Greece sees its economic depression continue with ever more debt

This morning has seen yet another outbreak of a theme which has been positively shameful so far. That is the barrage of establishment and official rhetoric proclaiming an economic recovery in Greece or Grecovery for short. In some ways it was even present back at the original bailout agreement in May 2010 when the “shock and awe” turned out to be about this.

Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

This morning’s Grecovery outbreak has been reported by The Greek Analyst.

Tsipras says is “entering growth stage,” calls on creditors 2 deliver debt relief.

The Prime Minister is also reporting that a 1.7 billion Euro tranche of debt relief will be provided today by the Euro area.

What about debt relief?

The Euro area partners are providing some of this to Greece via the way that their official vehicle the ESM or European Stability Mechanism lends to it so cheaply. Its President Klaus Regling pointed this out on the 10th of this month.

– because our loans have long maturities and very low interest rates, less than 1% for instance from the ESM. This provides savings for the Greek budget of over €8 billion every year in saved debt service payments, and that corresponds to about 4.5% of Greek GDP.

The problem for Greece is that it is piling up foreign debt albeit in the same currency as it uses in this instance. It would like to issue its own but this seems to be something which remains just around the corner. After all Greece can borrow at 1% and at what rate do you think markets would lend to it at?

One possible route where the Euro area could continue to provide help would be via the bond buying QE of the ECB. However that seems to have faded away as well probably due to what is implied by this from Mr. Regling.

but it depends if we get the missing information, the missing data, to be sure that the target on net arrears clearance has really been met by the end of September

For all the promises of reform and steps forward taken this all look rather, same as it ever was.

The debt continues to pile up

The official story was that the debt to GDP ratio would decline to 120% by 2020 but last week’s report to Eurostat told us this.

The deficit of General Government for 2015, in accordance with ESA 2010, is estimated at 13.2 billion euro (7.5% of Gross Domestic Product), while the gross consolidated General Government debt at year-end 2015 is estimated at a nominal value of 311.7 billion euro (177.4% of Gross Domestic Product).

Actually a fall in the total debt burden was reported there but sadly it has risen since to 315.3 billion Euros as of June according to Eurostat. So whilst the interest-rate paid has been slashed the overall or capital burden has continued to rise.

If we move to the fiscal deficit the numbers were affected by yet more banking bailouts to the tune of 7.71 billion Euros. That seems to be an eternally emptying pot doesn’t it? But you may also note that even after over 5 years of austerity there was still a fiscal deficit of around 6 billion Euros.


This can be summarised simply by reminding ourselves that the economy of Greece was supposed to grow from 2012 onwards and then looking at the actual numbers.

2012  GDP 191.2 Billion Euros

2013 GDP 180.7 Billion Euros

2014 GDP 177.9 Billion Euros

2015 GDP 175.7 Billion Euros

That is about as clear a definition of an economic depression as you can get. Greece was hit by the credit crunch then the Euro area crisis then the botched bailout and then of course saw the run on its banks last year.

Ordinarily a recovery out of this should be both strong and sharp or what is called a V-shaped recovery. However the latest (PMI) business survey was sadly more of the same.

The performance of Greece’s manufacturers during September followed the trend of inconsistency that has so far defined 2016. Again, the sector slipped back into contraction after declines in production and new orders were reported, with goods producers citing a combination of deteriorating demand conditions and a lack of liquidity at firms as the prominent factors behind the latest falls

The monetary position

There is a troubling issue to address and this is the amount of Emergency Liquidity Assistance still being provided by the ECB. Whilst this has fallen it is still at 51.8 billion Euros which reminds us of the E or Emergency part.

If we look at Greek bank deposits (household and business) we see that they nudged higher in August to 123. 9 billion Euros. But this compares to a past peak of above 164 billion Euros in the autumn and early winter of 2014. So a clear credit crunch which has loosened a little but not much.

House Prices

If we move to assets backing bank lending then there is little good news for the banks from this reported by Kathimerini yesterday.

The biggest drop in house prices since the outbreak of the crisis has been recorded in the northern and northeastern suburbs of Attica, and to a somewhat lesser extent in the south of the region, with rate declines exceeding 50 percent against an average drop of 40-45 percent across Athens, according to Bank of Greece figures since 2009.

The impact of the economic depression has been added to by rises in property taxation as part of the austerity measures. Looking at the new index provided by the Bank of Greece I see that the most recent numbers for the second quarter of this year show new properties falling in price by 0.6% and older ones by 0.5% making them 2.5% and 2.3% cheaper than a year before respectively.

If we move to a deeper perspective then the numbers are chilling. The older properties index was based at 100 in 2007 made 101.7 in the third quarter of 2008 and is now 58.5. That is another sign of an economic depression especially as we note that annual growth has been negative every reading since 2009 began.


This had been a bright spot for the Greek economy but these latest numbers do not help. From Kathimerini.

August saw a major decline in tourism revenues, which dropped 9.2 percent on an annual basis, according to data released on Friday by the Bank of Greece. This has brought the losses for the economy in the first eight months of 2016 to 750 million euros year-on-year.


