What is happening to the economy of Qatar?

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

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

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

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

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

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

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

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

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

How was the Qatari economy doing?

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

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

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

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

There was something of a familiar feature to this.

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

The World Cup Boomlet

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

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

However there was a consequence.

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

Oil

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

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

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

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

Monetary Policy

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

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

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

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

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

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

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

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

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

So presumably it has been using them.

Qatar Investment Authority

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

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

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

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

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

Comment

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

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

Also food is being sent from Turkey.

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

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

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

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

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

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

Me on TipTV Finance

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

Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.

Comment

The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.

 

As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.

China faces up to a ratings downgrade

This morning we have received news about the world’s second largest economy. The Ratings Agency Moodys issued this statement.

Moodys Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook from negative to stable.

As you can see from the statement this was not a complete surprise as the outlook had been negative although in some ways the timing was as not so long ago the IMF had told us this. From Reuters on the 18th of April.

The IMF upgraded its estimate for China’s 2017 growth to 6.6 percent from 6.5 percent, which it made in January. It also raised its forecast for growth next year to 6.2 percent from the previous 6.0 percent.

This added to the upgrade it has given China in January when it had raised the economic growth forecast for 2017 from 6.2%. In fact only on the 9th if this month the IMF had repeated this message.

In China, the region’s biggest and the world’s second largest economy, policy stimulus is expected to keep supporting demand. Although still robust with 2017 first quarter growth slightly stronger than expected, growth is projected to decelerate to 6.6 percent in 2017 and 6.2 in 2018.

 

This slowdown is predicated on a cooling housing market, partly reflecting recent tightening measures, weaker wage and consumption growth, and a stable fiscal deficit.

Although whilst it was relatively upbeat the IMF has warned about credit expansion.

Why did Moodys act?

As the quote from the Financial Times below shows Moodys are concerned about the financial system in China.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” Marie Diron, the agency’s associate managing director for sovereign risk, wrote in an announcement on Wednesday.

Indeed if we look at the statement they expect China to go along at least part of the journey that us westerners have travelled.

While China’s GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus.

Of course their economic growth is officially recorded at higher levels than ours but it looks like the Chinese will have to accept a sort of new normal where economic growth is lower just like we have.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016.

If we look at the situation in terms of the national debt to GDP ratio we have looked at for Greece and the UK this week already then it looks as if China is currently in a lot better place.

Moody’s expects China’s direct fiscal debt to reach 40 per cent of gross domestic product by the end of next year and 45 per cent by 2020. ( Financial Times).

However in a development which is very familiar just like us Westerners the Chinese do all they can to keep what is public-sector debt off the official books.

In addition, it notes that China’s reliance on disguised fiscal spending through off-budget special purpose vehicles owned by local governments is likely to persist. The Financial Times reported this month on a confidential World Bank assessment warning of risks from so-called local government financing vehicles.

Moodys are expecting further growth in this area.

Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

Let us look at the wider debt burden in China which is something I looked at back on January 5th.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

Moodys thinks that this will happen going forwards.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors.

I would counsel caution about the use of averages here as not only can they be misleading without an idea of dispersion it could be signalling a group going over the cliff together.

Debt and Demographics

Should debt continue to rise then China will share a problem that is affecting more than a few of the evil western capitalist imperialists. From my article on January 5th.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

Commodity prices

Mining.com updates us on the trends for Iron Ore.

The Northern China import price for 62% Fe iron ore fines was $61.90 a tonne on Monday, down more than 20% year-to-date on growing fears of an oversupplied market.

There is quite a bit going on as the Chinese increasingly use scrap iron in production but it is hard not to think of the Iron Ore which was used as collateral in financial deals as we looked at some time back.How much of that is in today’s 5% fall in the price of Iron Ore futures is hard to say. Dr.Copper rallied at the end of 2016 after several years of decline but seems to have mostly flat lined in 2017 at around US $2.50.

The outlook

This month’s business surveys recorded something of a slow down.

The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a further slowdown in growth momentum at the start of the second quarter. This was highlighted by the Composite Output Index posting 51.2 in April, down from 52.1 in March, and the lowest reading for ten months.

The ratio between the numbers here and official levels of economic growth are very different to what we see in the west but any slow down will not be welcome.

Comment

There are a few things to consider here. Firstly we are unlikely to see much of a fall in bond prices and rises in yields in response to this as used to happen. The Chinese bond market is almost entirely ( ~ 96% ) domestically owned making it rather like Japan meaning that any selling by foreign investors is not that likely to be significant. Also these days central banks mostly intervene to stop such things don’t they?

