Where next for US interest-rates?

Last night brought news on the planned interest-rate changes in 2022 from the US Federal Reserve. So we have a case of the morning after the night before. I did not make much of a deal of it ahead of the event because I was not expecting them to make any changes to policy last night merely set the scene for the year ahead. As the day progressed the Bank of Canada mined that particular theme.

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ %, with the Bank Rate at ½ % and the deposit rate at ¼ %.

So nothing from it except promises for the future.

The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound. Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.

They are in danger of quite a bit of satire on the inflation targeting bit because of this.

Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain close to 5% through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation.

Canadians might reasonably wonder why they have not used any of them when inflation is around 5% but will when it is “lower”? I do not want to get into the Transitory debate but as central bankers got the inflation rise wrong they have a bit of a cheek blaming events. So we are left with a promise that they will control inflation by acting on it after it has surged which reverses the past rule that you need to get ahead of events rather than chase your tail.

Back to the Fed

The essential part of the policy statement is here.

With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.

As you can see we have further conformation of my theme that central bankers are pack animals. We have an inversion of timing as the Bank of Canada is aping the Fed but they both seemingly believe that promises are more effective than actions. Well for interest-rate rises anyway, as interest-rate cuts can be instant.

The reality is that the US CPI has risen to 7% as the Federal Reserve has sat on its hands whilst telling everyone that the inflation would be transitory. It gets some relief from target the lower PCE index which last was 5.7% in November and looks set to edge nearer to 6% when the December numbers are released tomorrow.

There was an additional nuance in that with a balance sheet approaching US $9 trillion you might think that another US $30 billion could be avoided, but apparently not.

The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month.


Somehow the media have got the idea that this is hawkish, Perhaps they missed this in the first reply from Jerome Powell in his press conference.

we know that the economy is in a very different place than it was when we began raising rates in 2015. Specifically, the economy is now much stronger. The labor market is far stronger. Inflation is running well above our 2 percent target, much higher than it was at that time.

Sadly he did not get pressed on why he is in fact not even responding as he did in 2015. We did get a flash of honesty as he hinted that he is in fact responding to the labour market and not inflation.

I think there’s quite a bit of room to raise interest rates without threatening the labor market. This is, by so many measures, a historically tight labor market—record levels of job openings, of quits; wages are moving up at the highest pace they have in decades.

That is a rose tinted view on wages because the real terms picture is very different.

Median weekly earnings of the nation’s 116.3 million full-time wage and salary workers were $1,010 in the fourth quarter of 2021 (not seasonally adjusted), the U.S. Bureau
of Labor Statistics reported today. This was 2.6 percent higher than a year earlier, compared with a gain of 6.7 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period.

The labour market theme kept being confirmed.

So this is a very, very strong labor market, and my strong sense is that we can move rates up without having to, you know, severely undermine it.

We then got conformation that they believe that the real economy responds to their promises.

So we feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make. And monetary policy works significantly through expectations, so that in and of itself is appropriate.

They consider this to be a powerful weapon and I wonder sometimes if they think talk is more powerful than action? Although of course they do not behave in that manner when interest-rate cuts are on the table.

We then got a rather curious statement about a balance sheet they are presently still expanding.

Now, the balance sheet is substantially larger than it needs to be.

Finally someone got around to what I think should have been the first question.

So year over year, inflation’s at a 40-year high and input costs for a producer-price index for all of 2021 was the highest on record. Some investors fear that the Fed might be moving too late.


Reading between the lines I see the commitment to higher interest-rates along the lines of “Definitely Maybe” by Oasis. We seem set for an increase of 0.25% in March but that pales into insignificance compared to the inflation around. After all if they really believed in inflation targeting the interest-rate rises would have begun last summer. Indeed there was a question around them causing inflation rather than stopping it.

but do you feel that, you know, monetary policy and fiscal policy maybe did too much to react to the crisis and that part of the inflation problem that we’re having right now is because the government response, you know, collectively, was more than what the economy ended up needing?

Also the Federal Reserve is determined to look away now whenever the subject of house price rises is in the air.

So asset prices are somewhat elevated, and they reflect a high risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability.

Apparently in spite of falling wages people are doing well.

So asset prices are somewhat elevated, and they reflect a high risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability.

Perhaps he needs his own “I cannot eat an I-Pad” moment

My conclusion is that the claimed hawkish theme will soon disappear at the sign of any economic weakness. After all inflation is at least 5% higher than the present interest-rate yet they did not raise last night. Should the economy weaken how long would it be before we saw negative interest-rates?

On a separate point I regularly get asked about changes in retirement patterns post pandemic so here is a little light on the subject.

Now, we also know that labor-force participation is significantly lower. It’s a percentage point and a half lower than it was in February of 2020. Maybe a percentage point of that is retirements. Some part of those retirements are, you know, related to Covid rather than just regular retirements.


What is the economic situation in Russia?

At the present time the main geopolitical issue is what plans does Russia have for Ukraine? We have seen the troop and tank movements and also the response of the UK with the RAF flights delivering anti-tank missiles to Ukraine. But as ever our interest is the economic situation and let us start with something which raises a wry smile.


The basis for this comes from Newsweek.

During an interview with the state-run Tass Russian News Agency on Tuesday, Denisov said the two nations “are switching to national currencies” when it comes to bilateral transactions. And though the pair was not planning to “completely switch,” he suggested that the introduction of sweeping sanctions by Washington may “somewhat speed up” the process.

The wry smile comes from the fact that we have heard this for some years now so it is hardly breaking news. Also the recent warmongering gas pushed the Russian Ruble from just below 75 to the US Dollar ti just below 79 so now may not be the best time to push its use.

Actually the Russian authorities have been selling the Ruble as an oil price hedge.

(Bloomberg) — The Bank of Russia said it’s halting purchases of hard currency in a bid to ease pressure on the ruble, which has slumped amid tensions over Ukraine.

Policy makers are suspending buys of foreign exchange on the open market in order to “reduce financial market volatility,” according to a website statement. The central bank conducts the transactions for the Finance Ministry as part of Russia’s fiscal rule, which is aimed at reducing the economy’s exposure to fluctuations in oil prices.

But have stopped for the moment so they do not add to the Ruble’s fall.


We learn quite a bit from this.
On 17 December 2021, the Bank of Russia Board of Directors decided to increase the key rate by 100 b.p. to 8.50% per annum

There is more bad news from the US Dollar replacement theme because you would not need an interest-rate of 8.5% if your currency was strong. After all we live in a period of ZIRP ( Zero Interest-Rate Policy) and indeed NIRP. A plus is that they take inflation targeting seriously as in one move they have achieved what the US may do in the whole of this year in response to this.

Inflation is developing above the Bank of Russia’s October forecast. In October and November, seasonally adjusted growth in consumer prices rallied to a six-year high. Annual inflation went up to 8.4% (from 7.4% in September). It is estimated at 8.1% as of 13 December.

They target inflation at 4% and are willing to increase interest-rates even further if necessary.

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings.

Oil and Gas Reserves

Russia has extraordinary commodity resources and the developments in oil and gas markets brought it quite a windfall last year.

MOSCOW, Jan 21 (Reuters) – Russia’s sales of oil and natural gas far exceeded initial forecasts for 2021 as a result of skyrocketing prices, accounting for 36% of the country’s total budget.