The Greek economic depression continues to inflict suffering and pain on its people as Keep Talking Greece has pointed out this morning.

230,000 children live in households without any income and 39.9% of Greece’s population cannot afford basic goods and services, like food and heating.

According to the latest report published by the Greek Statistics Authority (ELSTAT)

Whilst the Euro area has seen growth return and maybe edge higher if today’s business survey is accurate Greece seems to have been left behind one more time. The industrial turnover figures for August did show a rise of 0.2% on a year before but the previous number had shown a decline of 18%.

Even Japonica who are the biggest investors in Greek government debt admit this.

From 2001 to 2015, Greece added only 10 cents in GDP for each additional euro of debt, compared to EZ peer average 45 cents.

Actually according to them Greece has very little debt at all.

Greece 2015 YE Balance Sheet Net Debt, correctly calculated in accordance with international accounting or statistics rules is 41% and 58% of GDP, respectively.

Meanwhile the best way out for Greece is as I have argued all along as Sheryl Crow reminds us.

A change would do you good
A change would do you good



The UK Public Finances continue to underperform the economy

A feature of the modern era is that way that the establishment economic debate has changed. There was a spell post credit crunch that we were told that fiscal deficits were a bad idea and most countries then set about trying to reduce them. The UK headed on that road although the reductions in the deficit came more slowly than promised and the surplus that was supposed to be achieved now somehow found itself some 3/4 years away. More recently there has been a shift in favour of fiscal stimuli both generally and in the UK. Even Mario Draghi of the ECB (European Central Bank) was at this game yesterday.

Fiscal policies should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union………At the same time, all countries should strive for a more growth-friendly composition of fiscal policies.

This is of course the same ECB which has enforced exactly the reverse in places like Greece and still supports the Growth and Stability Pact that even Germany ignores! Also Mario has driven many bonds including corporate ones into negative yields but still has the chutzpah to proclaim this.

so far we haven’t seen evidence of bubbles.

Although should Portugal be downgraded later it will fall out of the ECB QE criteria and would be forced to head in the opposite direction.

The UK

The impact of the vote to leave the EU was likely to have two impacts according to the Institute for Fiscal Studies. First a gain.

In principle, the UK’s public finances could be strengthened by that full £14.4 billion a year if we were to leave the EU. However, the EU returns a significant fraction of that each year. The amount varies, but on average our net contribution stands at around £8 billion a year.

But as they forecast a weakening of the UK economy there was also a loss depending on how much it weakened.

We estimate that if NIESR has broadly the right range of possible outcomes for GDP, then the budget deficit in 2019–20 would be between about £20 billion and £40 billion higher than otherwise.

Earlier this month The Times waded into the issue with a claimed leak of cabinet papers that actually turned out to be the pre vote Treasury analysis.

The net impact on public sector receipts – assuming no contributions to the EU and current receipts from the EU are replicated in full – would be a loss of between £38 billion and £66 billion per year after 15 years, driven by the smaller size of the economy.

There are obvious issues looking so far ahead and depend on the assumptions made. What we know so far is that the UK economy has not been plunged into a recession as some claimed but here at least we expect an impact next year as inflation rises in response to the lower UK Pound. Although of course indirect taxes gain from inflation on the one hand and index-linked Gilts mean the government pays out more so the picture is as ever complex.

Today’s numbers

Actually one is left wondering whether the proposed plan for an easing of fiscal policy in the UK is already in play.

Central government expenditure (current and capital) in September 2016 was £57.2 billion, an increase of £2.4 billion, or 4.3%, compared with September 2015.

As we look into the detail we see that expenditure is indeed higher but that there was another factor at play.

debt interest in September 2016 increased by £0.9 billion, or 34.6%, to £3.3 billion;

This initially looks odd because as I pointed out on Tuesday UK Gilt yields remain extraordinarily low in spite of the efforts of the Financial Times on Monday to convince us that the end of the world is nigh. Of course it may be but not this week (so far)! However just as I was remembering that September is a “heavy” month for index-linked Gilts Fraser Munro of the ONS kindly reinforced my thoughts.

We are seeing the recovery of the RPI impact on the uplift on index linked gilts and pushing up interest.

So we are already seeing costs arise from higher inflation and I do hope that fans of higher inflation will admit this rather than parking it at the back of their darkest cupboard.

Actually revenue growth was not to bad at 2.6% but the increased expenditure meant this.

In September 2016, public sector net borrowing (excluding public sector banks) was £10.6 billion; an increase of £1.3 billion, or 14.5% compared with September 2015.

This meant that the official plan to chop another £20 billion or so of UK annual borrowing is struggling so far this financial year.

In the financial year-to-date (April to September 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £45.5 billion; a decrease of £2.3 billion, or 4.8% compared with the same period in 2015.


Over this period the debt interest position is much more favourable showing that we will continue to benefit from low conventional Gilt yields ( assuming they stay low) but see an upwards push from index-linkers from time to time. Those of you with longer memories will recall that several years ago I suggested that if the UK was to borrow it should be via conventional Gilts when Jonathan Portes was arguing we should use index-linked ones. If you take his forecasts going forwards ( inflation and maybe a recession) you will see why.

