France sees quite a drop in production and manufacturing in February

This morning has brought some news which has shaken up the consensus somewhat and it has come from France.

In February 2021, output plummeted again in the manufacturing industry (−4.6%, after +3.3%) as well as in the whole industry (−4.7%, after +3.2%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (−7.1%), as well as in the whole industry (−6.6%). ( Insee)

This was rather against the new theme of manufacturing recovery and coming to terms with new Covid-19 procedures. In particular it gave a very different picture to what the surveys had told us.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI) – a single-figure measure of developments in overall business conditions – posted 56.1 in February, up from 51.6 in January. The latest reading signalled the quickest improvement in the health of the French manufacturing sector for just over three years, and one that was marked overall.

Just to avoid any possible confusion they then rammed the subject home.

The strong reading for the headline index was partially
supported by a renewed expansion in output during
February. The rate of growth was the fastest since last July
and solid overall. Panel members often cited improved
demand conditions when explaining increases in production.

There is quite a journey between the rate of growth being reported as the fastest since last July and a 4.6% decline to say the least.

What is happening here?

If we switch back to the official report we see the following took place in February.

In February, output plunged in the manufacture of transport equipment (−11.4% after −3.0%). It decreased sharply in “other manufacturing” (−4.0% after +3.9%), in mining and quarrying, energy, water supply (−5.4% after +2.8%) and in the manufacture of machinery and equipment goods (−5.3% after +8.8%). It declined more modestly in the manufacture of food products and beverages (−2.0% after +1.6%). Conversely, it continued to expand in the manufacture of coke and refined petroleum after the reopening of several refineries that had been shut down in late 2020 (+11.5% after +6.8%).

If we start with the transport sector there is Peugeot and Citroen for cars but then I thought of Airbus as well. Here are its latest production plans.

The new average production rates for the A320 Family will now lead to a gradual increase in production from the current rate of 40 per month to 43 in Q3 and 45 in Q4 2021. This latest production plan represents a slower ramp up than the previously anticipated 47 aircraft per month from July.

The A220 monthly production rate will increase from four to five aircraft per month from the end of Q1 2021 as previously foreseen.

Widebody production is expected to remain stable at current levels, with monthly production rates of around five and two for the A350 and A330, respectively. This decision postpones a potential rate increase for the A350 to a later stage.

So good in that there is a planned increase but it is hard to avoid noticing that the rate of increase has been reduced and March does not seem to have helped here is we look at what it tweeted yesterday.

We wrapped up March 2021 with 28 new orders including 20 for the #A220-300. 72 aircraft were also delivered last month to 34 customers (four A220, 60 #A320 Family and eight #A350) bringing the total deliveries to 125 in Q1-2021.

If you deliver 72 but only sell 28 then there is an issue for the future. February saw 11 orders but also 92 cancellations.

It has been a rough year for this sector.

and in the manufacture of transport equipment (−25.7%), especially in the manufacture of other transport equipment (−33.6%).

The Overall Economy

Things get rather awkward as according to the consensus it is the manufacturing sector which is pulling the economy along. If we now move to the latest PMI survey we were told this.

Following a six-month sequence of contraction,
latest PMI data pointed to a stabilisation in activity
levels across the French private sector. The result
was predominantly supported by a sharp expansion
in manufacturing output, while the service sector
continued to act as a drag on the economy.

Apparently manufacturing output surged by even more than it did in February posting 59.3. Make of that what you will………

There was a bit of hope for manyfacturing from the household consumption data for February.

Household consumption expenditure on goods was stable in February (0,0% in volume* compared to January 2021). The increase in manufactured goods purchases (+3.4%) was offset by a drop in energy expenditure (–3.1%) and food consumption (–2.2%).

But whilst in the circumstances a flat reading for February might seem okay January was revised down to -4.9% so the year so far has been weak in this area too.

Fiscal Stimulus

This has been in play if we look at the deficit numbers.

The general government deficit for 2020 stands at €211.5 billion, accounting for 9.2% of gross domestic product (GDP), after 3.1% in 2019.

So on the surface we have quite an effort although maybe not as much as it first appears.

Expenditures increased by €73.6 billion, reaching 62.1% of GDP, after 55.4% in 2019.

A lot of the change was lower tax revenue with expenditure rises being a bit over a third of the move.

As to the European Union fiscal response it still seems to be on hold if this from the ECB’s Isabel Schnabel this morning is any guide.

it is crucial for Europe to give a strong fiscal response, in the form of the EU recovery fund amounting to €750 billion. Funds should be used efficiently to make Europe permanently more competitive, more digital and greener.

Perhaps it was described by Bonnie Tyler.

I was lost in France
And the day was just beginning

You might reasonably think the time to spend began a while ago.

Switching to debt we are told this.

General government debt stands at 115.7% of GDP at the end of 2020.

So right now it could easily be 120% if we allow for lower GDP and more borrowing. I suggest that with a wry smile as it was the level suggested by the Euro area as a crisis signal when Greece was rescued into an economic depression. Of course that was then and this is now as evidenced by a benchmark ten-year yield of -0.06% or France is being paid to borrow. As opposed to 3% plus during those Euro area crisis days.


Today’s production figures pose quite a question for the French economy in the opening quarter of the year. The Bank of France has suggested this.

Based on the assumption that, in average terms, the first half will continue to be marked by significant health restrictions, activity should remain stable over the first part of 2021. This is consistent with our economic surveys for the start of March.

I notice that they avoid a prediction for the opening quarter of 2021 and this morning’s numbers suggest we will see another decline and maybe a solid one. The lockdown issue is of course in play here but those who forecast that production would rise by 0.5% in February knew about that. On its own it takes at least 0.5% off the expected GDP number.

Looking ahead we can at least gain some cheer from the improvement in the vaccine programme which after stumbling has now picked up.

PARIS (Reuters) -More than 10 million people in France have now received a first shot of a COVID-19 vaccine, with the government’s target for that number reached a week ahead of schedule, Prime Minister Jean Castex said on Thursday.

So let us wish them bonne sante



Consumer Credit in the US both booms and falls…..

Last night brought something intriguing from the US economy so let us take a look at the state of play in its credit market.

In February, consumer credit increased at a seasonally adjusted annual rate of 7.9 percent. Revolving credit increased at an annual rate of 10.1 percent, while nonrevolving credit increased at an annual rate
of 7.3 percent.

So we have a number that looks like it belongs to the good old days pre pandemic although as Michael Goodwell points out there were not so many of these even then.

Total US consumer credit for February rose by $27.57 billion versus $2.8 billion estimate.

Highest gain since $29.225 billion in November 2017.

In terms of the two categories then what is called  non revolving credit grew by  US $19.5 billion and in case you are wondering what these are?

Includes motor vehicle loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations.

So mostly car loans and student loans. According to the Federal Reserve a car loan costs around 5% and the average size is around US $34,000. Revolving credit grew by US $8.1 billion presumably because it is more expensive as for example credit card debt costs 15-16%.

So US Consumer Credit is now US $4205 billion

What about Retail Sales?

The numbers above do not fit well with the numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2021, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $561.7 billion, a decrease of 3.0
percent (±0.5 percent) from the previous month, and 6.3 percent (±0.7 percent) above February 2020.