According to Reuters there were some quite extraordinary numbers here.

According to its Finance Ministry, Russian oil and gas revenues exceeded initial plans by 51.3% in 2021, totalling 9.1 trillion roubles ($119 billion). In October alone, revenues were 1.1 trillion roubles, or almost $500 million per day.

– Total budget revenues reached 25.29 trillion roubles last year, up from 18.72 trillion roubles in 2020.

So there was quite a fiscal windfall as well as  a boost to GDP from this. The trade figures look very strong too.

According to the central bank, Russia’s total exports reached $489.8 billion in 2021. Of that, crude oil accounted for $110.2 billion, oil products for $68.7 billion, pipeline natural gas for $54.2 billion and liquefied natural gas $7.6 billion.

Trade Surplus

This meant that there was quite a balance of trade surplus.

A historic-high Russian current account surplus of $120.3 billion, equal to 7% of the gross domestic product and driven by high gas prices last year, is rouble-supportive, ING said.

So returning to the Rouble theme we have a currency backed by relatively high interest-rates and a current account surplus. Why is it not soaring? If you like Russia should be seeing a version of what became called the Dutch Disease where commodity resources lead to a higher exchange rate. But there are two problems with that. Firstly as we looked at earlier the state was selling. It was far from the only one.

Yet net capital outflows widened to $72 billion last year, its highest since 2014 and up from $50.4 billion in 2020. “This keeps the local currency undervalued, making it continuously favourable for the trade balance,” ING added.

This is a familiar theme for Russia and can be combined with the oligarch influence. Any economic strength seems to get frittered away into other areas.

Bank of Russia Foreign Exchange Reserves

The selling of the Ruble means that FX reserves are now over 630 billion Rubles which is more than a tidy sum and is up around 35 billion on a year ago. This includes some 133 billion Rubles of gold meaning that the Bank of Russia will appreciate the rise above US $1800 for gold that 2022 has brought.

This is also a type of sovereign wealth fund but is different from the Swoss version in that it invests in bonds. The countries below will have found their bond markets boosted by this in a type of foreign QE.

 Austria; · Belgium;  · Canada; · Denmark; · Finland; · France; · Germany; · Luxembourg; · the Netherlands; · Spain; · Sweden; · the United Kingdom; · the USA.

There is a sort of irony in holding UK and US bonds right now. However recent times of falling bond markets will not have been welcome although central banks usually only hold shorter-dated bonds.

Stock Market

Central  bankers keen on wealth effects will be very disappointed to see the MOEX index have such a rough run. In late October it nearly made 4300 but even with a 3% rally so far today it has not reached 3400.


The theme here is generally one of disappointment. Russia has economic strengths mostly from its geography and natural resources. But the story of the Ruble is something of a metaphor for the whole position as it is very disappointing in the circumstances. After all many oil benchmarks are over eighty US Dollars.

Considering the oil and has situation this feels disappointing too.

According to our estimates, economic activity is growing faster this quarter as compared to the previous one, but predictably more slowly than during the period of its active recovery in the second quarter of 2021. As of the end of the year, the overall increase in GDP might reach nearly 4.5%.  ( Bank of Russia)

On the more positive side there seems to be work for those who want it.

I would now focus on the labour market. In October, unemployment decreased to 4.3%, which is its record low. The demand for labour continues to grow. The number of vacant jobs is significantly higher than two years ago, specifically by about a third. Many industries are facing a shortage of workers, including both specialists and low-skilled workers.

And maybe even some real wage growth which is rare these days.

 several executives of our regional branches stressed that increasingly more companies were forced to raise wages at a double digit pace to be able to retain their employees.

But as you can see under the hard exterior of troops and tanks the underlying economic position is more fragile than you might think.

UK public-sector borrowing improves but debt costs soar

Today we can link to yesterday’s analysis but first we can note some good news from the UK public finances.

Since our last publication (21 December 2021), we have reduced our estimate of borrowing in the financial year-to-November 2021 by £6.0 billion. This is largely because of a reduction of £6.2 billion to our previous estimates of central government borrowing.

There has been a nice little windfall since the last release and in case you are wondering how? Here is the explanation.

The data for the latest months of every release contain a degree of forecasts. Subsequently, these are replaced by improved forecasts, as further data are made available and finally by outturn data.

One might reasonably think that in the modern technological IT era government’s would have a lot better idea of what they have spent and received than they do. If we look at the detail of the revisions we see that the suggest a stronger economy than previously thought via the increase in tax receipts.

We have increased our previous estimates of central government tax receipts by £5.2 billion and debt interest payments by £0.5 billion, while our previous estimate of departmental expenditure on goods and services has reduced by £1.3 billion over the same eight-month period.

It seems that we had little idea of how well our bigger businesses were doing.

Our previous estimate of Corporation Tax receipts has increased by £3.7 billion, largely because of higher than forecast cash payments made by very large companies in December 2021.

So whilst this is good news it is a large amount compared to the £5.5 billion collected in December from Corporation Tax.


Looking at the latest month we see a similar good news vibe from receipts.

Central government receipts in December 2021 were estimated to have been £68.5 billion, a £6.2 billion increase compared with December 2020. Of these receipts, tax revenue increased by £4.6 billion to £50.7 billion.

The again suggests a stronger economy and this is reinforced by some of the detail as income tax receipts were some £1.8 billion higher than last year and National Insurance was some £1.1 billion higher. Business Rates continued the Corporation Tax theme by being 25% higher at £2 billion. Finally we have something which I am not so keen on overall but is good for the public finances.The housing and indeed house price boom saw Stamp Duty receipts rise from £1.3 billion to £1.9 billion.


Here the saga starts to change and we get a hint of it from this number.

Central government bodies spent £84.7 billion in December 2021, £1.0 billion less than in December 2020.

One might reasonably expect expenditure to have fallen more than that. That is because we spent £8.2 billion on the various furlough schemes last December and that is now over. But in the meantime one area has boomed and not in a good way.

Debt Costs

These surged in December.

Interest payments on central government debt were £8.1 billion in December 2021, a December record and £5.4 billion more than in December 2020, albeit lower than in June 2021 when interest payments were £9.0 billion.

Those who have followed me over time will know I have argued for some years that the UK should be issuing conventional rather than index or inflation linked bonds. A while back I have a discussion on here with Jonathan Portes who took the other side of the debate because real yields were negative. I pointed out that in an inflationary episode we would be paying nominal rather than real amounts and here we find ourselves.

The recent high levels of debt interest payments are largely a result of movements in the Retail Prices Index (RPI) to which index-linked gilts are pegged.

This situation is about to get even worse as the numbers take some time to catch-up with reality.

To estimate the RPI uplift for three-month lagged index-linked gilts in December 2021, we reference the RPI movement between September and October 2021, while the eight-month lagged index-linked gilts reference the RPI movement between March and April 2021……RPI increases in the most recent periods will be reflected in our interest estimates in the coming months.

Procurement and Pay

This is another area which has been rising and is the other side of the booster and test and trace campaign’s impact on economic output ( GDP)

Spending in this area includes £18.0 billion on procurement and £14.0 billion in pay. This cost includes the expenditure by the Department of Health and Social Care (DHSC), devolved administrations and other departments in response to the coronavirus pandemic. It also includes the NHS Test and Trace programme and the cost of vaccines.

The Office for Budget Responsibility

There have been some grand claims about the OBR in the last few days.

