Will Mario Draghi ride to the rescue of the Italian banks?

One of the main long running themes of this website has been the problems and travails of the Italian economy. Back on the second of June I expressed the issue in this form.

I have taken a look at the annual numbers and in the year it adopted the Euro (1999) Italy had a GDP per capita of 26,353 Euro’s and in 2015 it was 25,479 Euro’s or 3.3% lower (2010 prices).

That still has the power to shock me and please take a moment to consider the impact of the fact that according to the official statistics the individual experience has gone into reverse both this century and in consequence in the Euro era. At that point I used the words of the Governor of the Bank of Italy which reinforced this grim message.

that Italy has the potential to recoup the growth gap it has accumulated in the last twenty years.

This made me have a wry smile at the latest report on the subject by the International Monetary Fund.

This growth path would imply a return to pre-crisis (2007) output levels only by the mid-2020s and a widening of Italy’s income gap with the faster growing euro area average.

This led to a flurry of lost decade style headlines many of which missed the fact that if we look back as I have described above Italy has been in such a situation for quite some time. Indeed whilst the economic forecast below is not great it is about as good as it gets for Italy.

Growth is projected to remain just under 1 percent this year and about 1 percent in 2017.

This backdrop has significance for the banking sector and the IMF put it thus.

It also implies a protracted period of balance sheet repair, and thus of vulnerability.

There was also some specific advice for the Italian banking sector.

To substantially reduce the stock of NPLs over the medium term, lower the cost of risk, and improve operating efficiency, Directors supported further measures, including more intensive use of out-of-court debt restructuring mechanisms; strengthened supervision; and a systematic assessment of asset quality for banks not already subject to the ECB comprehensive assessment, with follow-up actions in line with regulatory requirements.

That was quite a lot of advice! One can learn a fair bit by the amount of it and this clashed with the official view from Italy which is that there is no problem at all. We were told that the rescue fund would deal with the problems as we mused whether it would even last the summer. That story seems to be changing somewhat however.

Italian banks: So Fondo Atlante is seriously depleted thanks to no take up for new shares, so the solution? Fondo Atlante 2 with €5 to 6bn ( h/t Macroeconomics1 )

Mario Draghi responds

The ECB President was intimately involved in the past history of the Italian banks as both a bank supervisor and as the head of the Bank of Italy. These days of course he is involved but from more of a distance as he has a general overview from Frankfurt. Regular readers will be aware that I have long expected him to offer help to the Italian banks and yesterday we did get some hints. This was an interesting reply to a general question about the Portuguese and Italian banks.

We have in place rules of state aid, we have the BRRD, and as I said several times, these rules contain all the flexibility to cope with exceptional circumstances.

He took the opportunity to describe the rules whilst offering the potential get out of “exceptional circumstances” which made me think that Brexit could be used as such. That would be familiar Euro area policy in responding to a crisis for it rather than acting in advance. Later he became more specific.

On the first question, public backstop is a measure that would be very useful but certainly should be agreed with the Commission according to the existing rules.

Ah “public backstop” words which should send a shiver down the spine of Euro area taxpayers who seem to be facing more socialisation of banking losses. We also got quite a contradiction to the past official mantra that there is no real problem.

The second point about the NPLs in Italy: I think the very first measure – well, certainly, it’s a big problem

He even pointed out the transmission mechanism to the real economy.

But we should be aware that the longer we have this in place, the less functioning will be the banking system, or at least will be the banks with high NPLs, and so the less capable will be these banks to transmit our monetary policy impulses to the real economy.

Then we got a clear hint to future policy.

One of the measures is to have a well functioning market for NPLs. What is needed for such a market to develop?

The problem is that it is quit easy to see sellers on Italian NPLs but who would buy them? Yes what are called “vulture funds” might but that will not be at a price which is likely to be acceptable to the Italian banks who would have to take a large hit. This is in fact a hint that the ECB will be the buyer as the discussion is very similar to the way the ECB wanted an ABS market to develop so that it could start buying them! He also gave a clear hint to the Italian government.

Several things, but one is in my view dominant, namely to create a legislative framework where the NPLs can be traded and sold easily.

Build it and we will come is the message here.

The Market response

This was covered by the Financial Times

European bank stocks, led by Italian lenders, rallied……The rally in Italian bank stocks was led by a gain of 4.1 per cent for the shares of Banco Popolare. Shares in UniCredit, Italy’s largest bank, were 2.4 per cent higher. Monte dei Paschi shares rose 1.6 per cent.

Actually that did not seem much of a response frankly. After all the share prices of these banks has fallen so much that these were very minor responses. Also we were told this.

The remarks by the president of the European Central Bank, at his monthly press conference, helped alleviate concerns about Italian lenders,

I am not sure that is right as maybe he alleviated the concerns of Italian bankers but he certainly did not alleviate the concerns of Euro area taxpayers.


This is the issue which will not go away. In essence it started with the persistent slow economic growth in Italy which of course then slumped. In other countries there has been economic growth periods which have helped reduce problem loans and strengthen bank balance sheets. But in Italy the banks and the economy have dragged each other downwards. So we see that according to Morgan Stanley Unicredit has an NPL ratio of over 15% and Banco di Monte Paschi dei Siena has one over 35%.