The general theme of a US economic recovery works with the annual comparison. But the monthly data does not because we see that people have borrowed to spend less. Maybe we will see a rise next month but in general you borrow to buy a car as you buy it.

Seasonal Adjustment

There is a possible swerve here because if we move to the actual numbers for US Consumer Credit they fell by US $3.8 billion. So the growth reported in the headlines relies on the seasonal adjustment at a time when very little is normal.

Federal Reserve Minutes

These were typical of the times and let us start with some good news.

The U.S. economic projection prepared by the staff for
the March FOMC meeting was considerably stronger
than the January forecast.

Part of this was driven by the President Biden fiscal stimulus plan.

Moreover, the size of the ARP enacted in March was considerably larger than what the staff had assumed in the January projection.

I think that the fiscal stimulus led to this which is the opposite of what you might expect after an upgrade to economic expectations. The emphasis is mine.

In addition, members agreed that it would be appropriate for the Federal Reserve to continue to increase its
holdings of Treasury securities by at least $80 billion per
month and agency mortgage-backed securities by at least
$40 billion per month until substantial further progress had been made toward the Committee’s maximumemployment and price-stability goals.

It is kind of them to confirm my long-running theme that policy easing is for now and that policy tightening is for the distant future and sometimes the far distant future. But then they switch to being misleading.

They judged that these asset purchases would help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses

The main flow of support is to the US government yet it apparently does not merit a mention! It does merit one in another form elsewhere.

The Treasury yield curve steepened over the intermeeting period, with 5- and 10-year yields rising markedly

If we return to the economic situation we find that the Fed has rather fumbled the ball. It indulged in some Open Mouth Operations in January suggesting it would reduce or taper its bond purchases in 2021. Now when the economic situation is ” considerably stronger” in its own words it is ploughing on. It is plainly afraid of what might happen to US bond yields should it stop buying. Also we get phases when the US Treasury market seems to be struggling which will worry the Fed.


According to President Biden here are the details of his plan.

Biden will make a $2 trillion accelerated investment, with a plan to deploy those resources over his first term, setting us on an irreversible course to meet the ambitious climate progress that science demands.

There are some interesting details here.

Auto Industry: Create 1 million new jobs in the American auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations,

The US has a large auto industry but if you are going to win the new “green” era can you also do this?

And he’ll ensure those workers have good-paying jobs with a choice to join a union. Between 1979 and 2018, American workers have increased their productivity by 70%, while their real wages have only grown by 12% — in large part due to the decline in union density. Biden will reverse this trend, by ensuring that auto workers have jobs with strong labor standards

There are some interesting wages numbers there which lead into an issue I look at regularly. Can we do anything about the real wages issue? If we stick with the US it does have some power which we see often deployed by the Department of Defense buying aircraft from say Boeing giving it not only business but also economies of scale. But will consumers be willing to pay more for US cars when there are cheaper foreign choices? It is not clear to me that there is a “magic wand” here. You can of course become protectionist to help this but if others respond in kind you lose exports.

Also everyone seems to be claiming that they will be the leaders in battery technology and what they call clean energy….

As a final point the bit on railways gives food for thought. This is partly due to where I live. You see Battersea is about to get the London Tube with two new stations where test trains are now being run. The irony is that after a couple of decades of dithering will they have arrived just in time for lower demand for rail travel?


The mood music here is good as the IMF has recently added to.

The United States is projected to return to end-of-2019 activity levels in the first half of 2021

They have revised expected economic growth up to 6.4% for 2021. Care is needed in terms of the detail as they have a poor track record but the theme here is of a US economy surging forwards. But there are problems as we look around because the US Federal Reserve is pumping up house prices at an annual rate of around 10% meaning we get policies like this.

Housing: Spur the construction of 1.5 million sustainable homes and housing units.

Maybe that will help at the margin.

Still I wish President Biden well in his efforts to raise real wages. After all people will need them to pay for the energy prices his policies will create.


The Reserve Bank of India has switched its focus to fiscal policy

Today’s economic diary began early as we look East to India.

The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent. ( Reserve Bank of India )

The first thing to note is that India has resisted at least to some extent the trend to ZIRP and interest-rates of 0% and in some cases below. I also note that for India the rate cuts began back at the opening of 2015 when the repo rate was cut from 8% to 7.75% so interest-rates have halved. There was one solitary rise in June 2018 which lasted until spring next year. That is a theme of the times where the rise totalling 0.25% got swamped by cuts of 4%. As to the Covid-19 pandemic then it has seen cuts of 1.15% which were completed late May last year.

The Economy

Last year like in so many places saw a fall of depression size.

The National Statistical Office (NSO) in its update on February 26, 2021 placed the contraction in real GDP at 8.0 per cent for 2020-21.

With India’s many poor this sends out an especially concerning issue as we recall the impact on them of the demonetisation issue in late 2016. For those unaware 500 and 1000 Rupee notes which were some 86% of the cash in circulation were withdrawn and then replaced.

The RBI is optimistic for this year based on two main reasons.

Public investment in key infrastructure sectors is a force multiplier with historically proven ability to revive the broader economy by directly enhancing capital stock and productivity, and by attracting private investment. The focus of the Union Budget 2021-22 on investment-led measures with increased allocations for capital expenditure; the expanded production-linked incentives (PLI) scheme; and rising capacity utilisation (from 63.3 per cent in Q2:2020-21 to 66.6 per cent in Q3:2020-21) will reinforce the process of economic revival.

That is like something from the textbooks I studied back in the day as we find ourselves returning to talk of multipliers. Next comes business confidence.

In fact, firms engaged in manufacturing, services and infrastructure sector polled by the Reserve Bank in March 2021 are optimistic about a pick-up in demand and expansion of business activity into financial year 2021-22.

The combination leads them to forecast this.

Taking these factors into consideration, the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1; 8.3 per cent in Q2; 5.4 per cent in Q3; and 6.2 per cent in Q4.

There is a bit of a bipolar addition to it all as we have the good.

 Prospects for 2021-22 have strengthened with the progress of the vaccination programme.

But then the much less sure.

The recent surge in infections has, however, imparted greater uncertainty to the outlook and needs to be closely watched, especially as localised and regional lockdowns could dampen the recent improvement in demand conditions and delay the return of normalcy.

The International Monetary Fund did produce some updates on India yesterday and it was more upbeat than the RBI as it forecast growth of 12.5% this year. Actually if we look at their webcast they seem to be even more optimistic.

So, in the case of India, we have a pretty small change. It’s 1 percentage increase for growth for 2021. This came in with high frequency………..Just to add that the current forecast that we have already takes a fairly conservative view on the sequential growth for the Indian economy for this for this year.


I know it is rather unfashionable in central banking circles to worry about inflation ( unless you are trying to get more of it) but with its large number of poor food inflation in particular is a big issue in India. We see if we look at the numbers one way of policy being described as “accomodative”

While headline inflation at 5.0 per cent in February 2021 remains within the tolerance band, some underlying constituents are testing the upper tolerance level.

So the repo rate is below inflation but as you can see below forecasts for it.

Taking into consideration all these factors, the projection for CPI inflation has been revised to 5.0 per cent in Q4:2020-21; 5.2 per cent in Q1:2021-22; 5.2 per cent in Q2; 4.4 per cent in Q3; and 5.1 per cent in Q4, with risks broadly balanced.