“Far and away the most important judgments I have made as a policy maker” were at the OBR, Sir Charlie Bean says. Too much focus on “diddly squat” BOE rate moves when the real action is fiscal. ( Phillip Aldrick of Bloomberg)

How is that going?

The public sector borrowed £146.8 billion in the financial year-to-December 2021 (April to December 2021), £129.3 billion less than in the same period a year earlier and £12.9 billion less than the official Office for Budget Responsibility (OBR) forecast.

I have no idea how making the wrong calls again and again can be described as “important judgements”. Any my first rule of OBR Club that the OBR is always wrong strikes again.

UK National Debt

This is a more complex subject than it first appears and it starts relatively simply.

Public sector net debt excluding public sector banks (PSND ex) was £2,339.9 billion at the end of December 2021, an increase of £207.8 billion compared with the same time the previous year……..96.0% of GDP, a level last seen in the early 1960s.

But due to the activities of the Bank of England the number has been inflated and mark to market profits on UK bond holdings and the Term Funding Scheme are not debt but are counted as such. I am no great fan of the TFS due to the way it has funded the rises in house prices but an allowance of say 10% for any possible losses seems plenty not 100%. Anyway the impact has risen because the banks had a TFS party as it came to an end in flow terms.

PSND ex BoE is £323.4 billion (or 13.3 percentage points of GDP) less than PSND ex.

Meaning the adjusted number for the UK national debt is as show below.

Currently standing at £2,016.5 billion at the end of December 2021 (or around 82.7% of GDP),


The UK public finances have two main themes today and the initial one is positive as those who judge an economy by the tax receipts it generates have received a £6 billion plus boost. On the other side of the coin is the debt interest burden being generated by higher inflation and specifically the Retail Price Index or RPI on this.

£492.9 billion are index-linked gilts that pay an interest rate pegged to the Retail Prices Index and are recorded at their redemption value.

This links us to yesterday’s analysis as the Bank of England acted to reduce UK debt costs by buying UK government bonds. Its stopped at £875 billion but the gains for the public finances are being reduced partly by the stopping of flows as bond yields have risen but also by the rises in Bank Rate. 0.15% may not be much but on £875 billion it becomes a decent sum.

Also the Bank of England did not buy UK index-linked bonds. I wonder if it is regretting that now? Perhaps it did not want to be seen benefiting from inflation.Also is my subject of yesterday Catherine Mann even aware of the situation? I ask because the US Federal Reserve has and indeed still is buying inflation-linked bonds.



How will the Bank of England deal with the cost of living crisis?

On Friday we were treated to the first formal speech from a Bank of England policymaker for a while. It was one of the new external members Catherine L Mann who is an example of a disappointing but consistent move by the Bank of England which she highlighted in her first sentence.

As an international economist, I have always studied domestic economic conditions through the lens of
global influences.

She has no particular expertise in the UK economy and in fact is an American who has spent her life in the international bodies which have consistently failed us. We have plenty of British female economists who get overlooked time and time again. Just in case you thought it was because of Catherine’s abilities well the important issue for 2022 is inflation and the consequent cost of living crisis. She told us there wasn’t going to be any in the UK as recently as July last year. This is from her application process.

Only in the US is CPI inflation expected to exceed the 2% objective for some years. Inflation in other AEs
does not breach 2% at least as measured on an annual basis. For EM as well, after the 2021 boost in inflation, their average inflation also is expected to moderate substantially. ( AEs =Advanced Economies )

Could she have been more wrong? Well yes as she went on to assure us that central banks had the matter in hand.

While the conclusion might be that monetary authorities have inflation well in hand, the other conclusion is that policy moderates too soon

Even worse she looks to have been in favour of more expansionary policy into the present inflation surge.

What about now?

Her view on inflation has done a complete U-Turn

Global factors have been at the forefront
of the inflation surge in the UK, and their effects will persist into early 2022. However, expectations for
wages and prices for this year, if realized, could keep UK inflation strong for longer, which might then
generate a reinforcing cost-price dynamic.

Perhaps her error last July is still on her mind.

In the last half of 2021, UK CPI inflation surged, more than doubling from 2% in July to 5.4% in December.

Now she fears that 2022 will be even worse in inflation terms than 2021.

Residual strength in both wages and prices likely will continue for a time into 2022 as the domestic and global mismatch of supply and demand slowly resolve, as firms try to recover margins eroded in 2021, and as labour markets stay tight. Indeed, firms in the latest DMP panel (from December) expect to raise their prices by 5% in 2022 – a bit more than the 4% in 2021.

Rather curiously she seems to have retained quite a bit of faith in the wages data that I reported to the Office for Statistics Regulation in February last year.

Previously, average earnings had rebounded strongly from their trough in 2020 leading to headline wage
inflation rates as high as 9% in the summer. While some of these increases are due to base and compositional effects, demand and supply imbalances both in goods and labour markets built very quickly over the second half of the year.

You might reasonably think she would have her doubts about the wages numbers when she is told a completely different story by those paying them. But that detail seems to escape our Catherine.

Meanwhile, firms expect continued upward pressure on pay growth in 2022 on the top of the 2-3.5% increases of 2021.

So was it 2%-3.5% or rising to 9%? Most would be troubled by a gap wide enough to drive the QE2 through.

Anyway she now thinks that inflation could continue on its present high trajectory into next year.

These expectations for prices and wages, if realized, are ingredients for headline inflationary pressures that could
stay strong for longer, well into 2023.

Her attempts to explain away the inflation by trying to blame particular areas have failed as she ends up having to confess that most areas are rising.

Starting in the second half of 2021, however, rates in the lowest-volatility bucket have left their range of the
last decade and now look more in line with the period of 2011 and before. This tells me that high inflation is
no longer limited to components that are usually quite volatile, but has seeped into those that typically are
rather stable

Oh and she probably does not realise it but she has given a critique of the use of rents as a proxy for housing inflation.

Some examples are pharmaceutical products and hairdressing, but also housing rents, and restaurants and canteens – these latter two each account for over 8% in the CPI basket.

After all house prices are not low volatility are they?

Also you may miss in the explanation below the fact that the UK is expected to have the highest GDP growth in 2022 of the countries in Catherine’s chart.

But, prospects for 2022 GDP growth in the UK, coming from Consensus Economics for example, have been systematically downgraded over the course of
2021 to the January 2022 survey. With this downgrade, the UK economy is a clear outlier among advanced economies.

If we are the outlier I wonder how the others got downgraded too?

As well, prospects for global GDP growth have been dialled back for 2022 by the international institutions

It is all very curious as again we are told we are doing badly when we are the best performer on her chart.

 in any case, UK trade has underperformed the pace of recovery in global trade perhaps augmenting domestic headwinds from global demand.


So what will Catherine do in terms of policy? Well she seems to think the December 0.15% interest-rate rise was a big deal.

The small Bank Rate rise that I voted for in
December was to act on the commitment to the 2% target so as to influence the 2022 strategic decisions that workers, businesses, and asset holders are now making. Changing expectations is the first defence against a reinforcing wage-price dynamic.

Does she really think that a 0.15% interest-rate rise will influence “strategic decisions”?! After all economic history has seen much larger rises struggle to have much of an impact. She seems to be arguing it is simultaneously small and significant. The last sentence is very revealing as it highlights what she actually believes.

