Is it all about the debt for UK individuals?

One of the issues of the credit crunch era has been the subject of debt. Often it is sovereign debt that is discussed but of course the private-sectors of the world often also piled it up in the pre credit crunch era. This is a factor in the policy response of many central banks who have cut interest-rates sharply and increasingly even into negative territory as a way of cutting the interest or running costs of such debt. A problem with this is that whilst it may provide something of a short-term boost it also encourages the accumulation of yet more debt as incentives for saving are reduced and the cost of credit drops. It provides an incentive for behaviour which is exactly the reverse of the deleveraging which is what central banks claim that they want. Also we have seen that in our increasingly fractured and divided economic world the interest-rate cuts do not directly reach the areas that most need them. An example of this has been the periphery in the Euro area.

The UK

There have been two main additional measures in the UK to reinforce the credit position. First cam some £375 billion of Quantitative Easing by the Bank of England and second the summer of 2012 came its Funding for Lending Scheme which boosted mortgage lending and our banking sector. Today I wish to widen the analysis of its impact and also consider how it has impacted unsecured lending such as personal loans and overdrafts.

Unsecured Borrowing Surges

Price Waterhouse produced a report last week with some numbers which will send a chill down the spine of those familiar with UK economic history.

Britons added nearly £20bn to their total unsecured borrowing during 2014, an increase of nearly 9% on 2013 – the largest percentage rise in more than a decade.

As Karen Carpenter sang so beautifully, such numbers remind me of this.

All my best memories
Come back clearly to me
Some can even make me cry.
Just like before
It’s yesterday once more.

The likely  trends according to PwC are as follows.

Total unsecured borrowing now stands at £239bn, the equivalent of £8,936 per household …. PwC projects unsecured borrowing will grow over the next two years by between 4% and 6% annually. This projected rise would leave the average UK household with unsecured borrowing of close to £10,000 by the end of 2017, taking consumers into uncharted territory in terms of borrowing levels.

That phrase “uncharted territory” in terms of unsecured borrowing sends a sharper chill down the spine. What could go wrong?

One feature of these numbers is the inclusion of student loan debt in the PwC numbers as many versions these days omit it. If we consider the position of student loan debt whilst we hope it is secured on our student’s futures it has no bricks and mortar backing so they do have a  point. Also it is important that we allow for its rise and do not shuffle it down some statistical back-alley as some of the official data tries too. I guess they do not want to record the impact of the rise in tuition fees.

The average student loan value in 2014/15 is £11,710, a jump of more than 35% on last year’s figure.PwC estimates that the typical student who began university post 2012 will graduate with unsecured debt of between £40,000 and £50,000.


Of course this is debt but in some respects not as we know it as it often does not cost anything for a while and there are doubts about how much will ever be repaid but it is debt nonetheless. So we find a new facet of an old problem. It always leaks out somewhere doesn’t it?

Today’s data

If we look at today’s Bank of England data we see that this is one area where it has been able to generate some credit growth.

Consumer credit increased by £0.7 billion in February,compared to the average monthly increase of £0.9 billion over the previous six months.The three-month annualised and twelve month growth rates were 4.9% and 6.6% respectively.

I would not get too hung up on the monthly number as it is an erratic series which is also affected by rounding but an annual growth rate of 6.6% is more than double our rate of economic growth. A more exact breakdown is given below.

Within consumer credit, credit card lending increased by £0.2 billion in February in line with the average monthly increase over the previous six months. Other loans and advances increased by £0.5 billion compared to the average monthly increase of £0.6 billion over the previous six months.

In case you were wondering the total amount of unsecured debt in the UK was £169.1 billion in February according to the Bank of England. Also the range of growth rates goes from a frosty -2.3% in June 2010 to a red-hot 21.5% back in the early part of 1988.

Interest-Rates on Unsecured Debt

This is a story of two halves. So let me start with the sector which has seen a change and that is personal loans. If you were to borrow £10,000 now then the Bank of England has you paying some 4.5% as opposed to the 6.69% of two-years ago so quite a change. So it is no surprise to see more borrowing in this area as I wonder if it is related to this. From the Society of Motor Manufacturers and Traders or SMMT and the emphasis is mine.

The number of new cars registered has risen every month since March 2012, as the UK continues to bounce back from the recession and consumer demand has been driven by exciting new products and attractive finance deals.

Exciting new products sounds rather like the “innovation” of Irish financial products pre credit crunch.

The other half is of interest-rates on credit cards (17.8%) and overdrafts (19.7%) which have been rock solid over the past couple of years. In fact they have moved little at all in the credit crunch era in spite of all the official interest-rate cuts and measures we have seen.

Also there is another factor which is that the range of interest-rates offered these days varies very much with one’s credit rating and I wonder how well the Bank of England data catches this if at all.


There is much to consider in the UK private-sector debt position. You see even the extraordinary push provided by the FLS only managed to push net mortgage lending just into positive territory as shown by the numbers for February.

Gross lending secured on dwellings was £16.2 billion and repayments were £14.5 billion.

I guess the official fear here was a period of net falls in mortgage lending which in another twist to the tale is of course what they have often claimed they want! So the boost to unsecured lending has helped give the economy another nudge forwards for now at least.

Intriguingly however the real surge has come from student loan debt. As the Bank of England data ignores it then I will move to HM Parliament data. At the end of the 2013/14 fiscal year it amounted to £54.3 billion as opposed to the £40.3 billion of 2011/12 and this is what is expected to happen next.