It is also above target although within the wider band.

 On March 31, 2021, the Government retained the inflation target at 4 per cent with the lower and upper tolerance levels of 2 per cent and 6 per cent, respectively, for the next five years (April 2021-March 2026)

The good news from the inflation data is that it is not being led by food inflation which is at 4.25%. As ever there is wide variation with oils and fats at 20.8% but those with a sweet tooth would have been pleased to see a 0.7% drop in sugar and confectionery. The whole sector is 45.9% of the index which gives a clue to its significance.

Onion prices have been mostly helpful recently.

These steps, along with fresh arrivals, led to onion prices
moving into deflation during November 2020-January
2021. Onion prices picked up again in February
2021, however, due to drop in arrivals on account of
unseasonal rainfall in January 2021 in Maharashtra.  ( RBI)

The last bit comes with a reminder that many food prices are under the control of the weather rather than monetary policy.


This has weakened so far today by one Rupee versus the US Dollar to 74.5 as I type this. That is in line with the broad trend which involves the Rupee slip-sliding away over time although annual comparisons are positive right now because pandemic fears pushed it to 77 last spring.


So far today I have looked at conventional views of monetary policy but these days central banks have moved into the fiscal sphere as well. According to the Economic Times of India borrowing has been as below.

NEW DELHI: The government will borrow Rs 12.05 lakh crore from the market in 2021-22, lower than the Rs 12.80 lakh crore estimated for the current financial year……..The Budget has pegged fiscal deficit at 6.8 per cent for the next fiscal, down from 9.5 per cent of the GDP in the current financial year.

The RBI will do its bit to help with this.

Under the programme, the RBI will commit upfront to a specific amount of open market purchases of government securities with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions……..For Q1 of 2021-22, therefore, it has been decided to announce a G-SAP of ₹1 lakh crore.

Investments Eh?

In addition, the extension of Held-to-Maturity (HTM) dispensation opens up space for investments of more than ₹4.0 lakh crore.

Time for some Orwellian doublespeak too.

While laying out the liquidity management strategy for 2021-22, let me unequivocally state that the Reserve Bank’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof.

If it is going to be “governed by fundamentals” why are you buying so much and I think we know what “orderly evolution” means! The present ten-year yield is close to 6%.

Meanwhile as we note the economic contraction we see that the response has also been to sing along with “Money Money Money” by Abba.

Reflecting the surplus liquidity, reserve money rose by 14.2 per cent(YoY) as on March 26, 2021 driven by currency demand, while money supply (M3) grew by 11.8 per cent (YoY) (as on March 26), with bank credit growth at 5.6 per cent (YoY) (as on March 26).


Italy has revised its unemployment rate up by 1% and youth unemployment by 2%

It is time for us to take a look at Italy again and see what has happened to the honeymoon period for its new Prime Minister Mario Draghi? With the rate of turnover of Prime Ministers in Italy, which approaches that of managers in the English football premiership, it was unlikely to last long. It also comes with two contexts of which the first is that many will now doubt wish he was still running the European Central Bank. The second is the way that central bankers and politicians have become interchangeable with him ascending to running Italy as the former French Finance Minister Christine Lagarde took over the ECB. If we look further afield we see more of this in the way that the former head of the US Federal Reserve Janet Yellen is now US Treasury Secretary. Believe it or not some still talk of central bank “independence” which only exists in their minds.

There is a difference though in that in general as head of the ECB Mario Draghi gave orders and they happened. Even “Whatever it Takes”. But running Italy is a different kettle of fish as in some areas he would be in more control in his previous job.


This morning has brought a sign of a big issue at hand and there have been some large ch-ch-changes.

In February 2021 the number of employed persons were substantially stable, whereas a slight decline was
recorded for both inactive and unemployed people……..In the last month, the drop of unemployed people (-0.3%, -9 thousand) concerned men and under50; for
women and over50 a slight increase was registered. The unemployment rate declined to 10.2% (-0.1 p.p.)
and the youth rate to 31.6% (-1.2 p.p.).

The emphasis is mine and it is not because expectations missed by an extraordinary distance even by recent standards. It is because we were previously told this.

The unemployment rate rose to 9.0% (+0.2 p.p.) and the youth rate to 29.7% (+0.3 p.p.).

Those were for December and  we see that a 0.1% decline has suddenly become a 1.2% rise! What has happened?

From 1 January 2021, the new Labour Force survey started, which transposes Regulation (EU)
2019/1700. As reported in detail in the methodological note, the time series of the aggregates disclosed in
this press release have been back-recalculated on a provisional basis, for the period January 2004 –
December 2020.

So we see that they have raised the reported unemployment rate by 1% or so and the youth unemployment rate by around 2%.

If we now move forwards on the basis of the new survey we can see this as the pattern.

In the period December 2020-February 2021, with respect to the previous quarter (September-November
2020), employment dropped (-1.2%, -277 thousand) for both genders……..In the last three months, an increase was registered in the number of unemployed persons (+1.0%, +25 thousand) as well as for inactive people aged 15-64 years (+1.3%, +183 thousand).

So we are left with the view that employment has been declining again. This is reinforced by the annual employment comparison.

Compared to February 2020, employment showed a sharp fall both in terms of figures (-4.1%, -945
thousand) and rate (-2.2 percentage points).
On a yearly basis, the drop of employed people was accompanied by a growth of unemployed persons
(+0.9%, +21 thousand) and a substantial rise of inactive people aged 15-64 (+5.4%, +717 thousand).

As you can see a signal of trouble has been the inactivity level. Regular readers will be aware that I have been reporting on the failure of unemployment measures to tell us anything much at all due to the way the furlough schemes have impacted on their definitions.

But there is more and it brings back our “Girlfriend In a Coma” theme because employment in Italy has been falling since the summer of 2019 and thus quite some time before the pandemic. It peaked around 23.4 million on the three-monthly average and had already declined by at least 200,000 pre pandemic.

If we switch to earnings then the latest official survey was released last week.

Mean annual earnings in 2018 is 35,062 euros and goes up to 36,610 euros in Industry (except Construction), while it reaches the minimum value of 31,967 in Construction sector……The Gender pay gap (GPG), calculated as the difference between the m gross hourly earnings of men
and women expressed as a percentage of those of men, is equal to 6.2%…..mean hourly earnings for temporary employees is 29.7% less than those of
permanent employees. The negative gap rises to 31.1% for part-timers compared to

Economic Outlook

The official surveys tell us this.

In March 2021, the consumer confidence index decreased, passing from 101.4 to 100.9……….As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) made progress from 93.3 to 93.9.

The surveys relate to 2010 being 100 which gives one context and another is that both are around ten points below where they were back in 2019. Also the official business survey for manufacturing is presumably picking up the same as the Markit IHS PMI one.

March data highlighted a further acceleration of Italy’s
manufacturing recovery. Both output and new orders
registered the steepest expansions for more than three years, with panellists reporting surging sales due to improved client demand. Subsequently, firms continued to take on additional staff to cope with workloads, while business confidence remained robust.

So good news for manufacturing although it means other areas must be struggling.

Much of the outlook depends on the vaccine programme according to Governor Visco of the Bank of Italy.