In fact we see that she prefers expectations over reality as this issue pops up regularly in her speech. The quote below is from her first paragraph.

To return inflation to target, the Monetary Policy Committee’s first line of defence is to dampen expectations of future price increases. Achieving an inflection in these
expectations along with tailwinds from global factors could mean that a shallower path of future rate rises is
needed to bring inflation back to target.

How does it “dampen expectations” other than by increasing interest-rates? We seem to be singing along with Earth Wind and Fire here.

Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away.

How many people even knew she gave a speech? Not that many. You may note that she seems to think that it could lead to fewer interest-rate rises. But how? Perhaps she has been in the bodies filled with the supposedly “great and the good” for so long she actually believes all the hype.

She is back at the same game later in the speech.

Monetary policy has a role to play in managing expectations as well as ensuring that the economic and financial conditions facing firms and workers are consistent with the 2% target.

Let me put it bluntly. As her expectations about the inflation trends were completely wrong why should anyone take her seriously? Let alone act in accordance with her judgements.


High inflation reduces UK Retail Sales one more time

It was only last Friday that we were looking at what was some strong news from the UK economy. Today is an example of a ying to that yang as we look at what is disappointing news.

Retail sales volumes fell by 3.7% in December 2021, following growth of 1.0% in November (revised down from 1.4%).

So not only was December very weak but November has been revised lower, in a type of double-whammy effect. The pattern for the last few months now looks like this.

Over the three months to December 2021 they fell by 0.2% when compared with the previous three months.

So over this period things look to have stagnated.

Inflation’s Impact

Back on the 29th of January 2015 I first formally established this view.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

Contrary to conventional economic theory low and indeed negative inflation boosted retail sales growth. Thus we would expect high inflation to weaken it.

We can start by looking at December itself where the amount of money spent or value was some 5.7% higher than last year. But volumes were some 0.9% lower so we get am estimated level of inflation, or in technical terms a deflator,of 6.6%. So more grist for the mill that high inflation reduces retail sales.

Our official statisticians have crunched the numbers for the last three months. First inflation.

Over the three months to December 2021, the value of sales was up 6.2% on the same period a year earlier, reflecting an annual retail sales implied price deflator of 5.8%.

So it was strong and volumes?

Compared with the same period a year earlier, sales volumes over the last three months fell by 0.9%

So they were not only weak they actually fell.

The inflation measure for this area has been rising all year and just to give an idea was 0% in March. So on this picture the volume pattern has weakened as it has picked up.

What was at play here?

It looks as though Covid fears did affect the high street.

Economic activity and social change analysis of data provided by Springboard reported that in the week to 18 December 2021 overall retail footfall was below “normal” expectations for this time of year, at 81% of the level seen in the equivalent week of 2019. Shopping centres retail footfall for this period was at its lowest relative level since the week beginning 25 July 2021, which may be because of more cautious behaviour caused by the emergence of the Omicron variant.

This is backed up by the weakest sector in December.

Non-food stores sales volumes fell by 7.1% in December 2021, with falls in each of its sub-sectors (department stores, clothing stores, other non-food stores and household stores) following strong sales in November.

Added to this it looks as though something we had been expecting ( early Christmas shopping in an attempt to avoid supply chain problems), has been in play.

The sub-sector of other non-food stores, which includes retailers such as sports equipment, games and toy stores, reported a monthly fall in sales volumes of 8.9% in December 2021 but were 6.7% above their February 2020 levels.

I am not quite so sure how to report the next category. The factors above were no doubt in play but maybe pre pandemic we simply had too many clothes.

Clothing stores and department stores reported a fall of 8.0% and 6.3% over the month and were 7.2% and 10.6% below levels in February 2020.

A Voluntary Lockdown?

Whilst the UK did not formally lockdown there was a change in behaviour heading in that direction. There were country differences as Scotland and especially Wales tightened the rules more. But we get a signal from this I think.

Automotive fuel sales volumes fell by 4.7% in December and were 6.6% below pre-coronavirus levels of February 2020. This may be because of reduced travel following England’s move to Plan B in early December 2021, which asked people to work from home if they could.

So there was an impact from this which is backed up by this.

The Opinions and Lifestyle Survey covering the period 15 December 2021 to 2 January 2022 reported 60% of working adults travelling to work at some point in the past seven days compared with 72% in the previous period.

Also people did change their plans for their social lives.

The Coronavirus and social impacts release also reported a fall in those planning to meet up with friends or family in restaurants, pubs, bars or cafes over Christmas (29% for 15 December 2021 to 3 January 2022 compared with 34% for 1 to 12 December 2021) alongside a fall in those intending to visit a Christmas market (13%, 22% in the previous period), which may also have reduced travel.

Another factor in play here which is easy to forget now is the sense of fear that existed for a time.

Boris threw retail under a bus at the beginning of dec when he suggested possible lockdown for Xmas. Footfall feel hugely. Killed Xmas trade. ( Adele Bailey)

Also there were quite a few people isolating at times.

Online Sales

The numbers here will have been flattered by the extra isolations and voluntary lockdowns but even so it looks as  though higher numbers are here to stay.

Online spending values fell in December 2021 by 1.8% when compared with November 2021. Despite this fall, the proportion of online sales rose slightly to 26.6% in December 2021, from 26.3% in November.

Good for this sector but more sad news for the conventional high street which seems unable to catch a break.


We can take some comfort from the fact that UK retail sales are still one of the better performing areas of our economy. If we look back to December 2019 we see the index was at 99.7 as opposed to the 101.8 in December 2021. If we allow for the pandemic effect then we can estimate the underlying growth at 3% or better,

However,looking ahead there are problems. The first is the impact of my inflation theme which I expect to be chipping away at any growth in 2022. One way that will be in play is via the cost of living crisis which will hit harder in April when domestic energy bills look set to rise substantially and will cause some to consume less elsewhere. If we switch to incomes then in net terms they will be affected by the National Insurance rise due only a few days later. I was never much of a fan of it and now it looks an outright bad idea.

Let me finish with some especially sad news which is the death of Meatloaf. I am not sure that anyone has ever fitted more perfectly with the songs written for him. RIP and thank you.



Why can’t the ECB raise interest-rates for the Euro area?

Today has brought a reminder of our themes for 2021 and also a much longer running one. So let us start with the longer-running one.

(Bloomberg) Under current conditions and inflation forecasts, “an increase in interest rates is not expected in 2022” ECB Governing Council member Pablo Hernandez de Cos says in interview with Spanish television broadcaster TVE.

The European Central Bank or ECB has been hammering out that message for a while now. Indeed its President was on the case today as well.

PARIS, Jan 20 (Reuters) – Inflation in the euro zone will decrease gradually over the year as its main drivers, such as surging energy prices and supply bottlenecks, are expected to ease, European Central Bank (ECB) head Christine Lagarde told France Inter radio.

That is an interesting line of argument from someone who this time last year was telling us that inflation would average 1% in 2021 and 1.1% in 2022.How is that going? Next we got her policy prescription.

Asked on her policy to counter price pressures, Lagarde reiterated that the ECB did not need to act as boldly as the U.S. Federal Reserve because of a different economic situation.

In her next bit there is quite an admission of failure.

“The cycle of the economic recovery in the U.S. is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do,” she said, adding that inflation, too, was higher in the U.S.

