The UK Public Finances conform to the first rule of OBR club yet again

Not so long ago the UK Public Finances were headline news as we faced the consequences of the recession caused by the credit crunch and the cost of the various banking bailouts. We were promised that by now the situation would be fixed as we would have a surplus it terms of our annual deficit before it transpired that our previous Chancellor George Osborne was of the “jam tomorrow” variety and specifically always promised that success was 3/4 years away from whatever point in time you were at! This meant that what we might call the ordinary national debt has steady risen as whilst much of the bank debt is off our books we have borrowed overall. If we go back to the 2010 Budget forecast we were told this by the Office of Budget Responsibility ( OBR).

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;

So we might expect the national debt to be 63.4% of GDP now. How is that going?

In November we expected public sector net debt (PSND) to peak at 90.2 per cent of GDP in 2017-18, with the August 2016 monetary policy package raising debt significantly in 201617 and 2017-18. We continue to expect debt to peak as a share of GDP in 2017-18, but at a slightly lower 88.8 per cent. As in November, we expect it to fall each year thereafter.

This is one of the factors in my first rule of OBR club ( it is always wrong…) and in a way it is quite touching that they always think that the national debt is about to shrink relative to the size of our economy.

Current issues

The first is that economic growth in the UK has continued but has slowed so that revenue growth may be under pressure. This was highlighted to some extent by yesterday’s retail sales data.

The underlying pattern in the retail industry is one of growth; for the three-months on three-months measure, the quantity bought increased by 0.6%…….Year on year, the quantity bought in the retail sector increased by 1.2%, with non-food (household goods, clothing stores) and non-store retailing all providing growth.

That suggests there is a fading of the consumer sector with implications for revenue although of course Value Added Tax is on value and not volume so will get a boost from this.

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3% (non-seasonally adjusted).

The general picture was summed up in yesterday’s monthly economic review.

GDP growth has slowed in the first two quarters of 2017, while the economy has grown 1.5% compared with the same quarter a year ago – the slowest rate since Quarter 1 2013.

Also in a week where there has been a lot of news on problems with economic statistics there was this.

we will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

I admire the ambition here but not the brains. I particularly wait to see how the quarterly services surveys will give monthly results! Ironically the same monthly review suggested grounds for caution.

The latest figures include significant revisions due to improvements in the measurement of dividend income, which have led to an upwards revision of the households and NPISH saving ratio by an average of 0.9 percentage points from 1997 to 2016, with a revised 2016 estimate of 7.1% (revised up from 5.2%).

So places like the OBR can produce reports sometimes  hundreds of pages long on the wrong numbers?

Inflation

This is proving expensive because the UK has a large amount of index-linked Gilts which are linked to the Retail Price Index which is currently growing at an annual rate of 3.9%. The effect is described below.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

Today’s data

The deficit numbers were in fact rather good in the circumstances.

Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016…….Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £32.5 billion in the current financial year-to-date (April 2017 to September 2017), compared with the same period in 2016.

The main factor in the improvement is that revenue growth continues to be pretty solid.

In the current financial year-to-date, central government received £334.5 billion in income; including £250.5 billion in taxes. This was around 4% more than in the same period in the previous financial year.

You may have already guessed the best performer which was Stamp Duty on property which has risen from £6 billion in the same period last year to £7 billion this. By contrast Corporation Tax has been a disappointment as it has only risen by £100 million to £29 billion on the same comparison.

The National Debt

Here it is.

The amount of money owed by the public sector to the private sector stood at nearly £1.8 trillion at the end of September 2017, which equates to 87.2% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Oh and thanks Mark Carney and the Bank of England as yet another bank subsidy turns up in the figures.

£100.3 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility; including £84.6 billion from the Term Funding Scheme (TFS).

Comment

We see that for all the many reports of woe the UK economy continues to bumble along albeit more slowly than before. We can bring in that theme and also the first rule of OBR club as I expect another wave in November.

The OBR is likely to revise down potential productivity growth in its November forecast, weakening the outlook for the public finances.

