be avoided,

He even used one of the most popular words in my financial lexicon for these times “temporary”. Actually that does not sit quite so well on the day that one of the bonds bought by the ECB expires and it still owns it! That is about as permanent as you can get although as we will see in a moment actually we will get a new definition of permanent. Perhaps someone might like to ask him how this served the Greek economy well as 5 years later the Greek government does not have the money to repay it.


A rule of the Euro area crisis applied by the ECB has been that a Euro area country cannot default and hence all sovereign bonds will be repaid at par or 100. In its arcane world it was buying bonds at say 50 or 60 and then booking them at 100 and now is one of the occasions when it gets its 100 plus interest.  If Greece could repay it then you might say it was a job well done but of course that is not the case.

Step forwards the European Stability Mechanism (ESM)

The obvious solution to an expanding balance sheet at the ECB for a Eurocrat was to create a vehicle which was off-balance sheet. After all we don’t want to scare the taxpaying horses do we? So we ended up with a Special Purpose Vehicle or SPV which is rather different from the one usually driven by Captain Blue although it may have as many lives as Captain Scarlet. After a debacle called EFSF we now have the ESM and it has stepped forwards this morning.

The European Stability Mechanism (ESM) approved the first tranche of financial assistance for Greece of €26 billion.

Some of it is arriving as a banking faster payment.

The Board also decided to immediately disburse €13 billion to Greece. Today’s disbursement is the first part of a sub-tranche of €16 billion, to be used for budget financing and debt servicing needs.

Debt Monetisation

If we cut to the chase we see that The Euro area taxpayer backed ECB is being paid out by the Euro area taxpayer backed ESM. The only change is that the latter is an off-balance sheet although the attempt to stop it being recorded in national accounts was foiled by Eurostat. But there are problems here as there are clear Ponzi style elements to this and in fact debt monetisation especially if you believe that it will be an extremely long time before Greece is ever (if at all) able to repay this. From Hugo Dixon.

This loan will have a very long average maturity (32.5 years) and a very low interest rate which starts at 1%.

Thus the original 3 years became 5 plus and now we can add another 32.5 years to that in an “to infinity and beyond” type of way. I did argue at the beginning that these bonds would become perpetuals and for most if not all of those involved in the negotiations that is what they will be.

Care is needed with the interest-rate as it is not always a fixed rate but for now it is very cheap. With apologies to Middle of the Road the Eurogroup finance ministers view can be summed up by this.

Ooh we, chirpy, chirpy, cheap, cheap
Chirpy, chirpy, cheap, cheap, chirp

If we return to the issue of debt monetisation then the St.Louis Fed defines it thus.

a permanent source of financing for government spending

I will let readers decide for themselves whether what has been described above falls into that category.

Meanwhile the asset-stripping begins

From Keep Talking Greece.

A German company, airport operator FRAPORT won the bid to operate and maintain 14 regional airports, considered to be top of the top in Greece. With an offer of 1.23 billion euro, the consortium of Fraport -Slentel (a unit of Greek energy group Copelouzos) won the bid to lease the regional airports for 40+10 years.

The term of that seems rather permanent too doesn’t it?

What about Currency Wars?

Regular readers will be aware that I have argued that a devaluation and presumably a departure from the Euro was needed in Greece’s situation. In recent times the ECB has moved in that direction as its QE program has pushed the Euro lower. But the world is moving on including a neighbour and competitor with Greece for tourism business. From AFP.

Turkey’s embattled lira Thursday hit a new historic low in value against the U.S. dollar, breaking the ceiling of three lira to the dollar for the first time.

Also the Currency Wars drumbeat is being hammered out in Kazakhstan. From Bloomberg.

Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate,

Even the Swiss Finance Minister has popped up with a call for the Swiss Franc to return to 1.22 versus the Euro. As Snoopy would say “Good luck with that one!”

Fishing for a solution

The Wall Street Journal has looked at this.

And Greeks have earned a living from fish for eons. It is the country’s second-largest agricultural export, behind fruit and nuts but ahead of olive oil and cheese.

But sadly the news is grim.

A collapse in household buying power has demolished demand for fish, and with it fishermen’s income. Aquaculture companies, once a shining star in the marine economy, are drowning in debts. Fish processors are struggling with high costs for finance and relentless price pressure among strapped shoppers.

What especially caught my eye was the “high costs for finance” because if you look earlier in this article in official terms it is ever cheaper. Or if you like another example of my theme of the large gap between the finance sector and the real economy.

After five years of a supposed rescue that is about as big an indictment as you can get of what has gone on here.


The situation in Greece is one that can be described under the banner of round-tripping with most of it being corresponding debits and credits at different accounts backed by Euro area taxpayers. Whilst the statement below has been issued the fact is that the ESM in Luxembourg has paid the ECB in Frankfurt so some of the money has not really touched Greece at all!

gov’t pays on time €3.4bn bond held by the . (@YanniKouts )

Another 7.1 billion Euros repays the EFSM taking UK and other non-Euro members off the hook. You get the idea.

Meanwhile as Greece continues its economic depression and the refugees there live in squalor we have a let them eat cake style announcement.

has made sure programme is socially fair & protects most vulnerable throughout. ( European Commissioner for Employment, Social Affairs, Skills and Labour Mobility Marianne Thyssen).

The International Herald Tribune is right.