We have received a lot of hype from her about the Euro area recovery but now we are getting some truth that it is well behnd the US. She does have a point about inflation which is running more than 2% higher in the US but she is still well above target. I also find it interesting that an interest-rate rise totaling around 1% ( should it happen) is described as acting “brutally” which is revealing I think.

Then she looked to double-down on the mess as so far all she has done islet a programme she kept expanding come to its conclusion in March.

“But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it,” she said.

Actually they have been demanding it in inflation terms for a while. Then we moved to what is in fact misleading. She has spotted that the benchmark bund yield went positive yesterday but is ignoring the fact it is following US yields and the US recovery she has already mentioned.

“If the yields rise again, this means that the fundamentals of the economy are improving”, Lagarde said.

So the theme here is of no interest-rate increases this year which feeds into my music  lyric inspired view of the ECB and interest-rates.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

On that road I was asked about a Britcoin yesterday and a Euro digital coin seems more immediately likely for when they want to take interest-rates even more negative.


This has come up with rather a different perspective on things this morning.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to keep the policy rate unchanged at 0.5 percent.

“Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March”, says Governor Øystein Olsen.

The bit that should echo in the Frankfurt Towers of the ECB is here.

Monetary policy is expansionary.

So if an interest-rate of 0.5% is expansionary what is one of -0,5%? Of course we have even had a -1% one for the banks. The critique continues.

 In the Committee’s assessment, the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level.

That is the exact opposite of what Christine Lagarde is trying to argue.


This morning produced a number which is one of the highest so far.

WIESBADEN – Producer prices for industrial products were 24.2% higher in December 2021 than in December 2020. As the Federal Statistical Office (Destatis) also reports, this was the strongest year-on-year increase since the survey began in 1949.

Indeed the monthly one was even worse.

Compared with November 2021, the commercial producer prices by 5.0%. In a month-on-month comparison, this was the strongest increase recorded to date.

So quite a surge which at first looks to be slightly odd as we have seen reports of lower oil prices in December.

The price trend for energy continues to be primarily responsible for the increase .

But then we note that other energy costs are included and the gas ones are eye-watering.

Energy prices in December 2021 were on average 69.0% higher than in the same month last year . Compared to November 2021, these prices increased by 15.7%. The largest influence on the year-on-year rate of change in energy was natural gas in distribution (+121.9%) and electricity (+74.3%).

There is an obvious inflation issue here. But as we have been observing with the fertiliser industry there is also an economic activity one as prices have at times gone so high that energy intensive businesses are made uneconomic.

Even without the energy factor we would still have double-digit rises.

Excluding energy, producer prices were 10.4% higher than in December 2020 (+0.7% compared to November 2021).

As we stand there are a whole raft of products with much higher prices.

Metals overall had the greatest impact on the year-on-year rate of change for intermediate goods, up 36.1%. Here the prices for pig iron, steel and ferroalloys increased by 54.4%. Non-ferrous metals and their semi-finished products cost a total of 24.5% more.

The price increases compared to the previous year were particularly high for secondary raw materials (+69.1%), packaging materials made of wood (+66.9%) and fertilizers and nitrogen compounds (+63.5%). 8% rose. Softwood lumber was 61.5% more expensive than in December 2020.


There are as ever contrary moves happening at the same time. For example some Euro area countries are reporting lower inflation rates. But if we look at France a lot of that is that energy companies have not been allowed to raise domestic energy prices by more than 4% in 2022. So there is a deferral going on and maybe a lumping of risk on the taxpayer. So you could argue that Euro area inflation is above 5.3% if energy prices were not being manipulated.

That then begs the question off when would the ECB raise interest-rates? After all whilst inflation has risen the HICP measure ignores this.

Rents and house prices in the EU have continued their steady increase in Q3 2021, going up by 1.2% and 9.2% respectively, compared with Q3 2020.

Let us remember that this has been a deliberate policy by the ECB of pumping up house prices to claim “wealth effects”. Or if you prefer the rich and especially the very rich get richer.It does nothing for the poor and in fact makes them worse off.

So we are left wondering what would make the ECB raise interest-rates? As we stand it looks even less likely than before. One consequence of this has been a weaker Euro. It has been nothing dramatic but the UK Pound has touched 1.20 this morning. Such moves may be reinforced by another impact of higher energy prices.

As a result, the euro area recorded a €1.5 bn deficit in trade in goods with the rest of the world in
November 2021, compared with a surplus of €25 bn in November 2020. The last time that euro area recorded a
deficit was in January 2014.



UK inflation surges to thirty-year highs creating a cost of living crisis

We are in a run of UK economic data and we can review this morning’s via the lens of Bloomberg.

U.K. inflation surprises, with a jump to the highest level in 30 years.

The “surprises” bit is rather curious considering it is the main economic issue right now as they demonstrate an inability to see the wood from the trees. Let us start our analysis by looking at this via the target of the Bank of England.

The Consumer Prices Index (CPI) rose by 5.4% in the 12 months to December 2021, up from 5.1% in November.

On a monthly basis, CPI increased by 0.5% in December 2021, compared with a rise of 0.3% in December 2020.

The first thing to note is that this is 3.4% over the 2% annual target that the Bank of England is supposed to aim at. No amount of “in the medium-term” weaseling will let them dodge that. Next comes that fact that the monthly rise reinforces this so there is no sign of slowing. Also on this measure this is the highest it has been in its life of a couple of decades or so.

What Drove It?

The first perspective is that this is being driven by goods rather than services.

The CPI all goods index annual rate is 6.9%, up from 6.5% last month…..The CPI all services index annual rate is 3.4%, up from 3.3% last month.

So there is an element of the supply chain crisis at work. We start to break that down here with the main risers.

Price rises in transport, food and non-alcoholic beverages, furniture and household goods, and housing and household services were the largest contributors to the monthly rate in December 2021.

We can stay with the Bank of England and its acolytes because they describe the category below as non-core, whilst for the rest of us it is vital.

The largest upward contribution to the change in the CPIH 12-month inflation rate came from food and non-alcoholic beverages, which increased the rate by 0.14 percentage points between November and December 2021.

Even the humble spud gets a mention.

Amongst the food groups, the largest contributions came from bread and cereals, meat, and vegetables, potatoes and other tubers, which each contributed 0.04 percentage points to the increase in the CPIH 12-month inflation rate.

Actually that list seems to cover most food! Also I did not realise the price of fish usually fell at the end of the year.

change from fish, where price falls in December 2020 were larger than they were in December 2021.

Next came a category driven no doubt by the supply chain problems.

Rising prices for furniture and household goods led to an increase of 0.06 percentage points in the overall CPIH 12-month inflation rate in December 2021. Prices rose 2.0% on the month, compared with a smaller rise of 0.9% a year earlier.

It was broad-based here.

The effect was spread fairly evenly across the spending groups within this division, most of which contributed 0.01 percentage points to the change, the exceptions being a slightly larger contribution to the change of 0.02 percentage points from major household appliances, including fittings and repairs, and a negligible contribution to change from tools and equipment for house and garden.

Have we gone off gardening a bit? I recall the lockdown phase when the garden centres saw a rush of demand.

Even getting dressed is rising in price these days.

Clothing and footwear also provided a large upward contribution (of 0.04 percentage points) to the change in the headline rate. Prices rose in December 2021 by 0.7%, which was larger than the rise in the previous year of 0.1%.

The Retail Prices Index

The RPI recorded a much stronger move than the above.