As they have been consistently wrong they are also likely to change course at the wrong point so this may be the best piece of news for UK productivity in a while! Actually I think a lot of the problem is in how you measure it at all in the services sector? In fact any resources the ONS has would be much more usefully spent in this area than producing a monthly GDP figure.

For those of you who measure the economy via the tax take then a 4% increase in the year so far is fairly solid. There will be a boost from inflation on indirect taxes but so far not so bad. Also we can look at revenue versus the National Debt where £726 billion last year compares with our national debt of about 1800 billion or around 40%

Meanwhile there was some good news for the UK economy from Gavin Jackson of the Financial Times.

The UK has 6.5 per cent of the global space economy!

Plenty of room for expansion (sorry). Intriguingly it may be led by Glasgow which would be a return to past triumphs.

 

 

 

 

 

 

Advertisements

The Novo Banco saga has been one of misrepresentation and woe

Yesterday saw an announcement from the Bank of Portugal on a saga which has run and run and run.

Banco de Portugal and the Resolution Fund concluded today the sale of Novo Banco to Lone Star, with an injection by the new shareholder of €750 million, which will be followed by a further injection of €250 million to be delivered by the end of 2017.

Indeed there is an element of triumphalism and back-slapping.

The conclusion of this operation brings to a close a complex negotiation process with the new shareholder, European institutions and other domestic institutions, in close cooperation with the Government.
The completion of the sale announced on 31 March brings about a very significant increase in the share capital of Novo Banco and terminates the bank’s bridge bank status that has applied since its setting up.

The opening issue is why this New Bank which is what Novo Banco, means that was supposed to be clean, needs an increase in capital? Let us look deeper.

As of this date, Novo Banco will be held by Lone Star and the Resolution Fund, which will hold 75% and 25% of the share capital respectively. It will be endowed with the necessary means for the implementation of a plan ensuring that the bank will continue to play its key role in the financing of the Portuguese economy.

The story gets a twist as we see that Lone Star will be walking away with 75% of Novo Banco and in return the Portuguese taxpayer does not get one single Euro. The implication is that the Resolution Fund is keen to get it off its books at almost any price.

Step Back In Time

If we follow the advice of Kylie Minogue we can go back to August 2014 when the Bank of Portugal was dealing with this.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets. Deposits are fully preserved, as well as all unsubordinated bonds.

BES had collapsed and I note again that Novo Banco was supposed to be clean of problem assets. However it did not take long for what Taylor Swift would call “trouble, trouble, trouble” to emerge as a rather unpleasant Christmas present arrived a few months later for bondholders. From my article on the 4th of April.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

So just under 2 billion Euros was required to steady the ship of our “clean” bank and you can see why no one was in a rush to buy it!

Money Money Money

If we go back to the origination of this there was a bold statement from the Bank of Portugal.

This means that this operation does not involve any costs for public funds.

However there was this.

The State will bear no costs related to this operation. The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

Ah good so the banking sector was paying up.

The Resolution Fund’s sources of funding are the contributions paid by its member institutions and the proceeds from the levy over the banking sector, which, according to applicable regulations, are collected without jeopardising the solvency ratios.

Meanwhile if we rejoin the real world that is the same Portuguese banking sector that was in severe disarray so the money had to be found from elsewhere.

the Fund took out a loan from the Portuguese State. The loan granted by the State to the Resolution Fund will be temporary and replaceable by loans granted by credit institutions.

At this point it sounds rather like the Amigo loans advertised in the UK where you can borrow the money but somebody else has to guarantee it, in this case the Portuguese taxpayer. Also if this were an episode of Star Trek the USS Enterprise would be on yellow alert at the use of the word “temporary”. If we step forwards to just over a year ago the Resolution Fund told us this.

the conditions of the
loan of €3 900 million extended to the Fund in August 2014

which are?

Currently, the maturity date of said loan is 31 December 2017. The review that has now been
agreed upon will allow the extension of that maturity date in a way that ensures the capacity of
the Resolution Fund to meet in full its obligations through its regular revenue, and regardless of
the positive or negative contingencies to which the Resolution Fund is exposed.

Ah so it is To Infinity! And Beyond?! Oh and the temerity of the idea that the banks might have to back the er banking sector resolution fund.

without the need to raise any special contributions.