Whilst the Italian state might like to have a bailout there are two main problems. Firstly it has a national debt to GDP ratio approaching 133% according to the IMF. Secondly it has only recently signed up to Euro area bailout rules which mean there has to be a bail in equivalent to 8% of total liabilities before public capital can be used. That is awkward once you realise this. From Bruegel.

The prospect of bank resolution in Italy is complicated by the fact that a large share of banks’ bonds is held by retail investors who – as evident in the previous cases of resolution in 2015 – often had little awareness of the actual risk they were signing up to.

In Italy about a third of bank bonds are held by household retail investors

A bail in would include the Italian equivalent of Mrs Watanabe and would impact directly in the economy. There could be miss-selling compensation like we have seen in the UK but how could the Italian banks afford it? So that would likely have to come from the taxpayer. The Alan Parsons Project covered this.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

A bailout via the ECB seems much more likely and for its President it would have the beneficial effect of covering up past misdeeds. Also should he start running out of other countries bonds to buy it seems that there is likely to be a ready supply from Italy. Meanwhile though those who were painfully bailed in vis the Cypriot banks might reasonably think that they were not treated either fairly or equally.


Interest-Rate cuts are not always an economic stimulus

It is one of the themes of this blog that official interest-rate cuts do not always have a beneficial impact on the economy. To be specific once we go below a range around 1.5% to 2% the effect fades and dies in my opinion. That of course is a critique of those at the Bank of England who want to cut Bank Rate further such as Governor Mark Carney and even more so of the “muscular easing” proposed by its Chief Economist Andy Haldane. Overall the latest official minutes told us this.

To that end, most members of the Committee expect monetary policy to be loosened in August.

However someone who I have praised in the past for at least doing some thinking is Kristin Forbes at the Bank of England. She has demonstrated this again overnight in an article published in the Daily Telegraph. This makes its point starting with the headline.

Wait for Brexit fog to clear before interest rate cut

She even evokes the World War 2 message of Keep Calm and Carry On as she points out this.

The largest price movements have since moderated. Sterling has recovered one quarter of its post-referendum fall. Most major global stock markets (including the FTSE) are now higher than before the vote.

In the real economy she points out that contrary to past Bank of England rhetoric there was an apparent pick-up in the economy in the second quarter of this year.

And complicating any assessment, the economy was quite solid before the vote. May forecasts predicted growth in the second quarter would slow to 0.3pc, but the latest data suggest it strengthened to double that.

It is hard not to have a wry smile at the fact that many of those who are so sure of the future right now have just got their forecasts wrong again. Some humility please. Kristin sees a two-way pull on the economy.

Uncertainty may cause businesses to delay hiring and major new projects. Sectors that involve long-term commitments or major expenses—such as commercial real estate and housing—will undoubtedly be hurt……..Some companies could also benefit—such as exporters who gain from sterling’s depreciation.

Indeed we also get a critique of the panicky response at times exhibited by Governor Carney and indeed Andy Haldane.

This is not 2008. Then markets were collapsing, the financial system stopped functioning, and the global economy was entering a recession. This is not a “Lehman moment”.

The case against a Bank Rate cut

We are reminded that there are costs to monetary easing and not just benefits.

Unfortunately, easing monetary policy not only has benefits, but also costs.

Two are very familiar on here. There is an individual impact.

People will earn less on their hard-earned savings—potentially cutting back on spending to reach a target savings pot.

Also there is a corporate impact.

Pension and life insurance funds will have a harder time meeting their commitments. Companies may need to put more money into pension schemes—leaving less to spend on workers and investment.

It is way past time to change the rules on final salary schemes as for a start negative yields will blow them up. However when I press for this all I get is silence. The sort of silence I got when I pointed out that negative interest-rates were coming or that the Bank of England was more likely to cut than raise next.

Also of course every central banker worries about “the precious”.

Banks will make less money on lending—potentially making it harder for consumers and businesses to get loans.

You may note that the worry about the banks is dressed up as being a worry about the rest of us. Actually this is one area where I differ with Kristin. The latter bit about loan availability may or may not happen but in Sweden the banks have used negative interest-rates as an opportunity to widen margins in some cases to record levels I believe. “The precious” remains rather good at looking after itself.

There is also the cost from likely higher inflation as I discussed only on Tuesday. Here is Kristin’s estimate.

Historical relationships suggest sterling’s 15pc depreciation from its recent high will increase the price level by 2.5pc.

The 15% statement is slightly odd as you see the chart she has agrees with the 10% fall I have used. So on a like for like basis I would have suggested a 1.5% rise in inflation or she would suggest 1.7% on my basis.

We get a reminder that the Bank of England is supposed to support economic demand whilst aiming for the inflation target.

We face a trade off between supporting demand and our inflation target.

Retail Sales

These emerge with interesting timing after the way that Ms Forbes pointed out that consumers behaviour was going to be very important looking forwards.

Since consumer spending is over 60pc of total demand, this will provide an important support to the economy if it continues.

We found out that annual and quarterly growth remains strong.

The volume of retail sales in June 2016 is estimated to have increased by 4.3% compared with June 2015…….The underlying pattern in the quantity bought, as suggested by the 3 month on 3 month movement, increased by 1.6%….There has been sustained growth, spanning 31 months in the 3 month on 3 month movement in the quantity bought: the longest period of growth since records began in June 1996.

However there was a month on month fall.

Compared with May 2016, the quantity bought in the retail industry is estimated to have decreased by 0.9%.