Moving onto the economy we see that monetary conditions are the issue and for this to end well the Chinese will have to make a much better job of dealing with a credit boom than we did in the west. Will they be able to continue to tighten policy if economic growth slows further? As to outflows of money we are regularly assured these days that they have pretty much stopped but to my mind there is a worrying signal which is the continuing rise in the price of bitcoin.

The average price of Bitcoin across all exchanges is 2326.72 USD ( @bitcoinprice )

Finally these things are not the same without an official denial are they? From Xinhua News.

China’s Finance Ministry on Wednesday dismissed a decision by international rating agency Moody’s to downgrade China’s long-term local currency and foreign currency issuer ratings.

 

UK Inflation continues its ascent in spite of the measurement “improvements”

Today we will find ourselves updated on the latest official data for UK inflation. Sadly we will see it move further above target and there have been two main drivers of this. Firstly it is the fact that the price of oil stopped falling. This will impact on April’s inflation data as the price of a barrel of Brent Crude Oil was around US $10 per barrel higher than in the same month last year. Here is the Office for National Statistics on the subject.

Oil rose further above $55 (44.22 pounds) a barrel, supported by another shutdown at Libya’s largest oilfield and heightened tension over Syria. Libya’s Sharara oilfield was shut after a group blocked a pipeline linking it to an oil terminal, a Libyan oil source said. The field had only just returned to production, after a week-long stoppage ending in early April. Brent crude LCOc1, the global benchmark, rose 48 cents to $55.72, not far from the one-month high of $56.08. U.S. crude CLc1 was up 37 cents at $52.61.

In addition the next factor then arrives which is the lower level of the UK Pound £ which spent much of last April in the mid US $1.40s compared to the mid US $1.20s this year. Actually later this April the UK Pound £ rose to the current level of around US $ 1.29 so the exact annual difference depends a fair bit on which day in the month is used  but the underlying issue is that the cost will have risen. For the price of crude oil there is a double whammy effect as the two changes combine. Also it impacts on domestic fuel costs although the two main rises in April ( SSE and E.ON ) were on the 26th and 28th of the month so are more likely to be in the May data.

The UK Budget will also give prices an upwards nudge.

The measures that will be implemented in the financial year ending 2017 are estimated to increase the CPIH 1-month rate by approximately 0.16 percentage points, the CPI 1-month rate by approximately 0.18 percentage points and the RPI 1-month rate by approximately 0.23 percentage points.

This compares to 0.04% last year for CPIH and 0.06% last year for RPI.

A Space Oddity

Remember the official campaign against the Retail Price Index measure of inflation saying it does not meet international best practice? It looks like someone has let their greed for higher rises to create a bit of amnesia on that subject.

The March 2017 Budget announced that from 1 April 2017 VED rates will increase in line with the RPI for cars, vans and motorcycles registered between 1 March 2001 and 1 April 2017.

A direct impact

The producer price or PPI inflation measure shows us the impact of the factors analysed above as we look at the impact on input prices.

Crude oil provided the largest contribution of 5.82 percentage points to the annual rate and on the month it provided a contribution of 0.32 percentage points.

The overall picture is as shown below.

The monthly rate of inflation for goods leaving the factory gate (output prices) was unchanged at 0.4% in April 2017, while input prices rose 0.1% following 2 months of no growth….The annual rate for factory gate price inflation was positive but unchanged at 3.6%, while the annual growth rate for input prices fell back to 16.6% from a peak of 19.9% in January 2017.

As you can see some of the input price effect is fading but output prices will continue to be affected and therefore will exert an upwards pull on the consumer inflation indices.

The headlines

These raised a wry smile and I will give you just one example which is from the Press Association which was repeated by many other media and news outlets.

#Breaking Rate of Consumer Price Index inflation rises to 2.7% in April, from 2.3% in March, the Office for National Statistics says

The wry smile was caused by the fact that the new official inflation series is now CPIH and as someone who has led a campaign against it then perhaps more people were listening than I realised. For newer readers the CPIH is where H= Housing Costs, and so far so good. But it all goes wrong when a number is calculated for what houses which are owner-occupied would be rented out for based on Imputed Rent methodology. So a theoretical construct or made up number is used as opposed to actual real world numbers such as mortgage rates and house prices. Oh and the RPI index was downgraded for not being a national statistic whereas CPIH was upgraded for being.

CPIH is not currently a National Statistic.