Number Crunching

Here is Reuters from September 2015.

“Once more, I repeat, there is no direct impact (on taxpayers), since the Portuguese state did not nationalise the bank nor take a direct stake in Novo Banco’s capital,” minister and government spokesman Luis Marques Guedes said.

Okay that is clear so let us look at the view from Europe’s statistics agency Eurostat a mere one month later.

 The second most significant impact to the deficit in 2014 was in Portugal (3.0pp of GDP) and it was also mainly due to a bank recapitalisation……. The recapitalization of Novo Banco. In the third quarter of 2014, the Portuguese Resolution Fund injected 4.9 bn euro (2.8% of GDP) into Novo Banco. As the sale of Novo Banco did not occur within one year after the capitalisation, the capital injection has impacted the deficit of Portugal in 2014 for its full amount.

Comment

Let us consider this in terms of the two main variables which are time and money. The time element is that the new clean bank was supposed be sold quickly whereas it took more than three years. The money element is that the Resolution Fund underwrote the bank capital to the tune of 4.9 billion Euros. There was then a swerve to get just under 2 billion Euros off some bondholders as the word clean somehow meant dirty, Now we see that where 100%= 4.9 billion back then now 75% = 1 billion as we note the value destruction leaving the Resolution Fund with its 25% apparently worth 0.333 billion Euros but backed by a loan of 3.9 billion Euros.

So quite a large gamble has been taken by the Portuguese authorities with taxpayers money whereas if things go well Lone Star has been able to get assets very cheaply. It has 75% of the capital after only paying around 20% of the total Of course should it go wrong then we can refer back to my timeline for a banking collapse. We had this back in autumn 2014.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

And at some date in the future ( like when Eurostat rules on this for example) we are likely to see this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

Me on Core Finance TV

http://www.corelondon.tv/uk-inflation-understated/

 

UK wage and employment growth has been remarkably stable overall

Today brings new data on what is the most important economic number in the UK right now. This has been added to by the way that some Bank of England policymakers has plugged what some might call a bigly improvement in UK wage growth. Although of course you could say there is an element of deja vu all over again in that. But the issue did come up yesterday at the Treasury Select Committee interviews. This is the new policymaker Silvana Tenreyro quoted in the Guardian.

My position now is that if the data outturns are consistent with the picture i’ve just described, of an output gap going towards zero, then i would be minded to vote for a bank rate increase in the coming months.

The “output gap going towards zero” would be signalled by a sustained increase in wage growth. It used to be signalled also by the unemployment rate but the Bank of England has been in disarray on that subject since its Forward Guidance highlighted a 7% unemployment rate as significant. It is also very disappointing to see a policymaker continuing with the “output gap” theory which has failed so utterly in the credit crunch era but I guess that is simply a consequence of recruiting from an Ivory Tower. Also it seems that she knows better than the Bank of England’s own research on the subject of QE.

It’s far from evident that QE has contributed to higher inequality ( h/t Positive Money).

And whilst some loved it as it suited their particular views this was none too bright. Her words from the Financial Times about her suitability for the role.

I grew up in a developing country, subject to many crises

The pay squeeze

There is a nice chart showing the position from the Resolution Foundation albeit that it underplays the situation by being one of the few places that takes the CPIH ( H = Imputed Rents) inflation measure seriously.

There is the obvious issue that real wages have fallen according to the official data but there are two other consequences which pose problems for both the Bank of England and the Ivory Towers. Firstly as we have had nearly five years of economic growth the last shaded area should simply not exist as the claimed “output gap” seems to be operating both inversely and perversely. Also real wage growth did best in the period when inflation was low suggesting that it would be better to keep inflation low rather than aiming at a target of 2% annual growth in the Consumer Prices Index or CPI. Even worse of course the Bank of England helped to drive current inflation higher with its promises of “muscular” monetary easing post the EU leave vote which it acted upon in August 2016.