“The main instrument we bave at the
moment is neither monetary nor fiscal,
it is vaccinations,” he said.

This led to an awkward issue.

The G20 meeting this week comes as
the pace of the US’s vaccinati on push
has increased compared with the EU’s.
Economists have forecast that the US
will grow faster than European economies this year.
Visco said progress in the EU’s vacdnation programme meant that the bloc
would not be left behind by the US.

Plainly it has been left behind and added to this Italy decided on its own type of strategy.

Still lost in the EU vaccine supplies/exports drama is the fact that Italy has decided to give away a massive amount of its available shots to the least vulnerable parts of its population……..Government data released yesterday shows 88% of people aged between 70-79 are still waiting for their first vaccine jab, as are 43% of over 80s. Over 80% of Italy’s Covid-19 deaths have occurred in the over 70s. ( Miles Johnson of the Financial Times)


As you can see the Covid-19 pandemic is one issue for Mario Draghi but there are plenty of others from the long-running “Girlfriend In a Coma” theme. An example of the latter was the fall in the population by around 400,000 in 2020. There is also the issue of the Italian banks and the Financial Times has today noted one of the issues are play here.

The Banca d’Italia said the share of the nation’s authorities bonds owned by international traders fell from 25.9 to 23.6 per cent within the first six months of final yr, whereas Italian banks elevated their share from 16.9 to 18.6 per cent………….The debt of Italian banks to home authorities debt hit  €712bn in August, up greater than 9 per cent from February and dipping barely since then.

Ironically the driving forces here have as an architect one Mario Draghi.

Banking laws deal with sovereign debt as a risk-free funding for banks, permitting them to allocate zero capital towards such property. By borrowing cash from the ECB as cheaply as minus 1 per cent, there’s a straightforward “carry commerce” for banks to make cash from shopping for authorities bonds.

They have done well to buy more with the ECB buting so many and here we can move onto something where Mario left a little present for himself. All that QE means that the debt issue has faded as presently it is so cheap as the chart from @BernhardWarner below shows.



Canada has quite a house price problem

Let us take a trip over the Atlantic to Canada where we see that a familiar issue is bubbling up again.

Bank of Canada Governor Tiff Macklem said he’s seeing “worrying” signs in Canada’s hot housing market, in which households are taking on increasing levels of debt to chase rising prices. ( Financial Post)

Perhaps the housing market is soaring because someone has done this?

The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week. ( March 10)

You could quite easily read the next bit as Governor Macklem saying to house buyers that he has their back. He has set policy to make borrowing as cheap and he can and also he has done his best to keep the quantity of credit flowing.

In the Bank’s January projection, this does not happen until into 2023. To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway.  As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required.

We can look into this further because the Bank of Canada calculates a variable mortgage interest-rate. This came into the pandemic at 2.9% and now is at a record low of 1.42%. I raise this because the interview seems to have somehow missed it.

House Prices

These seem to have shot up for no reason at all.

The central bank had largely stayed quiet on the housing market until February, when Macklem said it was showing signs of “excessive exuberance” as national real estate prices jumped 25 per cent from the year before.

That is still continuing.

“Since then, the housing market has continued to run strong across a variety of dimensions; price increases have continued at a pretty high rate,” Macklem said in an interview with the Financial Post on Wednesday.

Indeed he is allowed to get away with a blame game

While the state of the market can be explained to some extent by a fundamental shift in demands, there are other factors, like speculation, at play, the governor said.

Considering his own behaviour and actions the bit below is breath-taking.

“What gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in. There certainly are some signs of extrapolative expectations,” Macklem said.

“If Canadians are basing their decisions on the kinds of price increases that we’ve seen recently are going to continue indefinitely, that would be a mistake. They’re not sustainable.”

So people just turned up and started speculating all of their own accord in a pandemic?

Debt Issues

Apparently according to Governor Macklem the fact that people are borrowing seems to be like the economic equivalent of an out of body experience.

“If you look at the household indebtedness, you are seeing, on average, the loan-to-value ratios are getting higher, particularly in the uninsured space. That suggests that Canadians are stretching and that is worrying.”

If we take a look we can see a driving force here and the good Governor only needs to look at his own website. It calculates an effective household interest-rate which includes mortgages but also other borrowing. It has dropped from 3.7% to 2.57%. I suggest the Governor needs to launch an immediate investigation into who has done this?

If we look for the debt data we see a sign that they have been listening to Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

They have switched from the Bank of Canada to Canada Statistics so we can see that as of last September residential mortgage borrowing was growing at an annual rate of 5.7%. From September to January it grew from Canadian $ 1.61 trillion to $1.66 trillion or about 2.7%.

Here is the view of Canada Statistics.

By the end of January, households had added $7.0 billion in overall mortgage debt compared with the end of 2020—a year-over-year rise of 7.1%. Sales of existing homes remained strong into January, with overall sales volumes up 35.2% from the previous year. Non-mortgage debt declined 1.6% by the end of January, compared with the same month of the previous year, and has yet to reach the levels of 2019, after a year of moderation, including a notable decline in the first half of 2020.

Overall, the total credit liabilities of households reached $2,453.2 billion by the end of January. Real estate secured debt, composed of both mortgage debt and home equity lines of credit, stood at $1,925.7 billion.

House Prices

Early last month the New York Times took a look.

Instead, of course, Canada is talking again about whether most of the country is in a soon-to-burst real estate bubble. In Vancouver last month, the benchmark price for detached homes rose by 13.7 percent compared with a year earlier, reaching 1.6 million Canadian dollars. In the Toronto area, the average selling price for detached homes rose by 23.1 percent over the same time period, and a composite price that includes all kinds of housing topped 1 million dollars.

This was put another way by CBC yesterday.

In December, the Canadian Real Estate Association warned that the average house price in Canada is expected to hit $620,000 throughout 2021. By this month, the CREA reported that home sales in February were up 39.2 per cent compared with a year ago, and the average price had hit $678,091, up 25 per cent from a year earlier.


This is part of what has become familiar for central bankers but Governor Macklem has taken it to something of an extreme. In some ways I am a little surprised that he did not try to claim “Wealth Effects” from the house price rises. If we step back for a moment he was responding to this from a Bank of Canada survey.

In particular, focus group participants voiced concerns about the costs of urban housing:

  • rising far beyond the 2 percent inflation target
  • growing faster than wages

These growing costs, they said, make it much harder for people to become homeowners. As a result, they felt this widens the divide between the rich and the poor, which negatively affects social cohesion.

This was right at the top of the survey. He is in something of a trap because he has promised to continue easy monetary policy until 2023. The Bank of Canada has recently stopped some of its emergency programmes but if we return to the Financial Post raising interest-rates is considered like this.

Tal reiterated Macklem’s view.

“The housing market is one part of the economy,” he said. “As a society, we have never been so sensitive to the risk of higher interest rates…. Every small increase in the interest rate can have a significant impact on the housing market and therefore, (Macklem) would like to see the market slow down before we have to raise interest rates.”

It did not seem to bother him when he cut interest-rates!

Also let me add in an additional factor here which comes to some extent from fiscal policy and the furlough schemes.

