What is happening to the economy of Qatar?

Today I intend to take a look at the economy of one of the Gulf states Qatar. It hit the news earlier this month due to these events from Gulf News.

June 5: The UAE, Bahrain, Saudi Arabia, and Egypt cut diplomatic ties with Qatar, accusing Doha of supporting extremism, and giving the countries’ diplomats 48 hours to leave.

June 6: WAM, the UAE state news agency, announces that the country has closed its seaports, as well as its airspace, to all Qatari vessels and airplanes.

So it went into the bad boy/girl camp as diplomatic and economic sanctions were applied. Although in the topsy-turvy world in which we live this happened soon after.

Qatar will sign a deal to buy as many as 36 F-15 jets from the U.S. as the two countries navigate tensions over President Donald Trump’s backing for a Saudi-led coalition’s move to isolate the country for supporting terrorism.

Qatari Defense Minister Khalid Al-Attiyah and his U.S. counterpart, Jim Mattis, completed the $12 billion agreement on Wednesday in Washington, according to the Pentagon.

The sale “will give Qatar a state of the art capability and increase security cooperation and interoperability between the United States and Qatar,” the Defense Department said in a statement.

I do not know about you but if I thought that someone was indeed sponsoring terrorism I would not be selling them fighter jets! Still I suppose it does help achieve one of the Donald’s main aims which is to boost US manufacturing.

Also whilst we are on the subject of “Madness, they call it madness” there was of course the decision to award the 2022 football World Cup to a country with extraordinarily high temperatures. Also one could hardly claim that football was coming home!

How was the Qatari economy doing?

There was a time when it was party, party, party. From the Financial Times.

ministers used to boast about the economy expanding at one of the fastest rates in the world: in the decade to 2016, growth averaged 13 per cent.

Much of this was of course due to higher prices for crude oil and associated products which then changed.

The oil crash in 2014 hastened a spending review, with budget cuts and widespread redundancies across the energy and government sectors, including thousands at the state petroleum group. Jobs have been cut in museums and across education, media and health, with many projects cancelled or delayed.

There was something of a familiar feature to this.

In the West Bay business district, the impact of shrinking corporate and residential demand is stark. The flagship development boomed from 2004 to 2014 but the area is now littered with unoccupied and half-built skyscrapers.

The World Cup Boomlet

Work on this has turned out to be anti-cyclical and has provided a boost.

The Gulf state is building nine sports stadiums, “cooled” fan zones, hotels, sewage works and roads ahead of the football tournament……the government is spending $500m a week on World Cup-related infrastructure.

However there was a consequence.

Qatar, the world’s top exporter of liquefied natural gas, recorded its first budget deficit in 15 years in 2016 — a $12bn financing gap

Oil

This and its related products are the driver of the economy as OPEC notes.

Oil and natural gas account for about 55 per cent of the country’s gross domestic product. Petroleum has made Qatar one of the world’s fastest-growing and highest per-capita income countries.

There are various different measures but Global Finance puts it as the world’s highest per capita GDP in 2016. Of course this wealth mostly simply emerges from the ground mostly in the form of natural gas.

Of course the fact that the price of a barrel of Brent Crude Oil has fallen below US $45 is not welcome in Qatar as it reduces GDP, exports and government revenue. Also since May the price of natural gas has been falling with the NYMEX future dropping from US $3.42 to US $2.89. So bad times on both fronts as Qatar mulls the impact of the US shale oil producers.

Monetary Policy

You might have been wondering why there have not been reports of a crashing Qatari Rial. That is because of this. From the Qatar Central Bank.

QCB has adopted the exchange rate policy of its predecessor, Qatar Monetary Agency, through fixing the value of the Qatari Riyal (QR) against the US dollar (USD) at a rate of QR 3.64 per USD as a nominal anchor for its monetary policy.

So we have a type of fixed exchange rate or if you prefer a currency peg. This means that monetary policy is in effect imported from the United States which led to this.

Qatar Central Bank has decided to raise its QMR Deposit rate (QMRD) on Thursday June 15,2017 By 25 basis point from 1.25% to 1.50% .

Even in these times of low interest-rates one of 1.5% is hardly going to cut it in terms of currency support so minds immediately turn to the foreign exchange reserves. The QCB had 125.4 billion Riyals at the end of April. This was down on the recent peak of 158.3 billion Riyals of July 2015 presumably due to responses to the lower oil price. This meant that a balance of payments current account surplus of 50.1 billion Riyals of 2015 became a 30.3 billion deficit in 2016.

At a time like this people will also note that the external debt of the Qatari government rose from 73.4 billion Rials at the end of 2105 to 116.2 billion at the end of 2016. Also the banking sector has become more dependent on foreign cash according to Reuters.

Qatar’s banks became dependent on foreign funding during the last few years of strong economic growth. Their foreign liabilities increased to 451 billion riyals (97.90 billion pounds) in March from 310 billion riyals at the end of 2015.

Also if we look back to the 13th of this month I noticed this in the statement from the QCB saying that the banking sector was operating normally, which of course usually means it isn’t!

that QCB has sufficient foreign currencies reserves to meet all requirements.

So presumably it has been using them.

Qatar Investment Authority

The QIA manages a portfolio estimated at around US $335 billion and at a time like this investing abroad will look rather clever in foreign currency terms. Although the exact list may not be entirely inspiring.