This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

For those of you wondering how much we owe as individuals in total the Bank of England calculates it at £1471 billion but it does not include student loans.

In a way this is a ying to Friday’s yang for the UK economy. There we see the positive impact of disinflation boosting the economy whereas today sees something familiar but not so friendly.

Lower prices are providing quite an economic boost for the UK, Spain and Ireland

Today I wish to reinforce a theme I established a couple of months ago, back on the 29th of January to be precise. This goes against the economic orthodoxy which tells us that consumers when faced with lower prices then expect even lower prices and defer consumption. Frankly that always looked dubious to me in a country like ours as the UK these days seems to be to be something of an instant gratification nation unlikely to be able to wait long for anything. Also even before these times of economic difficulty we had seen falling prices for many electronic goods and we saw booming sales of mp3 players I-Pads and the like rather than falls. Back on the 29th of January I reinforced the case in this fashion.

The results were fueled by all-time record revenue from iPhone® and Mac® sales as well as record performance of the App Store℠. iPhone unit sales of 74.5 million also set a new record.


This led me to this conclusion.

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.


And a subset conclusion about the likely behaviour of a profession that is prone to stuck in the mud type thinking.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories.


UK Retail Sales

My theory and theme received considerable reinforcement from yesterday’s UK Retail Sales data which were very strong and provided another sign that it has been a solid first quarter for the UK economy.

Year-on-year estimates of the quantity bought in the retail industry continued to show growth in February 2015, increasing by 5.7% compared with February 2014. This was the 23rd consecutive month of year-on-year growth and the longest period of sustained growth since May 2008 when there were 31 periods of growth.


Quite a powerhouse performance when we consider that UK consumer inflation was on its way to disappearing in February. But we get an even more significant implication if we look at retail price behaviour over the past year and the emphasis is mine.

Average store prices (including petrol stations) fell for the eighth consecutive month, falling by 3.6% in February 2015 compared with February 2014. This is the largest year-on-year fall since consistent records began in 1997. Once again the largest contribution to the year-on-year fall came from petrol stations, which fell by 15.5%, the largest year-on-year fall in this store type on record.


So for the deflationistas we should be seeing large amounts of deferred consumption to take advantage of expected lower prices in the future. It is not so easy to square that with year on year growth of 5.7% in the retail sector is it?! Indeed we are seeing quite the reverse as around 60% of the increase in the volume of retail sales is due to the effect of lower prices enhancing volumes. Furthermore if we drill down to the latest three months which is the period where consumer inflation has lurched down to zero we see this.

The underlying pattern in the 3 month on 3 month movement in the quantity bought continued to show growth for the 24th consecutive month, increasing by 2.0%. This was the longest period of sustained growth since November 2007


The doom,doom,doom theories of conventional economics should instead be listening to the Outhere brothers.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo


What is happening here?

We find ourselves examining a much longer-term theme of this blog which is that the above target consumer inflation in the UK which the Bank of England “looked through” contributed to a decline in real incomes and therefore had a contractionary impact as opposed to the promised expansionary one. However now we found ourselves in an environment where even the current level of weak wage growth -let us hope that this was a one-off- is higher than consumer inflation and is much higher than inflation in the retail sector. We do not have a like-for like comparison but even the 1.1% wage growth of January will make consumers and workers feel better off when it faces the 3.6% fall in prices in the retail sector in the year to February. Put this way we have quite considerable real wage growth here and accordingly no wonder we are seeing a boom.

An International Perspective

Y Viva Espana

Back on January 29th I also established the view that disinflation was providing an economic boost for Spain too. As you can see below prices are falling in Spain.

The Harmonised Index of Consumer Prices (HICP) annual change stands at –1.2%, thus it increases three tenths as compared with January.


Indeed prices have been falling in Spain since last July, so much more time for the deflationistas doom-doom cycle to kick in. Er well not quite at least not according to the Bank of Spain…

During 2015 Q1 the economy saw a continuation of the expansionary path of the previous year. On the information available, GDP is estimated to have grown at a quarter-on-quarter rate of 0.8% in Q1, which would take its year-on-year rate of change to 2.5%. This estimate marks a slight acceleration in activity on the final stretch of 2014.


Against this backdrop, estimated GDP growth for 2015 has been revised upwards to 2.8%. This 0.8% revision of the projection.


So rather than collapsing in on itself in the fashion of a black hole the Spanish economy is for now at least showing hints of escape velocity. The Bank of Spain launches itself on a rather wordy explanation of all this but does at one point approach something of a singularity in its explanation of what is causing at least part of the expansion.

the decline in prices


Of course it is taking its part in the ECB QE effort to end this boost to the Spanish economy, but I will leave that as a matter for them and the consciences.


It would be remiss of me to not also examine the data of the third country from my original analysis which is the Emerald Isle which is currently basking in its Six Nations rugby triumph. How is the economy doing? Well it has falling prices.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), decreased by 0.4% compared with February 2014.


So the economy has collapsed? You no doubt have guessed the answer but I doubt that you guessed the scale of it.

The  volume of retail sales (i.e. excluding price effects) increased by 3.3% in January 2015 when compared with December 2014 and there was an increase of 8.8% in the annual figure.


The motor trade has surged over there. Whilst this is not quite like for like as Ireland is tardy with some of its data we see that it is certainly boom-boom rather than doom-doom.