Canadians recorded a similar amount of savings in 2020 as in the previous seven years combined. Some of this savings made its way into currency and deposits of Canadian households, with growth in this asset nearing $160.0 billion over the first three quarters of the year. The savings rate for the fourth quarter stood at 12.7%, while the savings rate for 2020 was 15.1%. ( Canada Statistics)

Perhaps some of these savings are finding their way into the housing market as well.

Let me finish by wishing you all a Happy Easter.

Measuring UK GDP for Health and Education has turned out to be quite a hornet’s nest

This morning has brought us up to date on the latest official view on the UK economy and in line with the current rather glorious weather we have some good news.

GDP is estimated to have increased by 1.3% in Quarter 4 (Oct to Dec) 2020, an upwards revision of 0.3 percentage points.

In fact the second half of last year was better too meaning we came into 2021 with a bit more of a push.

and in Quarter 3 (July to Sept) is estimated to have grown by 16.9%, an upwards revision of 0.8 percentage points.

This meant that the annual comparison at the end of 2020 was improved.

The level of GDP in the UK is now 7.3% below its Quarter 4 2019 level, revised from the previous estimate of 7.8%.

Although 2020 itself improved by much less than you might think because we have now decided the initial impact of the pandemic was more severe than previously estimated.

Over the year as a whole, GDP contracted by 9.8% in 2020, slightly revised from the first estimate of a 9.9% decline………GDP in Quarter 2 (Apr to June 2020) is estimated to have fallen 19.5%, a downwards revision of 0.5 percentage points,

As we stand though some perspective can also be gained from this.

This is the largest annual fall in UK GDP on record (Figure 2), while historical figures from the Bank of England’s A millennium of macroeconomic data for the UK point to this being the largest annual contraction since “The Great Frost” of 1709.

Although as Ed Conway of Sky News points out the numbers are very tight.

Fall in 2020 GDP revised down from 9.9% to 9.8%. Another revision like that (which is quite plausible) and 2020 will “only” have been the worst year since 1921 (-9.7%), rather than the worst year since 1709 (-13.4%).

So in fact in the former instance well within the margin of error and likely to be revised away in time.

Education and Health

There have been more ch-ch-changes here since my criticism of last August 12th. Regular readers may recall that the inflation measure in these areas called the GDP Deflator got as high as 32.7%. I note that the end of 2020 seems to be shifting.

The implied deflator fell by 0.5% in Quarter 4 2020, which primarily reflects movements in the implied price change of government consumption which fell by a revised 3.1% – this was revised from the previous estimate of a 1.2% increase because of revisions to final consumption expenditure in health in the fourth quarter.

So they are rethinking their approach to measuring the health sector which is odd as I recall a supporter telling me it was “world beating.” The move from 1.2% to -3.1% is extraordinary and looks to me like they realise they have got things wrong and are trying to move the goalposts a bit at a time and hope nobody spots it.

The attempted denial below is a confession as “cost weighted” is an input rather than an output.

It should be noted that our health volume estimates are based on cost-weighted activity indicators, and therefore were less affected by revisions in the fourth quarter compared with the current price measure of health expenditure.

Education Education Education

This famous phrase from Prime Minister Tony Blair had a rough 2020 and apparently it just got even rougher.

Following the alignment of our methods, education output for Quarter 2 2020 in volume terms is now estimated to have fallen 36.7% and gross domestic product (GDP) 19.5%, a downwards revision of 13.6 and 0.5 percentage points respectively from the previous estimate.

I thought the numbers for this sector were extraordinary at the time but it turns out I did not know ( nearly) the half of it. Perhaps they were too frightened to release this at the time!

The cause has been the switch from school to online teaching.

This involves gathering data on changes in the number of students in different educational settings (themselves intended as proxies for the number of hours of teaching provision) and weighting them together according to their relative unit costs of production. Increases in the number of students in a relatively high (low) weight activity consequently increase measured education output by a relatively large (small) amount.

This is a very difficult area and for all the claims of following international standards the UK has been an outlier here. The problem starts because in much education ( and health) there is no price because it is free. So they have ended  up trying to measure outputs just as there have been sea-changes.

The whole situation gets more awkward as I note it is only quantity that is measure meaning there is no quality or productivity measure.

This means that our estimates of education output are based on information about school provision by teachers – encompassing the range of services which teachers provide, including education and childcare services – rather than the quality of learning students receive. Our estimates of the volume of education output are therefore designed to capture the quantity of teacher pupil hours provided, and do not respond to changes in teaching methods.

It is hard not to think about the debate on “the productivity puzzle” in the UK as we observe a sector where it is not measured at all.

All the changes along the way have meant that the equivalent of kryptonite has appeared as we note a recorded discontinuity.

Switching between using teacher labour input in the first lockdown and using information about remote learning materials in the autumn term can be seen to have introduced a discontinuity in our remote learning FTE estimate.

How do you discount between school and online earning? I do not know either. So if you do please let me know.

The consequence of this is that today has brought some big changes as for example the impact of GDP in the second quarter last year has been revised down from £13 billion to £10.7 billion.  This follows on as it contributes to our faster growth as it catches up to only being £400 million or do down at the end of the year. But thereby as it is lower has not contributed to the improvement in the annual comparison.


The situation here continues on its new path and if anything pocked up.

the households’ saving ratio rose to 16.1% in Quarter 4 compared with 14.3% seen in the previous quarter…….With a widened margin between household expenditure and income, households increased their gross savings by £6.8 billion an increase of 12.8% from Quarter 3.

Or if you want it in another form.

The household saving ratio rose sharply in 2020 in response to reduced expenditure, reaching a record high of 16.3% this year, compared with 6.8% in 2019. The previous record of 14.0% was seen in 1992.


So whilst we have some good news today we also have some food for thought. Of we stay with the good news then so far the data for the quarter ending today looks better than suggested by many and perhaps quite a bit better than the -4% suggested by the Bank of England. We should see quite a second quarter as the lockdown is reduced although some of it will be simply be some catching-up.

Next comes another installment on the issues with using GDP. Since the 12th of August last year we have been following the way that the UK’s attempt to use an output measure rather than the input measure more usually used for health and education has led to some extraordinary contortions which would tax even the most skilled limbo dancer. He or she has been busy limboing this time around too.

If we step back we see that it is the gap between theory and practice here yet again. In theory you want to measure output but in these sectors how do you do it? On a personal level I have mulled it since my knee operation as I believe Dr. Thompson did a very good job for me but it only gets recorded as an ACL repair rather than a return to running and so on or any form of quality measure. So any output measure is going to be flawed. As seems to happen more often than it should a statistics Black Swan appeared and left our statisticians to deal with paradigm shifts just at the wrong time.

Meanwhile I also noted more support for the challenge to the Office for Statistics Regulation about the 4.8% growth seen in the official average earnings numbers. I know this is from a little before but…..

The 4.7% fall in mixed income was the first decrease in self-employed income since 1997 (which was a contraction of 9.3%).



banks will be banks as Archegos Capital shows one more time

One of the features of a banking crisis is that there is so much that is familiar each time. Even if I may be permitted to leap into the future the inevitable enquiry that tells us it will not be allowed to happen again. Also it is quite rare that a blow up is alone as bankers are pack animals and copycats and if they see business elsewhere will rush to mimic iy So right no now doubt teams are being dispatched to make sure that other banks keep out of the news headlines if they can. As the story unfolds were see another issue which is a blow up like Archegos puts others in the firing line as it liquidiates

Archegos Capital

Let us open with a note of the scale of the issue here.