If we look at the numbers we see that there is another reason to raise a wry smile.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.6% in April 2017, up from 2.3% in March.

Conspiracy theorists will have noted that it has become the headline measure just in time to give a lower inflation reading than its predecessor! I tend to downplay such thoughts although the rush to make it the new headline measure at the end of last year does give some support to them. After all I was pointing out back then that I expected rents to struggle this year as opposed with what I considered hype from the real estate industry. This is now being borne out by the official data.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to April 2017; this is down from 2.0% in March 2017.

So the housing market has arrived in the numbers just in time to lower them after all the years of ignoring it as it surged. Some perspective on this has been provided by the Resolution Foundation today.

Staying with rents the official data is catching up on what has been going on in London which as usual is in the van of any changes.

London private rental prices grew by 1.4% in the 12 months to April 2017, 0.4 percentage points below the Great Britain 12-month growth rate.

If we return to my theme which is that house prices give a much better guide to inflation than rents let me point out that they continue to send a different message. Yes the inflationary burst is fading (good) but compare the number with the one for rents.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017).

Comment

The drumbeat in today’s numbers is that UK inflation is on the rise as was expected on here and that it is not good news. Indeed the news is more disappointing if we look at our old inflation measure.

The all items RPI annual rate is 3.5%, up from 3.1% last month.

With wage and indeed economic growth around 2% per annum the difference  between our old and newer inflation measures becomes more material. It is of course something the Bank of England should be looking into but apart from putting their own pensions in instruments benefitting from the RPI they are shamefully silent on the matter. What we can see is that each “improvement” in consumer inflation methodology seems to result in a lower number whereas other prices surge. I have already looked at house prices but whilst some of it is growth we have to wonder if inflation is also at play in this asset price as well.

The FTSE 100’s recent record breaking run showed no sign of ending as the UK’s main share index hit another record intra-day high.

In morning trade,the index climbed to 42 points, or 0.5% to 7,495.68 – meaning it is up 5% this year.

Vodafone led the way, with the mobile giant’s shares rising 4.1% as investors ignored news of a hefty annual loss and focused on its upbeat outlook.

What are the latest trends for inflation?

It is time to review one of the themes of 2017 which is that we expected a pick-up in the annual rate of inflation around the world. This has been in play with the US CPI rising at an annual rate of 2.4% in March and the Euro area CPI rising at 1.9% in April for example. If we switch to the factor that has been the main player in this we see that energy prices were 10.9% higher in the US than a year before and that in the Euro area they had gone from an annual rate of -8.7% in April last year to 7.5% this April. If we look at my own country the UK then the new headline inflation measure called CPIH ( where H includes an Imputed Rent effort at housing costs) then inflation has risen from 0.2% in October 2015 to 2.3% in March. So we see that the US Federal Reserve and the Bank of England have inflation above target and the ECB on it which means two things. Firstly those who went on and on about deflation a couple of years ago were about as accurate as central banking Forward Guidance . Secondly that we can expect inflation in the use of the words “temporary” and “transitory”!

Crude Oil

There has been a change in trend here indicated this morning by this from @LiveSquawk.

Saudi OPEC Governor: Based On Today’s Data, There Is Growing Conviction That 6-Month Extension May Be Needed To Re-balance The Market

You may recall that what used to be the world’s most powerful cartel the Organisation of Petroleum Exporting Countries or OPEC met last November to agree some output cuts. These achieved their objective for a time as the price of crude oil rose however this was undermined by a couple of factors. The first was that it was liable to be a victim of its own success as a higher oil price was always likely to encourage the shale oil wildcatters especially in the United States to increase production. This would not only dampen the price increase but also reduce the relative importance of OPEC. As you can see below that has happened.

U.S. crude production rose to 9.29 million barrels last week, the highest level since August 2015, according to the Energy Information Administration. (Bloomberg).

Also doubts rose as to whether OPEC was delivering the output cuts that it promised. For example they seem to be exporting more than implied by their proclaimed cuts. From the Financial Times.

Analysts at Energy Aspects say tanker tracking data suggests Opec’s exports have fallen by as little as 800,000 b/d so far in 2017 as some members have supplanted oil lost to production cutbacks with crude from storage, or have freed up barrels for export as they carry out maintenance at domestic refineries.

On the other side of the coin there is the fact that for a given level of output we need less oil these days and an example of this comes from the Financial Post in Canada today.

Canada substantially boosted its renewable electricity capacity over the past decade, and has now emerged as the second largest producer of hydroelectricty in the world, a new report said Wednesday.