So far the evidence is clear that disinflation is producing boom-boom rather than the doom-doom of conventional economic theory. Of course we have finite evidence and there are other factors impacting at the same time. These can offset the gains as we have seen in Greece. But we get a reinforcing note from the other side of the coin. You see Japan is the ying to this yang as it has forced consumer inflation higher via its consumption tax rise and Yen depreciation. How is that going? From Japan Today earlier.

Separate data from the ministry showed household spending dropped for the 11 months in a row since the tax hike, falling 2.9% on-year in February.


Now of course the higher tax rate had an impact but so in my view has the higher level of prices. Accordingly unlike the Bank of Japan I see the fact that its adjusted favourite measure of inflation has fallen to 0% as a benefit and not a loss.

Ben Broadbent speaks

We are in the season for Bank of England speeches and Mr.Broadbent has made a case for QE which must sound weak even to his own ears.

For one thing I think the evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften
the constraint of the zero lower bound.


Oh and the zero lower bound is back to 0.5% Base Rates again in a version of the hokey-cokey as one speech puts it back and the next dismisses it.

Also after Mark Carney’s speech on the Euro you might think that attacks on other countries policy would be a no-no. I guess many will miss the implied criticism of Denmark, Switzerland, Bulgaria et al.

 if it’s not ruled out by an exchange rate peg


Still if they complain he could take a leaf out of the lyrics of Luther Vandross.

Out of my head to say the things I said
I didn’t mean a word

And I really didn’t mean it




Is economic growth lost in France?

The last couple of days have seen a flurry of data about the economy of la belle republique and so let us take a look at what is taking place there. Before I do so it would be remiss of me not to express my sympathies to the friends and relatives of those affected by the Airbus 320 crash in the French Alps. The theme that has developed over the past 3 years or so is of an economy struggling to come to terms with the post credit crunch era with flatlining economic growth. Such have been the struggles that I wondered back on December 11th how near France was to actual deflation and disinflation which I define as a contracting economy combined with falling prices. Also on February 13th I pointed out that France was being outperformed by Germany leading to quite an economic divergence at the heart of the Euro project which of course only adds to the problems to be found elsewhere.

What about deflation and disinflation?

According to the official data France escaped the former at the end of 2014 by the skin of its teeth.

In Q4 2014, GDP in volume terms increased by 0.1%. Over the year, GDP rose by 0.4% as in 2013.


So very weak growth but at least there was a flicker of it. Whilst price changes were volatile in January and February due to the winter sales we can say that France is experiencing some disinflation.

Year-on-year, consumer prices diminished again (—0.3% after —0.4% in January).


Like many other places there is a clear split between goods prices which are seeing disinflation and services prices which are seeing inflation. For example manufactured product prices are falling at an annual rate of 1.5% but services prices are rising at an annual rate of 1.3%. Part of the latter is something which will be grim news for those holiday makers looking to take advantage of recent UK Pound Sterling strength.

This rise came mainly from prices of services related to winter holidays: prices of holiday accommodation services rose strongly in February 2015 (+22.3%). Vacation rental tariffs (+1.3%; +4.4% year-on-year),


What about the fiscal deficit and national debt?

This morning’s official data had a good news and bad news mix so let us start with the good. From the Financial Times.

The French deficit narrowed faster than anticipated to 4 per cent of gross domestic product in 2014, from 4.3 per cent the previous year,


So France reduced its fiscal deficit in 2014 albeit marginally. But the news about the national debt showed a further deterioration on the same basis. From the French Statistics Agency.

At the end of Q4 2014, the Maastricht debt reached €2,037.8bn….. As a share of GDP, it accounted for 95.0 %,


It slipped their minds to point out that this was up on the 92.3% of 2013. If we make a cross-channel comparison then the fiscal deficit in France is some 1% per annum better but the national debt is some 9% larger relative to economic output. On current trends that balance is likely to continue the UK because of its present faster rate of economic growth.

Comparing the national debt to revenue is problematic as revenues at 53.2% of GDP are much higher than tax revenue at 44.7% of GDP. Is anybody aware of what the other 8.5% of GDP is?

Does this matter?

In terms of a capital and thus long-term affordability issue yes it does but in the shorter term it matters much less due to the actions of the Bank of France. It has been operating the Quantitative Easing operations of the European Central Bank with such enthusiasm that some have thought it has bought too much (18 billion Euros) so far! More likely is that the numbers stated also include French private-sector debt.

This means that it is extraordinarily cheap for France to offer new sovereign debt. The ten-year yield is a mere 0.45% and at the two-year maturity investors are paying France 0.15% per annum to buy its debt! That is dangerous as it may be tempted to issue shorter-dated debt when a time like this is an opportunity to issue longer-dated bonds. Also it makes quite a mockery of the ratings agency downgrades that have taken place.

Looking Forwards

Back on the 11th of December I suggested that France should receive a boost from lower oil prices.

As France imports an estimated 1.7 million barrels of oil a day (US EIA) then it will benefit substantially from the falling oil price and similar if smaller gains will be made via gas imports.


Of course last nights military action in the Yemen by the Arab League has pushed the oil price higher but compared to a year ago it is much lower. Also monetary policy is very expansionary with the Euro lower against many currencies symbolised by its fall from nearly 1.40 to 1.10 versus the US Dollar. Today’s money supply numbers show that narrow money is growing very fast although it is a moot point as to how much is reaching the areas which most need it. But the bottom line is that the outlook for 2015 should certainly be favourable.

What data are we seeing?