Losses that triggered the liquidation of positions approaching $30 billion in value bring to light complicated financial instruments used by European investors that are effectively banned in the U.S. but could still have spillover effects domestically. ( MarketWatch )

Okay so even in these times US $30 billion is a chunky sum to try and liquidate in one go. I also note the use of “effectively banned in the US”. It sounds as if they are not quite so sure.

There is an issue with the trades in that they were a type of over the counter or OTC product where you deal direct with someone. This poses issues as what if one side cannot pay? Anyway below is a description of hat was taking place. CFDs are Contracts for Differences.

CFDs are a kind of derivative instrument that allow traders to place a directional bet on the price of a security without actually buying or selling the underlying instrument, Julius de Kempenaer, senior technical analyst at, explained to MarketWatch via email.

“It works much like a futures contract on, say, an index. The buyer and the seller agree on the price of a transaction sometime in the future. At the end-date, or earlier if they decide to unwind the position beforehand, only the difference between the actual and the agreed price will be settled.”

“If the price went up the seller pays the buyer the difference, and vice versa,” the analyst wrote. ( MarketWatch )

The issue here is the differences between this and a futures contract, It will have standardised rules and as well will have clearers that in the event of a failure will protect trades in the market. Who you trade with does not matter whereas in the case of a CFD it matters a lot.

That gets added to when we note this.

The analyst explained that CFDs are leveraged bets, where investors can use borrowed money at a fraction of the cost of the underlying asset, “typically around 10-20% depending on the volatility of the underlying market.”

“This means that you can get a position worth $1 million and only need $200,000 in margin. That allows building big positions very rapidly without a lot of market impact,” he said. ( MarketWatch)

Hang on as that is not quite right. You can build a big position without having to put up much cash as in this instance you are geared five times. So five times the profit if times are good but also five times the losses if things go the other way. Returning to market impact that is a risk transferred to the counterparty. Depending on how they hedge whether it be by stock purchases or options you could have a rather large market impact if they hedge a position with a delta of five. If you have followed the story of GameStop you will know that this sort of thing was supposed to increase market impact as those dealing with geared customers ( in this instance options) went and hedged the position. As an aside GameStop is at US $181 so something if still going on there.

There is another risk here and we get this if someone has geared five times but is at that limit with that counterparty. If they then go elsewhere there is an obvious issue.

On top of the leverage, sources reported that Hwang may have been able to obscure his investment fund’s exposures by using multiple banks to execute the firm’s trades. ( MarketWatch )

Reuters are keen to emphasise the leverage here.

Archegos had assets of around $10 billion but held positions worth more than $50 billion, according to the source, who declined to be identified.

The Banks

The issue here is that they are on the other side of the gearing so have five times the risk. Also their risk is with only one counterparty unlike on an exchange where risks are pooled and managed via the clearing system. On the other side they get commission and take a spread from the CFD trading. So it starts well on the income side and should a fund trade actively then the income rises and those responsible look towards big bonuses. But at the same time risk is rising in two ways. The first is that to get that income the bank is taken an ever bigger risk with one counterparty. The next as it continues to grow is that the stock or equity invested in can get swamped too. We see that from what happened to one.

The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news.  ( Wall Street Journal)

There are all sorts of issues here because we have a case of the Grand Old Duke of York as the share price for Viacom is US $45 as opposed to the peak of US $101 last week. So we see the liquidation effort tumbling the price. But as the share has been as low as US $11.92 in the last year what is a fair price? Archegos has pumped and dumped the price leaving some investors with Blood Sweat and Tears.

What goes up must come down
Spinning Wheel got to go ’round
Talkin’ ’bout your troubles
It’s a cryin’ sin
Ride a painted pony
Let the Spinning Wheel spin
You got no money, you got no home
Spinning Wheel all alone

So in a sense Viacom is a sort of victim although it has at times been a beneficiary. Oh what a tangled web and all that….


Due to the way the financial week opens the first news came from Japan.

Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results. The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26.

Next up came an organisation that seems to have set Deutsche Bank as its role model. Credit Suisse got itself into rather a mess with Greensill Capital and the losses this time around seem to be mounting.


This brings in another feature where we get the news like it has notches on a rope as @Rifleamp points out.

Last friday, they said 2 billion loss. Monday 4 billion. Now 7 billion. What is wrong? Market is up everyday.

Someone may also have come up with a “cunning plan” for hedging the loss. I have seen one or two of these in my time. What happens then is a situation that you think cannot get any worse does. For example I once saw a US $250,000 loss converted into a US $1 million one via that route.

There will be a litany of smaller casualties of this particular war as well.



There is a familiar list of issues every time. Let me start with one I have not mention so far is that one should always get nervous when an investor or hedge fund gets lauded. Obviously some are better than others but that is not the only reason for out performance. Then there is the issue of trading in size with one counterparty where apparently both are winning. Next we get leverage where you get a position you cannot afford but also by that definition can lose more than you can afford. Unlike with buying a call option where there is a stop loss provided by the option price.

Switching to the banks they have the issue of balancing income ( fees and commission) with risk. This so often hits the issue that when someone is encouraged to get more income the risk goes up to. That is fine until it isn’t when it is usually too late.

So we are left wondering how many share prices have been pumped up by this sort of leverage? Then how many will go wrong? That matters because whilst these schemes inflate bankers bonuses when they go right, when they go wrong in scale they tend to end up with the taxpayer footing the bill.


The amount of cash around continues to rise contrary to what we keep being told

Over the weekend I spotted a rather curious claim circulating via Bloomberg.

What happens if the Internet goes dark and we can’t use our phones or cards? We may have a solution to one of the biggest nightmares of an increasingly cashless world

This is a rather odd thing to say and as I shall explain it is simply not true. Actually we then find old that for world they really meant Sweden.

In doing so, the startup may have figured out how to help societies function without cash, even “if the lights go out,” which Sweden’s central bank Governor Stefan Ingves once mused would require a return to bank notes and coins………..The Bank for International Settlements has dubbed Sweden the world’s most cashless society. The virtual disappearance of cash in Sweden has spurred a fever of innovation within digital payments, including by the Riksbank itself. Along with China, Sweden leads major economies in developing a central bank digital currency. ( Bloomberg)

I am pointing this out because we have in fact seen quite a surge in the amount of cash in terms of notes and coins being around. Even the ECB pointed this out last week and the emphasis is theirs.

The growth in circulation of euro banknotes has been strong since they were introduced, even when considering the ratio of euro banknotes to GDP, or to the broad monetary aggregate M3.[3] This growth in circulation has intensified during the coronavirus (COVID-19) pandemic. At the end of 2020, the value of euro banknotes in circulation amounted to €1,435 billion, increasing by 11% from €1,293 billion in 2019 (Chart 1). Due to the COVID-19 pandemic, this annual growth rate was exceptionally high when compared with previous years (5% annual growth in the past 10 years on average). The only time the growth rate was higher was during the months following the Lehman Brothers collapse in September 2008.

As you can see reality is somewhat different to what we are regularly told and the ECB puts it like this.