What about the national debt?

An objective of the previous Chancellor George Osborne has been achieved again but of course to late for him.

This month debt as a percentage of GDP fell by 1.0 percentage point compared with September 2015. This is the fourth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

The official numbers tell us this.

Public sector net debt (excluding public sector banks) at the end of September 2016 was £1,627.2 billion, equivalent to 83.3% of gross domestic product (GDP); an increase of £39.5 billion compared with September 2015.

However these are different to what is the usual international standard so here is that version.

At the end of the financial year ending March 2016, UK government gross debt was £1,651.9 billion (87.8% of GDP).

Unfortunately those numbers are from further back but whilst the total is rising the percentage ratio to GDP has also been falling.

Term Funding Scheme

The new bank assistance scheme of the Bank of England will raise the national debt but reduce borrowing.

that (all else being equal) Public Sector Net Debt will be increased by the liability relating to the creation of the central bank reserves and Public Sector Net Borrowing will be decreased by the net interest flows relating to the TFS loans and central bank reserves.

So far it amounts to £1.279 billion.


We find ourselves noting yet again that the UK fiscal performance is disappointing. Or at least it was under the old plan! Maybe now borrowing a little extra is considered a success. Of course this means that the room for extra borrowing by the Chancellor Phillip Hammond in the upcoming Autumn Statement declines. Oh what a tangled web and all that. Also because we have had economic growth we have seen our national debt to GDP ratio fall as growth exceeds borrowing.

The next challenge will come in 2017 as inflation continues to pick up and the UK faces a benefit as indirect taxes are on nominal not real spending but also a loss as it will have to pay extra on index-linked debt. The government could win as the ordinary person loses but the bigger picture depends on economic growth. If we continue to grow then there will be a range of choices,if we do not then it will get harder. Meanwhile it is hard not to have a wry smile at one of the reasons for the increase in government expenditure both in September and in the fiscal year so far.

along with subsidies and contributions to the EU


Even central bankers struggle to provide proof that QE works

Today is ECB day with its President Mario Draghi taking centre stage at its press conference later on this afternoon. That is unless he is asked a particularly awkward question in which case the afternoon nap of Vice President Constancio is disturbed. In terms of actual decisions I do expect the ECB to extend its QE beyond program beyond next March but central banks tend to act when they have a new set of economic forecasts and they are not due until the December meeting. Also on the QE point we have in a way already been told. Here is Mario from the last press conference.

And I remind you again that our programme is meant to run to the end of March 2017 or beyond if necessary.

Today I wish to examine one of his other claims from that press conference.

So I would conclude that our policy has been very effective.

There is an obvious moral hazard in him reviewing his own policies and declaring them successful and when pressed for detail even he only made relatively small specific claims.

I think it’s 0.5% over the forecast horizon as far as growth is concerned, and I think it’s 0.3% as far as inflation

We can review the overall concept via a Working Paper on the subject issued by the Bank of England yesterday. However we need to note first that there is a large moral hazard here. After all the Bank of England is being judge and jury on itself. Also what do you think would happen to the careers of Andrew G Haldane,  Matt Roberts-Sklar,  Tomasz Wieladek  and Chris Young if they concluded that QE had not worked?

The QE experience

Accordingly our four intrepid economists must have had sweaty palms and a fast heart beta as they reported this.

Even in models which admit some role for central bank balance sheet expansions, the channels through which QE works are still the subject of debate, academically and practically.

Even worse this.

Schematically, the transmission mechanism for QE can be thought to comprise two legs: an expansion of the central bank’s balance sheet, creating new reserves to purchase short-term bills; and a maturity extension programme, swapping these bills for longer-term bonds. In many standard macroeconomic models, neither leg has an effect on economic activity.

Ah so that is why the Bank of England changed its economic models!

Along the way we also get a confession that it makes the rich well richer.

This would tend to put upward pressure on the prices of those assets.

So what do they conclude then?

We are told this.

It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions.

Actually for the effort involved the impact is rather small.

Looking across the first £375bn of Bank of England QE, Meaning and Warren (2015) estimate that QE reduced yields by around 25bps. ( They mean UK Gilt yields).

Anything else? Er well yes.

QE announcements are, in general, associated with higher equity prices……Over this period, asset prices movements were much more pronounced. ……..And there was a sustained rise in the FTSE index of around 50%. It would be heroic to attribute all of these gains to QE, but it seems plausible it made some contribution.

I think that it is true that expansionary monetary policy of the sort we have seen has boosted equity prices considerably but being specific is very difficult. For example how much is down to lower official interest-rates and how much to QE? We know that cash will have been looking for a home and some will have gone to equities but then the trail gets colder.

How does this boost the real economy?

Things get more difficult and I wonder whether to laugh or cry as I read this bit.

Anything economic agents learn about the path of future monetary policy.

What did they learn from the Forward Guidance of the Bank of England which promised interest-rates rises and then cut them? Here is former Bank of England policymaker Adam Posen demonstrating his forecasting skills from February about an EU leave vote.