The all items RPI annual rate is 7.5%, up from 7.1% last month.

Indeed if we return to the perspective of the Bank of England its old targeted measure ( it aimed for 2.5% back then)went even higher.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 7.7%, up from 7.2% last month.

No wonder it got dropped!

Owner Occupied Housing

A major factor in the differences above is the cost if housing and in particular for owner-occupiers who represent more than 60% of us. The CPI inflation measure completely ignores it on the grounds that two decades have apparently not been enough time to include it. Whereas the RPI includes house prices via a depreciation component.This means that housing contributed some 0.5% monthly and also 0.5% to the depreciation component in December so there is difference here leading to a higher number. The higher number is being driven by this.

UK average house prices increased by 10.0% over the year to November 2021, up from 9.8% in October 2021.

The average UK house price was £271,000 in November 2021, which is £25,000 higher than this time last year.

House price rises have been pretty consistent through the pandemic and they are a cost for anyone purchasing property. As it is often the largest expenditure category it is a disgrace to ignore it as CPI does.

There is another mess here if I switch to our new inflation measure which is supposed to include all housing costs.

The OOH component annual rate is 2.2%, up from 2.1% last month.

Yes they have managed to get owner occupiers housing costs rising by a mere 2.2% at a time where even those living under a stone will know that prices have surged. They do this by assuming that those who own a property and therefore do not pay rent make a mythical payment.

Thus on that road the UK’s overheated housing market reduces the rate of inflation as the 5.4% of CPI becomes this/

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 4.8% in the 12 months to December 2021, up from 4.6% in the 12 months to November.

I would say that you could not make it up but of course they have.

The Trends

There was hope of a slowing of the pressure in the producer price numbers.

On the month, the rate of output inflation was 0.3% in December 2021, down from 1.0% in November 2021….The annual rate of output inflation decreased by 0.1 percentage points from 9.4% in November 2021 to 9.3% in December 2021; this is the first time the annual rate of output inflation has slowed since May 2020.

The move from the input numbers was even stronger.

On the month, the rate of input inflation was negative 0.2% in December 2021, down from 1.5% in November 2021 ; this is the first time the monthly rate has been negative since August 2020, and was mainly driven by crude oil and fuel with negative monthly rates of 7.9% and 11.2% respectively.

There is a catch to this though which is that the price of crude oil has been rising for far in January with March futures for Brent Crude over US $88 as I type this. So that dip looks temporary as we stand.


The main point here is that younger people are experiencing an inflationary burst of this size for the first time in their lives. The RPI has not been at these levels for thirty years and it is our only inflation measure which existed back then.So people well into their forties and nearly fifty will be experiencing it for the first time as an adult. We have had sectors of inflation at times such as house prices but this is the strongest broad based push.It will get worse in April when the energy price cap is lifted by around 50%. You do not need to take my word for that as the debate in government about what to do about it confirms that something seismic is on the way.

This matters because the present cost of living crisis will sadly mean that some will have to choose whether to heat or to eat. Indeed it is life’s essentials such as shelter, food and energy which are rising in price and making us worse off. Some of these issues can be dealt with by the Bank of England which has been asleep at the wheel.Some of them are caused by a deeper government malaise such as an energy policy which has made it more expensive when the UK has gas and coal resources but has chosen not to use them. I have nothing against renewables in their place but with both existing and likely technology a power grid cannot be based on them or you end up where we are now.

UK employment looks strong but real wages are struggling

After Friday’s strong numbers for UK economic growth or GDP the question for today is/was will it be backed up by the labour market. We can start positively on that front.

There were 184,000 more people in payrolled employment in December 2021 when compared with November 2021.

So strong growth which brings hopes that the November economic growth momentum rolled into December. This continues what has been a strong period for payrolled employment.

Early estimates for December 2021 indicate that the number of payrolled employees rose by 4.8% compared with December 2020, a rise of 1,340,000 employees; the number of payrolled employees was up by 1.4% since February 2020, a rise of 409,000.

However we need to be cautious about the precise numbers as November was revised lower.

UK payrolled employee growth for November 2021 compared with October 2021 has been revised from an increase of 257,000 reported in the last bulletin to an increase of 162,000; this revision is a result of incorporating additional real time information (RTI) submissions into the statistics, reducing the need for imputation – which takes place every publication; as early estimates have a higher level of imputation, revisions of this scale are within expectation.

The use of the word imputation always makes me nervous after the way imputed rents are used to miss measure housing inflation. But more fundamentally a revision of just under a hundred thousand is seen as normal.

The detail also looks at an area that in my experience hit trouble over the Christmas and New Year break.

The increase in payrolled employees between December 2020 and December 2021 was largest in the accommodation and food service activities sector (a rise of 312,000 employees) and smallest in the transportation and storage sector (a fall of 2,000).

My instagram feed on here has pictures of the 2 pubs in my locale which have closed and another shut before Christmas saying it could not get staff. But as it has yet to re-open I fear it too has bitten the dust.


The numbers above are backed up by the strength we have seen in vacancies as the Covid pandemic has developed.

The number of job vacancies in October to December 2021 rose to a new record of 1,247,000, an increase of 462,000 from the pre-coronavirus (COVID-19) pandemic level in January to March 2020.

Although the growth is now fading.

The quarterly rate of vacancy growth fell to 11.4% in October to December 2021, down from 29.7% last quarter, and follows consecutive falls from a peak of 43.4% in May to July 2021.


This too was positive as it fell further.

The unemployment rate decreased by 0.4 percentage points on the quarter to 4.1%, while the economic inactivity rate increased by 0.2 percentage points to 21.3%.

There is a concern that some may have simply shifted to the inactive category but after the economic shock seen these are extraordinary unemployment numbers. Back in the day for example an unemployment rate of 4.5% was considered as a type of “full employment”. Also remember when Bank of England Governor Mark Carney set an unemployment rate of 6.5% as an indicator for raising interest-rates before morphing into an unreliable boyfriend?


This is the first hiccup in the quantity numbers and it is disappointing that the official release tries to hide it away. The number of self-employed has fallen by around 800,000 over the course of the pandemic from a level of just over 5 million. So the trumpeted payroll gains above are in part a switch rather than an outright gain.

I think that we also get something of a clue here to the impressive unemployment rate above. Yes there have been gains but there have also been ch-ch-changes as David Bowie would put it. This means that a particular unemployment rate is not as good a signal as it used to be.

Hours Worked

Here is a situation which we have been using as a signal due to the metrics above being distorted by the various furlough schemes.

Total actual weekly hours worked decreased by 2.6 million hours compared with the previous three-month period, to 1.02 billion hours in September to November 2021.. It is still 33.5 million below pre-coronavirus levels (December 2019 to February 2020).

As you can see it has not responded to the improved economic situation shown by the GDP numbers. It is hard to square with the increased number of payrolled employees as hours per person have dropped.On the upside if we look at the GDP numbers it does suggest a productivity improvement.


The situation here does pose some questions. At least we finally seem to be escaping the problems created by the pandemic which distorted the numbers themselves.

The rate of annual pay growth for total pay was 4.2%, and the annual pay growth for regular pay was 3.8% in September to November 2021. Previous months’ strong growth rates were affected upwards by base and compositional effects. These temporary factors have largely worked their way out of the latest growth rates, but a small amount of base effect for certain sectors may still be present.