A phenomenon referred to as the “paradox of banknotes”[1] has been observed in the euro area; in recent years, the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased.

This morning the Bank of England has confirmed the data for the UK and you have to drill though the numbers for it. But when you do you see that cash in circulation rose by 1.4% in February and is up some 13.1% on a year ago. Actually the last 3 months have an annualised growth rate of 18.1% So we see that reality is very different to what we keep being told. The amount of cash is £93.76 billion and since the end of April last year when it was £83 billion it has been on quite a tear. Also whilst there had been some plateauing for a couple of years or so the credit crunch has seen quite a rise overall too as the amount was £58.17 billion at the beginning of 2011.

That cashless world has rather lost its lustre hasn’t it?


Looking at the numbers above there looks like there is a correlation between QE and the rise in the amount of cash in circulation. In economics many things correlate without a real link but in this case it has reduced the price of holding cash in terms of interest-rates especially if we add in the associated Bank Rate cuts. So there is some logic to it.

Bank Deposits

We find that what is the nearest thing to cash has been surging as well according to the Bank of England.

Households’ flows into deposit-like accounts remained strong in February. The net flow of deposits remained strong at £17.1 billion, compared to the monthly average of £15.0 billion since March 2020.

This has been complicated by what has been happening at the state bank if I may put it like that but the picture remains the same.

There was a small withdrawal (£1.4 billion) from National Savings and Investment (NS&I) accounts in February, which are not captured within household deposits but can act as a substitute for them. The combined flow into both deposits and NS&I accounts in February (£15.8 billion) was similar to January but remained well above the monthly average of £5.6 billion in the six months to February 2020.

This is a reflection of the larger amount of savings we have been reporting although the returns are somewhat thin.

The effective interest rate paid on individuals’ new time deposits with banks fell to 0.34%, a new series low since the series began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.48%, respectively. The rate on the stock of sight deposits remains the lowest since the series began.

I wish they would stop meddling with the series as it inhibits longer-term comparisons. But as it stands it gives us a two-way swing. Because 0.34% is not much but then these days the concept of interest has been given a good shove lower and if we look to Europe we see much of it with negative ones although that still has mostly been kept away from the ordinary depositor.

Consumer Credit

This by contrast has had a simply dreadful pandemic and the beat goes on.

Individuals continued making net repayments of consumer credit in February (£1.2 billion). This is a slightly smaller net repayment than the average of £1.8 billion since March 2020 (Chart 2). As a result of the further repayment, the annual growth rate fell to -9.9%, a new series low since it began in 1994.

This is something that will have caused indigestion at the Bank of England. Policy had previously been to pump this up via the Funding for Lending and Term Funding Schemes getting the total up to around £220 billion as opposed to the £197.3 billion we now see. As to the detail there is this.

Within consumer credit, the weakness on the month reflected net repayments on credit cards (£0.9 billion) with some repayments of other forms of consumer credit (£0.3 billion). The annual growth rates of both components fell further, to -21.0% and -4.8%, respectively. Both represent new series lows.

As you can see the main mover has been credit card debt presumably because of the cost of it.

Rates on new personal loans to individuals fell to 5.16% and remain low compared to an interest rate of 7.03% in January 2020. The cost of credit card borrowing rose by 15 basis points to 18.18% in February, the highest since May 2020.


We keep being told that cash is dead but that is because the media only look at one part of it. The situation is in fact much more complex with in fact in terms of amounts if not being king it is like this.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, ooh
(Dirty cash, dirty cash) ( Stevie V)

Something else has been on the rise and it is due to the work of the present Bank of England Governor Andrew Bailey when he was in charge of the Financial Conduct. The overdraft interest-rate is now 33% as opposed to the below 20% it was when he tried to reduce it. Yes you did read that right.

Speaking of interest-rates there is one set that seems to be following the changes we have been noting in bond yields and it will concern the Bank of England.

The ‘effective’ rate – the actual interest rates paid – on newly drawn mortgages rose 6 basis points to 1.91% in February. That is slightly higher than the rate in January 2020 (1.85%), and compares with a series low of 1.72% in August 2020. The rate on the outstanding stock of mortgages remained at series low (2.09%)


UK Retail Sales suggest the UK economy and GDP are recovering

Who would have thought that we would find ourselves in a situation where we deliberately limit one of the strengths of the UK economy. But this is of course what we have done to retail sales with the lockdowns. We can add into that a situation where we have put a brake on other economies as well via our propensity to import the goods in our retail sector.

However we see that in fact February brought an improvement on January.

The value of sales was 2.2% higher, and the quantity bought was up 2.1% when compared with January 2021.

The main drivers of this are seen below.

The strongest growth was in both department stores and household goods stores of 16.2% and 16.1% respectively.

It seems that the lockdown has got more than a few looking to do some home improvements, both indoors and in the garden.

Anecdotal evidence from household goods stores suggested that the monthly growth of 16.1% in February 2021 could be attributed to the purchase of DIY products as consumers continue to improve their homes during lockdown. Retailers also noted that there was evidence of consumers buying outdoor products earlier in preparation for the easing of lockdown restrictions particularly the ability to meet friends and relatives in private gardens as the weather improves.

Also it seems that luck is in play because if the rules let you open you can sell things which if you only sold them would mean you were closed.

The increase in department stores comes predominantly from budget department stores that were able to keep their physical stores open during the restrictions because of selling a mix of food and other essential items.

That is a bit awkward for those who are forced to close and I remember Wales imposing strict rules for this but coming under fire for it.

On the other side of the coin we see a pattern repeating.

Clothing retailers reported the largest fall, of 50.4%, in sales volumes when compared with February 2020 before the coronavirus pandemic; automotive fuel stores also reported a large annual decline of 26.5% as travel restrictions continued to hit sales in that sector.

The clothing move reminded me of this from yesterday’s inflation report.

The largest downward contribution (of 0.13 percentage points) to the change in the CPIH 12-month inflation rate came from clothing and footwear. Prices, overall, fell by 1.5% between January and February 2021, compared with a rise of 0.9% between the same two months a year ago. Prices usually rise between these two months but price movements have not followed standard seasonal patterns since the beginning of the coronavirus (COVID-19) pandemic.

There are a whole load of issues here because with so many places shut who was surveyed for the prices. Were they imputed?

for the February 2021 price collection, we collected a weighted total of 81.1% of comparable coverage collected before the first lockdown (excluding unavailable items).

Also the weights for the clothing sector should have been far lower than normal because of the collapse in volumes seen here. Were they?

I am a little unsure how you can have increased discounting with so many places shut?

The movement reflects increased discounting, whereas normally this falls following the end of the sales period in December and January. The downward contribution came from a wide range of women’s clothing and footwear, with much smaller movements in other categories.

More Perspective

Whilst the monthly picture was improved this was on the back of an 8.2% fall in January as the latest lockdown hit hard. So here is the last three months.

In the three months to February 2021, retail sales volume fell by 6.3% when compared with the previous three months, with strong declines in both clothing stores and other non-food stores.

But as already noted this was heavily influenced by January so let us compare February to last year which was pre-pandemic.

Estimates for both the amount spent and the quantity bought were lower in February 2021 than a year ago. The amount spent decreased by 4.4% and the quantity bought decreased by 3.7% compared with the same month a year earlier.