This has so far disappointed. From Reuters.

The Labour Ministry said on Wednesday that the number of registered job seekers in mainland France rose by 12,800 last month to 3,494,400, up 0.4 percent over one month and 4.6 percent over one year.


This is disappointing and is the current French economic Achilles heel as the level of unemployment is not only elevated but looking rather persistent.

Even the official survey of business trends known for its optimistic slant seems to be continuing to struggle.

The indicator, compiled from the answers of business managers in the main sectors, has moved upward, from 94 to 96, after being stable during three months. It still lies below its long-term average (100).


So better but still not even average. Indeed in spite of the currency depreciation it is being held back by the manufacturing sector something which is reinforced by yesterdays purchasing managers report.

Flash France Manufacturing Output Index climbs to 47.1 (47.0 in February),


As 50 is the benchmark for unchanged we see that manufacturing continues to contract. This means that overall the expectation for the opening quarter of 2015 is as follows.

the surveys are signalling a mere 0.2% expansion of the French economy in the first quarter


Not much in the circumstances is it?


There are optimistic signs for the French economy as I have discussed above. However the further rise in unemployment was symbolic of a situation where any growth has so far been marginal, nascent and weak. A bit like the history of Portugal and Italy where even in the good times economic growth struggled leading them into their current malaise. Let us hope that Bonnie Tyler was not right about economic growth in France.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning
As I stood there in the morning rain
I had a feeling I can’t explain
I was lost in France in love


Meanwhile by contrast Spain seems to be continuing to benefit from the positive effects of disinflation that I discussed on the 29th of January. According to the Bank of Spain economic growth in the first quarter of 2015 was 0.8%. Quite a difference is it not?

Share Radio at Lunchtime

I will be on the Global Perspectives show on Share Radio after the 1pm news today. A clear subject after today’s Spanish data and indeed the UK Retail Sales numbers is how lower prices are boosting economic growth as per my article of the 29th of January. I did tweet Duncan Weldon of BBC’s Newsnight program to suggest that they should be covering this but apparently they were ahead of everyone or something like that.

we have been!





How will the Bank of England respond to zero inflation?

Yesterday’s inflation news poses quite a problem for the Bank of England. There are plenty of caveats in the inflation data as I discussed then but officially it finds itself in a position where it has to aim at an annual rate of CPI inflation of 2%. That is rather awkward when the actual level has fallen to 0% and should oil prices not rebound has a fair chance of going negative next month. Only a fortnight or so ago Bank of England Governor Mark Carney closed down a few options on himself.

Our job is to achieve a 2% rate of growth in CPI inflation……it’s a job given to us by the democratically elected representatives of the British people. We are mandated by Parliament to do that and we have an operational independence in order to accomplish that.

He had the opportunity to express the view that CPI was not the only measure of inflation, He could have pointed out about high house price inflation and the fact that the gap between the current targeted measure and our previous one RPIX (Retail Price Index less mortgage costs) has widened to 1%. This matters when the gap between the old and new target was set at 0.5%. As an aside I argued against it back in the day as I felt it was a policy loosening and if anything the situation is worsening. But returning to his speech an opportunity was missed if he wanted to avoid pressure for a policy easing.

What about the UK Price Level?

The reason I raise this is that we see a tsunami of economists emerge from their cubbyholes if inflation is below target for a period claiming we should catch-up. On the other side of the argument for intellectual and logical symmetry they should be arguing we need a period of below target inflation to slow down to where we should be. You have not heard it? Well nor have I! There is a clear inbuilt bias in the system.

In reality if we go back to the levels of 2008 and calculate where the CPI should be if we had hit our inflation target then it should be at 121. As it is instead at 127.4 then the deflation mania in the media should move from obsessing from monthly and annual changes to the bigger picture. In fact it would be good for all sorts of measures in the UK if we undershot our inflation target for a while. For example it would be much easier for us to establish a consistent pattern of real wage growth if inflation was low or even negative for a bit. Lower prices and costs would help our exporters at a time when we do have serious issues with our balance of payments so we could find ourselves in something of a win-win situation and I will leave it to others to explain why they reject this.

Just to be clear there is the possibility of a deflation/depression scenario but there are many other alternatives especially if we consider that we are where we are because oil and commodity prices have had a sharp reverse. Unless they fall forever that effect will fade and we will then return to an economy which left to its own devices does have inflationary pressure.

The CPI all services index annual rate is 2.4%, unchanged from last month.

Dr Shafik Speaks

One of the group of Carney’s cronies that has been appointed to the Monetary Policy Committee has given an interview to the Kent Business Newspaper. What insight does she offer?

Dr Shafik said the “central expectation” of the Bank of England’s monetary policy committee, which sets interests rates, is that the next move will be up…….The monetary policy committee has rightly said we shouldn’t change interest rates in response to something that is temporary……..we have the option to lower rates.

So interest-rates might go up or they might stay the same or they might go down. That about covers it! Still she did say something unlikely to come out of the mouth of the other Carney Crony Kristin Forbes.

Kent is interesting

You see Ms Forbes has not bothered much with coming to the UK leading me to wonder if she knows where Kent is? Still as a music fan let me air the possibility that she resides in Massachusetts because she is a fan of the Bee Gees.

Let me make it clear I am attacking these women as Carney’s Cronies because of their background and not their sex. There are plenty of British female economists that could and indeed should feel slighted by what has happened here. Why wasn’t one of them appointed?