But the numbers themselves start to look rather thin as we consider the background of ever higher inflation numbers.

In real terms (adjusted for inflation), total pay and regular pay for September to November 2021 are showing minimal growth at 0.4% and 0.0%, respectively.

Even the official series is hinting at the problem and it under measures inflation via its use of imputed rents.Also we know that inflation was rising during this period meaning things were worse in November.

Single-month growth in real average weekly earnings for November 2021 fell on the year for the first time since July 2020, at negative 0.9% for total pay and negative 1.0% for regular pay.

Actually we can add to that as wage growth is slowing and was 3.5% over the year to November for total pay. We know that the Retail Price Index or RPI rose by 7.1% or just over double that rate. Thus using it real wages fell by 3.6% which has hints already of the 2010 fall in real wages which was also caused by an inflation surge and from which we have never really recovered.

We can give some ground and trim some of the RPI due to the disputed parts but that still leaves us with wages falling at an annual rate of 3%. Just in time for 2022 to have a cost of living squeeze.

The actual wages numbers are below.

Average weekly earnings were estimated at £588 for total pay, and £550 for regular pay in November 2021.


There are strong elements to the UK labour market numbers which revolve around payrolled employment, unemployment and vacancies. These fit with the strong GDP numbers from last Friday. But then the picture gets more complex as we factor in the decline of self-employment. This is hard to put in accurately as we have long noted they were probably working fewer hours but there has been a shift here. Next comes the slightly curious dip in hours worked which will need careful monitoring. As the numbers are unlikely to have much information on the self-employed at this stage we have more (payrolled) employees working less? This is curious and maybe the numbers are under pressure from the switch from office to home working for so many.

The numbers which are really worrying are the real wages ones. The average earnings numbers themselves show signs of singing along with Queen and David Bowie.

Pressure pressure pressure pressure pressure
Pressure pressure pressure pressure pressure
Pushing down on me
Pressing down on you

Then we need to factor in rising inflation as well which is set to get worse as we move into the spring. Will we see another repeat of the falls we saw in 2010 and 11?


China cuts interest-rates in response to its property crisis

This morning and indeed this week has opened with something against what is supposed to be the theme of 2021. That is one of expected higher interest-rates which is in play with the US ten-year yield at 1.79% and the equivalent for Germany edging towards leaving negative territory at -0.03%. This week’s podcast even has a question on whether we would see concerted interest-rate rises in a type of Plaza Accord? I point out that several would not be on board with it especially China and it has kindly already backed me up.

The interest rate cut by the People’s Bank of China  (PBOC) on Monday exceeded market expectations and puts it at odds with other major central banks like the Federal Reserve, which is preparing to hike interest rates.

The one-year medium-term lending facility (MLF) rate was lowered to 2.85 per cent from 2.95 per cent, and the seven-day reverse repurchase rate was reduced to 2.1 per cent from 2.2 per cent.  (Bloomberg)

So the Chinese have cut interest-rates and whilst it is only by 0.1% there is another significance in it.

China’s central bank cut its key interest rate for the first time in almost two years,

They last cut in April 2020 so are they back on the road to zero and beyond like us western capitalist imperialists?  Also we need to note this as monetary easing in China more often comes from increasing the quantity of money and credit.

The PBOC also injected more liquidity by offering 700 billion yuan (S$148.7 billion) of MLF loans, exceeding the 500 billion yuan maturing, and added 100 billion yuan with seven-day reverse repurchase agreements, more than the 10 billion yuan due.

Economic Growth

It was only on Friday we were looking at some strong Gross Domestic Product or GDP numbers from the UK so let us now look at China.Things start well.

According to preliminary estimates, the gross domestic product (GDP) was 114,367.0 billion yuan in 2021, an increase of 8.1 percent over the previous year at constant prices with the average two-year growth of 5.1 percent. ( National Bureau of Statistics)

But if the trend is your friend, well you can see for yourself.

 By quarter, the GDP for the first quarter went up by 18.3 percent year on year, up by 7.9 percent for the second quarter, 4.9 percent for the third quarter and 4.0 percent for the fourth quarter.

The annualised numbers are not as weak as some expected but in a year when China saw surging demand from the west for goods I guess they are already wondering about this year and where growth will come from?

The total value added of industrial enterprises above the designated size increased by 9.6 percent over the previous year, an average two-year growth of 6.1 percent.

Actually one might have expected more from mining via the energy crisis.

In terms of sectors, the value added of mining was up by 5.3 percent, that of manufacturing up by 9.8 percent and that of production and supply of electricity, thermal power, gas and water up by 11.4 percent.

At the end of 2021 it was certainly a case of King Coal.

The spectacular (and depressing) surge in Chinese coal production in Nov-Dec 2021, hitting an all-time high of 384 million tonnes last month. That has kept the lights in China on, at the expense of lots more CO2 ( Javier Blas)

However this was a type of ying and yang problem. Because whilst China mined more coal at home in response to the trade disputes with Australia it also had power shortages. There was a hint of that here.

#China‘s #electricity consumption fell 2.1% in Dec from a year ago to 723.4 bn kWh, but rising 0.2% from previous month, up 6.8% from the same period in 2019, said National Bureau of Statistics. ( @YuanTalks)

Retail Sales

This is an area where China is something of our doppelganger. It has more investment but wants to switch towards consumption in a reverse of the “rebalancing” so beloved of the former Bank of England Governor Baron King of Lothbury. Also it would shift it more towards the private-sector at a tome we have been heading the other way. This morning’s retail sales data gives us some hints here.

In 2021, the total retail sales of consumer goods reached 44,082.3 billion yuan, up by 12.5 percent over the previous year with the average two-year growth of 3.9 percent.

The story starts well as retail sales  growth in 2021 was higher than both production and GDP growth. But at the end of the year we see a possible trigger for the interest-rate cut.

In December, the total retail sales of consumer goods grew by 1.7 percent year on year, or down by 0.18 percent month on month.

If we look back it is now surprise that the monthly number was declining as the main Covid impacts washed out of the numbers. But it looked as if there was some stability around a year on year growth rate of 4% which has been more than halved by a monthly fall.Some of this will be the new Omicron lockdowns but there is something else in play too.


This is another issue affecting consumption. As 2021 progressed we looked at the efforts of the Chinese authorities to slow the housing and property boom. We know from western experience that is much easier said than done. The image I use for this sort of thing is a brick pulled by elastic, nothing seems to happen and then you get hit hard. We only have to go back to yesterday to see this from Bloomberg.

China’s crackdown on its real estate sector shows few signs of stopping as officials seek to reduce the risk of a U.S.-style financial crisis.
The big questions now are what will the world’s largest property market look like at the end of this process — and whether the Communist Party can avoid a hard landing of the economy.

Now we can move on only a day.

The crisis engulfing China’s property sector is impacting its biggest developer, with Country Garden’s shares and bonds hammered amid fears that a reportedly failed fundraising effort may be a harbinger of waning confidence.

China managed to shuffle things around in the case of Evergrande but now there is a new kid on the block. Actually in two ways as the decline of Evergrande saw Country Garden take the number one spot and secondly it has just failed to raise more funding. As the funding was small it has led to the question why cannot it raise even that? Today as Sunchartist points out means that future funding will be even harder.