Main assets include Volkswagen, Barclays, Canary Wharf, Harrods, Credit Suisse, Heathrow, Glencore, Tiffany & Co., Total.

There is speculation that there is pressure to use these assets. From Reuters.

Qatar’s sovereign wealth fund has transferred over $30 billion worth of its domestic equity holdings to the finance ministry and may sell other assets as part of a restructuring drive, people familiar with the matter told Reuters.

As someone who cycled past one of those assets – Chelsea Barracks –  only yesterday that provides food for thought for the London property market I think.

Comment

The discussion so far has been about financial issues so let us look at a real economy one which could not be more Arabic.

Saudi blockade on Qatar sabotages multi-billion dollar camel ……….A rescue mission is underway in Qatar after thousands of camels were expelled from Saudi Arabia due to the ongoing blockade. each of them can be worth up to $75,000  ( Al Jazeera )

Also food is being sent from Turkey.

Turkey is sending food supplies to Qatar by sea on Wednesday to compensate for a recent embargo by Qatar’s neighbour states, according to Turkey’s economy minister. (Al Jazeera )

At least it is better than sending soldiers which is unlikely to improve anything. But if we move back to the financial impact we wait to see how much has been spent to support the currency. We can see from the forward rates that there must have been some and maybe a lot. Also is it a coincidence that the UK looks to be taking the investment in Barclays to court? On that subject this from The Spectator is quite extraordinary.

Why I’m sad to see Barclays in the dock, and astonished to see John Varley there

Apparently he should not be there because he was “impeccably well tailored and mannered, who always looked destined for the top — but was also universally liked by his colleagues” something which could have come straight from the satire and comedy about “nice chaps” in Yes Prime Minister.

Meanwhile with the UK weather and the subject of today it is time for some Glenn Frey.

The heat is on (yeah) the heat is on, the heat is on
(Burning, burning, burning)
It’s on the street, the heat is on

Me on TipTV Finance

http://tiptv.co.uk/car-loans-canary-coal-mine-not-yes-man-economics/

Of UK Austerity and the Queen’s Speech

Today in a happy coincidence we get both the future plans of the current government in the Queen’s Speech as well as the latest public finances data. It looks as though the atmosphere is for this at least according to the Financial Times.

But he (the Chancellor) is coming under growing pressure from some Tory MPs — who are reeling from the loss of the party’s majority in the House of Commons at the June 8 election — to learn lessons and increase public spending.

Why? Well this happened.

The opposition Labour party pulled off surprise gains in the UK general election by offering voters a vision of higher public spending funded by increased taxes on companies and the rich.

So there is likely to be pressure on this front especially as we will have a government that at best will only have a small majority.

Mansion House

The Chancellor Phillip Hammond also spoke at Mansion House yesterday and told us this.

And higher discretionary borrowing to fund current consumption is simply asking the next generation to pay for something that we want to consume, but are not prepared to pay for ourselves, so we will remain committed to the fiscal rules set out at the Autumn Statement which will guide us, via interim targets in 2020, to a balanced budget by the middle of the next decade.

Is that an official denial? Because we know what to do with those! But in fact setting a target of the middle of the next decade (so 2025) gives enormous freedom of movement in practical terms. You could forecast pretty much anything for then and the Office for Budget Responsibility or OBR probably has. If we look back over its lifespan we see that one error which is that forecasting wage inflation now would be 5% per annum as opposed to the current 2% has had enormous implications. Also we only need to look back to the 3rd of October to see the Chancellor giving himself some freedom of manoeuvre.

“As we go into a period where inevitably there will be more uncertainty in the economy, we need the space to be able to support the economy through that period,” he said. “If we don’t do something, if we don’t intervene to counteract that effect, in time it would have an impact on jobs and growth.”

As later today the media will no doubt be using OBR forecasts as if they are some form of Holy Grail lets is remind ourselves of the first rule of OBR club. That is that the OBR is always wrong.

A 100 Year Gilt

You might think that with all the political uncertainty and weakness from the UK Pound that the Gilt market would be under pressure. My favourite comedy series Yes Minister invariably had the two falling together. But nothing is perfect as that relationship is not currently true. It raises a wry smile each time I type it but the UK 10 year Gilt yield is blow 1% ( 0.98%) as I type this. In terms of recent moves the market was boosted yesterday by the words of Bank of England Governor Mark Carney who with his £435 billion of holding’s is by far its largest investor. In essence the likelihood of more purchases of that sort nudged higher yesterday and thus the market rallied and yields fell.

Also we live in a world summarised by this from Lisa Abramowicz of Bloomberg.

Argentina has defaulted on its external debt seven times in the past 200 years. It just sold 100-year bonds.

Actually it was oversubscribed I believe and I will let readers decide if they think a yield of 7.9% was enough. The UK however could borrow much more cheaply than that as according to the Debt Management Office the yield on our longest Gilt (2068) is 1.52%. Actually as we move from the 2040s to the 2060s the yield gets lower but I will not extend that and simply suggest we might be able to borrow for 100 years at 1.5% which seems an opportunity.

Actually quite a historical opportunity and we could go further as this from the Economist from 2005 ( h/t @RSR108 ) hints.