And if it occurred, you’d probably see very high interest rates,

If we move to the US whatever happened to the 3-5 interest-rate rises that were hinted at back at the start of 2016. So this gain is singing along to Mariah Carey.

But it’s just a sweet sweet fantasy baby

If we move onto other possible connections we get heavy going and the working paper ends up admitting this.

The effectiveness of QE policies does vary, however, both across countries and time.

Indeed this bit looks a little desperate.

QE improves the economic outlook/reduces risk of bad outcomes (via any mechanism)

Especially as it apparently needs some sort of confidence fairy.

People need to believe QE will improve the economic outlook.

Ah, so if it does not work it is all our fault for being non-believers? As to actual reasons for it working the issue is indeed troubled. There is also a blatant contradiction as you see we are told that part of it is by making other countries less competitive.

Impact on the exchange rate, through changing interest rate differentials and/or risk premia and long-term exchange rate expectations.

Yet those with the new less competitive exchange-rate are apparently winners too.

There is also evidence of strong positive international spill-over effects of QE from one country to another.

According to one of the research tables UK GDP benefits more from US QE than US GDP does! Also it appears that such research is taking the credit for nearly all the economic growth seen in the credit crunch era.

evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.

Actually the research admits that the UK gets more inflation than implied by this but for some reason omits to specify this. Also as the main author was one of those who implemented UK QE Martin Weale is hardly unbiased. Even so one of the slides tells us this.

These results are dependent on the parameters I have selected.

Anyway we are left with this conclusion.

There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.


This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.


We get a lot of central banker hyperbole about the apparent effectiveness of their policies. One subject they skip is why more than 7 years down the road we need ever more of it!?That sounds more like a snake oil sales(wo)man than someone with any sort of fix or cure. An example of this was provided by the UK Chancellor Phillip Hammond only yesterday.

An easier monetary policy in this country over the past six years has also delivered us 2.7 million jobs and there will be a lot of people out there today who may not own assets, but do have a job that they may not otherwise have had.

Sadly it did nor appear to be challenged. Meanwhile obvious problems such as QE benefiting the already wealthy find that they are kicked into the long grass.

This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.

Until after they have retired? Also I note that the distributional problems are somewhat breath-takingly being placed at the hands of government leaving Mark Carney and the Bank of England singing along with Shaggy.

She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)

If we consider the UK Gilt market and likely inflation it is plain that it is at completely the wrong level. From this mis- pricing there are maybe more costs than benefits.

Me on TipTVFinance

As the prospect of further UK real wage growth fades what about the self-employed?

Today brings us to the labour market report for the UK. Over the period of the credit crunch the quantity numbers have performed very well and scare stories from some economists of 3 or 4 million unemployed have been replaced by record employment and falling unemployment. However we are now in a phase where we are much less sure that unemployment will continue to fall. Also the quality number or wage growth has been somewhere between poor and not so good. In spite of an economy recovery which began in 2013 wage growth has only managed about half of what we would have expected pre credit crunch.We can put this into numbers as those in the Ivory Tower of the Office for Budget Responsibility predicted this back in 2010.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

This reminds us that the long-term trend here has been for wage growth to decline. The improvement in the real wages picture which has been extremely welcome in boosting both consumption and living-standards mostly came about because consumer inflation fell to historically low levels.

What about the self-employed?

Regular readers will be aware that the official average earnings numbers exclude the self-employed and in fact the smaller businesses. This has led to concerns expressed both by me and in the comments section that there would at least be sections of those self-employed with a poorer record for wages growth (and perhaps falls) than stated in the official statistics. This has become an increasingly important issue as the number of people self-employed has grown.

Yesterday the Resolution Foundation released some new research on this subject and it did attract attention for this.

Remarkably, this data suggests that typical earnings for the self-employed were lower in 2014-15 than in 1994-95, twenty years earlier. …….. From their peak (2006-07) to trough (2013-14), typical self-employment earnings fell by 32% – £100 per week.

Ouch! So self-employed earnings have had their own private economic depression. How does this compare with the overall picture?

A fall of 15% compares to a rise of 14% in typical employee earnings

As with ordinary earnings it found that some of this was compositional as in caused by the fact that the newly self-employed were less likely to employ others and worked fewer hours leading to this conclusion.

This analysis suggests that, over the 2001-02 to 2014-15 period as a whole, compositional effects were responsible for over 60% of the fall in average earnings (and there may be other compositional factors that we have not accounted for here), with the remainder being a purer earnings effect.

That still leaves a large gap with the official average earnings series to explain. Also the grim truth is that the credit crunch era did bring outright falls in income for the self-employed.

However, between 2008-09 and 2013-14, while there was still a negative compositional drag, the large majority (86%) of the substantial fall over this period is not explained by compositional effects.

More than a few questions are posed here and some of the answers are hard to find. Some may have been happy to switch from employment to self-employment and others may have been happy to work fewer hours, but it is hard to avoid the few that some were forced to and others were involved in underemployment. As the numbers grow this becomes a bigger issue.

the number of self-employed has grown from 3.3m (11.9% of the workforce) in 2001-02 to 4.5m (14.7%) in 2014-15

There was a flicker of better news at the end which suggested that the economic recovery had finally fed through to the self-employed.

More recently, compositional changes played a positive role and together with strong growth within groups meant a rise in average income in 2014-15

So we hope that this trend continued but we do not do so. The analysis above relies on the Family Resources Survey which has considerable lags in the data it provides.

Back in the day (2008) this was all reviewed by Martin Weale latterly of the Bank of England and recently appointed a Fellow of the ONS. In all his Ivory Tower pages of maths the little people slipped through his net.

Note that firms employing fewer than 20 employees are not surveyed.

I doubt it seemed important to him at the time….

Today’s numbers

Let us open with what remains good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the joint highest since comparable records began in 1971…….There were 23.23 million people working full-time, 362,000 more than for a year earlier. There were 8.58 million people working part-time, 198,000 more than for a year earlier.

Thus we see that more people are employed and the growth these days is not as heavily biased to part-time work as it was. Wages growth nudged higher than we were told last month too.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% both including and excluding bonuses compared with a year earlier.

In the meantime so of last month’s data has been revised higher too.

Not so good news

This comes from a nudge higher in unemployment.

There were 1.66 million unemployed people (people not in work but seeking and available to work), 10,000 more than for March to May 2016 but 118,000 fewer than for a year earlier.

Actually this was a type of sexism if you note this.

There were 765,000 unemployed women, 23,000 more than for March to May 2016 but 37,000 fewer than for a year earlier.

I would welcome readers thoughts on why male unemployment fell but women’s rose?

Real Wages

There is an issue here as in spite of the fact that in the latest 3 months wage growth was 2.3% we know that inflation is on the rise. Indeed if we look at the monthly series wage growth in August was 2%. That seems to have been driven by a big swing in bonuses payments from up 8% to -6% but nonetheless we face a position where our real wage growth fades a fair bit if this continues into September and meets an official CPI inflation rate of 1%.

If you look at Retail Price Inflation (2%) then we are now facing the distinct possibility that real wage growth has either ended or faded to a low-level.


Whilst the situation remains strong overall there is an obvious concern with the rise in unemployment which whilst small overall will matter to the 10,000 concerned. Also there is the issue that we are seeing unemployment rise for women which may be a quirk but may not. But for real wages it would appear that the words of the latest Nobel winning poet are appropriate.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Will that end the apparent improvement for the self-employed?





UK inflation begins its rise whilst the Bank of England looks away

Today is in terms of statistics inflation day in the UK as we receive pretty much all of our inflation data in one burst. It did not use to be that way but the powers that be decided that it was better to have all the bad news in one go rather than have several days of high inflation being reported. As ever their sense of timing saw inflation actually go below target! However we will see the seeds of change today as I forecast back on the 2nd of March.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago……….Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use.

I was expecting these two more domestic factors to add to the end of the impact of lower oil prices.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release….energy (annual rate) -8.0%, compared with -5.4% in January.

It fell to -3% on an annual basis yesterday and rose by 1% on a monthly basis.

Thus I was expecting this.

However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising.


What has happened since then has been the further fall in the UK Pound £ post the EU leave vote which will put more pressure on inflation. Regular readers will be aware that I expect a boost to inflation of the order of 1.5% from this impact although we do not know yet where the value of the UK Pound will settle. Many prices will take some time to change so we will not see their impact until 2017 but the area which changes quickly is petrol prices which have had a double whammy. Firstly the oil price has risen to US $52 per barrel and secondly the exchange-rate of the UK Pound has fallen quite a bit against the US Dollar and is now 20% lower than a year ago. So we see this.

The price of ULSP is 3.4p/litre higher, with the price of ULSD 3.6p/litre higher than the equivalent week in 2015.

Today’s numbers

As you can see from the points made above it was no great surprise when this was reported today.

The all items CPI annual rate is 1.0%, up from 0.6% in August…….The all items CPI is 101.1, up from 100.9 in August.

Actually it could have been more as I note that something I have been flagging all year had a slight dip.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

Interestingly a lot of the move was in clothing and footwear and I would be interested in readers views on this.

the upward effect came primarily from garments (in particular women’s outerwear), for which prices rose by 6.0% between August and September 2016, compared with a rise of 3.3% a year ago.

The only article which got cheaper for women was coats,everything else got more expensive.

What is in prospect?

We see that the producer price numbers are also suggesting a rise in inflation going forwards.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.

This is the third month of rises in this indicator which previously registered a couple of years of declines. In turn it will be pushed higher by this.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.

So input prices will put upwards pressure on output prices and the largest riser was the price of imported metals which rose by over 19% on a year before. Also at this stage of the chain the value of the UK Pound is a major factor.

In trade weighted-terms, sterling depreciated by 14.4% in the year to September 2016.

Actually the main driver is of course the US Dollar but in this instance it had a similar decline.

What about the RPI?

Our old inflation measure which is still used for index-linked Gilts amongst other things did this in September.

Annual rate +2.0%, up from +1.8% last month

The version we used for inflation targeting edged quite close to its old target of 2.2%.

Annual rate +2.2%, up from +1.9% last month

This meant that the wide divergence between it and out new official measure of inflation continues.

The difference between the CPI and RPI unrounded annual rates in September 2016 was -1.08 percentage points, narrowing from -1.11 percentage points in August 2016.

In other words changing the inflation target by only 0.5% back in 2003 was a loosening of policy which many places which should know better simply ignore.

What about housing costs and house prices?

The main way the official UK inflation measure is kept low is by its exclusion of owner-occupied housing costs. This means that the numbers reported today are ignored.

Average house prices in the UK have increased by 8.4% in the year to August 2016 (up from 8.0% in the year to July 2016), continuing the strong growth seen since the end of 2013.

There is an official version which includes such costs but as I argued from the beginning it is the equivalent of a chocolate teapot. This is because it uses rents and thereby end up with this.

The OOH component annual rate is 2.4%, unchanged from last month. ( OOH is Owner Occupied Housing )

The plan is for this to be our main measure of inflation although frankly such a recommendation did a lot of damage to the soon to be Sir Paul Johnson of the Institute for Fiscal Studies. Let me highlight yet another problem with the series which begs belief in many ways.

OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.

There have been a lot of revising of such numbers which applies also to the imputed rent numbers which mean that no-one can even be sure what the past was from one year to the next. The Alice In Wonderland critique applies.

“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”


We see that as pointed out in the spring UK consumer inflation is heading on an upwards path. There is statistical noise in the exact monthly numbers but the trend was already clear back then although we know now that it will go higher and be more sustained because of the additional impact of the lower UK Pound £. We will head towards 3% on the CPI and 4% on the RPI if things remain as they are.

The Bank of England should of course respond to this for two reasons. It is supposed to target annual CPI inflation of 2% and also because higher inflation will reduce and perhaps eliminate real wage growth and thus have a contractionary impact on the economy. In response to this we have been told this by Governor Carney. From the BBC.

Earlier, Mr Carney said that the Bank of England was willing to see an “overshoot” of its 2% inflation target if it meant supporting economic growth and protecting jobs.

Perhaps our dedicated follower of fashion has been listening to Janet Yellen of the US Federal Reserve. From MarketWatch.

Fed’s Yellen sees benefits in letting inflation exceed central bank’s 2% target

Benefits for who exactly? Certainly not workers or consumers….

Women’s Coats

Lucy Meakin of Bloomberg has given us a hint of a quality change here.

Possibly because this season most of them don’t have lining for some reason

Is there a crisis building in the UK Gilt market?

The period post the UK EU leave vote has led to some powerful moves in financial markets of which the clearest has been the fall in the value of the UK Pound £. However the last few days have seen some declines in the UK Gilt (sovereign bond) market which have unsettled some of the media and the Financial Times in particular. From Friday.

Britain’s benchmark 10-year bond yield is soaring today, rising 0.17 percentage points to 1.143 per cent – its highest since the Brexit vote and a sell-off that is far worse that its developed word rivals. The leap is the single biggest daily climb since April, according to data from Bloomberg.

Biggest daily climb since April, should we be cowering in our boots then? Over the years I have seen a lot of Gilt market sell-offs and noted that many big moves take place on a Friday afternoon. As there are fewer end of week liquid lunches these days such moves can often be put down to a different type of lack of liquidity. The actual issue is much more complex than the Great British sell-off line being plugged.

Inflation Inflation Inflation

Back on the 14th of June I pointed out that there was a building problem for the UK Gilt market.

There is much to consider as we note that inflation expectations and bond yields are two trains running in opposite directions on the same track. The exact path of inflation is unknown as we do not know what oil prices will do but we do know they will have to continue to fall for inflation to stay where it is. Also as someone who questions official inflation measures I would point out that even the UK 30 year Gilt is now offering no real yield at all on current expectations and looks set to go negative.

Thus the UK Gilt market looked expensive even back then as I noted that inflation was on course to head higher. Only last week on the 11th I returned to this same subject.

Now if we add to this the extra 1.5% of annual inflation I expect as the impact of the lower UK Pound £ then even the new higher yields look rather crackpot.

I gave a lyrical accompaniment to the situation from Madness.

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

The problem for UK Gilt prices and yields is that they look on a different planet to the one where the official measure of inflation is heading towards 3% and the RPI (Retail Price Index) is heading towards 4%.

The Bank of England causes instability

The way that Governor Mark Carney and the Bank of England rushed to promise a “sledgehammer” of monetary easing post the EU leave vote saw the Gilt market soar. This was one of the worst cases of miss pricing I have seen as at the same time rising inflation expectations meant that the Gilt market should be falling. As well as an announcement of £60 billion of extra Gilt purchases via a new burst of QE (Quantitative Easing) there were hints/promises of “more,more,more”.

by expanding the scale or variety of asset purchases.

The markets simply front-ran the expected purchases and the ten-year Gilt yield headed for but did not quite reach 0.5%. At this level it was completely mispriced compared to inflation expectations and as it happens in meant that the inflation expectations market was completed mispriced as well as they were giving higher coupons which investors were desperate for. Quite a mess!

Now with the UK Pound £ lower the Bank of England is reining back on its Forward Guidance Mark 25. Ben Broadbent has been on Radio 4 doing exactly that today. From Bloomberg.

“Having a flexible currency is an extremely important thing, especially in an environment when your economy is facing a shock that’s different from your trading partners,” he said in an interview broadcast Monday. “In the shape of the referendum, we’ve had exactly one of those shocks. Allowing the currency to react to that is a very important shock absorber.”

It is a shame he did not think of this before he voted for more easing and gave hints of more to come. Now markets are thinking to themselves that once the current round of Bank of England QE ends who wants to buy Gilts at these levels? I am not surprised that few are to be found with yields a bit over 1% and inflation heading much higher.

Having driven the market up the Bank of England is now pushing it down with Open Mouth Operations. Let us think of that as we read its Mission Statement.

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

What would you do if you were a Gilt investor and saw this on Bloomberg from the Bank of England?

Broadbent said that inflation will probably rise “somewhat” above the goal in the next few years but didn’t indicate any concern about this.

International Trends

A day before it went into panic mode the FT was pointing out that the trend to higher bond yields was international.

Thirty-year gilt yields have jumped 25 basis points so far this month, while US and German equivalent yields are up 21 and 24bp respectively, as prices in long-dated bonds head for one of the steepest monthly falls in a year.

In fact I think it also got the reason why right although there is seldom just one.

Inflation expectations drive the performance of long-dated debt as fixed rate payments are less attractive over time as consumer prices rise.

The other factors to consider are that the US Federal Reserve is yet again hinting at an interest-rate rise and that other forecasts for QE have changed. Do not misunderstand me as the ECB for example is likely to do more QE but for now it wants us to believe that it will not ( so that when it does it can claim a larger impact…).

Fiscal Policy

As well as a reduction in the demand for UK Gilts from the Bank of England there has been the likelihood that there will be more supply as the new government hints at an easier fiscal stance. So again we see a case for lower prices and higher yields.


The UK long Gilt future is down one point this morning at 125.62 and yields 1.18%. There is an obvious problem with calling something yielding 1.18% a crisis! Let me offer some further perspective as I have followed this market for 30 years now (Eeeek). These 30 years have been a bull market for Gilts and this was added to by the Bank of England ploughing in at what is the highest level it has even been to. If we look at any long-term chart we remain close to all-time highs. You can see that from the Gilt future price being 125 or above 100.

In yield terms 1.18% compares to the above 15% I saw in the past so we get some perspective from that.Oh and about that 1.18% from here on June 14th this year.

UK 10-year yields fall to all time lows of 1.18%

Of course we could cope with nothing like 15% now. If we move to the yield at which one might look for long-term funding which is the thirty year yield we see that it at 1.83% remains very low both in historical terms and compared to likely inflation.

I note concerns about foreign buyers deserting this market well I can see why anyone would not want to buy it even at these new higher yields! In truth foreign buyers mostly buy for the currency so in fact a lower currency and higher yields may bring some back. Although there is not so much to buy these days as the Bank of England chomps away as the Kaiser Chiefs described.

a powered-up Pacman

The consequence of this can be found in a children’s song as the Bank of England has created this.

The Grand old Duke of York he had ten thousand men
He marched them up to the top of the hill
And he marched them down again.
When they were up, they were up
And when they were down, they were down
And when they were only halfway up
They were neither up nor down.

So we see what is a muddle caused by an overpriced market caused by central bank intervention rather than a crisis. Oh what a tangled web we weave and all that….

As a final point has anybody heard the sighs of relief from the UK annuity and pension industry?

Let us hope this economic renaissance for Spain can end its depression

Having looked at the travails and economic woe of Italy in the Euro area it is time to look at the other side of the ledger which is the recent economic improvement in Spain. As you can see the latest official economic growth data was strong.

The Spanish economy recorded a quarterly growth of 0.8% in the second quarter of 2016. This rate is similar to that recorded in the first quarter. The growth compared to the same quarter last year stood at 3.2% compared to 3.4% in the previous quarter.

In these times sustaining an economic growth rate of over 3% is good news indeed. This new better phase for Spain began in the middle of 2013 and was such that by the beginning of 2014  quarterly economic growth was 0.4% and it ended that year with it at 0.9%. However if we use 2010 as 100 we see that in the second quarter of 2013 the level of GDP (Gross Domestic Product) had fallen to 94.6 which is a long way below the previous peak of 104.36 in the second quarter of 2014. A decline of that size over such a time period brings the phrase economic depression into play and if you think on those terms whilst the situation is much better now with the latest data being 102 you see that Spain whilst doing well currently has not regained the lost ground fully.

Inflation is low

Today’s official data tells us this.

The annual change in the CPI in September is 0.2%, three
tenths above that registered the previous month….. The annual rate of core inflation decreased one tenth to 0.8%…. The monthly variation of the general index is 0.0%.

There was a time when annual economic growth of around 3% and little or no consumer inflation was seen as a form of economic paradise. Apparently no more according to the Financial Times.

Spanish inflation disappoints as prices hold steady……The reading will disappoint eurozone-watchers who expect the single currency area to record a steady rise in inflation over the coming months,

It will not disappoint Spaniards who will welcome news like this.

Inflation was pushed down by a 2.8 per cent fall in housing costs last month, while transport and recreation costs also fell.

Appalling isn’t it? Who wants things to be cheaper? Of course as it demonstrated over the Marmite issue the FT does not seem to want them to be more expensive either! But let me point out that Spaniard who like chicken, lamb,pork and fresh vegetables will welcome the fact they  are cheaper than this time last year. They will be less keen on potatoes which have risen in price by 14.7% over the past year and are now presumably the favourite vegetable of Eurozone watchers and the ECB,

The Spanish do not use what we call CPI as their headline and the equivalent to our was also steady on the month and rising at an annual rate of 0.7%.

If we look at wage costs it is also for the best that inflation is low. These are for the second quarter of 2016.

The wage cost per worker per month increased by 0.1% and amounted to 1,943.01 euros on average.

This is an erratic series but is we compare to the same quarter in 2015 (1941 Euros) and 2014 (1929 Euros) there has been very little wage growth.

The Bank of Spain

The latest monthly bulletin is upbeat on the current state of play in the Spanish economy.

The information available on the Spanish economy points to a continuation of the expansionary course of activity, at a quarter-on-quarter rate in Q3 which is expected to be 0.7%. …In 2016 as a whole, GDP growth in the Spanish economy is expected to rise to 3.2%, an upward revision of 0.4 pp on the June projections

Also it is upbeat on the future although it cannot resist blowing its own trumpet.

In the two years spanning 2017-18, the expansion of the Spanish economy is expected to run further, continuing to be underpinned by comfortable financial conditions associated with the prolongation of the expansionary monetary policy stance, by the headway in the ongoing deleveraging by private agents (meaning that additional reductions in indebtedness have an increasingly less adverse impact on activity), and, as the projection period unfolds, by the foreseeable strengthening of export markets.

What do other surveys say?

The Markit PMI (Purchasing Managers Index) was positive about the service sector.

Spanish services activity continued to grow at a solid pace during September, supported by a faster increase in new business. Companies also remained optimistic of further rises in activity over the coming year.

Also a pick-up in manufacturing was seen.

September saw growth momentum in the Spanish manufacturing sector recover somewhat as output, new orders and employment all rose at sharper rates than in August.


This is also boosting the Spanish economy as the numbers below show.

Total expenditure on behalf of international tourists that visited Spain in August stood at 10,354 million euros, an increase of 3.8% compared with the same month last year.

There will of course be worries about whether growth from UK tourists (21% of the total so far in 2016) can be maintained with the lower value of the UK Pound. Also there does seem to have been a move from places that have had terrorist attacks.

Expenditure by tourists from France increased by 9.1%


This is a ying and yang type situation as whilst it has improved the situation is still bad.

The unemployment rate stands at 20.00%, which is one point less than in the previous quarter. In the last year the rate has fallen by 2.37 points.

Also the Bank of Spain is optimistic looking forwards.

Turning to the labour market, jobs are expected to continue to be created at a high rate during the projection period, with low growth in apparent labour productivity, as is habitual in upturns in the Spanish economy. Job creation will allow further reductions in the unemployment rate, which is expected to stand at slightly below 17% of the labour force at end-2018.

The productivity bit is troubling though isn’t it? Also there are problems with the participation rate which is flattering things.

However, in the current economic recovery in Spain, the participation rate has continued to decline, falling by slightly more than 0.5 pp to 59.4% since the employment creation process began. The pattern is particularly striking among Spanish men…

Those worried about youth unemployment will view this next bit with trepidation.

By age group, the decline in the participation rate of Spanish nationals has been concentrated among young people (16 to 24 years), although more recently it has also been observed, to a lesser extent, in the 25 to 34 age groups

The hope is that they are studying and improving themselves, the danger is that they get used to not being involved in the labour market.


The economy of Spain is in a much better phase and once again it has followed the timing of the UK improvement. On that subject there are solid links itemised by the Bank of Spain below.

In the specific case of tourism, the British economy accounts for 21% of total receipts……The United Kingdom is less important in comparative terms as a destination for Spanish goods exports (accounting for around 7% of the total)….. Spain’s bilateral commercial transactions with the UK economy yield a surplus of almost 1.5% of GDP.

As to more domestic matters I note that credit from banks to businesses has improved from the annual rate of -8% early in 2013 but is still falling. If we look at the source of “trouble,trouble,trouble” before then whilst quarterly growth in house prices was 1.8% in the second quarter of this year annual growth was a relatively sedate 3.8%.

Perhaps Spain should continue without having a government as it seems to be working out as well as it did for Belgium.