Country Garden Holdings Co. Ltd. 3.125% 2025

-9 points

Holy mother of God


So in the end we see that as so often the monetary easing and interest-rate cut is to bail out the property sector and via that The Precious! The Precious! ( the banks). Remember it was only on December 6th we looked at this.

The relevant financial institutions uniformly implement the most favorable deposit reserve ratio, so that the total release of the RRR cut will be The long-term funding is about 1.2 trillion yuan.

1.2 trillion Yuan does not seem to go far these days does it? Six weeks or so. Thus we now apparently need another nudge to the system to relieve pressure on the property market and banks.

Thus the squeeze on the property sector seems to be something they cannot keep up as we see the reverse of the “wealth effects” that central bankers are usually so keen to tell us about. The fall in retail sales as the property crunch and the Omicron wave combine seem to have spooked things. The problem though is that as we discovered when the credit crunch hit all the liquidity in the world can be of little use if the real problem is a lack of solvency.


The UK economy and GDP surpass pre pandemic levels

In these troubled economic times it is always nice to have some better news to report. This morning that has been provided by the Office for National Statistics in the UK.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.9% in November 2021, compared with a 0.2% increase in October 2021 (revised from 0.1%).

We were expecting growth in November but not that strong a level and we were also expecting to get right back where we started from to quote Maxine Nightingale and indeed we did.

In November 2021, GDP is estimated to be above its pre-coronavirus (COVID-19) pandemic level (February 2020) for the first time, by 0.7%.

So we were ahead of the pre pandemic levels for the first time and if we were reporting a quarterly number it too would be strong.

Overall, GDP grew by 1.1% in the three months to November 2021, reflecting the strong performance of the services sector. Administrative and support service activities, human health and social work activities and transport and storage were the three largest contributors to the services sector growth.

As to the quarterly level we will produce in a month’s time it will require something -0.2% or better for December GDP.

If there are no other data revisions, quarterly GDP for Quarter 4 (Oct to Dec) 2021 will either reach or surpass its pre-coronavirus level (Quarter 4 2019), provided our monthly December 2021 estimate does not fall by more than 0.2%.

On an initial view that looks likely to be a no due to the impact on the hospitality industry of the Omicron variant but there will be a boost from the vaccine booster campaign plus the Test and Trace programme.

Before I move on there is the first rule of OBR Club in play. You do not need to take my word for it as here is the economics editor of the Financial Times Chris Giles.

UK economy was bigger than pre-pandemic level in November – much earlier than forecasters (like OBR, who were, if you remember, using the wrong data) expected.

Also the New Year 2021 forecasts submitted to the FT not only missed the bullseye they missed the target completely.

A survey of nearly 100 economists revealed that most of them expect the size of the economy not to return to pre-pandemic levels until the third quarter of 2022, despite the expectation of a strong consumer-led rebound from the rollout of the coronavirus vaccine.

What happened in November?

We can start with noting what is a return to more normal behaviour for the UK economy.

There was an increase in output in all sectors in November 2021, with services output the main driver of GDP growth, contributing 0.5 percentage points.

Which leads to services having recovered after a period when they were a laggard.

Services and construction are both 1.3% above their pre-coronavirus levels but production remains 2.6% below.


We can break this down because whilst the overall position has improved but that there have been a lot of changes in the structure.

Services output grew by 0.7% in November 2021……. At the services sub-sector level, 8 of the 14 have surpassed their pre-coronavirus levels, with the largest contributions from human health and social work activities, wholesale and retail trade, and arts, entertainment and recreation.

The leader of the growth pack is below.

Professional, scientific, and technical activities grew by 2.5% in November 2021 and was the main contributor to November’s growth in services . The main driver of the growth in this sector was architectural and engineering activities; technical testing and analysis, which grew by 6.2%, with anecdotal evidence of work brought forward from year end.

The next category looks to be a sign of a structural shift in the economy ( away from high street retail) which is ongoing.

Transport and storage grew by 3.8% and was the second largest contributor to November’s growth in services. The main drivers of this growth were postal and courier activities (growing by 8.0%) and warehousing and support activities for transportation (growing by 3.3%).

Another growth area is below.

Output in consumer-facing services grew by 0.8% in November 2021, mainly driven by a 1.4% increase in retail trade.

There has been a clear structural shift here.

Consumer-facing services are 5.0% below their pre-coronavirus levels (February 2020) in November 2021, while all other services are 2.9% above them.

On the other side of the coin here are some of the fallers.

Downward contributions to services growth in November 2021 included a 0.1% fall in real estate activities and a 0.3% fall in public administration and defence.


As we expected there was an upwards push from this area in November.

The NHS Test and Trace and COVID-19 vaccination programme had a positive 0.2 percentage point impact on gross domestic product (GDP) growth in November 2021, with NHS Test and Trace and vaccination programmes both increasing (by 2% and 40% respectively)

As I have written before I have much more faith in the value of the vaccine programme. However several of my friends have found the ability to test useful and are very enthusiastic about it. So I should up rate my view of it a bit.


We can start with some good news here too.

Production output increased by 1.0% in November 2021, with a mixed performance across the four sectors.

There was also a welcome hint of an improvement in the supply chain problems we have been seeing.

Manufacturing was the largest contributor to production growth in November 2021, increasing by 1.1%, with positive growth in 9 out of the 13 manufacturing sub-sectors…….After two months of contraction, output in the manufacture of motor vehicles increased by 7.8% with anecdotal evidence around improvements to the sourcing of parts, although other businesses in this industry noted a continued supply shortage.

But the overall picture remains problematic.

Production is 2.6% below its pre-coronavirus (COVID-19) pandemic level (February 2020), predominately driven by manufacturing, which is 2.2% below its pre-coronavirus level.

There is a curiousity here because there has been a debate about water quality in UK rivers and the like but the GDP stats tell us this.

Water supply and sewerage is the only production sub-sector above the pre-coronavirus level (7.6%).


There was apparently strong growth here too.

Construction output increased 3.5% in November 2021 following a fall of 1.7% in October 2021 (revised from a 1.8% fall). This is the largest monthly rise seen in construction output growth since March 2021 (4.5%). Construction output is now 1.3% above its pre-coronavirus (COVID-19) pandemic level.

However it leads to a different result as the sector has now grown.

As ever care is needed with this sector as there are wild swings and it the numbers had problems in more settled times.


There is the good news we were expecting which is exceeding pre pandemic levels of economic output and in fact by more than we thought. December will be tougher due to the travails of the hospitality industry but may get as much as a 0.4% boost(er) from the heath sector.

We can now move on to a point I regularly make which is the unreliability of the monthly numbers which the pandemic has exacerbated. Since the last monthly numbers March as been revised up by 0.7% and June lower by 0.5%. So whilst such revisions would not change the overall picture reductions of that sort of size could mean we have just regained the previous peak.

Also there looks to have been quite a shift in UK goods trade in 2021. Here is Thomas Sampson of the LSE.

Gap between EU and non-EU imports widened further in November EU imports down 30% relative to non-EU imports since start of 2021 Suggests TCA has had large negative effect on imports from EU.

Whereas exports have been affected much less.

On other hand, exports to EU and non-EU have performed similarly in 2021. Both around 10% below pre-Covid levels, but no compelling evidence that TCA has led to persistent reduction in exports to EU so far.

So there has also been a shift in the pattern of trade which is likely to be Brexit influenced. There will also be an effect as time passes from the higher energy prices we have been seeing.