Compared to last time around this is very different and we can see this by looking at the index where 2018=100. Last March it fell to 97.4 on its way to 79.7 in April. Whereas this time around it fell to 96.9 in January and rose to 99 in February. Care is needed as the Office for National Statistics clings to its seasonal adjustment like a drowning man clings to a float even when we are in a period where their own statements point out this is a very different phase. But the falls are of a different order of magnitude.

Switching now to GDP we look like we are going to see more good news. This is because the dip in January retail sales is correcting ( 2.1% rise in February) which seems logical to continue this month. So the fall seems likely to be smaller and on the evidence so far much smaller than many thought.

Online Sales

These have continued their upwards trajectory.

The monthly picture in February 2021 was one of growth, with total online sales increasing by 4.6% when compared with January 2021……….The proportion of online retail increased to a record level in February 2021 reaching 36.1%, up from 35.2% in January 2021 and was far higher than the 20.0% in February 2020, reflecting the impact the pandemic has had on consumer behaviours for online retailing.

Purchasing Manager’s Index

Earlier this week we also received some better news for the UK economy.

The headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index registered 56.6 in March, up sharply from 49.6 in February and above the crucial 50.0 no-change mark for the first time in three months. The latest reading signalled a strong rate of private sector output growth and the speed of recovery was the fastest since August 2020. For the first time since the start of
the pandemic, service sector activity (index at 56.8) outpaced manufacturing production growth (55.6).

So it looks as though the UK economy pretty much trod water in February and then picked up quite a bit in March. Continuing today’s theme we also got an implicit thumbs up for retail sales.

Service providers noted forward bookings from domestic consumers, while some manufacturers cited advanced orders from hospitality businesses and high-street retailers.

As ever I counsel taking this as a broad brush as refining the reading to decimal points is beyond the pale.


These are very odd times to say the least because we have in effect deliberately reduced the economy. But the news from the UK economy suggests we will be picking up quickly. That would correlate well with the success of the vaccine programme. In terms of GDP then retail sales look set to be quite a swing factor. In annual terms they will be quite a downer for January, less so for February and then quite a surge in March followed by what Stevie Wonder would call Masterblaster Jammin in April.

So we have some hope and let me finish the week with something I spotted on the Have I Got News for You twitter feed.

Bank of England to release new £50 note in June, after mistakenly assuming anyone in the UK will ever use cash again.

I know it is comedy but in fact cash in circulation is up by 13% over the past year,

Euro area money supply growth has fed government spending and house prices

A feature of these times is that thing’s are often not what they seem. After all the Bank for International Settlements is holding a conference on innovation today but the speakers are bureaucrats like Christine Lagarde of the ECB and Mark Carney formerly of the Bank of England. Still we can stay in the international scene because before we even get to Euro area money supply let us take a moment to note that it is not the only source of what Abba sang about.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

If they are right then it is about to be very sunny at the offices of the International Monetary Fund.

Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion! Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery. ( IMF Head Kristalina Georgieva )

That would be quite an increase on the present level of US $293 billion. One can easily see how this would be attractive to politicians as it is money created out of nothing they can then spend. Thus I can see how Kristalina is excited and even more so as I note it inflates her status. However I note the reception on Twitter was much less warm especially from Argentinians noting the IMF role in their problems. Of course that returns us to Christine Lagarde again as I recall her assuring us that the IMF programme in Argentina was going well.

Switching back to the Euro I note that it is 31% of the SDR so in equivalent terms its share of the increase would be around 170 billion Euros.


Just over a year ago this new variant of QE was announced by the European Central Bank. This was because it was in danger of breaking issuer limits in places like Germany and the Netherlands. Let me explain this via the ECB Blog just written on the subject and may I remind you that each announcement was accompanied by an “up to”

We launched the PEPP on 18 March 2020, with an initial envelope of €750 billion, as a targeted, temporary and proportionate measure in response to a public health emergency that was unprecedented in recent history.

That seemed a lot of the time but well that did not last long…..

In June 2020 we expanded the PEPP envelope by €600 billion, to a total of €1,350 billion, and announced that we expected purchases to run for at least another year.

Actually that did not either.

To underpin our commitment, in December 2020 the Governing Council decided to expand the PEPP envelope by an additional €500 billion, to a new total of €1,850 billion – more than 15% of pre-pandemic euro area GDP.

This is a lesson in how up to 750 billion has ended up at just over 900 billion so far and looks on course to double that. I say that with the confidence of someone noting that no central bank has ever done less and indeed none have ever reversed course. The US Federal Reserve did have a slight trim but then added far more. From the point of view of the money supply we see that over 900 billion Euros have been added over the past year and that this is in addition to the existing QE programme or PSPP.

Also let me call out its second sentence.

It stabilised financial markets by preventing the market turbulence in the spring of last year from morphing into a full-blown financial meltdown with devastating consequences for the people of Europe.

The reality is that it was the FX Swaps programme of the US Federal Reserve which did that. The PEPP allowed governments and with other efforts large corporates to borrow even more cheaply and in fact frequently be paid to do so.

As to my “More!More! More! ” point it is kind of Christine Lagared to reinforce it albeit unwittingly.

Based on this joint assessment, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

Money Supply

Such measures leave us on this road.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

The slight hint of slowing may well simply be that February is a relatively short month. These are record levels and a further point is that with M1 at just under 10.5 trillion it is on a grand scale. Also let me slay a dragon which frequently appears. Last month there was an extra 10 billion of cash money making the growth rate 12.5% and the total 1.39 trillion Euros. So it is far from dead.

The narrow money push feeds straight into broad money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 11.3 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.3 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (down from 0.9 percentage point).

The net effect was a slight slowing from 12.5% to 12.3% and whilst it in itself means little change there is something significant in the breakdown. The theory is that narroe money growth is supposed to stimulate a response from bank lending but as you can see M3-M2 is not much and in fact has slowed. This is significant as it breaks one of the monetary transmission chains or rather if you prefer the “high powered money” of the textbooks has been replaced by a limp lettuce. Unlike Fleetwood Mac they have broken the chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain)


Let me know spin this around and look at it from a different perspective which is both good and bad. From an article by Patricia Kowsman in the Wall Street Journal.

LISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

The good bit is an ordinary person benefiting as it is usually government’s and big business. I hope there are plenty of others.

The catch is that in theory broad money should be expanding due to much more lending as we see a narrow money push and negative interest-rates. But whilst credit in the Euro area is now over 20 trillion Euros ( 20.4) I see that of the February increase 66 billion is for governments and only 36 billion is for the private-sector. Or if you prefer annual growth rates of 22.9% and 5.1%.

So if we take the 5.1% number that may be why inflation is disappointing the hyper- inflationistas. Although there is one area where we see rampant inflation if we stay with the example of Portugal.

In 2020, the House Price Index (HPI) increased 8.4% when compared with the previous year. This rate of change was 1.2 percentage points (pp) lower than in 2019. From 2019 to 2020, the prices of existing dwellings (8.7%) increased at a higher rate than new dwellings (7.4%).
In the 4th quarter of 2020, the HPI year-on-year rate of change was 8.6%, 1.5 pp more when compared to the previous quarter. ( INE)