Self-employed

These do not matter for the official wages series as they are simply ignored as are smaller businesses. If I remember correctly the cut-off point is twenty employees. This has been an issue of increasing significance in the credit crunch era as the number of self-employed has risen especially as it approaches the same number as those who work in the public-sector.

self-employed people increased by 70,000 to 4.86 million (15.1% of all people in work)

There has been some potentially better news for self-employed earnings in the latest revisions to the UK economic data set. From Monday.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

As this follows other revisions in this area we see two things. Firstly that we have no reliable up to date data on the subject and secondly we have just been through a spell where dividend income was massively underestimated. So the news for the self-employed may well have been better than it may have appeared to be. Of course such large revisions whilst signs of a welcome look into the issue also pose questions about the credibility of the data.

Today’s data

Quantity

The numbers here continue to be very good.

There were 32.10 million people in work, 94,000 more than for March to May 2017 and 317,000 more than for a year earlier……..The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, up from 74.5% for a year earlier……..Between March to May 2017 and June to August 2017, total hours worked per week increased by 4.6 million to 1.03 billion.

This has had a consequence for those out of work too.

There were 1.44 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for March to May 2017 and 215,000 fewer than for a year earlier. The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 5.0% for a year earlier and the joint lowest since 1975.

So good news on this front with the only caveat being that we find out little about any issues with underemployment.

Average earnings or Quality

The Ivory Towers will be expecting a surge in wages as the “output gap” in the labour market continues its collapse. So let us take a look.

Between June to August 2016 and June to August 2017, in nominal terms, total pay increased by 2.2%, the same as the growth rate between May to July 2016 and May to July 2017.

So yet again they are disappointed. Actually as July was a weak month ( 1.4%) then August must have been better but I cannot say how much at this stage as the Office of National Statistics has forgotten to update the data set. Perhaps bonuses bounced back as we mull the (non)sense of monthly figures in this area.

If we move onto real wages we see this.

Comparing the three months to August 2017 with the same period in 2016, real AWE (total pay) fell by 0.3%, the same as the three months to July 2017. Nominal AWE (total pay) grew by 2.2% in the three months to August 2017, while the CPIH increased by 2.7% in the year to August 2017.

So we have seen yet another small decline in the official series for real wages with the caveat that the situation is worse if you use other inflation measures such as CPI and particularly the Retail Prices Index.

Comment

What we see yet again is quite remarkable stability in the UK labour market where employment rises but wage growth is weak considering that. For wages the summary of the Bank of England Agents continues to be accurate.

Growth in labour costs per employee had been subdued, with settlements clustered around 2% to 3%. Recruitment difficulties remained elevated, with conditions becoming very tight for some skills.

The Bank of England faces two problems here. Firstly its theoretical basis has all the stability of the Titanic and secondly there is the issue of its promised interest-rate rise. It is not the fact of one which is an issue it is the timing as why now and not before as not much has changed? On that road the monetary easing of August 2016 looks ever more a panic move.

Meanwhile the underlying picture for real wages continues on its not very merry way.

average total pay (including bonuses) for employees in Great Britain was £488 per week before tax and other deductions from pay, £34 lower than the pre-downturn peak of £522 per week recorded for February 2008

 

 

Imputed Rent is doing its job of reducing UK consumer inflation

Today is inflation day in the UK where we receive numbers for consumer, producer and house price inflation. As there were quite a few new readers yesterday let me open today in that spirit and explain the rotten heart of the UK inflation infrastructure. It comes via the issue of the housing sector and in particular people who own their own house or flat. What this involves is paying a large sum if you are lucky enough to be able to do so or taking a mortgage and paying it off in monthly instalments over years and indeed decades or some combination of the two. This presents us with two actual numbers which can be used in the inflation process which is house prices and mortgage payments.

Instead the UK authorities have chosen to make up their own number based on what are called imputed rents. They choose to assume that someone who lives in their own property rents it out ( of course they do not) and put that rental number in the inflation figures for the index which is called CPIH. There is an obvious issue in this which is the making up of the number when you have real ones to use! Even worse they have had a lot of trouble with the rental series based on those who do rent and in fact scrapped their first effort as it went so badly. So their number series has proven unreliable but they have ploughed on anyway and if you take the case to the National Statistician I am sorry to have to tell you that the response is much more like propaganda that reasoned argument. Why do they do it? Well I doubt it is a coincidence that it leads to a lower inflation number.