So the trajectory for oil demand looks lower making the “balance” OPEC is looking for harder to achieve.

Other commodities

We get a guide to this if we look to a land down under as the Reserve Bank of Australia has updated us in its monetary policy today.

Beyond the next couple of quarters, prices of bulk commodities are expected to decline………Consistent with previous forecasts, iron ore prices have already fallen significantly in the past few weeks.

The RBA also produces an index of commodity prices.

Preliminary estimates for April indicate that the index decreased by 3.5 per cent (on a monthly average basis) in SDR terms, after decreasing by 1.7 per cent in March (revised). A decline in the iron ore price more than offset an increase in the coking coal price. Both the rural and base metals subindices decreased slightly in the month. In Australian dollar terms, the index decreased by 2.0 per cent in April.

So the rally seems to be over and the index above was inflated by supply problems for coal which drove its price higher. As to Iron Ore the Melbourne Age updates us on what has been going on.

Spot Asian iron ore prices have performed worse than Chinese steel rebar futures in recent weeks, dropping 31 per cent from a peak of US$94.86 a tonne on February 21 to US$65.20 on Thursday.

If we switch to Dr. Copper then the rally seems to be over there too although so far the price drops have been relatively minor.

What about food prices?

The United Nations updated us yesterday on this.

The FAO Food Price Index* (FFPI) averaged 168.0 points in April 2017, down 3.1 points (1.8 percent) from March, but still 15.2 points (10 percent) higher than in April 2016. As in March, all commodity indices used in the calculation of the FFPI subsided in April, with the exception of meat values.

As ever there are different swings here and of course the swings remind us of the film Trading Places. There was a time that these looked like the most rigged markets but of course there is so much more competition for such a title these days including from those who are supposed to provide fair markets ( central banks ).

Comment

There is a fair bit to consider here as we look forwards. There is always a danger in using financial markets too precisely as of course sharp falls like we have seen this week are often followed by a rebound. But it does look as if the commodity price trajectory has shifted lower which is good for inflation trends which is likely to boost economic growth compared to otherwise. Of course there are losers as well as winners here as commodity producers lose and importers win. But overall we seem set to see a bit less inflation than previously predicted and over time a little more economic growth.

As to the impact of a falling crude oil price on inflation the UK calculates it like this and I would imagine that many nations are in a similar position.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

There are of course also indirect effects on inflation from lower energy prices as well as other direct effects such as on domestic fuel bills. For the UK itself I estimated that inflation would be around 1.5% higher due to the EU leave due to the lower level of the Pound £ and for that to weaken economic growth. So for us in particular any dip in worldwide inflation is welcome as of course is the rise in the UK Pound £ to US $1.29.

A (space) oddity

We are using electronic methods of payment far more something which I can vouch for. However according to the Bank of England we are also demanding more cash.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

Who is stocking up and why? Pink Floyd of course famously provided some advice.

Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team

Share Radio

Sadly it comes to an end today and in truth it has been winding down in 2017. As someone who gave up his time to support it let me say that it is a shame and wish all those associated with it the best for the future.

 

House price growth in Toronto poses quite a problem for Canada

One of the economic themes of these times has been the boom in asset prices caused by ultra easy monetary policy and the way that establishment’s present this as “wealth effects” leading to economic growth when in fact some and often much of this is in my opinion inflation. For example those investing in government bonds have benefited from rises in prices and this is presented as a “wealth effect” but on the other side of the coin someone taking out an annuity faces much lower yields and much lower income from a set sum. Yet the “wealth loss” for them is not counted. There is also the issue of house prices where again rises are presented as an economic benefit which for some they are but both first-time buyers and those wishing to trade up in the market face higher prices.

The house price issue is one which has dogged economic comment about Canada and merited a substantial mention by the Bank of Canada last week. This is significant because central banks  look away from such matters until they feel they have no other choice. The emphasis is mine.

Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short-term, but a downside risk over the longer term.

What is happening to house prices in Toronto?

Canada Statistics has an index for the price of new houses.

On the strength of price increases for new houses in Toronto, the NHPI rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010.

Chart 2 Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase
The metropolitan region of Toronto posts the highest year-over-year price increase

Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase

Toronto recorded an 8.6% year-over-year price increase, the largest among the metropolitan areas surveyed, followed by Victoria (+6.3%), St. Catharines-Niagara (+6.2%), and Windsor (+6.2%). The gain for Windsor was the largest reported since January 1990.