In 1751 Henry Pelham’s Whig government pulled together the lessons learnt on bonds to create the security of the century: the 3% consol. This took its name from the fact that it paid 3% on a £100 par value and consolidated the terms of a variety of previous issues. The consols had no maturity; in theory they would keep paying £3 a year forever.

I have a friend who has always wanted to own a piece of Consols to put the certificate on his wall so he would be pleased. Assuming of course they still do certificates…..

Today’s data

It was almost a type of Groundhog Day.

Public sector net borrowing (excluding public sector banks) decreased by £0.1 billion to £16.1 billion in the current financial year-to-date (April 2017 to May 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2008.

So the financial year so far looks rather like its predecessor. Although below the surface there were some changes as for example it is hard to put a label of austerity on this.

Over the same period, central government spent £123.5 billion; around 4% more than in the same period in the previous financial year.

In case you were wondering on what? Here it is.

Of this amount, just below two-thirds was spent by central government departments (such as health, education and defence), around one-third on social benefits (such as pensions, unemployment payments, Child Benefit and Maternity Pay)

This meant that tax revenue had to be pretty good.

In the current financial year-to-date, central government received £110.2 billion in income; including £79.1 billion in taxes. This was around 5% more than in the same period in the previous financial year.

In case you are wondering about the gap some £20 billion or so is National Insurance which is not counted as a tax.

How much debt?

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of May 2017, which equates to 86.5% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Actually some of this is due to the Bank of England something which we did not hear about yesterday from Governor Carney.

£86.8 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.8 billion, £63.3 billion relates to the Term Funding Scheme (TFS).

Comment

There is much to consider about austerity UK style. Ironically in the circumstances we would qualify under one part of the Euro area rules as our deficit is less than 3% of GDP. But of course that is a long way short of the horizon of surpluses we were promised back in the day. Please remember that later today as all sorts of forecasts appear, as the George Osborne surplus remained 3/4 years away regardless of what point in time you were at. As we have run consistent deficits is that austerity? For quite a few people the answer is yes as some have lost jobs or seen very low pay rises as we note it represented a switch. The switch concept starts to get awkward if we look at the Triple Lock for the basic state pension for example.

Moving onto other matters it was only yesterday that Governor Carney was boasting about the credit boom and I pointed out the unsecured portion. Well already the news has not gone well for him.

Provident Financial said recent collections performance had “deteriorated”, particularly in May. ( New York Times)

Presumably they mean the month and not Theresa. Also there was this in the Agents Report about the car market.

Increases in the sterling cost of new cars and decreases in the expected future residual values of many used cars had put some upward pressure on monthly finance payments on Personal Contract Purchase (PCP) plans.

If there was a canary in this coal mine well look at this.

Car companies had sought to offset this in a
number of ways, including increasing the length of PCP
contracts.

As the can gets solidly kicked yet again we wait to see if finance in this area is as “secured” as Governor Carney has assured us.

The Longest Day

The good news for us in the Northern Hemisphere is that this is the longest day although the sweltering heat in London it felt like a long night! So enjoy as for us it is all downhill now if not for those reading this Down Under. I gather it is also the Day of Rage apparently which may be evidenced when the Donald spots this.

Ford Motor Co (F.N) said on Tuesday it will move some production of its Focus small car to China and import the vehicles to the United States ( Reuters )

The Mark Carney experience at the Bank of England

This morning Mark Carney has given his Mansion House speech which was delayed due to the Grenfell Tower fire tragedy. One thing that was unlikely to be in the speech today was the outright cheerleading for the reform of the banking sector which was the basis of his speech back on the 7th of April as the news below emerged.

Barclays PLC and four former executives have been charged with conspiracy to commit fraud and the provision of unlawful financial assistance.

The Serious Fraud Office charges come at the end of a five-year investigation and relate to the bank’s fundraising at the height of 2008’s financial crisis.

Former chief executive John Varley is one of the four ex-staff who will face Westminster magistrates on 3 July.

Firstly let me welcome the news that there will be a trial although the conviction record of the Serious Fraud Office is not good. The problem is that this has taken around nine years about something ( £7 billion raised from Qatar ) which frankly looked to have dubious elements when it took place. What you might call  slooooooooooooow progress of justice.

What about UK interest-rates?

We first got a confession about something we discovered last week.

Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase.

Actually that is an odd way of saying it as five members voted for no change with some more likely to vote for a cut that a rise in my opinion. Although of course Mark Carney has had trouble before with rises in interest-rates which turn out to be cuts!

Next we got a confirmation of the Governor’s opinion.

From my perspective, given the mixed signals on consumer spending and business investment, and given
the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time
to begin that adjustment

Indeed he seems keen to kick this rather awkward issue – because it would mean reversing last August’s Bank Rate cut – as far into the future as possible.

In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.

Indeed if we are willing to ignore both UK economic history and the leads and lags in UK monetary policy then you might be able to believe this.

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.

Missing from the slap on the back that the Governor has given himself is the most powerful instrument of all which is the value of the UK Pound which has given the UK economy and more sadly inflation a boost. Indeed the initial response to the Governor’s jawboning was to add to the Pound’s fall as it fell below US $1.27 and 1.14 versus the Euro. Should it remain there then the total fall since the night of the EU leave vote then it is equivalent to a 2.75% fall in UK Bank Rate which is a bazooka compared to the 0.25% peashooter cut provided by the Bank of England. So if you believe Mark Carney you are likely not to be a fan of Alice In Wonderland.

“Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Also if he is going to take credit for er “Credit is widely available” then he will be on very thin ice when he next claims the surge in unsecured credit is nothing to do with him.

Carney’s Cronies

Ironically in a way the foreign exchange market was a day late as you see the real change came yesterday.

​The Chancellor of the Exchequer has announced the appointment of Professor Silvana Tenreyro as an external member of the Monetary Policy Committee (MPC).  Silvana will be appointed for a three year term which will take effect from 7 July 2017.

There are several issues here, if I start with British female economists then that is another slap in the face for them as none have been judged suitable for a decade. Next came the thought that I had never previously heard of her which turned to concern as we were told she came from “academic excellence” in an era where Ivory Towers have consistently crumbled and fallen along the lines of Mount Doom in the Lord of the Rings. But after a little research one could see why she had been appointed. From a survey taken by the Centre For Macroeconomics.

Question Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

Agree. Confident. Reforming the monetary system to allow negative policy interest rates will equip the BoE with an additional tool to face potential crises in the future.

Does “reforming the monetary system” sound somewhat like someone who will support restrictions on the use of cash currency and maybe its banning? She is also a fan of QE ( Quantitative Easing ) style policies.

Question Do you agree that central banks should continue to use the unconventional tools of monetary policy deployed in response to the global financial crisis as part of monetary policy under normal economic conditions?

Agree. Confident. A wider set of policy tools would give mature and credible central banks like the BoE more flexibility to respond to changing economic conditions.

What is it about her apparent support for negative interest-rate and QE that attracted the attention of Mark Carney? Of course in a world after the woeful failure of Forward Guidance and indeed the litany of forecasting errors he was probably grateful to find someone who still calls the Bank of England “credible”!

Comment

We have a few things to consider and let me start with the reaction function of foreign exchange markets. The real news was yesterday as a fan of negative interest-rates was appointed to the Bank of England but the UK Pound waited until Mark Carney repeated his views of only Thursday to fall!

Meanwhile there was this from Governor Carney.

Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new
trading arrangements with the EU. But it can influence how this hit to incomes is distributed between job losses and price rises.

His views on the EU leave vote are hardly news although some are trying to present them as such. You might think after all the forecasting errors and Forward Guidance failures he would be quiet about such things. But my main issue here is the sort of Phillips Curve way we are presented a choice between “job losses” and “price rises” Just as all credibility of such thinking has collapsed even for those with a very slow response function in fact one slow enough to be at the Serious Fraud Office. He is also contradicting himself as it was only a few months ago we were being told by him that wage growth was on the up. Although that February Inflation Forecast press conference did see signs that the normally supine press corps were becoming unsettled about a Governor previously described as a “rockstar central banker” and “George Clooney” look a like.

Governor, back in August the forecast for GDP for this year
was 0.8%. Now it’s being forecast at 2.0%. That’s a really
hefty adjustment. What went wrong with your initial
forecast?

He may not be that bothered as you see much of today’s speech was in my opinion part of his job application to replace Christine Lagarde at the IMF.

With many concerned that global trade is taking local jobs, protectionist sentiments are once again rising
across the advanced world. Excessive trade and current account imbalances are now politically as well as
economically unsustainable.

Number Crunching

Of Denmark its banks and negative interest-rates

The situation regarding negative interest-rates mostly acquires attention via the Euro or the Yen. If the media moves beyond that it then looks at Switzerland and maybe Sweden. But there is an outbreak of negative interest-rates in the Nordic countries if we note that we have already covered Sweden, Finland is in the Euro and the often ignored Denmark has this.

Effective from 8 January 2016, Danmarks Nationalbank’s ( DNB ) interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

Actually Denmark is just about to reach five years of negative interest-rates as it was in July of 2012 that the certificate of deposit rate was cut to -0.2% although it has not quite been continuous as it there were a few months that it rose to the apparently giddy heights of 0.05%.

In case you are wondering why Denmark has done this then there are two possible answers. Geography offers one as we note that proximity to the Euro area is associated with ever lower and indeed negative interest-rates. Actually due to its exchange rate policy Denmark is just about as near to being in the Euro as it could be without actually being so.

Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro area and participates in the European Exchange Rate Mechanism, ERM 2, at a central rate of 746.038 kroner per 100 euro with a fluctuation band of +/- 2.25 per cent.

Currently that involves an interest-rate that is -0.25% lower than in the Euro area but the margin does vary as for example when the interest-rate rose in 2014 when the DNB tried to guess what the ECB would do next and got it wrong.

A Problem

If we think of the Danish economy then we think of negative interest-rates being implemented due to weak economic growth. Well the DNB has had to face up to this.