The trends

We know that there was some building producer price pressure last month although September itself saw some amelioration of that as the UK Pound £ had a better month against the US Dollar ( the currency in which most commodities are priced). So it will depend on which day they did the survey. But the price of crude oil was rising and has continued to do so since September ended with Brent crude oil above US $58 per barrel as I type this so that there is some inflationary pressure again from this source.

The producer price data today indicated a sort of steady as she goes position with a hint of a dip.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to September 2017, from 3.4% in August 2017…….Prices for materials and fuels (input prices) rose 8.4% on the year to September 2017, which is unchanged from August 2017.

 

What about the impact of inflation?

This sadly tends to hit the poorest the hardest as this from the BBC indicates.

Benefit freezes combined with the predicted rise in inflation could set some low-income households back £300 next year, a think tank has warned.

September’s inflation data will be released on Tuesday, and some analysts predict the Consumer Price Index (CPI) will be 2.9%……….The Resolution Foundation’s analysis found that a single unemployed person would be £115 worse off, a single parent in work with one child would be £225 worse off, and a single earner couple with two children would be £305 worse off.

You may note that the analysis concentrates on our previous inflation measure and not the new CPIH version in yet another embarrassment for the Office for National Statistics.

Today’s numbers

The headline number will capture the er headlines.

The all items CPI annual rate is 3.0%, up from 2.9% in August.

Actually it was a very marginal shift as if we look into the detail the rate was in fact 2.9593%. Also I did point out above that the CPI was what everyone still concentrates on as this from the Financial Times whose economics editor Chris Giles was one of those who argued strongly for the CPIH inflation measure shows.

How times change! Back in the day he and I were taking opposite sides at the Royal Statistical Society and it is nice to see the implied view that he now agrees with me. This leaves the Office for National Statistics somewhat short of friends for its propaganda on the subject of CPIH.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the most comprehensive measure of inflation.

The CPIH number gets so few mentions our statistics authority sends out its staff to get the numbers up.

You might think that after the problems with the UK trade figures I highlighted yesterday the staff there might be too busy to be on social media plugging the new inflation measure but apparently not. James has contacted me to say he is working in the prices division at the moment which gives a partial answer although if he is tweeting official information he might want to use a more accurate title.

The housing problem

Let me explain with the relevant numbers why this is an issue. Firstly let me bring the house price numbers up to date.

Average house prices in the UK have increased by 5.0% in the year to August 2017 (up from 4.5% in July 2017). The annual growth rate has slowed since mid-2016 but has remained broadly under 5% during 2017.

Now let us look at the data on which the Imputed Rental numbers for owner-occupied housing is based.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to September 2017; this is unchanged from August 2017.

Which leads to this.

The OOH component annual rate is 1.9%, unchanged from last month.

So the machinations of the UK statisticians do the following. Firstly they are using a method which reduces the annual rate of inflation from 3% to 2.8% if we use their favoured CPI series. Even worse a previous change meant that the Retail Price Index was abandoned and it is at 3.9%. Those buying a house may reasonably wonder how annual price inflation which has been circa 5% ends up reducing the inflation rate!

If you wish to follow the timing of this there was a rush late last year from the Office for National Statistics to bring CPIH ignoring some of its own guidelines as it was “not a national statistic” at that point. I did tell the National Statistician John Pullinger that doing this at a time inflation was higher but rental inflation was likely to fall ( based on wages growth) was playing with fire as regards both his personal and the body’s overall credibility in my opinion.

Comment

So we have headlines of 3% consumer inflation in the UK in spite of the official machinations to keep it below by changing the measure. The latter may strengthen in influence if London continues its pattern of being a leading indicator in this regard.

London private rental prices grew by 0.9% in the 12 months to August 2017, which is 0.7 percentage points below the Great Britain 12-month growth rate.

Those of you who pointed out that owner occupied housing would only go into UK inflation when it lowered the numbers have been proven correct so well-played.

An impact of all of this is to widen the intergenerational issue as the basic state pension will rise next year by 3% which is higher than the wage growth we have seen. Of course Bank of England pensioners will do even better as theirs are linked to the higher Retail Price Index. If we stay with the Bank of England Governor Mark Carney does not have to get out his fountain pen and headed notepaper as the remit was eased and he only has to write if it exceeds 3% on the CPI measure.

Moving onto the detail we see that there has been a strong impact from the rising price of butter we have previously looked at as the oils and fats section has risen by 14.9% on a year ago. Will we now get Imputed Butter prices?

Meanwhile our old inflation target of RPIX is at 4.1% which poses a question for the “improved” measures.

Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

For earlier monthly releases of UK Trade Statistics that have also been affected by this error, the versions on the website should be amended to make clear to users that the errors led the Authority to suspend the National Statistics designation on 14 November 2014.

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.

 

 

It is party and sake time at The Tokyo Whale as the Nikkei 225 hits highs

This week has brought a succession of news which will be welcomed by supporters of what has become called Abenomics and the Bank of Japan in particular. In fact the Bank of Japan will be pleased in two ways, one as an ordinary central bank and the other in its hedge fund style role as the Tokyo Whale. From The Japan Times.

The benchmark Nikkei average rose further and marked another 21-year closing high on the Tokyo Stock Exchange on Thursday, boosted by Wall Street’s overnight advance. The Nikkei 225 average gained 73.45 points, or 0.35 percent, to end at 20,954.72 — the best finish since Nov. 29, 1996.

Today this has gone one step further or for Madness fans one step beyond,

Let us start with the most recent period from when Abenomics was first likely to be applied to now. In that time the Nikkei 225 equity index has risen from around 8000 to 21000. As this was one of the policy objectives as according to the mantra it leads to positive wealth effects for the economy it will be regarded as a success. It may also help oil the wheels in the ongoing Japanese election. But you see there is another reason for the Bank of Japan to be happy about this because since a trial effort back in 2010 it has been buying Japanese shares via Exchange Traded Funds. A more regular programme started in 2012 and this was boosted in size and scale over time and here is the current position from the September monetary policy statement.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.

So the Bank of Japan will have some considerable paper profits right now especially in the light of a clear behavioural pattern which I looked at on the 6th of June.

The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

The Nikkei Asian Review analysed this development like this.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

There have been various rumours over the years about central banks providing something of a “put option” for equity markets leading to talk of a “plunge protection team”, well here is one literally in action. The Japanese taxpayer may reasonably wonder why it is supporting equity investors in yet another example of a policy which the 0.01% will welcome in particular. But for now let is move on with the Governor of the Bank of Japan enjoying a celebratory glass of sake as he looks at the wealth effects of the equity market high and the paper profits in the Bank’s coffers.

The “Put Option” in practice

A paper had been written by Toby Nangle and Tony Yates on this. You may well recall Tony Yates as the person I had a debate with on BBC Radio 4’s Moneybox programme and that events since have not been kind to his views. Anyway they tell us this.

 the cumulative purchases by the Bank of Japanese equities are becoming substantial. We estimate the market value to have been just below ¥20 trillion at the end of July 2017, or around 3.2% of the total Japanese stock market, making the central bank the second largest owner of Japanese stocks after the Government Pension Investment Fund.

Indeed they find themselves producing analysis along the lines of my “To Infinity! And Beyond!” theme.

Without further adjusting the pace of ETF purchases, we project that the central bank will own 10% of the market sometime between 2022-2026, depending on the interim market performance.

First they look for an announcement effect.

We control for this by examining the excess returns of Japanese stocks versus global stocks two business days post-announcement in common currency (last column in Table 1). The relationship between the scale of purchases and the price change is positive in each episode, although the confidence we have in the relationship is not strong given such few data points.

Personally I would also be looking at the days ahead of the announcement as many of these type of events are anticipated and if you like “front-run” these days. Next we see they look for an execution effect and they struggle to find one as the Japanese market underperformed in the period they looked at compared to other equity markets. However we do get a confirmation of the put option in operation.

 we find that the Bank of Japan has timed the execution of its ETF purchase programme to coincide with episodes of market weakness, potentially with the aim of dampening price volatility.

Oh and “dampening price volatility” is the new reduce and/or stop market falls as otherwise it would also sell on days of market strength.

Will it spread?

This is slightly dubious depending on how you regard the actions of the Swiss National Bank which of course buys equities abroad which I presume they regard as the difference.

Japan has been alone in purchasing equities as part of its monetary easing programme, and the question of whether the purchase of equity securities is the next step along this path is of wider interest.

But I agree with the conclusion.

 Even if central banks in the US/Eurozone/UK achieve a lasting lift-off from the zero bound, and are able to shed asset purchases from their balance sheet, low central bank rates are discounted by markets to be a fact of life for the next decade or two, and the chance of needing to have recourse to unconventional measures appears very large.

Comment

Thank you to Tony and Toby for their paper but they use very neutral language and avoid any opinion on whether this is a good idea which tends to suggest a form of approval. Yet there are a myriad of problems.

The ordinary Japanese taxpayer is very unlikely to be aware of this and what is being done both in their name and with their backing. This is especially important if we consider the exit door as in how does this end?

There is a moral hazard problem in both backing and financing a market which disproportionately benefits the already well off. This gets added to by the latest scandal in Japan as the company below has been ( indirectly) backed by the Bank of Japan.

DJ KOBE STEEL SAYS FOUND MORE INSTANCES OF SHIPPED PRODUCTS WITH QUALITY PROBLEMS ( h/t @DeltaOne )

There are real problems here and is one of the arguments against central banks buying risky assets of this form and the clue of course is in the use of the word risky.

Next we have the issue of what good does it do? Yes some get an increase in their paper wealth and some will take profits. In a sense good luck to them, but as we note that this will be disproportionately in favour of the wealthy this is in my opinion a perversion of the role of a central bank.

On the other side of the coin is the current media cheerleading for equity markets of which this from Bloomberg this morning is an especially disturbing example.

To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009. Aided by an 8 percent drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount — $20 trillion — that is comparable to the total value of all equities nine years ago……… And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

You see congratulating people on doing well out of equity investments is very different to saying you should buy now at what are higher prices. Unless of course Bloomberg thinks they are more attractive at higher prices in which case perhaps it should be buying Bitcoin. Let me leave you with this which feels like something out of a dystopian science fiction piece.

Big companies are becoming huge, from Apple Inc. to Alibaba Group Holding Ltd.

The outlook for UK house prices is turning lower

Today brings together two strands of my life. At the end of this week one of my friends is off to work in the Far East like I did back in the day. This reminds me of my time in Tokyo in the 1990s where Fortune magazine was reporting this at the beginning of the decade.

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

Back then property prices were so steep that these came into fashion and to set the scene the Imperial Palace and gardens ( which are delightful) were rumoured to be worth more than California. Younger readers may have a wry smile at the interest-rates which these days they only see if student loans are involved I guess. But this feature of “Discovering Japan” or its past as Graham Parker and the Rumour would put it comes back into mind as I read this earlier. From the BBC.

The average mortgage term is lengthening from the traditional 25 years, according to figures from broker L&C Mortgages. Its figures show the proportion of new buyers taking out 31 to 35-year mortgages has doubled in 10 years.

We have noted this trend before which of course is a consequence of ever higher house prices which is another similarity with Japan before the bust there. Although there is an effort to deflect us from that.

Lenders have been offering longer mortgage terms, of up to 40 years, to reflect longer working lives and life expectancy.

Let us look into the detail.

The average term for a mortgage taken by a first-time buyer has risen slowly but steadily to more than 27 years, according to the L&C figures drawn from its customer data.
More detailed data shows that in 2007, there were 59% of first-time buyers who had mortgage terms of 21 to 25 years. That proportion dropped to 39% this year.
In contrast, mortgage terms of 31 to 35 years have been chosen by 22% of first-time buyers this year, compared with 11% in 2007.

Should the latest version of “Help To Buy” push house prices even higher then we may well see mortgage terms continue to lengthen. This issue will be made worse by the growing burden of expensive student debt and the struggles and travails of real wages.

If you extend a mortgage term the monthly payment will likely reduce but the capital sum which needs to be repaid rises.

The total cost of a £150,000 mortgage with an interest rate of 2.5% would be more than £23,000 higher by choosing a 35-year mortgage term rather than a 25-year term.
The gain for the borrower would be monthly repayments of £536, rather than £673.

House Prices

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

Prices also held steady in September at the national level, with 6% more respondents seeing a rise in prices demonstrating a marginal increase. Looking across the regions, London remains firmly negative, while the price balance in the South East also remains negative (but to a lesser extent than London) for a fourth consecutive month.

“firmly negative” is interesting isn’t it as London is usually a leading indicator for the rest of the country? Although care is needed as the RICS uses offered prices rather than actual sales prices. Looking ahead it seems to be signalling a bit more widespread weakness in prices.

new buyer enquiries declined during September, as a net balance of -20% more respondents noted a fall in demand (as opposed to an increase). Not only does this extend a sequence of negative readings into a sixth month, it also represents the weakest figure since July 2016,

It is noticeable that there are clear regional influences as some of the weaker areas are seeing house price rises now, although of course that may just mean that it takes a while for a new trend to reach them.

That said, Northern Ireland and Scotland are now the only two areas in which contributors are confident that prices will rise meaningfully over the near term.

The Bank of England

This morning has seen a signal of a possible shift in Bank of England policy. If we look at its credit conditions survey we see that unsecured lending was supposedly being restricted.

Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4 (Chart 2). Credit scoring criteria for granting both credit card and other unsecured loans were reported to have tightened again in Q3, while the proportion of unsecured credit applications being approved fell significantly.

As demand was the same there is a squeeze coming here and this could maybe filter into the housing market as at a time of stretched valuations people sometimes borrow where they can. Care is needed here though as the figures to August showed continued strong growth in unsecured credit making me wonder if the banks are telling the Bank of England what they think it wants to hear.

Also we were told this about mortgages.

Overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — were reported to have narrowed significantly in Q3 and were expected to do so again in Q4.

However on the 6th of this month the BBC pointed out that we are now seeing some ch-ch-changes.

The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low.

Barclays and NatWest have become the latest lenders to increase the cost of some of their fixed-rate products.

At least nine other banks or building societies have also raised their rates in the past few weeks.

Business lending

This is an important issue and worth a diversion. The official view of the Bank of England is that its Funding for Lending Scheme and Term Funding Scheme prioritise lending to smaller businesses and yet it finds itself reporting this.

Spreads on lending to businesses of all sizes widened in Q3 (Chart 5). They were expected to widen further on lending to small and large businesses in Q4.

This no doubt is a factor in this development.

Lenders reported a fall in demand for corporate lending for businesses of all sizes — and small businesses in particular (Chart 3). Demand from all businesses was expected to be unchanged in Q4.

The Bank of England will no doubt call this “counterfactual” ( whatever the level it would otherwise have been worse) whereas the 4 year record looks woeful to me if we compare it to say mortgages or even more so with unsecured lending.

Comment

There is a fair bit to consider here especially if we do see something of a squeeze on unsecured lending as 2017 closes. That would be quite a contrast to the ~10% annual growth rate we have been seeing and would be likely to wash into the housing market as well. Some will perhaps borrow extra on their mortgages if they can whilst others may now be no longer able to use unsecured lending to aid house purchases. These things often turn up in places you do not expect or if you prefer we will see disintermediation. It is hard not to wonder about the car loans situation especially as it is mostly outside the conventional banking system.

So we see an example of utter failure at the Bank of England as it expanded policy and weakened the Pound £ as the economy was doing okay but is now looking for a contraction when it is weaker. We will need to watch house prices closely as we move into 2018.

Meanwhile people often ask me about how much buy-to-let lending goes vis businesses so this from Mortgages for Business earlier made me think.

Last quarter nearly four out of every five pounds lent for buy to let purchases via Mortgages for Business was lent to a limited company. With strong limited company purchase application levels throughout Q2, and the softer affordability testing that is commonly applied to limited companies leading to higher-than -average loan amounts, it is no surprise to see them take such a large slice of buy to let purchase completions in Q3.

Now this is something of a specialist area so the percentages will be tilted that way but with”softer affordability testing” and “higher than average loan amounts” what could go wrong?