UK Monetary Policy Has Tightened

Real Interest-Rates

We now have a Base Rate which is higher than current inflation as 0.5% is of course more than 0% so we have a unique situation for the UK in the credit crunch era which is a real interest-rate. In spite of the fact that Gilt yields have been falling some of them have a real interest-rate too now. For example the five-year yield at 1.11% will have one at least for a while and even longer-dated Gilts will have one. Of course for the latter the strict definition is over the life of the bond but lets face it this is a period of time where any such longer-term calculations are a fantasy.

The Pound £

This has risen overall since its nadir of March 2013 and has been tightening UK monetary policy ever since. More recently the rise has been shrouded in mist due to the strength of the US Dollar forcing the UK Pound lower against it but overall it has been strong. Back in March 2013 the trade-weighted index fell at one point to 77.9 as opposed to the 89.2 of yesterday. Over the past year the rally has been equivalent to a 1% rise in UK Base Rates.

Funding for Lending Has Faded

From its inception the Funding for (Mortgage) Lending Scheme or FLS gave quite a boost to the UK housing sector and prices via the downwards pressure it applied to mortgage interest-rates which approached 1%. This has now ended so let us look at how it is helping businesses.

Net lending by FLS Extension participants to all businesses was -6.9bn in the fourth quarter of 2014.

So it continues to be a complete failure which is my financial lexicon definition for a counterfactual success which no doubt it will be claimed to be.

However one area did benefit from the FLS in the last quarter of 2014.

Of these, 14 participants made drawdowns of £8.5bn in total.

Remember when we were promised that the banks would only get cheap liquidity if they increased lending. Well up is the new down yet again!


There are a lot of factors at play here but regular readers will be aware that I have been warning about the dangers of an interest-rate cut from the Bank of England since December 2013. In my opinion the protestations about an interest-rate rise are like the boy (girl) who cried wolf for the majority of the Monetary Policy Committee to establish their credentials and mean little if anything. As I have described above there are several grounds for arguing that UK monetary policy has tightened.

The template has been provided by the Riksbank in Sweden which on the day of the UK Budget Statement cut interest-rates to -0.25%. Yet according to it the state of play is as below.

GDP growth is relatively good, the labour market is strengthening gradually and there are signs that inflation has bottomed out, although it is still low

If interest-rate cuts are the new fashion for central bankers replacing forward guidance well we know from the comments section that Governor Mark Carney is this.

They seek him here, they seek him there,
His clothes are loud, but never square.
It will make or break him so he’s got to buy the best,
‘Cause he’s a dedicated follower of fashion.

With house prices rising at an annual rate of 8.4% how can UK inflation be 0%?!

The UK is facing right now what is an unusual situation in its inflation targeting history. Up until now all problematic episodes have been of inflationary pressure which are not a surprise in a nation prone to administered and institutional inflation. Whereas right now the fall in the oil price which is some 48% lower than a year ago and other commodity prices has given the UK economy a strong disinflationary push. The strength of the UK Pound £ has also added to this as whilst it has been pushed into reverse by a strong US Dollar otherwise it has been firm. Accordingly on the 12 th of February Bank of England Governor Mark Carney had to make history and write a letter to the Chancellor George Osborne explaining why the official inflation measure CPI was so far below target.

The most important single reason for below – target inflation over the past year is the unexpected recent sharp drop in energy prices. Between the middle of 2014 and the time at which the December CPI collection was made, the sterling price of crude oil fell by 40%. The price of a litre of unleaded petrol fell by 10% in the year to December, from £1.30 to £1.17. And in contrast to the previous December, when they rose by over 6% on the month, retail gas and electricity prices were unchanged in December 2014.

You may note that the official view always finds falls in prices to be “unexpected” which is revealing in itself! But also I note that even after such a sharp fall in energy costs domestic fuel costs were unchanged. However even so UK workers and consumers have for once had some good news and this has been added to by another basic commodity.

Food prices, which rose by 1.9% a year during the 1997 -07 decade, fell by 1.7% in the year to last December. That reflects a combination of factors, including bumper harvests in 2014, which reduced UK farm prices by 11%, falls in global agricultural prices and more intense competition among retailers.

And The Beat Goes On

All shoppers will be pleased to know that the British Retail Consortium feels that shop prices continue to be on a downwards path.

Overall shop prices reported deflation for the 22nd consecutive month, accelerating to 1.7% in February, after reporting deflation of 1.3% in January.

Today’s Data

After such a build-up you may not be surprised that something I tweeted before the figures were released has happened this morning.

The Consumer Prices Index (CPI) was unchanged in the year to February 2015, that is, a 12-month rate of 0.0%, down from 0.3% in January.

So it is now inflation rather than economic growth which is flatlining in the UK! You may not guess it from the media scare stories but this is a vastly preferable development. The particular drivers were as follows.

The main contributions to the slowdown in the rate came from price movements for a range of recreational goods (particularly data processing equipment, books and games, toys; hobbies),food and furniture ; furnishings.

What is coming next?

It looks as though there is still considerable downwards pressure on prices to come.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 1.8% in the year to February 2015, compared with a fall of 1.9% last month.

Even further down the chain it is a case of ice,ice baby.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.5% in the year to February 2015, compared with a fall of 14.1% in the year to January 2015.

Of course the recent uptick in the oil price could end this period but for now we remain under pressure the other way.

Accordingly the situation starts to look very optimistic in terms of the official data. Even the UK’s troubled wages series should be able to beat 0% growth and so we can expect an improvement in the real wages series. Indeed with the recent economic growth performance of the UK there was a long time that this would be considered to be an economic nirvana although apparently Robert Peston missed that out.

So deflation just a sneeze away, with zero inflation rate for Feb – below expectations.

If you are a retailer perhaps you might like to raise prices just for him to make him happy!

What about house prices?

The economic nirvana does not come under pressure from lower prices as alleged by Robert Peston as he ignores much higher asset prices. Odd because according to his logic they appear to be welcome to him. The issue here is that higher asset prices are being ignored by the UK consumer inflation system. The obvious issue is over UK house prices as shown below.

UK house prices increased by 8.4% in the year to January 2015……..In January 2015, prices paid by first-time buyers were 9.7% higher on average than in January 2014.

As you can see there is considerable inflation to be found here. Also we apparently help first time buyers to experience an even higher rate of house price inflation than everyone else. They must feel that they are living a real life version of Alice In Wonderland!

The situation as to how to deal with this has been a conceptual and organisational shambles in the UK which brings discredit to our establishment. An example of this is shown below.

following improvements made to the OOH index, the annual average growth rate of OOH (for the period from 2005 to 2014) has been revised upwards by 0.6 percentage points to 1.5 per cent,

Yes the measure only recently recommended by Paul Johnson of the Institute of Fiscal Studies could not have a worse track record!

If we use the new numbers developed we see that a consumer inflation measure for housing would have it with an 18% weight. So putting the house price numbers in from above would mean CPIH would be running at 1.5%. Now for various reasons that is an overstatement but it would end the deflation mania would it not? Unless of course we only want to count the prices which are either flat or falling….


Whilst we are gaining in many areas that does not mean that the UK tendency to institutionalised inflation has gone away. Some companies are raising prices by reducing product size and hoping that we do not spot it. Which magazine put it thus last week.

In our latest investigation, we uncovered 13 products that have lost 50g here or a few centimetres there, which all adds up to a more expensive shop.

For example a tub of Philadelphia cheese spread lost 10%, Birds Eye mixed vegetables lost 6% and those baking a Hovis Best of Both loaf produced one of 750 grams rather than 800! Tetley Blend of Both Tea Bags were the worst as the loss of 5 tea bags to 75 saw the price rise 20 pence as well.


There is much to welcome in the current UK economic situation as we find that economic growth is strong and at least according to official data inflation has disappeared bringing in a period known already as no-flation. Soon we are likely to see outright falls in prices or negative inflation which will be good for consumers and indeed as real wages rise also good for workers. I hope that the media reflects this rather than spinning some deflation mania.

The rub as Shakespeare would put it comes in as we consider how we measure inflation. As I have pointed out above a large amount of expenditure goes on housing which is excluded from the official series for no better apparent reason than it tends to go up! Although it has its weaknesses our old inflation measure the Retail Price Index covers the situation much more adequately in my view.

The all items RPI annual rate is 1.0%, down from 1.1% last month.

Yes inflation has fallen but we still have some especially in our housing market. Of course when surveyed by the Bank of England we tell it that something which it then chooses to conveniently ignore.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, compared with 2.8% in November.

Greece is the word one more time as the economics version of a car crash continues

Today sees a meeting between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras as the Greek Prime Minister visits Germany. As he does so we find ourselves singing along to the rock band Muse.

Our time is running out
Our time is running out
You can’t push it underground
You can’t stop it screaming out
How did it come to this?


There are genuine fears now that Greece will run out of money and these have been reinforced by the letter that Alexis Tsipras sent to Chancellor Merkel last week.

What did the letter say?

The crucial part involves a combination of putting pressure on the European Central Bank to provide more liquidity for Greece and in the part I emphasise a statement that Greece could run out of money. From the Financial Times.

Given that Greece has no access to money markets, and also in view of the ‘spikes’ in our debt repayment obligations during the Spring and Summer of 2015 (primarily to the IMF), it ought to be clear that the ECB’s special restrictions [see (a) above] when combined with the disbursement delays [see (b) above] would make it impossible for any government to service its debt obligations.



That is a threat of default in anybody’s language and is reinforced by the fact that Greece’s creditors are now in essence official ones so it is a threat to Euro area taxpayers and at the limit to world taxpayers via the International Monetary Fund. As Euro area minister set up their “rescue” vehicles on an off-balance sheet basis any sizeable losses would pose a problem as they bring them back into the national accounts. Ouch! For example earlier this month Handelsblatt raised the issue with the head of the main two rescue vehicles.

Handelsblatt: Mr. Regling, the euro rescue fund EFSF has lent around €142 billion to Greece and is thus by far Greece’s largest creditor. Are there realistic chances that this money will ever be repaid?
Regling: Greece has to repay that loan in full. That is our expectation, nothing has changed in that regard


As you can see he has a mantra to chant. What was the saying that if you owe one Euro to a bank it owns you but if you owe 142 billion you own it? Even back then Klaus Regling was irritated I wonder what he is now?

That is one of several recent statement that have irritated me.


The Klaus Regling View

The view of the Euro area establishment was given by Klaus Regling in that interview too.

Economists who claim this have not done their homework. It is true: the Greek debt level of around 175% of GDP is very high. But this does not burden economic development because the debt service is very low. The EFSF has suspended interest payments for Greece for 10 years and the average maturity of our loans is around 32 years.


So as long as the interest-payments are low you can borrow as much as you like! There is no allowance here for the size of the capital burden or feeling out of control of events.

A Confession

Klaus let the cat out of the bag when he stated where the bailout money had gone.

Handelsblatt: The Eurozone and the International Monetary Fund have already granted loans to Greece in the volume of around € 240 billion. Where did all this money go?
Regling: With financial volumes of this magnitude at stake this is a justified question and the answer is no secret: around three-quarters of all the loans for Greece have been used to serve the country’s debt to private and public creditors.


So much for helping the Greek people as claimed! The reality as I have often pointed out on here is that it was a rescue operation for Greek, German and French banks in the main. The ordinary Greek was sold very short and not told the truth.

What about the economy?

The other side of such arrangements is the economy. A large debt burden can indeed be affordable if an individual,company or nation manages a fast rate of income growth. Unfortunately the austerity medicine prescribed for Greece made the illness worse and not better. As the boom ended in the latter part of 2007 then Greek Gross Domestic Product rose to 65.2 billion Euros per quarter (2010 prices) and by the last quarter of 2014 it had fallen to 46.6 billion. Even worse the official chorus proclaiming that a “Grecovery” was in place had to face this reality.

Available seasonally adjusted data indicate that in the 4th quarter of 2014 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% compared with the 3rd quarter of 2014.


Also the rate of growth compared to a year before slowed as opposed to the surge you might expect after declines equivalent in economic terms to something of a nuclear winter.

This is the other side of the debt burden coin as Greece faced not only a lack of economic growth – remember the original bailout forecasts involved economic growth returning in 2012-  but a contraction which peaked at 10% per annum. Thus the national debt to GDP burden which was supposed to be reduced from 170% to 120% by the 2012 private-sector default or PSI is now at 175%.

The Greek Banks

These are part of the rescue mechanism proposed by Alexis Tsipras and the Greek government as it wants them to be allowed to buy Greek sovereign debt. Greece is still issuing short-dated debt called Treasury Bills. Frankly nobody else shows any particular inclination too! The catch is that permission is needed and this looks like debt monetisation mostly because it is on a road to it.

However the Greek banks in spite of all the money that has been poured into them are in a bad way as deposits flee. In December and January some 16 billion Euros or just under 10% left the Greek banking system taking it back to levels last seen in 2005. Bloomberg estimates that another 1.6 billion Euros left the system last week.

In response the European Central Bank has allowed the Greek central bank to stabilise the system via Emergency Liquidity Assistance or ELA. But it is doing so on a short leash as it only allowed an extra 400 million Euros last week and in itself it hardly inspires confidence that the Greek banking sector now requires some 69.8 billion Euros of ELA.

Credit Crunch Alert

Greece faces two types of potential credit crunch right now. The first is being faced by its banks as they see deposits flee the country. This in my view was exacerbated by an extraordinarily stupid statement by Dutch Finance Minister Jerome Dijsselbloem made six days ago.

capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.


Bank depositors in Greece have clearly constructed one or two scenarios of their own and decided to flee! You would have thought a muzzle would have been put on “Dieselboom” after he regularly put his foot in his mouth over Cyprus, but apparently not.

The second capital crunch is for the Greek government which has to pay out around 2 billion Euros before the end of April and around 5.7 billion Euros according to Bloomberg by the end of the second quarter of 2015.


The irony of all this is that with monetary policy so loose and the impact of much lower oil and commodity prices feeding into the system Greece should be finally seeing springlike economic conditions. Yet in something of an anti-triumph the latest business survey reported this about Greek manufacturing.

February saw a further contraction in Greece’s manufacturing sector, with the rate of decline in production the fastest seen since October 2013.


Another very important metric is again showing signs of struggling and it gets even harder to express how grim this must be.

The unemployment rate was 26.1% compared
with 25.5% in the previous quarter, and 27.8% in the corresponding quarter of 2013


Employment fell compared to the previous quarter as well. Added to this has been yet more grim data from Greece today.

The Turnover Index in Industry (both domestic and non-domestic market) in January 2015 compared with January 2014 recorded a decline of 16.0%.

Thus we see a situation where the economy is struggling in spite of favourable developments and both the banking and government sectors face a credit crunch. To the Greeks it must seem that.

You will suck the life out of me


Of course I suggest that they take a route which involves default and devaluation which the actual position sadly looks more like this.

I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted


Want to help?

The Bank of Greece does have an account for this.

Pursuant to Bank of Greece Governor’s Act 271/4.3.2010, an account entitled “SOLIDARITY ACCOUNT FOR REPAYMENT OF PUBLIC DEBT” (No. 24/26132462) has been opened at the Bank’s Head Office, Public Entities Accounts Section, for voluntary deposits, to be used exclusively for the repayment of Greece’s public debt.


The details of the solidarity account are as follows:
IBAN: GR 04 010 0024 0000000026132462



The UK Public Finances finally improve even with £5.5 billion lost down the back of the sofa

Today in something of a coincidence of timing so soon after the Budget Statement we will receive or by the time you read this have received the latest UK public finances data. One thing that the data will not tell us is this.

public sector net borrowing (PSNB) to fall from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16.

public sector net debt (PSND) to increase from 53.5 per cent of GDP in
2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16

The numbers above were from the June 2010 Budget analysis of the Office for Budget Responsibility that of course has turned out to be anything but responsible! Oh well. Reality has not been a friend of theirs. Even the boost to UK GDP (Gross Domestic Product) from the ESA 10 inspired changes has not helped them much compared to the scale of the errors at play here.

You may note that the UK National Debt as a proportion of GDP was supposed right now to be taking the advice of Alicia Keys.

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

I keep on


They get going at this game although there is a confession tucked away in their latest effort. Also I note that target has followed target has followed target which speaks for itself.

Public sector net debt is forecast to peak in 2014-15 and to fall by 0.2% of GDP in 2015 16 and a further 0.5 per cent of GDP in 2016 17, thereby meeting the new supplementary target. The previous target would also have been met the first time we have forecast debt falling as a share of GDP in 2015-16 since March 2012.


Where is the UK National Debt?

You may note that the official view is invariably that our national debt to GDP ratio is falling. Indeed  I pointed out on Share Radio that at one point in this weeks Budget Statement Chancellor George Osborne told us that the National Debt was about to fall! If we look at today’s data we immediately have a problem.

At the end of February 2015, public sector net debt excluding public sector banks (PSND ex) was £1,468.5 billion (79.6% of GDP); an increase of £83.6 billion compared with February 2014.


As you can see it has fallen to a higher number as 79.6% has replaced the 69.4% it was supposed to be now. I guess fallen and falling need to go into my financial lexicon for these times! Sadly as I have pointed out before the saga does not stop there as the UK uses a much more favourable measure of its national debt than what is considered to be the international standard so let me show that too.

At the end of February 2015 General Government Gross Debt (Maastricht debt) was £1,583.3 billion (85.8% of GDP).

Don’t get a job involving numbers

Someone who had that on their school report back in the day seems to have taken no notice of it.

The public sector net debt has been revised upwards by £5.5 billion, from October 2014, as the result of a correction to previously published estimates which were erroneously double counting bank deposits held by the central government body, UK Asset Resolution Ltd.

Quite a bit to find down the back of the sofa isn’t it? If they have apologised for such an error then they must have forgotten to put it on their website. I guess it would be silly to enquire as to whether anybody has been sacked as we already know that large errors are not anybodies responsibility as opposed to minor errors which of course are.

A New Hope

For some time the UK fiscal deficit figures were fairly resistant to the improving economic trends that started at the beginning of 2013. Projecting past trends would put us in a lot better place than we are. However 2015 has started more hopefully such that today we have been told this.

From April 2014 to February 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £81.8 billion; a decrease of £8.8 billion compared with the same period in 2013/14.

So finally we are seeing an improvement of decent size on last year and if we look at February’s numbers we see why.

In February 2015, PSNB ex was £6.9 billion; a decrease of £3.5 billion compared with February 2014.

Tucked away in the detail was a better report from something which in the early part of this fiscal year was very troubled which is income tax revenue.

the total self-assessment recorded in January and February 2015 was £15.0 billion; an increase of £1.9 billion on the same period in 2014.

Perhaps we are finally seeing the benefits for the public finances in the increase in the numbers of self-employed. If so it may be late but it is nonetheless more than welcome. Indeed there was a general improvement in revenues.

VAT receipts increased by £0.2 billion, or 1.8%, to £10.1 billion;
corporation tax increased by £0.2 billion, or 11.9%, to £1.6 billion;

Have the VAT revenues been nudge lower by the disinflationary trends in the retail sector? If so the position there is better than it looks. Also regular readers will have a wry smile at the laggard.

stamp duties (on shares, land & property) decreased by £0.1 billion, or 9.6%, to £0.9 billion.

Maybe we are seeing a sign of a cooling UK property market? Or perhaps the numbers in this sector have risen so far and so fast that they have run out of puff.

Also expenditure was lower than last year by £1.5 billion with two things regularly discussed on here playing a role.

debt interest decreased by £0.4 billion, or 9.3%, to £4.0 billion.

Firstly we have the fall in inflation (RPI is now 1.1% per annum) meaning that our inflation linked debt costs will be lower and secondly the impact of lower Gilt yields will be helping too although that takes much longer to have a real impact.

A Welcome Change

The significance of this move will be missed by many and those that read it may not understand it. What it means is that we are beginning to account for some of the payments we make to international organisations like the African Development Bank

 the treatment of UK Government subscriptions to the IDA has changed to record them as capital transfers (which impact net borrowing) instead of the current treatment as equity injections (which don’t impact net borrowing).

Up until now we carried on assuming it was in essence free money. Why? Well because there is a cost for this. We still preserve such fantasy economics and accountancy with the European Investment Bank sadly so there is still work to be done.


There is an elephant in the room so let me address it directly, I think that the proximity of the General Election is not an explicit factor in the improvement in UK public finances. We now seem to be in a welcome phase where our economic growth is having a beneficial effect and I welcome that. However even with this we remain a country with a large fiscal deficit which our political parties will no doubt misrepresent and obfuscate over the next two months. Also even the OBR must ocassionally get something right…..

Nice To See the Bank of England catching up

Readers will be aware that I have been arguing since December 2013 that a cut in UK Base Rates is as likely as a rise . Accordingly I note this from Bank of England chief Economist Andy Haldane.

I think the chances of a rate rise or cut are broadly evenly balanced.

If they had put me on the Monetary Policy Committee everybody could have been told that 15 months ago!

All About That Bass

I was involved in a discussion yesterday about songs with the best bass lines. So here are some suggestions.

Fools Gold by The Stone Roses
The Chain by Fleetwood Mac
Billie Jean by Michael Jackson
Over to you….