However, the November revision stands out as an unusually large upward revision of the compilation of GDP level and
growth……… average annual GDP growth has now
been compiled at 1.3 per cent for the period 2010-
15, up from 0.8 per cent in the previous compilation.
GDP in volume terms is now 3.4 per cent higher in
2015 than previously compiled,

Ooops! As this begins before interest-rate went negative we have yet another question mark against highly activist monetary policy. The cause confirms a couple of the themes of this website.

new figures for Danish firms’ foreign
trading in which goods and services do not cross the
Danish border entailed substantial revisions

So the trade figures were wrong which is a generic statement across the world as they are both erratic and unreliable. Also such GDP shifts make suggestions like this from former US Treasury Secretary Larry Summers look none too bright.

moving away from inflation targeting to something like nominal gross domestic product-level targeting would be a better idea.

In this situation he would be targeting a number which was later changed markedly, what could go wrong?

Also there is a problem for the DNB as we note that it has a negative interest-rate of -0.65% but faces an economy doing this.

heading towards a boom with output above the normal level of capacity utilisation……….The Danish economy is very close to its capacity limit.

Whatever happened to taking away the punchbowl as the party starts getting going?

Oh and below is an example of central banker speech not far off a sort of Comical Ali effort.

Despite the upward revision of GDP, Danmarks Nationalbank’s assessment of economic developments
since the financial crisis is basically unchanged.

The banks

This is of course “the precious” of the financial world which must be preserved at all costs according to central bankers. We were told that negative interest-rates would hurt the banks, how has that turned out? From Bloomberg.

Despite half a decade of negative interest rates, Denmark’s banks are making more money than ever before.

What does the DNB think?

Overall, the largest Danish banks achieved their
best ever performance in 2016, and their financial
statements for the 1st quarter of 2017 also recorded
sound profits…………In some areas, financial developments are similar to developments in the period up to the financial crisis in 2008, so there is every reason to watch out for
speed blindness.

Still no doubt the profits have gone towards making sure “this time is different”? Er, perhaps not.

On the other hand, the capital base has not increased notably since 2013, unlike in Norway and Sweden where the banks have higher capital adequacy.

What about house prices?

Both equity prices and prices of owner-occupied
homes have soared, as they did in the years prior to
the financial crisis.

Although the DNB is keen to emphasise a difference.

As then, prices of owner-occupied homes in Copenhagen have risen considerably, but with the difference that the price rises have not yet spread to the rest of Denmark to the same degree. The prices of rental properties have also increased and are back at the 2007 level immediately before
the financial crisis set in

It will have been relieved to note a dip in house price inflation to 4.2% at the end of 2016 although perhaps less keen on the fact that house prices are back to the levels which caused so much trouble pre credit crunch. Of course the banking sector will be happy with higher house prices as it improves their asset book whereas first-time buyers will be considerably less keen as prices move out of reach.

In spite of the efforts of the DNB I note that the Danes have in fact been reining in their borrowing. If we look at the negative interest-rate era we see that the household debt to GDP ratio has fallen from 135% to 120% showing that your average Dane is not entirely reassured by developments. A more sensible strategy than that employed by some of the smaller Danish banks who failed the more extreme version of the banking stress tests.

A Space Oddity

Politician’s the world over say the most ridiculous things and here is the Danish version.

Denmark should cut taxes to encourage people to work more, which would increase the supply of labour and help prevent the economy from overheating in 2018, Finance Minister Kristian Jensen said…

So we fix overheating by putting our foot on the accelerator?

Comment

If we look wider than we have so far today we see that international developments should be boosting the Danish economy in 2017. This mostly comes from the fact that the Euro area economy is having a better year which should boost the Danish trade figures if this from the Copenhagen News is any guide.

Denmark has been ranked seventh in the new edition of the World Competitiveness Yearbook for 2017, which has just published by the Swiss business school IMD.

But if we allow for the upwards revision to growth we see that monetary policy is extraordinarily expansionary for an economy which seems to be growing steadily ( 0.6% in Q1) . What would they do in a slow down?

We also learn a few things about negative interest-rates. Firstly the banking sector has done rather well out of them – presumably by a combination of raising margins and central bank protection as we have discussed on here frequently – and secondly they did not turn out to be temporary did they?

Yet as we see so often elsewhere some events do challenge the official statistics. From the Copenhagen Post.

Aarhus may be enjoying ample wind in its sails by being the European Capital of Culture this year, but not everything is jovial in the ‘City of Smiles’.

On average, the Danish aid organisation Kirkens Korshær has received 211 homeless every day in Aarhus from March 2016-March 2017, an increase of 42 percent compared to the previous year, where the figure was 159.

Portugal

Let me offer my deepest sympathies to all those affected by that dreadful forest fire yesterday.

The problems facing inflation targets

Today I wish to discuss something which if it was a plant we would call a hardy perennial. No I do not mean Greece although of course there has been another “deal” which extends the austerity that was originally supposed to end in 2020 to 2060 in a clear example along the lines of To Infinity! And Beyond! Nor do I mean the Bank of Japan which has announced it will continue to chomp away on Japanese assets. What I mean is central bankers and members of the establishment who conclude that an inflation target of 2% per annum is not enough and it needs to be raised. The latest example has come from the chair of the US Federal Reserve Janet Yellen. From Reuters.

Years of tepid economic recovery have Fed Chair Janet Yellen and other central bankers considering what was once unthinkable: abandoning decades-long efforts to hold inflation down and allowing price expectations to creep up.

I am not sure if the author has not been keeping up with current events or has been drinking the Kool Aid because since early 2012 the US Federal Reserve has been trying to get inflation up to its 2% per annum target. It managed it for the grand sum of one month earlier this year before it started slip sliding away again. Indeed for a while the inflation target was raised to 2.5% which achieved precisely nothing which is why the change has mostly been forgotten. From December 2012.

inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,

Of course the Bank of Japan has been trying to raise inflation pretty much since the lost decade(s) began. Anyway here is Reuters again on the current thinking of Janet Yellen.

In remarks on Wednesday, Yellen called an emerging debate over raising global inflation targets “one of the most important questions facing monetary policy,” as central bankers grapple with an economic rut in which low growth, low interest rates and weak price and wage increases reinforce each other.

There is a clear problem with that paragraph as this week’s UK data has reminded us “weak price” increases boosted both retail sales and consumption via the way they boosted real wages. The rationale as expressed below is that we are expected to be none too bright.

The aim would be a change of households’ and businesses’ psychology, convincing them that prices would rise fast enough in the future that they would be better off borrowing and spending more today……..Raising that target to 3 or even 4 percent as some economists have suggested would shift the outlook of firms in particular, allowing them to charge more for goods and pay more for labor without the fear that a central bank would step on the brakes.

They are relying on us being unable to spot that the extra money buys less. Oh and after the utter failure of central bank Forward Guidance particularly in the UK you have my permission to laugh at the Ivory Tower style idea that before they do things consumers and businesses stop to wonder what Mark Carney or Janet Yellen might think or do next!

The theme here is along the lines set out by this speech from John Williams of the San Francisco Fed last September.

The most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target. This would imply a higher average level of interest rates and thereby give monetary policy more room to maneuver. The logic of this approach argues that a 1 percentage point increase in the inflation target would offset the deleterious effects of an equal-sized decline in r-star.

In John’s Ivory Tower there is a natural rate of interest called r-star.

Meanwhile in the real world

Whilst I am a big fan of Earth Wind and Fire I caution against using their lyrics too literally for policy action.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

You see if we actually look at the real world there is an issue that in spite of all the monetary easing of the credit crunch era we have not seen the consumer inflation that central bankers were both planning and hoping for. The Federal Reserve raised its inflation target as described above in December 2012 because it was expecting “More,More, More” but it never arrived. For today I will ignore the fact that inflation did appear in asset markets such as house prices because so many consumer inflation measures follow the advice “look away now” to that issue.

If we move to the current situation and ignore the currency conflicted UK we see that there is a danger for central bankers but hope for the rest of us that inflationary pressure is fading. A sign of that has come from Eurostat this morning.

Euro area annual inflation was 1.4% in May 2017, down from 1.9% in April.

Tucked away in the detail was the fact that energy costs fell by 1.2% on the month reducing the annual rise to 4.5% from the much higher levels seen so far in 2017. As we look at a price for Brent Crude Oil of US $47 per barrel we see that if that should remain there then more of this can be expected as 2017 progresses. That is of course an “if” but OPEC does seem to have lost at least some of its pricing power.

Actually today’s data posed yet another problem for the assumptions of central bankers and the inhabitants of Ivory Towers. We have been seeing am improvement in the Euro area economy as 2016 moved in 2017 so we should be seeing higher wage increases according to economics 101. From Eurostat.

In the euro area, wages & salaries per hour worked grew by 1.4%…., in the first quarter of 2017 compared with the same quarter of the previous year. In the fourth quarter of 2016, the annual change was +1.6%

What if our intrepid theorists managed to push inflation higher and wages did not rise? A bit like the calamity the Bank of England ignored back in 2010/11. As an aside a particular sign that the world has seen a shift in its axis is the number from Spain which for those unaware is seeing a burst of economic growth. Yet annual wage growth is the roundest number of all at 0%.

Comment

Much has changed in the credit crunch era but it would appear that central bankers are at best tone-deaf to the noise. We have seen rises in inflation target as one was hidden in the UK switch to CPI from RPI ( ~0.5% per annum) and the US had a temporary one as discussed above and a more permanent one when it switched from the CPI to PCE measure back in 2000 ( ~ 0.3% per annum). I do not see advocates of higher inflation target claiming these were a success so we can only assume there are hoping we will not spot them.

The reality is quite simple the logical response to where we are now would be to reduce inflation targets rather than raise them. Another route which would have mostly similar effects would be to put house prices in the various consumer inflation measures.

Oh and something I thought I would keep for the end. have you spotted how the US Federal Reserve sets its own targets? I wonder how that would work in the era of the Donald?!

Music for traders

My twitter feed has been quite busy with suggestions of songs for traders. All suggestions welcome.

 

Problems mount for Mark Carney at Mansion House

The UK’s central bank announces its policy decision today and it faces challenges on several fronts. The first was highlighted yesterday evening by the US Federal Reserve.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

UK monetary policy is normally similar to that in the US as our economies often follow the same cycles. This time around however the Bank of England has cut to 0.25% whilst the Federal Reserve has been raising interest-rates creating a gap of 0.75% to 1% now. In terms of the past maybe not a large gap but of course these days the gap is large in a world of zero and indeed negative interest-rates. Also we can expect the gap to grow in the future.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate;

There was also more as the Federal Reserve made another change which headed in the opposite direction to Bank of England policy.

The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

So the Federal Reserve is planning to start the long journey to what used to be regarded as normal for a central bank balance sheet. Of course only last August the Bank of England set out on expanding its balance sheet by another £70 billion if we include the Corporate Bond purchases in what its Chief Economist Andy Haldane called a “Sledgehammer”. So again the two central banks have been heading in opposite directions. Also on that subject Mr.Haldane was reappointed for another three years this week. Does anybody know on what grounds? After all the wages data from yesterday suggested yet another fail on the forecasting front in an ever-growing series.

Andrew Haldane, Executive Director, Monetary Analysis and Statistics, and Chief Economist at the
Bank of England, has been reappointed for a further three-year term as a member of the Monetary Policy
Committee with effect from 12 June 2017.

For those interested in what Andy would presumably call an anti-Sledgehammer here it is.

( For Treasury Bonds) the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…… ( for Mortgage Securities) the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Whilst these really are baby steps compared to a balance sheet of US $4.46 trillion they do at least represent a welcome move in the right direction.

The Inflation Conundrum

This has several facets for the Bank of England. The most obvious is that it eased policy last August as inflation was expected to rise and this month we see that the inflation measure it is supposed to keep around 2% per annum ( CPI ) has risen to 2.9% with more rises expected. It of course badged the “Sledgehammer” move as being expansionary for the economy but I have argued all along that it is more complex than that and may even be contractionary.

Today’s Retail Sales numbers give an example of my thinking so let me use them to explain. Here they are.

In May 2017, the quantity bought in the retail industry was estimated to have increased by 0.9% compared with May 2016; the annual growth rate was last lower in April 2013…..Month-on-month, the quantity bought was estimated to have fallen by 1.2% following strong growth in April 2017.

So after a strong 2016 UK retail sales have weakened in 2017 but my argument is that the main driver here has been this.

Average store prices (excluding fuel) increased by 2.8% on the year; the largest growth since March 2012.

It has been the rise in prices or higher inflation which has been the main driver of the weakness in retail sales. A factor in this has been the lower value of the Pound which if you use the US inflation numbers as a control has so far raised UK inflation by around 1%. This weakness in the currency was added to by expectations of Bank of England monetary easing which of course were fulfilled. You may note I say expectations because as some of us have been discussing in the comments section the main impact of QE on a currency happens in the expectations/anticipation phase.

On the other side of the coin you have to believe that a 0.25% cut in interest-rates has a material impact after cuts of over 4% did not! Also that increasing the Bank of England’s balance sheet will do more than adding to house prices and easing the fiscal deficit. A ten-year Gilt yield of 0.96% does not go well with inflation at 2.9% ( CPI) and of course even worse with RPI ( 3.7%).

House Prices

I spotted this earlier in the Financial Times which poses a serious question to Bank of England policy.

Since 1980, the compounded inflation-adjusted gain for a UK homeowner has been 212 per cent. Before 1980 house price gains were much tamer over the various cycles either side of the second world war. Indeed, in aggregate, prices were largely unchanged over the previous 100 years, once inflation is accounted for.

A change in policy? Of course much of that was before Mark Carney’s time but we know from his time in Canada and here that house price surges and bubbles do happen on his watch. The article then looks at debt availability.

The one factor that did change, though, and marked the start of that step change in 1980, is the supply of mortgage debt……….has resulted in a sevenfold increase in inflation-adjusted mortgage debt levels since then.

This leads to something that I would like Mark Carney to address in his Mansion House speech tonight.

Second an inflation-targeting central bank, which has delivered a more aggressive monetary response to each of the recent downturns, because of that high debt burden.

On that road we in the UK will see negative interest-rates in the next downturn which of course may be on the horizon.

Comment

There is much to consider for the Governor of the Bank of England tonight. If he continues on the current path of cutting interest-rates and adding to QE on any prospect of an economic slow down then neither he nor his 8 fellow policy setting colleagues are required. We could replace them with an AI ( Artificially Intelligent ) Robot although I guess the danger is that it becomes sentient Skynet style ( from The Terminator films ) and starts to question what it is doing?

However moving on from knee-jerk junkie culture monetary policy has plenty of problems. It first requires both acknowledgement and admittal that monetary policy can do some things but cannot do others. Also that international influences are often at play which includes foreign monetary policy. I have looked at the Federal Reserve today well via the Far East other monetary policy applies. Let me hand you over to some research from Neal Hudson of Residential Analysts on buyers of property in London from the Far East.

However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases.  The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one.

Okay on what terms?

The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples.

These people are not as rich as might previously have been assumed and we need to throw in changes in the value of the UK Pound £ which are good for new buyers but bad for existing ones. Complicated now isn’t it?

On a personal level I was intrigued by this.

Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.

You see I live in another part of Battersea ( the other side of the park) and where i live feels like that as well.

 

 

 

UK Real Wages took quite a dip in April

As we looked at the inflation data yesterday it was hard not to think of the implications for real or inflation adjusted wages from the further rise in inflation. There were quite a few such stories in the media about a fall in real wages although they were a little ahead of events because the inflation data was for May and even today we will only get wages data up to April. However there is an issue here that has been building in the credit crunch era where real wages fell heavily as the Bank of England looked the other way as inflation went above 5% in the autumn of 2011. Sadly they relied in their Ivory Tower models which told them that wages would rise in response. Not only did that not happen but the recovery since has been weak and was in fact driven much more by low inflation than wage growth. This is different to past recessions as this from the Resolution Foundation shows.

As you can see the pattern has been very different from past recessions. Real pay rebounded very strongly after 1979 and did well after 1990 but on the same timescale in remains in negative territory this time around. A lot of care is required with long term data like this but this is a performance that looks the worst for some time.

The Napoleonic war period seems especially grim for real wages. If I recall correctly we were imposing a blockade on much of Europe which seems to have our economy hard as well.

Today’s data

We see that wage growth has faded a bit in the latest numbers.

Between February to April 2016 and February to April 2017, in nominal terms, regular pay increased by 1.7%, slightly lower than the growth rate between January to March 2016 and January to March 2017 (1.8%)……..Between February to April 2016 and February to April 2017, in nominal terms, total pay increased by 2.1%, lower than the growth rate between January to March 2016 and January to March 2017 (2.3%). The annual growth rate for total pay, in nominal terms, has not been lower than 2.1% since October to December 2015.

This is of course happening at the same time that inflation is rising and leads to this situation.

The rate of wage growth slowed in the 3 months to April 2017; adjusted for inflation, annual growth in total average weekly earnings turned negative for the first time since 2014.

That is rather ominous when we consider the first chart above as it means that we are getting further away from regaining where we were in 2008 rather than nearer so let us look deeper. The emphasis is mine.

Average weekly earnings, including bonuses, grew by 2.1% in the same period and are the weakest since the December to February 2016 period. Taking into account recent increases in inflation, real average weekly earnings decreased by 0.4% including bonuses and by 0.6% excluding bonuses in the 3 months to April 2017 compared with the same period a year earlier. This is the first annual decline in total real average weekly earnings since 2014.

Of course they are using the new lower headline measure of inflation called CPIH which uses Imputed Rents to estimate owner-occupied housing costs. So the goal posts have been moved a little and this happens so often these days that we should be grateful that so many goal posts now come with wheels.

Where does this leave us overall?

The situation is as follows according to our official statisticians. They are using constant 2015 prices so they are real numbers.

average total pay (including bonuses) for employees in Great Britain was £487 per week before tax and other deductions from pay, £35 lower than the pre-downturn peak of £522 per week recorded for February 2008.

Number Crunching

We can go deeper because there are numbers for the month of April on its own. In that month total pay only rose at an annual rate of 1.2% because whilst regular pay rose by 1.8% bonuses fell by 5.8%. Care is needed as if we look back April has been an erratic month for bonuses but we see that real wages were falling at an annual rate of 1.5% if we use CPI inflation. 1.4% if we use CPIH and 2.3% if we use RPI. Even if we ignore the bonus numbers we see -0.9% for CPI, -0.8% for CPIH and -1.5% for RPI.

The sectors which seem to have impacted in April are the finance and construction ones which both saw total pay fall at an annual rate of 0.5%.

Is the UK labour market tight

Conventional analysis based on such theories as the Phillips Curve will be telling us that the UK labour market is “tight”. An example of this is below from Andy Verity of the BBC.

Unemployment: a 42-year low (1.53m, 4.6%); work force: another record high (31.95m people). But tight labour market isn’t pushing up pay.

If we put some more meat on those bones there are things heading in that direction as this shows below.

The number of people in work increased by 109,000 in the 3 months to April 2017 compared with the previous 3 months, to 31.95 million, with an increase in full-time employment (162,000) partly offset by a fall in part-time employment (53,000) . The employment rate reached a joint record high of 74.8%.

This looks good and indeed is but questions remain. For example having checked I know that there is not a clear definition of full-time work it is something that responders to the survey decide for themselves. Added to this is the issue of self-employment and how much work they are actually doing.

self-employed people increased by 103,000 to 4.80 million (15.0% of all people in work).

Just as a reminder the self-employed are excluded from the official wages data. There is more reinforcement for the labour market being tight here.

Total hours worked per week were 1.03 billion for February to April 2017. This was 0.7 million more than for November 2016 to January 2017 and 15.4 million more than for a year earlier.

We are left with the concept of underemployment here I think which measures the gap between the work that people are doing and what they would like to do. Sadly the UK does not have an official measure of this unlike the US with its U-6 data. We only have flickers of insight via the growth of self-employment which needs to be sub-divided into positive and negative and the rise of zero hours contracts. In terms of influencing pay there seems to have been an associated rise in job insecurity but we have no clear measure of this.

Comment

The real wage squeeze we feared for this year is now upon us and we face the grim reality that it has been more than a lost decade for them.

Looking at longer term movements, average total pay for employees in Great Britain in nominal terms increased from £376 a week in January 2005 to £502 a week in April 2017; an increase of 33.5%. Over the same period the Consumer Prices Index including owner occupiers’ housing costs (CPIH) increased by 31.8%.

The cross-over was in early 2006. This poses all sorts of problems for the Ivory Towers who will look at the employment numbers and forecast much stronger wage growth. Of course they were usually responsible for the increasingly inadequate employment data as we note that one thing they are certainly very poor at is adapting to ch-ch-changes.

Grenfell Tower

Let me express my deepest sympathies for anyone involved in the dreadful fire there which started this morning.