UK GDP grinds higher thanks to services and the film industry

Today brings us up to date in terms of official data on the performance of the UK economy in the first half of 2017. Whilst expectations are low rather than stellar the last week or so has brought a little more optimistic tinge to things. This started with the retail sales numbers last week. From last Thursday.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

This contrasted with the fall of a similar amount seen in the first quarter of the year which meant that we got back to levels seen at the end of 2016 or around 2.6% higher than in the second quarter last year.

This was added to by better news on the tourism front albeit for only some of the latest quarter.

For the period March to May 2017, spend in the UK by overseas residents increased 14% on the previous year to £5.6 billion………During the period March to May 2017, there were 2% more visits abroad by UK residents compared with the corresponding period a year earlier, and they spent 1% more on these visits

So whilst there was still a considerable trade deficit it did shrink a bit compared to last year as we presumably see a beneficial impact of a lower exchange rate for the pound.

Manufacturing

Yesterday came news from the Confederation of British Industry that the manufacturing was in pretty good shape.

Production among UK manufacturers grew at the fastest pace since January 1995 in the three months to July, according to the latest quarterly CBI Industrial Trends Survey……….Output growth is expected to continue to grow strongly in the quarter ahead and manufacturers are upbeat about prospects for overall demand. Domestic orders are expected to continue growing strongly, while expectations for growth in export orders improved to a four-decade high

This was upbeat as you can see and came with positive expectations from all of employment, investment and exports. It also came with some better inflation news.

Meanwhile, input cost pressures cooled in the quarter to July and are expected to soften further in the near-term, while factory gate price inflation is also expected to be more subdued.

This poses a few questions as whilst this is to some extent consistent with the Markit PMI business survey although it was more subdued and had a fading in June. It is much less in line with the official data which has shown only a little growth up to May.

Mini

There was some good news on the production front here as well. From City-AM.

A fully-electric version of the Mini is to be built at BMW’s plant at Cowley, in Oxford, the car firm has announced.

Actually whilst good news it is more accurate to say that it will be assembled there. Also in the light of the announcement that sales of petrol and diesel cars will be banned from 2040 it was interesting to see that BMW is heading down that road to at least some extent.

By 2025, BMW expects electric vehicles to make up between 15 and 25 per cent of sales. It currently produces electric models at 10 plants worldwide.

Today’s GDP Data

Here we go.

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 2 (Apr to June) 2017.

So some but not a lot and it was driven by a very familiar sector.

The growth in Quarter 2 2017 was driven by services, which grew by 0.5% compared with 0.1% growth in Quarter 1 (Jan to Mar) 2017.

As I regularly point out this sector must be 80% of our economy by now as again and again it grows faster than the other sectors.

The services aggregate was the main driver to the growth in GDP, contributing 0.42 percentage points. Production and construction recorded falls in Quarter 2 2017 of 0.4% and 0.9% respectively, each contributing negative 0.06 percentage points to GDP.

This had an interesting corollary though.

Construction and manufacturing were the largest downward pulls on quarterly GDP growth, following 2 consecutive quarters of growth.

As I have noted above this is very different from the “Production among UK manufacturers grew at the fastest pace since January 1995 ” of the CBI and the growth recorded in the Markit business surveys. I note that Chris Williamson of the latter has been on the wires.

ONS say economy grew 0.3% in Q2, but & output fell 0.5% & 0.9% respectively. These likely to be revised higher.

Regular readers will be aware of my particular doubts about the official data on the UK’s construction sector although there was an interesting reply from the Mayor of West Yorkshire who said that elections always cause slow downs as people wait for the result.

The Film industry

There was good news on this front.

The second largest contributor was motion picture activities, which grew by 8.2% and contributed 0.07 percentage points to GDP growth….. Motion picture activities are a subset of the transport, storage and communications sector, which grew by 1.0%.

Actually only a couple of weeks or so ago Albert Bridge was closed for filming at the weekend and yesterday I noted filming taking place in Battersea Park. This is of course purely anecdotal but this sector has been mentioned in GDP despatches before in recent times. For more information we get referred to the BFI website which does not have the numbers until tomorrow but the ones for the first quarter were strong and perhaps provide a guide.

The total UK spend and budget of these films was £747 million and £983 million respectively, a substantial increase from UK spend of £231 million and total budget of £318 million in Q1 2017. UK spend, as a percentage of budget, was the highest since 2013, at 76%.

The only cloud in this silver lining is that we may have to start being more tolerant of some of the extraordinary statements made by luvvies, excuse me I mean economic miracle workers.

Comment

So the UK economy is grinding on in a slow way as we see the annual rate of growth fall to 1.7%. Also the news from looking at the data on a more personal level shows the minimum rate of growth possible.

GDP per head was estimated to have increased by 0.1% during Quarter 2 2017.

We also learn that the first quarter may not have been the type of statistical quirk we see regularly from the US but of course much more data will be needed for us to be sure of that.

On the more positive side this was always going to be the awkward period after the EU leave vote as higher inflation from the Pound’s fall causes not only lower real wage growth but actual falls.

Real earnings declined despite historically low unemployment. Adjusted for inflation, average weekly earnings fell by 0.7% including bonuses and by 0.5% excluding bonuses, over the year ( to May). For total real pay (including bonuses) this is the largest 3-month average year-on-year decrease since the 3 months to August 2014.

Also the film industry numbers make me wonder about the UK football premiership where the numbers are ballooning but the latest update I can find is this from E&Y.

The Premier League and its Clubs together generated over £6.2 billion in economic output that contributed approximately £3.4 billion to national GDP in 2013/14.

Surely there has been a fair bit of growth? Although of course the flow of money in then sees a flow of money out in transfer fees. Some are claiming that so far this year the defence budget of Manchester City exceeds that of around 25 countries.

 

 

 

The Bank of England is warning about the consumer credit boom it created

Yesterday saw a speech from a Bank of England policymaker that travelled the road we have been on for a year now concerning the issue of unsecured or consumer debt. However before we got to that Alex Brazier of the Financial Policy Committee found time to chant some central banking mantras.

Since then there has been a programme of repair and reform.

Britain’s households have paid down debt.

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Only a banker would have the chutzpah to claim that the financial system is now simpler and fairer. Perhaps he has forgotten that speech from Sir Charles Bean saying that savers had to take some temporary pain that in the subsequent 6/7 years has looked in fact ever more permanent. There was however an interesting insight into what happened back in the day to Royal Bank of Scotland.

At Royal Bank of Scotland – the most egregious case – that illusion meant the bank could be toppled by losses of less than one per cent of its assets.

Best for Alex to move on from that one as after all it is an example of failed regulation as he tries to assure us that this time will be different. Before we move on however he seems to be confused as to who is the servant of whom.

Only once the puncture in the banking system was repaired was it able to get back to serving the economy.

The truth is that we have become the servants of the “precious”.

The problem of consumer credit

First we are assured that there is no problem at all really.

So Britain doesn’t have a high level of consumer debt. It doesn’t have a debt-driven housing market. And as we’ve seen, it doesn’t have rapid growth of credit overall.

It makes you wonder why he feels the need to discuss it at all doesn’t it? Of course we know what to think about official denials but I would like to draw attention to what the statement below does not say.

Since the financial crisis, helped by low interest rates, Britain’s households have reduced their debt.

It does not say that they paid it down for a while but that from 2013 with the Funding for Lending Scheme and last August with the Bank Rate cut to 0.25% and an extra £70 billion of QE ( Quantitative Easing) if we include the Corporate Bonds it has been quite clear that Bank of England policy was for them to borrow again. So net mortgage lending went from negative to positive and more recently consumer credit growth has surged.

The catch is that as we have regularly discussed on here if encouraged the British consumer soon revs up the engine.

In the past year, outstanding car loans, credit card balances and personal loans have increased by 10%. Household incomes have risen by only 1.5%.

With real wages and incomes under pressure from higher inflation that relationship seems set to get worse. We now get something which is breath taking if we remind ourselves again that the Bank of England has driven this with its circa £70 billion Term Funding Scheme.

On credit cards and personal loans, terms and conditions have become easier. The average advertised length of 0% credit card balance transfers has doubled to close to 30 months………..Advertised interest rates on £10,000 personal loans have fallen from 8% to around 3.8% today, even though official interest rates have hardly changed (Chart 10).

Only just over a month ago at Mansion House Governor Mark Carney declared this to be quite a triumph.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

This is rather awkward for Mr.Brazier  so he blames the banks.

These are all classic signs of lenders thinking the risks are lower. ………Lenders’ own assessments of how risky these loans are, which they use to calculate how much capital they need to withstand losses, have fallen. Over the past two years, these ‘risk weights’ on credit card loans have fallen by 7% and those on other consumer loans by 15%

Shouldn’t we have something like a regulator to stop this?

In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions.

Actually of course the regulator is the same organisation which has encouraged and bribed the banks to do this.

Car Loans

This is an interesting way of describing the issue.

Car finance has drawn particular attention, with growth of 15% in the past year and more than 100% in the past 4 years.

A clear triumph for the Funding for Lending Scheme! Oh hang on probably best not to tell everyone that so lets look at this.

The Financial Conduct Authority, which regulates car finance, has expressed its concerns about a lack of transparency, potential conflicts of interest and irresponsible lending in parts of the car finance industry. It will explore and address those practices.

You may note that after 4 years of evidence our intrepid regulators are still only at the “explore” stage so what have they been doing? Well they can tell us move along please there is nothing to see here.

If those optional balloon payments are excluded, this car finance debt accounts for only 1.2% of aggregate household income,

Also as the risk is with the finance arms of the car manufacturers then as they are not banks frankly who cares? Certainly not those in Threadneedle Street.

The main risks are with the finance companies offering these contracts – typically arms of car manufacturers.

Unlike credit cards or personal loans, the lenders here are predominantly the finance arms of car companies. Their losses – however painful to them – pale in significance for the wider economy next to situations in which it’s the banking system making the losses.

After all they only make real things as opposed to the important job of sending pieces of imaginary paper around the financial system.

Mortgages

There is trouble here too.

Lenders have been reporting that their objectives to grow market share are pressing them to make credit more available

Ah excellent so they have been passing on the cheap money handed to them by the Bank of England in a “the cost of borrowing is near record lows” sort of way. But something which was completely predictable has “surprised” the Bank of England.

Boundaries are being pushed in less benign ways too. Lending at higher loan to income multiples has edged up. Over the past 2 years the share of lending at loan to income multiples above 4 has increased from 19% to 26% .

But this was fixed by a macroprudential policy announcement back on the 26th of June 2014 wasn’t it?

The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5.

So 4 is the new 4.5 which is troubling in itself if you think about it in only 3 years. Along the way we see one of the problems with macropru in that it ends up chasing its own tail which of course is nobodies fault. Meanwhile the problem gets worse….

Comment

Alex Brazier is between something of a rock and a hard place here. This is because his boss the Governor of the Bank of England has declared the rising amount of credit as a triumph so warning of potential disaster has the danger of being career limiting. Perhaps being posted to a dingy basement office where the Bank of England tea and cake trolley never goes. However he deserves some credit ( sorry..) for raising the issue and in particular let me welcome this bit.

As mortgage debt expands, house prices rise. Lenders think borrowers have more valuable houses against which to secure mortgages.

And as terms and conditions ease up, it becomes easier to service debts. More borrowers get access to consumer debt and make their repayments. Credit scores improve,

The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.

 

Yep so called triumph can head towards disaster. Also there is this.

Mortgage debt is high, in large part, because housing costs are high. Across the nation, the average house costs 4.5 times income

Yes, the problem is that house prices are too high. Also this has consequences for those who rent.

Those who rent in the private sector typically spend a third of their income on rent.

Except there are two problems here. Firstly it is the Bank of England which via its policies has driven house prices higher. Secondly there is a potential misrepresentation in “4.5 times income”, it gives the impression of individual income whereas in fact it is household income and you can bet that will be 2 full-time workers. It is of course much worse in London which is why people are leaving……

 

What is happening in the US economy?

It has been a while since we have taken a good look at the US economy so it is overdue. This morning it has been analysed by the International Monetary Fund which has grabbed some headlines with this.

U.S. growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated.

As you can see the IMF has had something of a road to Damascus change since the days it argued that Greece could expand its economy in the face of harsh austerity! Also it is hard not to have a wry smile at the thought that anyone can really predict accurately what will emerge from the Trump administration next. Of course it and the IMF are on various collision courses included this one which was mentioned in the IMF’s Friday press conference.

Since the Trump administration has been promoting its “America first” polices, Managing Director Lagarde has talked more about promoting free and fair trade policies

Returning to the forecast here are the specific numbers.

The growth forecast in the United States has been revised down from 2.3 percent to 2.1 percent in 2017 and from 2.5 percent to 2.1 percent in 2018.

In addition to  the view on fiscal policy there were concerns about this.

the markdown in the 2017 forecast reflects in part the weak growth outturn in the first quarter of the year.

That is slightly odd because as regular readers will be aware US economic growth tends to underperform in the first quarter these days. Also it is reassuring to know that the number could be either too high or too low.

Risks to the U.S. forecast are two sided: the implementation of a fiscal stimulus (such as revenue-reducing tax reform) could drive U.S. demand and output growth above the baseline forecast, while implementation of the expenditure-based consolidation proposed in the Administration’s budget would drive them lower.

So let us move on with two thoughts. The first is that if we look at the IMF’s track record it is completely incapable of forecasting economic growth to that level of accuracy. Secondly I note that the forecast for the next two years is the average of the last two.

The Nowcast

Several of the US Federal Reserves do what are called nowcasts of economic forecasts so let us head down to the good old boys and girls in Atlanta.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 2.5 percent on July 19, up from 2.4 percent on July 14. The forecast of second-quarter real residential investment growth increased from -1.6 percent to -0.6 percent after this morning’s new residential construction report from the U.S. Census Bureau.

This represents an overall decline on the initial estimate of 4.3% in early May. There have been notable falls in both export expectations and investment of all types including housing combined with a dip in consumption. Perhaps the fall in exports is a response to the stronger dollar that we saw a year or so ago.

The Labour Market

This remains very strong as the latest report indicates.

Total nonfarm payroll employment increased by 222,000 in June, and the unemployment rate was little changed at 4.4 percent, the U.S. Bureau of Labor Statistics reported today.  Since January, the unemployment rate and the number of unemployed are down by 0.4 percentage point and 658,000, respectively.

As you can see in spite of the fact that we are in fact above what some would call full employment jobs are still being generated. If we move to the measure of underemployment there continue to be improvements in it as well. The U-6 measure of this has seen the rate fall from 9.6% in June 2016 to 8.6% in June ( seasonally adjusted) this although a rise in this June needs to be watched.

However as we observe so often to the sound of Ivory Towers crumbling to the ground this has not generated much wage growth.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.25. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent.

If we move to median wage growth to exclude the impact of very high earners then we see something that is becoming ever more familiar across many different countries.

We see that the good news is that the US has some real wage growth but the bad news is that it is not that great. The numbers if we return to averages are below.

Real average hourly earnings for all private nonfarm employees increased 0.8 percent from June 2016 to June 2017. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 1.1-percent increase in real average weekly earnings over the year.

Not much is it? If we look back on the chart above we see higher levels that it looked briefly we might regain but in spite of further employment improvements we are now left mulling wage growth fading and wondering how much it and inflation will dip. At this point it is hard not to wonder also about the impact of the “lost workers” from the around 4% fall in the labour force participation rate.

Monetary policy

This is of course being “normalised” which at a time when nobody really has any idea of what normal is anymore is therefore easy to claim. An interest rate of between 1% and 1.25% certainly does not feel normal nor does a central bank balance sheet approaching US $4.5 trillion. There are now plans to trim a minor amount off the balance sheet.

Of course this leaves everyone wondering what happened when the next recession strikes? Well everyone apart from those who believe that the central bankers have ended recessions. It looks as though bond markets have switched to wondering about that as the 30 year which had pushed above 3% is now at 2.8%. Also even the IMF has spotted that the US Dollar is in a weaker phase now.

As of end-June, the U.S. dollar has depreciated by around 3½ percent in real effective terms since March.

These moves will take a little off the edge of what tightening we have seen as I note that US consumer credit flows are in the middle of the post credit crunch range,

In May, consumer credit increased at a seasonally adjusted annual rate of 5-3/4 percent. Revolving credit increased at an annual rate of 8-3/4 percent, while nonrevolving credit increased at an annual rate of 4-3/4 percent.

Comment

A couple of years or so we discussed the likelihood that US economic growth would be around 2% going forwards and we now note that such thoughts have come true. Is that as good as it gets? The US has had one of the better recoveries from the impact of the credit crunch in terms of GDP and unemployment. We should be grateful for that. But we are again left wondering what happens should things slow or head towards a recession?

Still some will not be too bothered, from the Financial Times

Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options.

Does the continuing enormous gains of the banksters go into the wages numbers?

UK Public Finances see a fiscal stimulus for bond holders and the EU

Today we advance on the latest data for the UK Public Finances. This adds to a week where they have already been in the news. After all they will be affected by the HS2 railway project especially if its costs overrun as we looked at on Tuesday. It is tempting to suggest it will take place in a time way beyond how far ahead politicians think but of course the raising of the state pension age to 68 beginning in 2037 was badged as saving this according to BBC News.

The government said the new rules would save the taxpayer £74bn by 2045/46. While it had been due to spend 6.5% of GDP on the state pension by 2039/40, this change will reduce that figure to 6.1% of GDP.

If you look at the state pension system it appears that you can take away jam tomorrow but not jam today. Only yesterday I looked at this and the pension prospects for millennials who will ( rightly in my view) fear further rises in the state pension age.

The better economic news this week on inflation and retail sales will help a little in the short-term but the truth was that after the EU leave vote 2017 was always going to be more of an economic challenge due to a lower value for the UK Pound £ leading to higher inflation and lower real wages. We have some economic growth but not much.

Looking ahead

A week ago the Office for Budget Responsibility looked at the UK public finances and attempted to forecast years and indeed decades ahead. For perspective let me remind you that the first rule of OBR club is that the OBR is always wrong! However there are a few issues to look at and this summary of our current position is a start.

But the budget is still in deficit by 2 to 3 per cent of GDP – as it was on the eve of the crisis – and net debt is more than double its pre-crisis share of GDP and not yet falling. As a result, the public finances are much more sensitive to interest rate and inflation surprises than they were.

That latter sentence suggests they have been reading the discussions on here. I remember a comment pointing out that the UK would struggle if gilt yields rose above 3% and I have pointed out the impact of this year’s rise in inflation on the debt costs of index-linked Gilts. On that subject the economics editor of the Financial Times has written another piece of propaganda about the Retail Price Index saying it gives much to high a number. You may note he uses clothing prices as apparent proof but the vastly more important housing market somehow gets forgotten. Mind you if I had been a vocal supporter of putting imputed rents into the botched CPIH maybe I would suffer from selective amnesia as well.

 I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ it all ( Michael McDonald )

Still my rule that forecasts will tell us the public finances will be fine in four years time continues to be in play.

Our March forecast showed it on course to reduce the deficit to 0.7 per cent of GDP by 2021-22, but predicated on plans for a further significant cut in real public services spending per person.

Today’s data

Some of the cheer from this week’s UK economic data disappeared as these numbers were released.

Public sector net borrowing (excluding public sector banks) increased by £2.0 billion to £6.9 billion in June 2017, compared with June 2016………….Public sector net borrowing (excluding public sector banks) increased by £1.9 billion to £22.8 billion in the current financial year-to-date (April 2017 to June 2017), compared with the same period in 2016.

So we see that the financial year so far has deteriorated and the cause was June. If we drill into the detail we see that my point about the cost of inflation is in play as debt interest costs rose from £3.7 billion to £4.9 billion. This has to be the cost of our index linked Gilts rising as the RPI does ( currently 3.5% annually ). So far this financial year we have paid an extra £3.3 billion and whilst there may be a small cost from conventional Gilts the may player again will be higher inflation.

Also there was something which Britney Spears would describe as a combination of toxic and hit me baby one more time.

In June 2017, the UK paid £1,249 million to the EU budget through GNI and VAT based contributions, which are made net of the UK rebate. This payment consisted of our standard monthly VAT and GNI based contribution of £991 million, along with a £258 million payment adjustment covering earlier years.

That was some £700 million higher than last year.

If we switch to the broad picture then the revenue situation looks pretty good and makes us mull economic growth.

In the current financial year-to-date, central government received £164.2 billion in income; including £119.6 billion in taxes. This was around 5% more than in the same period in the previous financial year.

But we have spent more and it can hardly be called austerity can it?

Over the same period, central government spent £185.7 billion; around 5% more than in the same period in the previous financial year

Oh and rather curiously Stamp Duty receipts are up from £3 billion to £3.4 billion so far this financial year.

The Bank of England and the national debt

At first the rise of the UK national debt looks troubling.

This £1.8 trillion (or £1,753.5 billion) debt at the end of June 2017 represents an increase of £128.5 billion since the end of June 2016.

It has the feel of surging until we note the impact of the Bank of England’s Sledgehammer so beloved of Mark Carney and Andy Haldane.

Of this £128.5 billion, £86.6 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.6 billion, £69.3 billion relates to the Term Funding Scheme (TFS).

So our national debt rises so they can subsidise the banks yet again!

Comment

Depending on your perspective you can argue that the UK has seen austerity in the credit crunch era as the annual deficits have shrunk or stimulus as each year has seen a deficit. Actually we have seen a hybrid where some have experienced austerity but others such as beneficiaries of the triple-lock on the basic state pension have gained. The “Forward Guidance” is that the deficit will be gone in around 4 years time but that remains true at whatever point in time you choose to pick.

Meanwhile June has seen a fiscal stimulus except there are two catches. Firstly the main component has gone to the holders of RPI linked Gilts which means their credit crunch has been a stormer. I wish I had continued to hold some as whilst it went very well I did not realise that even more was on its way. Let us hope they spend/invest the money in the UK. Of course it will be party time at the pension fund of the Bank of England. The other catch is more toxic as the fiscal stimulus goes to the European Union of which we will only get some back. Ouch!

Meanwhile do we have another potential signal for the state of play in the UK economy? From the BBC.

Air traffic controllers are warning that UK skies are running out of room amid a record number of flights.

Friday is likely to be the busiest day of the year, with air traffic controllers expecting to handle more than 8,800 flights – a record number.

Me on Core Finance

http://www.corelondon.tv/leaky-cpi-effects/

 

 

 

The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.

Millennials

I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.

 

People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.

Comment

If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.

 

 

Ireland highlights many of the problems of using GDP to measure economic growth

The last couple of years or so have seen the return of the Celtic Tiger. Indeed Celtic Tiger 2.0 has been even stronger than the first version especially in the rather extraordinary first quarter of 2015. Let us go back just over a year to the Central Statistics Office.

The National Accounts for 2015 released yesterday (on 12 July 2016) reported an increase in GDP of 26.3%. This scale of increase is unprecedented in OECD economies historically

This came with quite an admission.

The results published yesterday for the National Accounts 2015 accurately capture and highlight the open and globalised nature of the Irish economy. However due to the highly globalised nature of our economy, GDP and GNP do not always help to understand what is happening in the Irish economy.

Regular readers will be aware of the problem here which is that Ireland is a relatively small country whose economy is in fact pretty much in thrall to the machinations of large corporations. Much of this is due to the way it pushed for such companies to have operations in Ireland via its low Corporation Tax rate and efforts like the tax-free district in Dublin which I recall being built back in the day.  Back on the 17th of March I pointed out that the Central Bank of Ireland had described it like this.

However, this masked offsetting trends in the components of GDP, in particular investment and trade, which were not closely aligned with indicators of activity in the domestic economy, but were mainly accounted for by the off-shore activities of multinational firms.

Such factors were strongly at play here.

There is an obvious concern with GDP (Gross Domestic Product) rising by 21% in one-quarter as it did at the opening of 2015.

This poses all sorts of questions as not only was the Irish economy suddenly much larger but other numbers such as debt matrices and ratios changed with it. If we look at it then it is an exaggeration to say it had a public sector debt problem beforehand but not after but it is not one to say there was quite a change.

A new effort

Ireland’s statisticians have attempted to take out the impact of aircraft leasing, depreciation and redomiciled companies ( to take advantage of the tax regime). On this road we get some extraordinary numbers for 2016. Let us start with GDP or Gross Domestic Product which was 275.6 billion Euros. Next up is GNP or Gross National Product which was 226.7 billion Euros. So quite a drop and why the change? It comes from the use of the word National which adjusts the numbers to try to allow for companies which really have more of a letter box in Ireland than an actual business. Not an easy job but it makes a big difference as you can see.

Next up is Gross National Income which in this instance adds or subtracts the impact of the European Union and Ireland gained just under a billion Euros from this meaning GNI was 227.7 billion Euros. Food for thought there as to how a relatively rich country benefits overall from European Union membership. But next comes the main event which is the adjustment described above as GNI is then 189.2 billion Euros.

This leaves us a very long way from where the official statistical story began as the Financial Times summarises.

 

The Irish economy is about a third smaller than expected. The country’s current account surplus is actually a deficit. And its debt level is at least a quarter higher than taxpayers have been led to believe.

If we look at the balance of payments we see that previously Ireland was reporting a current account surplus of 9.2 billion Euros but now trying to allow for the effects of globalisation switches that to a deficit of 29.4 billion Euros. The big change came in 2015 when the annual impact of globalisation went from around 10 billion Euros to over 30 billion and then jumped further to nearly 40 billion last year.

If we move to debt ratios then the already high 120% ratio to GDP in 2012 rises to a rather Greek like 160% or so if we use GNI. The National Treasury Management Agency gave a presentation yesterday on the state of play at the end of 2016.

Government debt-to-GDP fell to 72.8% in 2016; and the GG deficit to 0.5%. The inflated GDP denominator means other metrics of debt serviceability are required to complement debt as a ratio of GDP. 

Debt-to-GNI* (106%), Debt-to-GG Revenue (274%), interest cost as a share of revenue (8.5%) and the average interest rate on Ireland’s debt (3.1%) are superior measures for comparison with other sovereigns.

So there you have it 106% or 72.6%, aren’t you clear that this is er clear?

Oh and the interest-rate on the debt may seem high but of course Ireland had to issue quite expensively for a while. Whereas for new debt it can offer a vote of thanks to Mario Draghi and the European Central Bank as the cost is very low. For example it issued some more of a 2045 bond earlier this month for less than 2%.

Oh and this caught my eye.

In April, the NTMA issued its first inflation-linked bond: €610m 23-year tenor, 0.25% coupon + Irish HICP excluding tobacco.

This is because for quite some time now Ireland has essentially had no inflation. According to its statistics office consumer inflation was in fact 0% in 2016. If this continues these bonds will be a very good deal for the Irish taxpayer! Or do the buyers know something?

Ireland is something of a doppelganger to Japan in that if the numbers for bond sales in January are any guide some 97% were to international investors.

What about 2017?

Not so hot.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms decreased by 2.6 per cent for the first quarter of 2017. GNP decreased by 7.1 per cent over the same period.

A sort of here we go again.

Initial estimates for the first quarter of 2017 indicate that there was an increase of 6.1 per cent in GDP in real terms in Q1 2017 compared with Q1 2016…….Factor income outflows were 1.6 per cent lower than in the same quarter of 2016 leading to an overall increase in GNP of 7.9 per cent year-on-year.

As you can see the economy is bouncing around as flows of corporate money wash in and out over time.

Housing Inflation

Whilst there is no overall consumer inflation in Ireland some sectors are seeing it. For example whilst headline inflation was -0.4% in June rents increased at an annual rate of 7.1%. Also house prices are doing this.

In the year to May, residential property prices at national level increased by 11.9%. This compares with an increase of 10.0% in the year to April and an increase of 5.4% in the twelve months to May 2016.

For those of you wondering where Ireland currently sits in its house price boom and bust cycle the index set at 100 in 2005 is now at 92.4 so the banks will be pleased.

Comment

Firstly let me welcome this effort by Ireland’s statisticians. You can see why they have been tardy as there must have been enormous pressure from the establishment to stay with GDP. What these numbers do is give us a guide as to why with some much apparent economic success this has happened. From March 17th.

The fact that more than 6,000 people, including children, are now officially “homeless” and living in emergency accommodation in hotels, guesthouses and charity shelters is offensive……….It flows from policy decisions and political collusion that created a deeply unequal society.

Yet there has been economic growth which these numbers from the NTMA highlight.

Employment is expanding, unemployment is at 6.3%; Labour input is growing by 4.0%

There has been quite a bit of success in reducing unemployment and increasing employment from the levels of the dark days of the banking inspired crisis. Yet according to Nama Wine Lake there are still ongoing issues from that.

NAMA again waffling about €5.6bn of state-aid it overpaid for loans; NAMA has said the €32bn it paid equalled value of underlying collateral.

 

 

 

Welcome relief for UK real wages from lower inflation numbers

Today is inflation day in the UK as we get the official data for consumer, producer and house price inflation. In case you were wondering why they all come out on one day  meaning that some details get ignored in the melee ( mostly producer price inflation) well that is the point! Previously when the data were released separately there were potentially three days of embarrassment for the government and establishment which they have reduced to just one. Job done in a way.

However even before we get today’s numbers the subject is in the news in several ways. From the BBC.

Motorists are being saddled with the fastest year-on-year rise in insurance premiums since records began five years ago, the industry has warned. Average car insurance premiums have gone up by 11% in the past year, according to the Association of British Insurers (ABI). The typical bill for an annual policy is now £484, it said.

One of my themes which is institutionalised inflation is on the march here.

The ABI says the change in the discount rate is the main reason behind the rise, but also blames the latest increase in insurance premium tax which went up from 10% to 12% on 1 June…….That is why the government reduced the discount rate to -0.75%.

I have included the discount rate as it is a consequence of the way Bank of England QE has driven real bond yields into negative territory. Oh what a tangled web, and that is before we get to the plague of false claims and deliberate accidents which mar this area and drive up premiums.

Buttering us up

An odd feature of the current phase is high butter prices which stretch well beyond the UK as this from @Welt indicates.

price has risen this week in Germany by another 30 Cent or 20% to 1.79€, highest price ever after WWII.

In France there are worries about rises in croissant prices and maybe even a shortage of them. The causes are in essence the farming boom/bust cycle combined with a rise in demand as the Financial Times explains.

 

The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization…..

 

Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.

So far this has yet to be fully reflected in consumer prices but as supply is inelastic or inflexible in the short-term this could carry on for the rest of 2017.

The other side of the coin

On the 13th of June I pointed out this about the trend for producer prices.

Fortunately we see that the main push is beginning to fade.

Also adding to this is that the UK Pound has been improving against the US Dollar. Friday’s surge that took it to US $1.31 is of course after today’s numbers were calculated but the lower UK Pound will be a decreasing effect as we go forwards.

Today’s Numbers

There was a very welcome change today.

The Consumer Prices Index (CPI) 12-month rate was 2.6% in June 2017, down from 2.9% in May 2017.

The drivers of this were as follows.

Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 2.2%. Taken together, these movements resulted in prices for motor fuels making a large downward contribution to the change in the rate………Recreational and cultural goods and services, with prices overall falling by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago.

If we look at the pattern actually there was no inflation in the month itself.

The all items CPI is 103.3, unchanged from last month.

Oh and the period where the oil price drove goods prices lower is over as we see that goods and services inflation are now pretty much the same.

The CPI all goods index annual rate is 2.6%, down from 2.9% last month. ……..The CPI all services index annual rate is 2.7%, down from 2.8% last month.

Looking Ahead

As we noted last month the pressure coming from higher producer price inflation is looking like it is fading.

Factory gate prices (output prices) rose 3.3% on the year to June 2017 from 3.6% in May 2017, which is the slowest rate prices have increased since December 2016…….Input prices rose 9.9% on the year to June 2017 from 12.1% in May 2017, meaning the annual rate has fallen 10 percentage points since January 2017.

This is mostly about one thing.

Inputs of crude oil is the main driver of the recent slowing of input price inflation as annual price growth for crude oil fell from 88.9% in February 2017 to 9.1% in June 2017.

Two factors are at play here as we see the impact of the oil price no longer falling and the UK Pound/Dollar exchange rate which has risen from its lows of January.

Housing Inflation

We have an official measure that includes imputed rents as a way of measuring housing costs for owner-occupiers. As you can see they are in fact reducing the level of inflation measured.

The all items CPIH annual rate is 2.6%, down from 2.7% in May. …….The OOH component annual rate is 2.0%, down from 2.1% last month( OOH= Owner Occupied Housing Costs)……..Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to June 2017;

The problem for our official statisticians is that few people have bothered much with the change in its headline measure as this from Adam Parsons the Sky News business correspondent indicates.

CPIH – the stat that nobody wants, and nobody quotes

Oh and it is still not a national statistic which were the grounds for demoting RPI but seem to be ignored in the case of CPIH.

Meanwhile house price inflation is rather different to rental inflation.

Average house prices in the UK have increased by 4.7% in the year to May 2017.

This is why they put imputed rents into the new headline inflation measure! It was always likely to give a lower number because house prices can and indeed have been inflated by the way that mortgage costs have been driven lower by the Bank of England. As to troubles here we saw another sign last week. From whatmortgage.co.uk.

The Bank of England has warned mortgage lenders of the possible risks posed by the recent trend of longer loan terms………Woods highlighted the recent trend of mortgage terms rising from 25 years to 35 years or “even longer”.

Comment

First let me welcome the better inflation data which will help with the economic issue of the day which is real wage growth. Or to be more specific it is seems set to be less poor than it might have been. Good.

In terms of inflation I would like to draw your attention to a problem which the UK establishment does its best to try to sweep under the carpet. This is that the old inflation target called RPIX is at 3.8% but the newer CPI is at 2.6% with the gap now being 1.2% which is very significant. Also there is the issue that we pay things at RPI ( Retail Price Index) currently at 3.5% but only receive CPI currently at 2.6% which is quite an establishment scam. This particularly affects students who find that costs in their loans are escalating into the stratosphere with implications for matters such as mortgage affordability if not final repayment as so many of these will never be repaid.

Looking ahead we are certainly not out of the inflation woods as there are still dangers of higher numbers in the autumn as we note the butter and insurance effects discussed earlier. We do not know what the Pound £ and the oil price will do. As to comparisons with Euro area inflation at 1.3% we get a guide to how much the lower Pound £ has affected our inflation rate which has turned out to be pretty much along the lines I suggested back on the 19th of July last year.

I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.