This is already being presented as “the end of the world as we know it” in some quarters but if they bothered to read to the end of the report they would have seen this.

The largest downwards contribution for both quantity bought and amount spent came from food stores.

Whereas a Brexit dip would presumably be in discretionary spending categories. Also some of it was a pre-existing trend and let me put on sackcloth and ashes for mentioning the weather in an economic context.

According to the British Retail Consortium, there was a decline in sales in the fashion categories, especially in women’s fashion and footwear, following one of the wettest starts to a UK summer since records began.

Public Finances

We use these as a guide to economic health in the sense of how much a government gets in revenue and receipts is another type of insight into the economy. We start with some positive news.

Public sector net borrowing (excluding public sector banks) decreased by £2.2 billion to £7.8 billion in June 2016, compared with June 2015.

Hopeful and some of the better news was driven by this.

Income Tax-related payments increased by £0.7 billion, or 6.3%, to £12.2 billion.

Some care is needed as in the previous two months it had disappointed. Oh and another theme of this website popped up.

debt interest in June 2016 decreased by £0.8 billion, or 19.0%,

Whilst our national debt continues to rise Gilt yields have fallen heavily and combined with lower RPI inflation have more than offset it.


This is a welcome and in some senses overdue intervention from Kristin Forbes on the impact of official interest-rate cuts and monetary easing. Back on July 1st I pointed out that her past speeches were likely to lead her to such a view. This clearly begs a question as to whether in reality she signed up to the claims and rhetoric of Governor Carney. Meanwhile the Bank of England’s Chief Economist has been on BBC Radio 4.

“Low rates & large asset purchases can stimulate prices of risky assets, encourage risk taking”

“Little evidence of bubbles since financial crisis”

I do hope that he was not telling us there is no evidence of bubbles from Central London! Oh and aren’t those two sentences contradictions in terms? Was he to be found bopping to disco queen Kim Syms in his youth?

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing

Anyway there are other central bankers in the news as we look east to Nihon. From Francine Lacqua.

Kuroda Says No Need and No Possibility for Helicopter Money

What happened last time he denied something 8 days before a Bank of Japan meeting?



We know so little about the economics of the growing number of UK self-employed

The post credit crunch period in the UK has seen a labour market performance of two halves. The good part has been the way that employment has been strong as illustrated by the latest official Economic Review.

The UK labour market continued to show its strength in the 3 months to April 2016, with the employment rate among those aged 16 to 64 increasing to 74.2%, up from 74.1% in the 3 months to January 2016 and 73.4% over the year.

This is a factor in the unemployment rate fall to mid-2005 levels. However the less good part has been the way that wage growth has broken with past relationships and remained weak. Old employment models ( some of which exist unchanged in Ivory Towers) would predict wage growth of the order of 4-5% if they looked at the employment/unemployment situation. Whereas the reality is of numbers close to 2%. The welcome improvement in real wage growth has in fact mostly come because of lower inflation rather than any acceleration in wage growth.

Employment for older people

There are no doubt some in the older age groups who welcome the availability of work, however some may be less willing.

Female participation over the age of 60 has increased by 21.8% since 2010, almost double that for males, and is likely to be heavily influenced by the increase in the state pension age for females in recent years.

One thing we can be clear about is that “early-retirement” is less frequent now and that this has impacted on the labour force.

The increase in the activity level over the age of 50 represents the largest driver of the growth in the activity level for men and women since 2010,

The self-employed

Tucked away on its website the Office for National Statistics has done some in depth research into self-employment. Let us remind ourselves of the basic theme at play here.

The level of self-employment in the UK increased from 3.8 million in 2008 to 4.6 million in 2015.

However this added to something which seems to have begun from around 2001 as we note like in my analysis of Monday that the credit crunch has often added to pre-existing trends.

While this strong performance is among the defining characteristics of the UK’s economic recovery, the recent rise in self-employment is the extension of a trend started in the early 2000s.

We do learn some other things as well.

Part time self-employment grew by 88% between 2001 and 2015, compared to 25% for the full-time mode. As a result, part-time self-employment accounts for 1.2 percentage points of the 1.6 percentage point increase in the self-employment share of all employment between 2008 and 2015.

There seem to be various factors at play but the research suggests much of this is older people using it as a way of transitioning to unemployment and if asked say they are happy with their lot. Indeed there is a clear group who have had high earning jobs and seem content with their lot. We also get an insight into both which economic sectors they are in and also the geography.

The fraction employed in finance and business services has risen considerably, they are relatively concentrated in the South East and London

We even get a brief glimpse of the wages/earnings situation.

Analysis also suggests that those moving from employee positions to self-employment tend to have somewhat higher pre-transition hourly earnings than workers moving to new employee positions: trends which are more consistent with workers making a positive choice, rather than being forced to be self-employed.

So a hint for some of them at least. For newer readers the reason I highlight this is that the self-employed are excluded from the official wages series data, both the monthly average earnings series and the  annual ASHE survey. This was never a good state of play and it gets worse as the number of self-employed grows.

Today’s Data

In terms of quantity the situation continues to improve.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.4%, the highest since comparable records began in 1971……The unemployment rate was 4.9%, down from 5.6% for a year earlier. The last time it was lower was for July to September 2005.

However the price of labour continues to disappoint as we see that even in what looks like very favourable circumstances ( this is what was previously described as full employment) it does this.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% including bonuses and by 2.2% excluding bonuses compared with a year earlier.

So real wage growth relies on low inflation which is troubling if you expect inflation to rise as I described only yesterday.

Between March to May 2015 and March to May 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.8% and total pay increased by 1.9%.

Those who prefer our old inflation measure the Retail Prices index or RPI can knock around 1% off that. Oh and that self-employment issue will not go away.

self-employed people increased by 300,000 to 4.79 million (15.1% of all people in work) ( this is over the past year).

Post Brexit?

The numbers above are before the Brexit referendum but we do get a look from the Agents of the Bank of England about the post referendum economy.

A majority of firms spoken with did not expect a near-term impact from the result on their investment or staff hiring plans. But around a third of contacts thought there would be some negative impact on those plans over the next twelve months.

So for the majority L.I.F.E.G.O.E.S.O.N as Noah and the Whale put it whilst some have fears about activity slip-sliding away. The real question is to whether the latter group feel this temporarily or more permanently.


The official data tells us a rather hopeful story. Here we have strong employment growth which has pushed the unemployment rate much lower and real wages are growing. The cloud in that silver lining is that wage growth is very low for such circumstances. Also there are some more pages you can tear out of your economics textbooks such as the ones covering “full employment” and NAIRU ( Non accelerating inflation rate of unemployment).

Meanwhile if we dig deeper we see signs that the official picture is too rosy. For example whilst I welcome the extra research into the self-employment sector we need to know much more about what they earn and where it stands on the choice/compulsion spectrum. Also there is the issue of underemployment which our official monthly data misses out. According to the TUC it exists.

There were 2.3 million people underemployed in early 2008, however underemployment rose rapidly following the recession and reached 3.4 million in early 2014. It has fallen slowly in the last year to reach just under 3.3 million in early 2015 – but this is still over 900,000 higher than it was before the recession.

Hopefully it has improved over the last year and there is an official update suggesting it fell to 8.9% in the first quarter of this year. But it is apparently outweighed by overemployment of 10.5%!

Meanwhile at the stroke of a pen or indeed movement of a computer mouse reported reality can get better. From the Institute for Fiscal Studies.

Prior to this year, DWP’s official statistics adjusted for inflation using the (now discredited) Retail Prices Index (RPI). Given that RPI inflation is generally higher than CPI inflation, this means that trends in living standards now look more favourable than did previous versions of the government’s statistics.

Time for Freddie Mercury and his band mates.

It’s a kind of magic,
It’s a kind of magic,
A kind of magic,

The inflation picture for the UK is about to shift into a higher gear

The UK finds itself facing quite a few economic changes as it moves forward. One of the most immediate has been the change in the value of the UK Pound £ as it fell heavily as the result of the Brexit referendum emerged. This will have an inflationary impact on the economy as we wonder how much? The Bank of England rule for currency changes does not help much here but we do have one provided by Mario Draghi of the ECB.  Back on the 3rd of May I reminded us of it.

A couple of years ago we did get a “Draghi Rule” for measuring the impact of all this…….Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

How much of a fall have we had? If we keep to round numbers then in terms of the trade weighted or effective exchange rate the UK Pound £ has fallen by 8% since the referendum result emerged. Applying the Draghi Rule would see an increase in inflation of 0.3% to 0.4%. If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

What is the commodity background?

We also need to look at the commodity price background to see if it will reinforce the upwards trend or weaken it. Some good news comes from the price of crude oil which was rising in the spring but has lost momentum in the summer. So whilst it is up in 2016 so far by 23% it is also some 18% lower than this time last year as we note it has fallen by 8% in July so far. So should Brent Crude Oil remain at US $47 or so it will not be reinforcing the inflationary burst.

The other commodity price news is less good as the CRB index has risen from 375 to 415 so far in 2016. This means that it is pretty much where it was this time last year. If we look for what has driven the change then the metals sub index has risen from 556 to 702 so far this year. Other pictures are more mixed as for example a popcorn consumer will cheer lower corn prices but be less happy about rises in the price of the oils it is cooked in. Prices for meats were rising but this year has seen record pork production in the US so pork prices have dipped recently.

What about wages?

This is of course the dog that has not barked so far in the UK economic recovery. Accordingly fears of a 1970s style wages and prices spiral seem like from another world if not universe. As I discussed yesterday this has been a very different type of recovery and wages were struggling to grow pre credit crunch.

Todays numbers

Here are the headlines.

The all items CPI annual rate is 0.5%, up from 0.3% in May.

This was higher than economist expectations and the cause was especially embarrassing as higher air fares for the Euro 2016 tournament would surprise almost nobody else.

Within transport, the largest upward effect came from air fares which rose by more than a year ago, with the main contribution coming from European routes. The 10.9% rise in fares this year was the largest May to June movement on record although it is important to note that air fares are highly variable.

There was also something that has become rather familiar.

The CPI all services index annual rate is 2.8%, up from 2.6% last month………The CPI all goods index annual rate is -1.6%, up from -1.8% last month.

The services sector has seen inflation above the target for some time now and this is also an international theme as I see it elsewhere ( most recently in the US CPI release). However the continuing good price disinflation is keeping overall inflation low and still close to zero.

What is the outlook?

If we move to the producer price series then the effect of past oil price falls and indeed other commodiities is fading and some of the commodity price rises I discuss above are coming into play.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.4% in the year to June 2016, compared with a fall of 0.6% in the year to May 2016.

This was seen even more at the input level.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 0.5% in the year to June 2016, up from a fall of 4.4% in the year to May 2016.

There were various factors at play here. firstly the consequence of the rise in the price of crude oil in 2016 ( as the more recent fall was yet to happen) and more expensive food both from the UK and abroad.

Home-produced food prices increased 6.7% in the year to June 2016, compared with a rise of 3.0% last month…… The main contribution to this movement was from crop and animal production which increased 6.1% in the year to June 2016 and 0.1% between May and June 2016.

I am loath to blame the weather but will those with more knowledge of agriculture please let me know if the wet weather was a factor here?

House Prices

These seem to have completely ignored the expectations of a dip as the buy to let surge ( to escape a Stamp Duty Tax rise) faded and ended.

UK average house prices have increased by 8.1% in the year to May 2016 (unchanged from the year to April 2016), continuing the strong growth seen since the end of 2013.

Ah yes! Since the Funding for Lending Scheme came into full force. As ever we see very different swings in prices as well as extraordinary differences. Let us start with a quite extraordinary difference.

In May 2016, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.27 million. In contrast, the cheapest area to purchase a property was Burnley, where an average house cost £69,000.

Just the 18.4 times higher! Also very different rates of change.

The local authority showing the largest annual growth in the year to May 2016 was Slough, where prices increased by 23.3% to stand at £287,000. The lowest annual growth was recorded in the City of London, where prices fell by 9.2% to stand at £692,000.

Perhaps there are fans of the TV series The Office are buying and people have forgotten the words of Ali G and indeed John Betjeman. It is interesting to see prices fall in the City of London and I will scan the data later to see if we can glean any news on the area around Nine Elms.

Of course this is all pre Brexit but if you want some post Brexit views well here is one via Ed Conway of Sky.

Whoa. SocGen: house prices in London’s most expensive areas could halve in the wake of Brexit

I did point out that a lot of people (first time buyers for example) would welcome that.


If we now look to bring everything together we see that the UK looks set to see a rise in inflation as 2016 progresses. Regular readers will be aware that I expected a rise in the annual rate in the autumn anyway as past goods disinflation fades and services inflation carries on. That theme has now seen a boost of the order of 1% per annum from the initial Brexit leave vote effect. That of course is an initial estimate as we do not know what if any second order effects there will be. Also I am assuming that the UK Pound £ remains at its current level and whilst it seems more stable now that could easily change. Rises in its value would weaken the effect and falls strengthen it.

That will feed into a reduction in real wage growth which returns me to my theme of yesterday. Meanwhile of course if you put house prices into the inflation numbers you would argue that it was not so low in the first place. You can argue about weights but a proper UK CPI would be of the order of 1.5% right now if you put house prices in. As that happens the indicator which takes a lot of official scorn seems to be in the right area!

The all items RPI annual rate is 1.6%, up from 1.4% last month.

Has the ordinary person seen any economic recovery in the UK?

A long running theme of this website has been that the collective economic experience in the UK has been much better than the individual one. In other words the aggregate size of the economy has risen but the benefits have been much weaker by the time they arrive at you or me. There are various issues here such as the rise in the UK population and no doubt many of you will be wondering if some funds have been siphoned off by the 0.1%?! However on Friday the Chief Economist of the Bank of England addressed this issue so let us take a look at what he thinks about it. If you want it in a nutshell he put it like this.

The language of “recovery” simply did not fit their facts

The aggregate performance

This was covered here.

Since 2009, however, all three measures have begun to recover: GDP has risen by around 14%, employment by around 8.5% and wealth by around 35%. These are strong recoveries. Indeed, all three measures now exceed their pre-crisis peaks: GDP is 7% higher, employment 6% higher and wealth over 30% higher than in 2008.

So far so conventional, in terms of view although there is something in there so central bankerish that perhaps our central banker does not see it. I am referring to him using an increase in wealth which via house and equity prices is something he has helped to drive. This of course disproportionately benefits the already well-off.

Just as a reminder this recovery has not been great if we look back at others.

Even after the Great Depression of the 1930s, GDP was 16% higher. For those with a long enough memory, this time’s recovery is likely to feel quite anaemic, relative to those in the past.

What never seems to occur to central planners is to wonder if there would have been a better recovery without them! Instead of course we get a call for “More! More! More” or as our Andy puts it “muscular easing”.

The individual experience

Andy brings up a metric that will be very familiar to readers of my work.

GDP is a measure of the size of the economic pie, a pie that has grown substantially larger since 2009. But so too has the number of people eating it. Taking the two together, GDP per head has risen significantly more slowly than aggregate GDP since 2009. Indeed, GDP per head today is only around 1% above its pre-crisis peak

So 1% is the new 7% if you wish to put it like that.

Going Wider

Andy heads towards a metric that covers the flaw in GDP numbers which I regularly cover concerning Ireland. Indeed as recently as last Wednesday I wrote about my concerns re the 21% increase in GDP recorded in a single quarter.

GDP measures income from all UK-based activities. But not all of that income flows to UK citizens…….

Okay what is the answer then?

If we take net overseas income out of GDP, to give a measure of net national disposable income per head, it has recovered even more slowly than GDP per head. It is currently at levels little different than its pre-crisis peak. National income per head suggests there has scarcely been any recovery.

As discussed in the comments section on here over the weekend ( h/t Andrew Baldwin) there is a problem with scarcely any recovery. You see the chart provided shows a fall of ~2%. If a 1% rise merits a mention which is a ~2% fall brushed over? I have looked at the data and note that in 2007 we saw £24,068 and in 2015 we saw £23,718. Or a drop which turns out to be of 1.5%.

Now some care is needed here as what Ireland with its wild swings in recorded exports and imports for 2015 taught us is that official data is unreliable in this area.In my opinion the recording of investment flows is even worse. But if you take them as they are then in fact “there has scarcely been any recovery” is the new down.

Indeed for a substantial group the problem predated the credit crunch.

Half of all UK households have seen no material recovery in their real disposable incomes since around 2005.

Generation X face a worrying future

Regular readers will be aware of the factors at play here but the Resolution Foundation has some new data on the subject and skipping the politicisation as ever let us take a look.

Young people have experienced the biggest pay squeeze in the aftermath of the financial crisis, seen their dreams of home ownership drift out of sight.

Indeed the meat of the situation comes here.

In contrast to the taken-for-granted promise that each generation will do better than the last, today’s 27 year olds (born in 1988) are earning the same amount that 27 year olds did a quarter of a century ago. Indeed, a typical millennial has actually earned £8,000 less during their twenties than those in the preceding generation – generation X.

A little care is needed here as we have been through a sharo downturn in this period but even before it there were signs that there may be trouble ahead.

there are signs that problems preceded the recent crisis. Those millennials who were 25 years old before the financial crisis hit were already seeing no pay progress on preceding cohorts.

This is a clear change after more than a few generations of progress but I would now lile to make a point which the Resolution Foundation does not. Please think again about the policies that Andy Haldane has supported before reading the bits below.

evidence that the pay of today’s workers has been suppressed by firms filling deficits in defined benefit pension schemes that provide for older or retired workers. Some estimates suggest that as much as £35 billion is being diverted to this effort each year by businesses.

This is an example of how QE has sucked money out of businesses rather than boosting the. So it has weakened businesses whilst supporting gains for shareholders on it way to creating exactly the wrong set of economic incentives. For those who are unaware of the methodology the lower Gilt yields driven by QE style policies make (defined scheme) pension benefits larger which means that company funds are diverted to fill the perceived gap. Stealers Wheel were kind enough to summarise my views on those who have not only let this state of affairs exist but have in fact made it worse.

Clowns to the left of me jokers to the right

Also rental costs are higher which of course relates to the fact that house prices have been driven higher by the Bank of England.

With more people in such accommodation and renting costs rising over time, millennials are spending an average of £44,000 more on rent in their 20s than baby boomers did


There is much to consider here as the Chief Economist of the Bank of England echoes two of the main themes of mine. Firstly that just looking at GDP is misleading and secondly that different groups have been impacted very differently by the impact of the credit crunch. However the favourable view of him weakens when you see that he seems blind to the way that policies he not only has supported but wants more of have contributed to this state of affairs. The Resolution Foundation gives us some data on the adverse impacts of QE via pension schemes.

If we stick to Generation X the band rather than the age group we did get this albeit via John Winston Lennon.

All I want is the truth now
Just gimme some truth now
All I want is the truth
Just gimme some truth
All I want is the truth
Just gimme some truth

ARM Holdings

The proposed takeover by SoftBank of Japan is of course big news. However as I see so many today trying to fit square pegs into round holes in weak attempts to explain it there is the issue of the fall in the UK Pound £ versus the Yen of 21% in 2016. Actually the timing fits with a reversal of the Yen more recently and perhaps getting ahead of the next move of the Bank of Japan.

I also see that the Financial Times is sending out messages about a “‘sad loss of independence’” and cannot help wonder if this also applies to its own recent takeover by a Japanese company?

The problem that is the Buy to Let sector in the UK

A long running theme of this website has been that too much economic effort is put into the housing sector except in the area of building houses. This has been reinforced in the credit crunch era where a litany of economic measures have boosted the housing market. We had a Bank Rate cut to 0.5% ( one of the longest running emergency measures ever) , £375 billion of Quantitative Easing and when they did not work July 2012 saw the Funding for Lending Scheme. The latter saw mortgage rates pushed lower by up to 2% according to the Bank of England and was the trigger for the house prices to rise again. There have also been other measures under the “Help To Buy” banner. But the overall effect has been to create a put option for house prices as we seen a Baron King and then Mark Carney put in play here.

This has reinforced the long running view that investments in housing are “as safe as houses” and lead to the UK economy being tilted that way. Some of this is self-reinforcing in that as house prices rise those who buy them as a business make a profit and of course contrary to the official “Help” theme it becomes more difficult for people to afford to buy and thus more rental customers are created. As long as it lasts it is pretty much self-fulfilling.

As I pointed out on the 7th of this month the situation has gathered pace in recent times.

From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%

You may note the use of the number 8 for house price to earnings ratios. A consequence of this is that there are fewer owner occupiers these days as the numbers have fallen from 18.2 million (2008) to 17.7 million (2014). The slack has been taken up surprise,surprise by the private rented sector where numbers have risen from 3.9 million to 5.3 million over the same time period. We can only suspect and infer that those trends have continued since then.

As to the future well it looks as though it will be a rental one.

In 1991, 67% of the 25 to 34 age group were homeowners. By the financial year ending 2014, this had declined to 36%.There were also reductions in home ownership over the same period for the 16 to 24 age group (from 36% to 9%) and for the 35 to 44 age group (from 78% to 59%).

There is something of an offset from more older people being homeowners but overall the numbers are falling.

Putting this another way I noticed this in a report from the Institute of Fiscal Studies this week.

Twenty years ago over two-thirds of middle-income children lived in owner-occupied housing, compared to 40% of the poorest fifth of kids. Today only half of middle-income children are in owner-occupied housing.

Where have they gone?

But they ( the poor) have shifted away from social housing towards private rented accommodation, which – you’ve guessed it – is where those in the middle are increasingly found as well.

The Bank of England

It has weighed in on the subject this morning as it analyses whether there is a bubble here. At the risk of spoiling the suspense the answer will be no unless somebody actually wants their employment to be terminated today. However we do get more data on the subject.

Since 2008, the number of outstanding buy-to-let mortgages grew by 6.1% per annum on average, while the number of owner-occupier mortgages fell by 1.7%.

This has led to this.

Rapid growth rates in the buy-to-let market have caught the attention of policymakers.

Indeed, they have regularly told us that they are “vigilant”. Anyway let us continue.

The share of the PRS (Private Rental Sector)  as a proportion of all properties in the UK has been rising since 2002, financed in part through the expansion of buy-to-let lending.

Tenant Demand

We get an analysis of why there is more demand to rent.

Demographics matter because there are cohorts of the population, such as students, immigrants and younger people, who are more likely to rent. If these groups expand, all else equal, we expect there to be more demand for PRS properties.

There are one or two sub-plots there as of course much of the increase in students was centrally planned vis the expansion of universities as we note it missed out the implications for housing in another in the long list of central planning failures.

Then we get an enormous swerve as the Bank of England turns a Nelsonian style blind eye to the issue of affordability.

We think of affordability constraints as borrowers’ ability to secure a mortgage given a set of credit conditions…….Our analysis focuses on credit conditions, which we can quantify more readily.

This is really quite poor as we measure something regardless of it being more minor and ignore the bigger issue. However it is not without value as there was a change in credit conditions.

Our estimates suggest that, as a result of the withdrawal of high LTV mortgages, ‘frustrated’ demand for mortgages from prospective home owners meant one million additional households required PRS accommodation, accounting for 66% of the growth in PRS properties during the period

Anyway they cannot completely ignore affordability.

We believe the unexplained growth is related to housing becoming less affordable.

Actually more than that as if it was in from the beginning the whole analysis would change. Oh and I told you so.

Without concrete evidence on the impact of buy-to-let mortgages on house prices, it is not possible to say whether the gap represents a buy-to-let ‘bubble’

Looking Forwards

The Bank of England suggests there will be a slow down in demand.

Our projection suggests that additional tenant demand for PRS properties could be less than half between 2014 and 2019 compared to the post-crisis period…This translates to an average annual growth for the number of outstanding buy-to-let loans in the range of 2-7%. By comparison, average annual growth for 2014 and 2015 was 7.6%.

The problem is that the elephant in the room returns as we are told this.

The extent to which demand for PRS properties falls primarily rests on whether frustrated prospective first-time buyers from the post-crisis period eventually secure a mortgage.

You see this links us to a past piece of research which did not ignore the elephant.

For first-time buyers, we expect the issue of affordability to persist. Increased availability of low deposit mortgages could help but are easily outweighed by continued house price increases.


There are quite a few factors to consider here. The nation is changing as fewer become owner occupiers and more rent especially from private sources. As I recall my grandparent renting nearly everything ( for younger readers they rented their TV for example) it makes me wonder if we are going back to the future as more and more things are rented rather than owned. If a rentier style culture and economy is a concern well it is getting a bigger concern.

Let me be clear there is no harm in individual examples of buy to letting or renting. My issue is that it has become perceived as a road to easy profits which shifts the economy towards it and weakens other productive sectors as resources are shifted. This road has been backed and supported by government policy and the money made is invariably out of capital gains rather than the rent itself. That does not look stable to me especially as governments are heading towards the limits of what they can do.

In a way it speaks for itself that in its road to concluding that there is no bubble the Bank of England does its best to ignore the biggest issue which is affordability. But they do remind us of an important issue which is that we discuss the availability of cheap credit but that it applies to far from everyone. It is of course another theme of this website that these days there are quite different effects on different economic groups as we become ever more heterogeneous. In a way it would appear that Andy Haldane agrees with me.

So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much.

Meanwhile regrets already?

Andy Haldane has also said this today.

In my personal view, this means a material easing of monetary policy is likely to be needed,……..And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

He has been kind enough to help with a new definition of promptly for my financial lexicon for these times.

By promptly I mean next month


The unreliable boyfriend takes center stage at the Bank of England

Take is a rare day in that it is one where we have a live Bank of England policy meeting where there is a good chance that the announcement will not be unchanged! I am being careful with my words because the nine members of the Monetary Policy Committee voted yesterday. So market players will this morning face the issue of potentially trading with people who have an early wire on the news. Should there be a Bank Rate cut then it will be the first since March 2009 and the last vote for more Quantitative Easing was in early 2013 when the previous Governor of the Bank of England Baron King failed to get enough for a majority. That was for the best as he would have eased policy into a boom.

Mark Carney presses for a cut

A few days after the Brexit referendum Bank of England Governor Mark Carney told us this.

we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.

Considering his pre referendum warnings about the impact of a vote to leave the European Union this provided food for thought which he then backed up with this.

It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners.

He then committed himself.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

The bit about not pre judging the views of the other 8 members sadly badly with this bit.

As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum. This was the view of all nine independent members of the MPC.

If I was one of the 8 other members of the MPC I would have been very unhappy with this.

Shadow MPC

There are various shadow MPCs around and the City AM version has voted for a cut. Mind you some care is required with these bodies. You might like to check who is on them and the record of the longest established one from the Institute of Economic Affairs has not been great. They told us this less than a month ago.

In its June 2016 e-mail poll, the Shadow Monetary Policy Committee (SMPC) elected, by a vote of five to four, to raise rates in June.

This does mean that they are not a guide to what will happen next I think! Although they have much more of a chance with their suggestion of a hold today of course.

The unreliable boyfriend

This phrase was used about Mark Carney by the Labour MP Pat McFadden just over two years ago. From the BBC.

“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.

“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”

Lest we forget Mark Carney had used a 7% unemployment rate as a threshold for interest-rate rises and had just hinted at an interest-rate rise “sooner than markets expect” in his Mansion House speech. What Mr McFadden did not know then was that there would be more policy swerves and U-Turns and that rather than a series of interest-rate increases raising Bank Rate to between 2.5% and 3% there would in fact be none at all.

There is a begged question of here whether Mark Carney will also be an unreliable boyfriend on the issue of interest-rate cuts?

The case against a cut

There has already been quite an easing in monetary policy. If we look at the fall in the effective or trade-weighted exchange-rate since the Brexit referendum is if we use the Bank of England rule of thumb equivalent to a 2% cut in Bank Rate. The situation over the past year is similar to that (slightly more ). If we look back we are near to the recent low established in March 2013 on this measure but returning to the monetary consequences we will receive a boost to both output and inflation from this if we stay here. The catch of course is the mixture which a Bank Rate cut could easily make worse rather than better.

There is also the issue of the fall in Gilt yields ( UK sovereign bonds). The night before the Brexit referendum the 10 year Gilt yield closed at 1.37% and it is at .0.77% as I type this. We have seen a response to this in the falls in fixed-rate mortgages sometime to record low levels. Also if we look longer-term there has been an enormous change in what it costs to borrow with our 30 year yield being 1.61% as I type this. The underlying principle of what I wrote below remains.


This does move us towards the arena of fiscal policy and combines with the issue of the UK having a new Chancellor and government. The “mood music” such as we have it points towards an easing of fiscal policy but we have little or no idea of how much or when beyond hints towards the Autumn Statement in November. Perhaps someone has noticed the hints of a 0% coupon perpetual Japanese Government Bond which have emerged this week which is the nearest I have ever seen to the economics concept of “free money”. Of course they have not yet actually done this but in the current environment it seems feasible as of course it does appear that the spaceship described by Douglas Adams is currently in orbit around the Earth.

“Please do not be alarmed,” it said, “by anything you see or hear around you…We are now cruising at a level of two to the power of two hundred and seventy-six thousand to one against and falling, and we will be restoring normality just as soon as we are sure what is normal anyway. Thank you…”


There is much to consider today as we find ourselves considering hints and promises made by a man who is an “unreliable boyfriend”. Those who remortaged or took out fixed-rate business loans on the back of his Forward Guidance may well have rather unpleasant  thoughts about the consequences. So we know that his Forward Guidance about interest-rate rises was useless which begs a question about Forward Guidance for cuts.

As regular readers will know I stood alone against the barrage of Forward Guidance forecasts of interest-rate rises in the media and by official bodies as it was back in December 2013 I first made my view know that a cut was as likely as a rise. It is awkward saying something will happen when you do not agree with it but these days I find I have a lot more company in that expectation! Have any of them issue a mea culpa? Surely someone must have?

As to other policy measures then an addition to the Bank of England’s £375 billion of QE is a possibility. I have felt that Governor Carney has given the impression that he is not a QE fan over his period of tenure at the Bank of England but of course the infinite improbability drive is in play. I feel that some version of a boosted/revived Funding for Lending Scheme is not far off a certainty but that may have to wait. That needs the permission of the Chancellor and would therefore have to be quite a rush job. Also that tends to be announced away from monetary policy meetings.

I will be updating this as the day progresses but as Douglas Adams pointed out whatever happens.

Don’t Panic

Update 2:45 pm

The correct decision was reached by the majority in the end as shown below.

At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.

Those who have followed my analysis will not be surprised to read that Gertjan Vlieghe voted for a cut and became the first person to vote for a UK Bank Rate below 0.5%. If there was a surprise it was that Andrew Haldane did not join him in that. Maybe Governor Carney found a way of corralling the Bank of England insiders.

However in spite of the almost continual failure of his efforts at Forward Guidance Mark Carney tried Mark 21.

To that end, most members of the Committee expect monetary policy to be loosened in August.

Those are the same members who have been expecting a Bank Rate rise (from themselves) over the last two years or so! Truly we can say that the left hand does not know what the right hand is doing.




Yesterday I gave my thoughts on this to TipTV Finance.