Care is needed with such measures as for example the UK has hit trouble. So let us look further, the editorial of the Toronto Sun told us this yesterday.

house prices are skyrocketing in Toronto (the price of an average detached home is now over $1 million and has risen 33% in the past year)

The Toronto Life has something that is even more eye-catching.

Sale of the Week: The $2.7-million house that proves asking prices are meaningless in Summerhill

Ah too high eh? Nope.

The listing agents say they priced the house at what they thought was market value. Eight offers came in, after which the agents gave everyone the chance to improve. Seven did, and the sellers accepted the offer with the fewest conditions and best price, for more than $750,000 over asking. This may not have been a complete fluke: two other houses on Farnham Avenue have sold in the $2.5-million price range in the past year.

You have to question the listing agents there of course but it is an interesting price for a house which is very smart inside but does not look anything special from the front. We do get perhaps more of a realistic perspective from yesterday’s “sale of the week” as we have a comparison.

Previously sold for: $659,000, in 2007

Okay and now.

The sellers made the easy decision to go with the highest offer, at more than $400,000 over asking, $1,656,000.

Yesterday the Royal LePage house price survey told us this.

In the first quarter, the aggregate price of a home in the Greater Toronto Area increased 20.0 per cent to $759,241, while the price of a home in the City of Toronto rose 17.0 per cent to $763,875. Home prices also increased significantly in the surrounding GTA regions, with suburbs such as Richmond Hill, Oshawa,Vaughan, Markham and Oakville posting increases of 31.5 per cent, 28.2 per cent, 25.8 per cent, 23.2 per cent and 23.1 per cent to $1,209,741, $500,105, $985,534, $970,216 and $987,001

What about monetary policy?

According to the Bank of Canada it is very expansionary or loose.

The neutral nominal policy rate in Canada is estimated
to be between 2 .5 and 3 .5 per cent, 25 basis points
lower than previously estimated

If we maintain a straight face at the chutzpah and indeed fantasy that they know that to that degree of accuracy we can see that with an official interest-rate of 0.5% they are some 2.5% below neutral.

If we look at the exchange-rate then there was another boost as the trade-weighted Loonie or CERI fell from the low 120s in 2011/12 to a low of 89 as 2016 opened. It then rallied a little and over the year from March 2016 has in fact started at 95 and ended there. There are two issues here that need to be noted. Firstly this is an effective exchange rate with an elephant in the room as the US Dollar is 76.2% of it! Secondly due to its plentiful stock of raw materials the currency is often at the mercy of commodity price movements.

Moving to the money supply we see that the taps are open pretty wide. The broad measure has seen its annual rate of growth rise from the 4.5% of late 2010 to 7.7% in February of this year. There was a dip in narrow money growth in March but it is still increasing at an annual rate of 9%.

Household debt

Canada Statistics tells us this.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,028.7 billion in the fourth quarter. Consumer credit was $596.5 billion, while mortgage debt stood at $1,329.6 billion.

If we compare to incomes we see this.

Household credit market debt as a proportion of adjusted household disposable income (excluding pension entitlements) edged up to 167.3% from 166.8% in the third quarter. In other words, there was $1.67 in credit market debt for every dollar of adjusted household disposable income.

On the other side of the ledger that was something to please the Bank of Canada.

National wealth, the value of non-financial assets in the Canadian economy, rose 1.4% to $9,920.0 billion at the end of the fourth quarter. The main contributors to growth were real estate and natural resources. The value of real estate grew by $93.0 billion while the value of natural resource wealth increased $29.4 billion.

Although the rest of us will wonder how much of that $93 billion is from the Toronto area?

Comment

There is a lot to consider here as whilst the word bubble is over used it is hard to avoid thinking of it as we look at Toronto and its housing market. If we look at wages growth it has been slowing from around 3% to 0..9% in Canada in terms of hourly wages so it is not any sort of driver. The price moves are if anything even more extreme than seen in London.

If we move to the economics then if you own a property in Toronto and want to move elsewhere you have a windfall gain and good luck to you. A genuine wealth effect. But against that all new buyers are facing rampant inflation and there are clear wealth losses for them. We are back to a society of haves and have note here,

A big factor is we see another place where foreign funds are flowing in and like in the other cases we are left to mull this from Transparency International.

Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners.

Canada is of course far from alone in such worries.

Meanwhile the Bank of Canada finds itself not far off irrelevant which is awkward to say the least for a central planner. Of course where it is relevant it is making things worse.

 

 

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops