About notayesmanseconomics

I am an independent economist who studied at the London School of Economics. My speciality was (and remains) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and knowledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years. I have also worked in Tokyo Japan again in the derivatives sphere and the Japanese "lost decade" made me think about what I would do if it spread,which is very relevant now. My name is Shaun Richards and apart from the analysis on here you may have heard me on Share Radio where I regularly analyse economic events and developments, Bloomberg Radio or more recently on BBC Radio 4's Money Box. I also write economics reports for groups such as Woodford Investment Management. I can be contacted via the contact details on this website or on twitter via @notayesmansecon.

The Swedish monetary experiment faces the decline of both cash and house prices

It is time to take a look again at the policies of the world’s oldest central bank as we remain in the Baltic region. From the Riksbank of Sweden.

In 1668, the Riksdag, Sweden’s parliament, decided to found Riksens Ständers Bank (the Estates of the Realm Bank), which in 1867 received the name Sveriges Riksbank. The Riksbank is thus the world’s oldest central bank. In 2018, the Riksbank will celebrate its 350th anniversary.

Yesterday brought news which will cheer the Swedish government as it received something of a windfall from this creation mostly due to a revaluation of its gold reserves. It has some 125.7 tonnes much of which is in London ( or not if you believe the conspiracy theories).

The General Council proposes that SEK 2.3 billion be transferred to the Treasury.

However the last bit of the 350 years has seen the Riksbank break new ground proving that you can teach an old dog new tricks.

In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent.

This was announced last week and technically applies from tomorrow although of course it is a case of what might be called masterly inaction. We see that the world of negative interest-rates not only arrived in Sweden but continues and in fact if we look deeper we see that it has an interest-rate of -1.25% on bank reserves which is the lowest to be found anywhere.

Also we see that the Riksbank surged into the world of Quantitative Easing bond buying.

The Riksbank’s net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon
payments will be reinvested in the bond portfolio.

As you can see policy is now set to maintain the stock of QE with any maturing bonds reinvested. So our old dog learnt two new tricks which does provide food for thought when we note a 350 year history after all why was it not necessary before. Also as we look ahead we see signs of a third new trick.

Economic outlook

This seems set fair.

Indicators for the fourth quarter suggest that GDP growth
picked up at the end of last year………Monthly indicators for demand and output also indicate that GDP growth at the end of last year was stronger 
than normal. Both industrial and services production have increased………. 
The model forecasts indicate GDP growth of 3.9 per cent during the fourth quarter, compared with the previous quarter and
calculated at an annual rate.

So economic growth has been good as this would be added to this.

 GDP increased 2.9 percent, working-day adjusted and compared to the third quarter of 2016.

If we look back we see that GDP is around 16% larger than at the pre credit crunch peak of the last quarter of 2007. Looking ahead the Riksbank expects economic growth of the order of 3% annualised at the opening of 2018 with growth slowing a little in subsequent years.

Employment

As you might expect with strong economic growth seen the situation here has been positive too.

Last year, the number of redundancy notices reported to
Arbetsförmedlingen (the Swedish public employment agency) was at the lowest level since 2007 and the level of 
newly reported vacant positions was very high . The strong demand meant that both the employment 
rate and the labour force participation rate reached historically high levels.

Yet in spite of other signs of what has been in the past come under the category of overheating ( resource allocation is at its highest ever) we seem something very familiar.

 Estimates indicate that the definitive outcome for short‐term wages in the economy as a whole for the full year 2017 will, on average, increase by 2.5 per cent, 
which entails a downward revision compared with the forecast in December.

These days wage growth nearly everywhere we look in what we consider to be the first world is around 2% and seems to have completely disconnected itself from many factors which used to drive it. Is this another side effect of the QE era? In Sweden we see that businesses seem reluctant to pay more.

the preliminary rate of wage increase is significantly higher in the public sector than in the business sector. 
recent outcomes indicate that wage increases at the start of 2018 will also be lower than in the Riksbank’s 
assessment from December.

Unemployment

The overall rate of unemployment has fallen less than you might think due to this.

The large increase in the labour force led to
unemployment.

Which is further explained here as we wonder what “weaker connection to the labour market” means.

 Unemployment has not fallen further among those born abroad 
partly because the inflow of labour in this group has been large, 
but also primarily because people born outside Europe, on average,
 have a lower education and a weaker connection to the labour market.

So in reality there are two labour markets here where the Swedish born one is at what was considered to be full employment. Bringing them both together gives us this for January.

Smoothed and seasonally adjusted data shows an increase in the employment rate and a decrease in the unemployment rate, which was 6.5 percent.

Inflation

This morning’s update from Sweden Statistics told us this.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.6 percent in January 2018, down from 1.7 percent in December 2017. The HICP decreased by 0.9 percent from December to January.

The inflation number above is using the same methodology as in Europe and the UK and as you can see there is not a lot of inflation for an “overheating” economy. The Swedish measure called CPIF fell from 1.9% to 1.7% leading some to seemingly lose contact with reality.

Is Sweden’s inflation shortfall – short-term core trend below 1% versus 2% target – a serious concern? ( SRSV )

Not for Swedish consumers nor for workers as we note that in the past at least Sweden can have inflation.

The CPI for January 2018 was 322.51 (1980=100).

Those who follow my specialist interest in inflation measurement may have a wry smile at the cause of the fall.

 In January 2018, the basket effect contributed -0.2 percentage point to the monthly change in the CPI, which is close to the historical average.

Comment

There is a lot to consider here and the first is a familiar one of how will the Riksbank exit from its negative interest-rates and QE? It was promising interest-rate rises later this year but we have seen those before and the dip in the inflation rate puts it between a rock and a hard place which is before we get to this. From Bloomberg last month

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

This may be a response to new rules that have been imposed in recent times on interest-only mortgages in response to this reported by Reuters.

Currently, around 70 percent of Swedish home owners have interest-only mortgages, meaning they do not pay off any of the principal of the loan they have borrowed.

Care is needed with the house price data as the official numbers show rises continuing but as 2018 progresses it too should be picking up ch-ch-changes. This leaves the Riksbank in something of a pickle of its own making as many of its members from the last 350 years would recognise but not apparently those in charge now. Especially as the economic growth in the credit crunch era does not look quite so good when we note the population has increased by around 9%.

Meanwhile we have yet another fail for economics 101 as I note this from Bloomberg earlier.

Last year, the amount of cash in circulation in Sweden dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record.

With negative interest-rates one might have expected cash demand to rise but it has not returning me to me theme as yet untested that around 1.5% will be the crucial level. Still if nothing else Kenneth Rogoff will be delighted at the sight of Swedes waging their own war on cash. What could go wrong?

Advertisements

What is happening to the banking sector in Latvia?

This morning has brought yet more news on what appears to be a growing issue which is the banking sector of Latvia. It has been around a decade since Latvia made the economic news as a type of test case for a joint IMF ( International Monetary Fund) and European Union bailout which was caused by this.

Despite the bailout, Latvia suffered the largest decline in economic output of anywhere in the world between 2007 and 2009 – a 24% drop in GDP. Unemployment quadrupled; and that doesn’t include the estimated one in 10 of the workforce who left the country to look for a better life somewhere else. ( The Guardian).

Since then (2014) Latvia abandoned its own currency the Lat and adopted the Euro although it had pegged its currency to the Euro.

This morning has seen the ECB ( European Central Bank) take action.

The Financial and Capital Markets Commission (FCMC) has imposed a moratorium on ABLV Bank, following a request by the European Central Bank (ECB). This means that temporarily, and until further notice, a prohibition of all payments by ABLV Bank on its financial liabilities has been imposed, and is now in effect.

It is that word “temporarily” again as we note that until further notice was sufficient on its own. So how did we get here?

In recent days, there has been a sharp deterioration of the bank’s financial position. This follows an announcement on 13 February by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network to propose a measure naming ABLV bank an institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act.

ABLV has been accused by the US of being linked to North Korea.  As to the scale of the issue there is this.

ABLV Bank has been supervised by the ECB since November 2014, by virtue of the bank being one of the three largest credit institutions in Latvia, as measured by total assets

The ECB may be forgiven for perhaps wishing it was not the supervisor here. Those who hold the ABLV bank bonds totalling US $95 million that mature on Thursday may be forgiven some nervousness too.

 

Meanwhile as you might expect ABLV itself has found credit hard to come by meaning that the central bank is providing assistance. From the Baltic Times.

“Based on the request from ABLV Bank and a supporting opinion from the Finance and Capital Market Commission, the Bank of Latvia has decided to grant a EUR 97.5 million loan to ABLV Bank against a reliable pledge of highly liquid securities,” the Bank of Latvia said, stressing that the value of the pledge was much higher that the loan amount.

The last bit may be regretted if you think about it and more seems to be on the way.

As reported, ABLV Bank has decided to pledge some securities, asking in return a loan of up to EUR 480 million from the Bank of Latvia, order to stabilize its situation.

Bank of Latvia

This has its own problems as this headline from it yesterday implies.

Latvijas Banka continues its business as usual.

Why announce this and especially on a Sunday? Well it has its own problems.

 during the absence of the Governor, his duties are performed by the Deputy Governor.

Why is he absent? Bloomberg explains.

Latvian authorities prepared to explain the detention of ECB Governing Council member Ilmars Rimsevics by the anti-graft bureau in a weekend of activity culminating in the early-Monday imposition of a payment moratorium on the nation’s third-largest bank.

Officials including Prime Minister Maris Kucinskis and Finance Minister Dana Reizniece-Ozola called on Rimsevics, 52, to recuse himself from his duties as the Baltic state’s anti-corruption office pursued an investigation against him.

This is awkward to say the least as he is unable to lead the rescue effort for ABLV because not only is he under investigation he has been detained, The whole issue of money laundering and corruption is a live one in Latvia partly due to its close connections with Russia. A bit like the Cypriot banking sector we see that one needs to take great care when accepting Russian private money and to this we can add apparent involvement with North Korea which is unlikely to improve anything.

What about the economy?

The latest Bank of Latvia Monthly Development report brought good news.

GDP growth has been very strong in 2017, exceeding forecasts. In the second quarter, GDP grew by 1.4% quarter-on-quarter (according to seasonally adjusted data) but in the third quarter of 2017 – by 1.5%. Thus, annual GDP growth reached 5.8% in the third quarter of 2017 (according to seasonally adjusted data – 6.2%).

Thus there was quite a surge helped by various factors such as the better economic performance of the Euro area and in particular the other Baltic states. Also there was this giving a helping hand.

As Russia’s economic growth was stabilising, Latvia’s exports of goods to Russia grew by 36.6% year-on-year in the first ten months of 2017. The expansion of exports was largely supported by an increase in exports of beverages, machinery and electrical equipment and
pharmaceutical products.

Overheating?

I have given the good side of the coin but here is the ying to that yang.

In the first ten months of 2017, imports of goods grew by 16.0% year-on-year……..The value of imported goods rises at a more rapid pace than that of exported goods, thus
increasing the foreign trade deficit in goods.

Although in a small country particular care is needed with the data.

a significant contribution to the increase in imports of goods came from purchasing Bombardier CS300 aircrafts. Earlier in 2017, the JSC Air Baltic Corporation purchased
seven aircrafts and by the end of 2017 it had eight aircrafts of this kind.

Also there was this.

According to the data provided by real estate enterprises, price hikes of standard apartments displayed no trend toward acceleration in August and September, and the annual rate of increase remained close to 10%.

Prices moving like that make us look at the credit figures where we see this.

In six months of 2017, i.e. from May to October, new loans to households exceeded the respective indicator of 2016 by 7.0%, including loans for house purchase and consumer
credits which increased by 9.5% and 8.8% respectively. Meanwhile, new loans to nonfinancial corporations posted a 15.3% decrease year-on-year.

So plenty of credit for housing but in a familiar development none for business. Also UK readers especially will wonder about housing affordability when we see what could be described as a Latvian Help To Buy.

Moreover, the state aid programme for families with children to purchase housing, implemented by the JSC “Attīstības finanšu institūcija Altum”, will be expanded from 2018. It is envisaged that about 1 000 young specialists up to 35 years of age could receive aid
for house purchase in 2018.

Comment

Our trip to the Baltics and Latvia gives us food for thought. An economy growing strongly and expected to put up another strong (4.1%) performance this year. The unemployment rate has fallen to 7% although employment has remained pretty stable as we wonder if some joined the migration abroad that has been seen.

In 2000, Latvia’s population stood at 2.38 million. At the start of this year, it was 1.95 million. No other country has had a more precipitous fall in population — 18.2 percent according to U.N. statistics. ( Politico.eu )

Maybe now some will return although the current banking crisis will hardly provide much encouragement and nor will house prices. One thing we do know is that in banking crises the truth is invariably the first casualty.

 

Some in the UK have experienced higher and not lower interest-rates

Today has brought more news on a long running theme of this website. This is the way that ever easier monetary policy has made home ownership increasingly unaffordable for the young. Here is the Institute for Fiscal Studies on the subject and the emphasis is theirs.

Today’s young adults are significantly less likely to own a home at a given age than those born only five or ten years earlier. At the age of 27, those born in the late 1980s had a homeownership rate of 25%, compared with 33% for those born five years earlier (in the early 1980s) and 43% for those born ten years earlier (in the late 1970s).

So in generational terms this has gone 43%, 33% and now 25% with about as clear a trend as you could see. The driving force of this will be very familiar to regular readers but it seems that more than a few elsewhere need to be reminded of it.

The key reason for the decline is the sharp rise in house prices relative to incomes. Mean house prices were 152% higher in 2015–16 than in 1995–96 after adjusting for inflation. By contrast, the real net family incomes of those aged 25–34 grew by only 22% over the same twenty years. As a result, the average (median) ratio between the average house price in the region where a young adult lives and their annual net family income doubled from 4 to 8, with all of the increase occurring by 2007–08.

That is an odd ending to the paragraph because we know house price growth began again in the UK in 2013 and yet real wage growth has been to say the least thin on the ground. But we can at least agree with the broad sweep that compared to income the affordability of houses has halved.  It is also interesting to note that over the twenty year period looked at real family income growth was only 1% per annum. The IFS then goes on to give us more of a breakdown of its analysis.

This increase in house prices relative to family incomes fully explains the fall in homeownership for young adults. The likelihood of a young adult owning their own home given how their income compares with house prices in their region is little changed from twenty years ago. But in 2015–16 almost 90% of 25- to 34-year-olds faced average regional house prices of at least four times their income , compared with less than half twenty years earlier. At the same time, 38% faced a house-price-to-income ratio of over 10, compared with just 9% twenty years ago.

If we step back for a moment this is merely the other side of the coin from the “wealth effects”  otherwise known as higher house prices that the Bank of England has been so keen on. We have had Bank Rate cut to 0.5% and even 0.25% for a while, some £435 billion of Quantitative Easing and of course the Funding for Lending Scheme which the Bank of England felt cut mortgage rates by around 2%. So if we take away the spin the problems with house price affordability were a deliberate policy move by the Bank of England and I do sometimes wonder why millennials are not picketing Threadneedle Street.

Debt

I have some thoughts for you on the report by the Resolution Foundation on the scale of the problem here.

Standing at nearly £1.9 trillion, UK household debt remains a big issue.

We get quite a bit of analysis that tells us much of this is fine but a lot of care is needed here as you see that is a line straight out of the Bank of England which has an enormous vested interest here. This phrase gets us ready for another “surprise” at a later date.

appears to have been associated with borrowing by higher income households,

Also does anyone really believe this line?

And many of the credit market fundamentals look much improved relative to the pre-crisis period, with tighter lending criteria and closer monitoring of potentially unwelcome developments.

We are always told it is better until they can tell us that no more. But even such analysis cannot avoid this.

 Increases in the base rate will inevitably increase costs for many indebted households and have the potential to further increase the debt ‘distress’ faced by some.

We then get much more Bank of England inspired spin.

The base rate is expected to rise only gradually, and to remain well below past norms.

It has been telling us that such 2014 whereas Bank Rate is still 0.5% as they of course cut it after promising increases and then put it back. But you see the position is more complex than that as whilst some borrowing got cheaper for example the mortgage rates I was looking at above and some personal loans other bits of borrowing got more expensive. These days we have a proliferation of payday lenders and the like who are on our television screens plugging loans with annual interest rates of 50% or 60% at best and in some cases far higher. What difference would a Bank Rate of say 1.5% make here?

I noted some analysis on the United States which pointed out that for consumer debt Americans were paying higher interest-rates for a given official one which raised a wry smile as that was one of my earliest themes and may even be the first one albeit I was referring mostly to the UK. Let me explain what I mean as the UK average credit card interest rate was 15.67% on the first of January 2017 pre credit crunch ( Bank of England data). So after all the Bank Rate cuts and QE it has fallen to 17.95%. Oh! The overdraft rate has responded to all the official easing by going from 17.16% to 19.71%. Oh times two!

Putting it another way for the around 4% cut in official interest-rates up is yet again the new down as the borrowers above see a rise of around 2% in what they are paying. Is this yet another bank subsidy?

Also the Bank Rate cut and £60 billion QE about which Governor Carney frequently likes to boast reduced the credit card interest-rate by 0.03% briefly and raised the overdraft rate by 0.03%. I doubt anyone noticed.

Comment

One of the features of the credit crunch era is the way that we have been broken down into different groups. For example those with a mortgage have in general seen lower interest-rates as have personal loans but those with overdrafts or ongoing credit card debt have not and even worse have seen rises. Of course some with credit card debt have been able to take advantage of 0% deals but I notice that these seem to come with fees these days. So lots of different impacts on different groups which brings me to the impact of Bank of England policy. This is yet another example of where it has benefited some groups at the expense of others as some gain but others lose. There is also a more general point that is true everywhere I look is that “the precious” otherwise know as the banks have been able to raise their margins whilst the authorities look away.

If we shift to the asset side of the equation the Bank of England has benefitted those with them by the way it has boosted house prices. But the other side of the coin is seen by the falling levels of home ownership amongst the young as they ( and others) face inflation as they see higher house prices. Next in the equation comes that some will be helped by the “bank of mum and dad” be that by cash or inheritance. How much more of a mixed soup could this be? Yet the central planners continue to meddle and these days are so confused themselves that they come out with rubbish like there will be more interest rate rises than the ones we have promised but not delivered for the last four years.

 

How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.

Wages

There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)

Comment

As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV

 

 

 

The economy of Italy has yet to awaken from its “Girlfriend in a coma” past

The subject of Italy and its economy has been a regular feature on here as we have observed not only its troubled path in the credit crunch era but also they way that has struggled during its membership of the Euro. This will no doubt be an issue in next month’s election but the present period is one which should be a better phase for Italy. Firstly the Euro area economy is doing well overall and that should help the economy via improved exports.

Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and in the EU28 during the fourth quarter of
2017, compared with the previous quarter……..Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.7% in the euro area and
by 2.6% in the EU28 in the fourth quarter of 2017…….Over the whole year 2017, GDP grew by 2.5% in both zones.

The impact on the economy of Italy

If we switch now to the Italian economy we find that there has been a boost to the economy from the better economic environment. From the monthly economic report.

Italian exports keep increasing with a positive trend following world trade expansion…….Over the period September-November, foreign trade kept a positive trend
driven by the exports (+2.9%), while the imports increased at a lower pace (+0.6%).

However the breakdown was not as might be expected.

Sales to the non-EU area (+4.6%) contributed positively to the favorable trend in exports and more than the sales to the EU area (+1.5%). In 2017, trade with non-EU countries increased both exports (+8.2%) and imports (+10.8%).

So the export-led growth is stronger outside the Euro area than in it which is not what we might expect as we observe the way that the Euro has been strong as a currency. Effects in this area can be lagged so it is possible via factors such as the J-Curve that the new higher phase for the Euro has yet to kick in in terms of its impact on trade, so we will have to watch this space.

Production

There was some good news on this front in December as the previous analysis had been this.

Taking the average values of September-November, shows that production decreased compared to the previous quarter (-0.2%, ). In the same period all the main industrial groupings recorded a decrease except durable consumer goods (+2.7% compared to the previous quarter).

As you can see that is not what might have been expected but last weeks’ data for December was more upbeat.

In December 2017 the seasonally adjusted industrial production index increased by 1.6% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.8.

This meant that the position for the year overall looked much better than the downbeat assessment above.

in the period January-December 2017 the percentage change was +3.0 compared with the same period of
2016.

If we move to the outlook for 2018 then the Markit business survey or PMI could not be much more upbeat.

Italy’s manufacturing sector enjoyed a strong start
to 2018, registering the highest growth in output
since early 2011 and one of the greatest rises in
new orders of the past 18 years.

In addition domestic demand was seen adding to the party.

but January data pointed to a growing contribution from within Italy itself.

This leads to hopes for improvement in one of the Achilles heels of the Italian economy.

The response from many manufacturers was to
bolster employment numbers, and January’s survey
indicated the second-strongest rise of employment
in the survey history.

Unemployment and the labour market

At first glance the latest data does not look entirely impressive.

In December 2017, 23.067 million persons were employed, -0.3% over November 2017. Unemployed were
2.791 million, -1.7% over the previous month.

There is a welcome fall in unemployment but employment which these days is often a leading indicator for the economy has dipped too.

Employment rate was 58.0%, -0.2 percentage points over the previous month, unemployment rate was
10.8% -0.1 percentage points over November 2017 and inactivity rate was 34.8%, +0.3 percentage points in
a month.

However if we look back we see that over the past year 173,000 more Italians have been employed and the level of unemployment has fallen by 273,000.  What we are still waiting for however is a clear drop in the unemployment rate which has been stuck around 11% for a while. We are told it has dropped to 10.8% but there has been a recent habit of revising the rate back up to 11% at a later date meaning we have been told more than a few times that it has fallen below it. Sadly much of the unemployment is concentrated at the younger end of the age spectrum.

Youth unemployment rate (aged 15-24) was 32.2%, -0.2 percentage points over the previous month.

So better than Greece but isn’t pretty much everywhere as we again wonder how many of these have never had a job and even more concerning, how many never will?

Sometimes we are told that higher unemployment rates are a consequence of better wages. But is we look at wages growth there does not seem to be much going on here.

The labor market outlook is characterized by the wage
moderation: in 2017 both the index of contractual wages per employee and that of hourly wages increased by +0.6% y-o-y.

On a nominal level that is a fair bit below even the UK but of course the main issue is in real or inflation adjusted terms.

In January 2018, according to preliminary estimates, the Italian consumer price index for the whole nation (NIC) increased by 0.2% on monthly basis and by 0.8% compared with January 2017 (it was +0.9% in December 2017).

So there was in fact a small fall in real wages in 2017 which we need to file away on two fronts. Firstly there is the apparent fact that better economic conditions in Italy are not being accompanied by real wage growth and in fact a small fall. Secondly we need to add that rather familiar message to our global database.

The banks

This is a long running story of how the banking sector carried on pretty much regardless after the credit crunch and built up a large store of non-performing assets or if you prefer bad loans. This has meant that many Italian banks are handicapped in terms of lending to help the economy and some have become zombified. From Bloomberg earlier.

Even after making reductions last year, Italian banks are still weighed down by more than 270 billion euros ($330 billion) of non-performing loans. Struggling households account for almost a fifth of that total, according to the Bank of Italy.

It is hard not to have a wry smile at a proposed solution.

The Bank of Italy says an improvement in the country’s real estate market is helping to reduce the risks for banks.

Whether that will do much good for what has become the symbol of the problem I doubt but here is the new cleaner bailed out Monte Paschi. From Bloomberg on Monday.

The bank, which is cutting about a fifth of its workforce, eliminating branches and plans to sell 28.6 billion euros of bad loans by 2021, posted 501.6 million-euro net loss in the last three months of the year.

How is the bailout going?

The shares were down 2.8 percent at 3.72 euros as of 9:55 a.m. The stock, which returned to trading Oct. 25 after an 10-month suspension, is now valued more than 43 percent below the 6.49 euros apiece paid by Italy for the rescue.

This morning it is 3.44 Euros so the beat goes on especially as we note that pre credit crunch and the various bailouts the equivalent price peak was over 8800.

Demographics

This issue continues to be ongoing.

The population at 1st January 2018 is estimated to be 60,494,000; the decrease on the previous year was
around 100,000 units (-1.6 per thousand).

Driven by this.

The number of live births dropped to 464 thousand, 2% less than in 2016 and new minimun level ever.

We have seen on the news so often that there is considerable migration to Italy and if we look into the detail we see that not only is it so there is something tucked away in it.

The net international migration in 2017 amounted to +184 thousand, recording a consistent increase on the
previous year (+40 thousand).

Yet Italians themselves continued to leave in net terms as 45,000 returned but 112,000 left which is a little surprising in the circumstances. As to the demographics well here they are.

At 1 January 2018, 22.6% of the population was aged 65 or over, 64.1% was aged between 15 and 64, while
only 13.4% was under 15 years of age. The mean age of the population exceeded 45 years.

The theme is that the natural change has got worse over the past decade rising from pretty much zero to the 183,000 of 2017 but contrary to the news bulletins net immigration is lower as it approached half a million in 2007.

Comment

This morning has brought news which will be very familiar to readers of my work which is an Italian economy which seems to struggle to grow at more than around 1% per annum for any sustained period.

In the fourth quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the third quarter of 2017 and by 1.6 per
cent in comparison with the fourth quarter of 2016.

As we note a negative official interest-rate ( -0.4%) and a large amount of balance sheet expansion from the European Central Bank the monetary taps could not be much more open. Italy’s government in particular benefits directly by being able to borrow very cheaply ( ten-year yield 2.05%) when you consider it has a national debt to annual GDP ratio of 134.1%. Thanks Mario!

Thus we return on Valentines Day to the “Girlfriend in a Coma” theme of Bill Emmott which is a shame as Italy is a lovely country. Can it change? Let us hope so and maybe the undeclared economy can be brought to task. Meanwhile if you want to take the Matrix style blue pill here is Bloomberg.

ITALY: GDP expanded by 0.3% in 4Q, a bit less than expected. Still, 2017 was the best growth year (+1.5%) since 2010. Shows how broad-based the euro-area recovery has become. A rising tide lifts all boats

 

 

 

 

UK Inflation looks set to fall as 2018 progresses

Today brings us face to face with the UK context on what many are telling us has been the cause of the recent troubled patch for world equity markets. This is because a whole raft of inflation data from the consumer producer and housing sector is due. The narrative that inflation has affected equities markets has got an airing in today’s Financial Times.

The inflation threat has simmered for months, but the missing link had been wage growth, which made the rise in the US jobs figures for January so important, fund managers say. Indeed, the yield on the 10-year Treasury is 40 basis points higher this year, driven almost entirely by inflation expectations. Strong global economic data, coupled with sweeping tax cuts and the recent expansionary budget deal in Washington, should stir price pressures.

Actually that argument seems to be one fitted after the events rather than before as the rise in bond yields could simply be seen as a response to the expansionary fiscal policy in the US combined with interest-rate increases and a reduction albeit small in the size of the Federal Reserve balance sheet. Actually as the FT admits inflation is often considered to be good for equities!

While faster inflation would typically be good for stocks, lifting companies’ pricing power and suggesting economic growth is accelerating.

Wages

There is also a theme doing the rounds about wage inflation. Yesterday Gertjan Vlieghe of the Bank of England joined this particular party according to Reuters.

 a pick-up in wages ……..signs of a pick-up in wages

The problem for the Bank of England on this front is two-fold. Firstly it has been like the boy ( and in some cases) girl who has cried wolf on this front and the second is that the official data has picked up no such thing so far. Thus we are left essentially with one higher wages print of 2.9% for average hourly earnings in the United States. So the case is still rather weak as we wonder if even the current economic recovery can boost wages in any meaningful sense.

Trends

The first trend which should first show in the producer price numbers is the strength of the UK Pound versus the US Dollar over the past year. It was if we look back about 14 cents lower than the current US $1.388. Also the price of crude oil has dipped back from the rally which took it up to US $70 in terms of the Brent benchmark to US $62.47 as I type this. This drop happened quite quickly after this.

Goldman Sachs has held one of the most optimistic views on the rebalancing of the oil market and oil prices in the near term, and the investment bank is now growing even more bullish, predicting that the oil market has likely balanced, and that Brent Crude will reach $82.50 a barrel within six months. ( OilPrice.com)

The Vampire Squid is building up quite a track record of calling the market in the wrong direction as back in the day it called for US $200 a barrel and when prices fell for a US dollar price in the teens. I will let readers decide for themselves whether it is simply incompetent or is taking us all for “muppets”.

Today’s data

The good news was that the trends discussed above are beginning to have an impact.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to January 2018, down from 3.3% in December 2017…….Prices for materials and fuels (input prices) rose 4.7% on the year to January 2018, down from 5.4% in December 2017.

Tucked away was the news that the worst seems to be passing us as this is well below the 20.2% peak of this time last year.

The annual rate of inflation for imported materials and fuels was 3.5% in January 2018 (Table 2), down 1.7 percentage points from December 2017 and the lowest it has been since June 2016.

It is a little disappointing to see the Office for National Statistics repeat a mistake made by the Bank of England concentrating on the wrong exchange rate.

The sterling effective exchange rate index (ERI) rose to 79.0 in January 2018. On the year, the ERI was up 2.6% in January 2018 and was the fourth consecutive month where the ERI has shown positive growth.

Commodities are priced in US Dollars in the main.

Consumer Inflation

This showed an example of inflation being sticky.

The all items CPI annual rate is 3.0%, unchanged from last month.

However prices did fall on the month due to the January sales season mostly.

The all items CPI is 104.4, down from 104.9 in December

The inflation rate was unaffected because they fell at the same rate last year.

There was something unusual in what kept annual inflation at 3%.

The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year.

I will put in a complaint when I pass Battersea Park Childrens Zoo later! More hopeful for hard pressed budgets was this turn in food prices.

This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.

My friend who has gone vegan may be guilty of bad timing.

An ongoing disaster

The issue of how to deal with owner-occupied housing remains a scar on the UK inflation numbers. This is the way they are treated in the preferred establishment measure.

The OOH component annual rate is 1.2%, down from 1.3% last month. ( OOH = Owner Occupied Housing).

Not much is it, so how do they get to it? Well this is the major player.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

If you are thinking that owner occupiers do not pay rent as they own it you are right. Sadly our official statisticians prefer a fantasy world that could be in an episode of The Outer Limits. They have had a lot of trouble measuring rents which means their fantasies diverge even more from ordinary reality.

If they had used something real then the numbers would look very different.

UK house prices rose 5.2% in the year to December 2017, up from 5.0% in November 2017.

This makes inflation look much lower than it really is and is the true purpose in my opinion. A powerful response to this at one of the public meetings pointed out that due to the popularity of leasing using rents for the car sector would be realistic ( they do not) but using it for owner-occupied housing is unrealistic ( they do).

If you want a lower inflation reading thought it does the trick.

The all items CPIH annual rate is 2.7%, unchanged from last month.

Comment

The underlying theme is that UK consumer inflation looks set to trend lower as 2018 progresses which is good news for both consumers and workers. The initial driving force of this was the rally of the UK Pound £ against the US Dollar and as it has faded back a little we have seen lower oil prices. We also get a sign that prices can fall combined with annual inflation.

The all items CPI is 104.4, down from 104.9 in December…..The all items RPI is 276.0, down from 278.1 in December…….The all items CPIH is 104.5, down from 105.0 in December.

One issue that continues to dog the numbers is the treatment of housing and for all the criticisms levelled at it a strength of the RPI is that it does have house prices ( via depreciation).

The all items RPI annual rate is 4.0%, down from 4.1% last month.

Meanwhile the Bank of England seems lost in its own land of confusion. It cut interest-rates into an inflation rise and then raised them into an expected fall! This is of course the wrong way round for a supposed inflation targeter. Now they seem to be trying to ramp up the rhetoric for more increases forgetting that they need to look 18 months ahead rather than in front of their nose. Perhaps they should take some time out and listen to Bananarama.

I thought I was smart but I soon found out
I didn’t know what life was all about
But then I learnt I must confess
That life is like a game of chess

 

 

Is Greece growing more quickly than the UK?

Today we return to a long running and grim saga which is the story of Greece and its economic crisis. However Bloomberg has put a new spin on it as follows.

Greece is growing faster than Britain and is outperforming it in financial markets.

Okay so let us take a deeper look at what they are saying. Matthew Winkler who is the Editor-in-Chief Emeritus of Bloomberg News, whatever that means, goes on to tell us this.

In a role reversal not even the most prescient dared to anticipate, Greece is growing faster than the U.K. and outperforming it in financial markets. ……..Now that Europe is leading the developed world in growth, productivity and job creation after the euro gained 14.2 percent last year — the most among 16 major currencies and the strongest appreciation since 2003 — Greece is the biggest beneficiary and Britain is the new sick man of Europe.

This is really quite extraordinary stuff isn’t it? Let me just mark that the author seems to be looking entirely through the prism of financial markets and look at what else he has to say.

In the bond market, Greece is the king of total return (income plus appreciation), handing investors 60 percent since the Brexit vote. U.K. debt securities lost 3 percent, and similar bonds sold by euro-zone countries gained 7 percent during the same period, according to the Bloomberg Barclays indexes measured in dollars. Since March 1, 2012, when the crisis of confidence over Greece was at its peak and its debt was trading at 30 cents on the dollar, Greek bonds have returned 429 percent, dwarfing the 19 percent for euro bonds and 10 percent for the U.K., Bloomberg data show.

Also money is flowing into the Greek stock market.

ETF flows to Europe gained 15 percent and 13 percent to the U.K. during the same period. The Global X MSCI Greece ETF, the largest U.S.-based exchange-traded fund investing in Greek companies, is benefiting from a 35 percent increase in net inflows since the 2016 Brexit vote.

Finally we do actually get something based on the real economy.

The same analysts also forecast that Greece will overtake Britain in GDP growth. They expect Greece to see its GDP rise 2.15 percent this year and 2.2 percent in 2019 as the U.K. grows 1.4 percent and 1.5 percent.

Many of you will have spotted that the Greece is growing faster than the UK has suddenly morphed into people forecasting it will grow quicker than it! This poses a particular problem where Greece is concerned and can be illustrated by the year 2012. Back then we had been assured by the Troika that the Greek economy would grow by 2% on its way to an economic recovery and the UK was back then enmeshed in “triple-dip” fears. Actually there was no UK triple dip and the Greek economy shrank by around 7% on the year before.

GDP growth

According to the Greek statistics office these are the latest figures.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2017 the Gross Domestic
Product (GDP) in volume terms increased by 0.3% in comparison with the 2nd quarter of 2017, while in comparison with the 3rd quarter of 2016, it increased by 1.3%.

Thus we see that if we move from forecasts and rhetoric to reality Greece has some economic growth which we should welcome but not only is that slower than the UK in context it is really poor if we look at its record. After the severe economic depression it has been through the economy should be rebounding rather than edging forwards. I have written many times that it should be seeing sharp “V Shaped” growth rather than this “L Shaped” effort.

If we look back the GDP at market prices peaked in Greece in 2008 at 231.9 billion Euros but in 2016 it was only 175.9 billion giving a decline of the order of 24% or 56 billion Euros. That is why it should be racing forwards now to recover at least part of the lost ground but sadly as I have predicted many times it is not. Even if the forecasts presented as a triumph above come true it will be a long long time before Greece gets back to 2008 levels. Whereas the UK economy is a bit under 11% larger and to be frank we think that has been rather a poor period.

Job creation

You may note that there was a shift to Europe leading the world on job creation as opposed to Greece so let us investigate the numbers.

The number of employed persons increased by 94,071 persons compared with November 2016 (a 2.6% rate of increase) and decreased by 9,659 persons compared with October 2017 (a 0.3% rate of decrease).

I am pleased to see that the trend is for higher employment albeit there has been a monthly dip. Actually if we look further the last 3 months have seen a fall so let us hope we are not seeing another false dawn. Further perspective is provided by these numbers.

The seasonally adjusted unemployment rate in November 2017 was 20.9% compared to the upward revised 23.3% in November 2016 and the upward revised 20.9% in October 2017. The number of employed in November 2017 amounted to 3,761,452 persons. The number of unemployed amounted to 995,899 while the number of inactive to 3,242,383.

The first issue is the level of unemployment which has improved but still has the power to shock due to its level. The largest shock comes from a youth unemployment rate of 43.7% which is better than it was but leaves us mulling a lost generation as some seem set to be out of work for years to come and maybe for good. Or perhaps as Richard Hell and the Voidoids put it.

I belong to the Blank Generation, and
I can take it or leave it each time.

Before I move on I would just like to mark the level of inactivity in Greece which flatters the numbers more than a little.

Bond Markets

Last week there was a fair bit of cheerleading for this. From the Financial Times.

Greece has wrapped up the sale of a seven-year bond after a 48-hour delay blamed on international market turbulence, raising €3bn at a yield of 3.5 per cent. The issue marked the first time since 2014 that the country has raised new money. A five-year bond issue last July raised €3bn, about half of which involved swapping existing debt for longer-dated paper.

The problem is in the interest-rate as Greece has got the opportunity to borrow at a much higher rate than it has been doing! Let me hand you over to the European Stability Mechanism or ESM.

The loans, at very low-interest rates with long maturities, are giving Greece fiscal breathing space to bring its public finances in order……..Moreover, the EFSF and ESM loans lead to substantially lower financing costs for the country. That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment.

As you can see the two narratives are contradictory as we note Greece is now choosing to issue more expensively at a considerably higher interest-rate or yield. This matters a lot due to its circumstances.

They point to the debt-to-GDP ratio, which stands at more than 180%.

Comment

I would be more than happy if the Greek economy was set to grow more quickly than the UK as frankly it not only needs to be growing much faster it should be doing so for the reason I explained earlier. As someone who has consistently made the case for it needing a default and devaluation I find it stunning that the Bloomberg article claims this is a success for Greece.

 the euro gained 14.2 percent last year — the most among 16 major currencies and the strongest appreciation since 2003

After all the set backs for Greece and its people what they do not need is a higher exchange rate. Finally the better prospects for the Euro area offer some hope of better days but they will be braked somewhat by the higher currency.

The confused narrative seems to also involve claiming that paying more on your debt is a good thing. Awkward in the circumstances to be making the case for sovereignty! But the real issue is to get out of this sort of situation which is sucking demand out of the economy. From Kathimerini.

 It is no coincidence that the “increased post-bailout monitoring” is expected to end in 2022, when the obligation for high primary surpluses of 3.5 percent of gross domestic product expires.

So in conclusion there is a lot to consider here as we wish Greece well for 2018. It badly needs a much better year but frankly also more considered and thoughtful analysis as those who have suffered through this deserve much better. The ordinary Greek was mostly unaware of what their establishment was doing as it fiddled the data and let the oligarchs slip slide away from paying their taxes.