Meet the new boss same as the old boss as the CFA Franc becomes the Eco

As Christmas approaches things usually quieten down but if turn out eyes to Africa and in particular West Africa there have been some currency developments over the weekend. So without further ado let me hand you over to Reuters.

West Africa’s monetary union has agreed with France to rename its CFA franc the Eco and cut some of the financial links with Paris that have underpinned the region’s common currency since its creation soon World War Two.

So we have both an economic/financial element and a colonial one. We have looked at the CFA Franc briefly before but now courtesy of LSE Blogs let us have a refresher.

Firstly, a fixed rate of exchange with the euro (and previously the French franc) set at 1 euro = 655.957 CFA francs. Secondly, a French guarantee of the unlimited convertibility of CFA francs into euros. Thirdly, a centralisation of foreign exchange reserves. Since 2005, the two central banks – the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC) – have been required to deposit 50 per cent of their foreign exchange reserves in a special French Treasury ‘operating account’. Immediately following independence, this figure stood at 100 per cent (and from 1973 to 2005, at 65 per cent)……The final pillar of the CFA franc, is the principle of free capital transfer within the franc zone.

As you can see via their relationship with France the countries here became implicit members of the Euro, and follow the broad sweep of its monetary policy. If we return to Reuters the scope of the issue and ch-ch-changes is explained.

The CFA is used in 14 African countries with a combined population of about 150 million and $235 billion of gross domestic product.

However, the changes will only affect the West African form of the currency used by Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo – all former French colonies except Guinea Bissau.

The Central Bank of West African States or BCEAO

If we look at monetary policy here we do see one advantage of this.

The minimum interest rate for bidding on open market transactions (calls for bidding) and the interest rate applicable on the marginal lending window (repo rate), whose levels are currently set by the Monetary Policy Committee at respectively 2.50% and 4.50%, are the principal leading interest rates of the BCEAO.

That is considerably lower than what is common in that part of Africa as Ghana is at 16% and Nigeria 13,5% so there is a gain here.

The Economy

According to Friday’s meeting of the council of ministers for the BCEAO things are in fact going really rather well.

The Council of Ministers has analyzed the recent economic and monetary situation in the Union. To this end, he noted the increased dynamism of economic activity in the third quarter of 2019 as well as the favorable economic outlook in the WAEMU countries. Indeed, growth in real gross domestic product (GDP) came out at 6.6% year-on-year, after 6.4% the previous quarter, under the effect of renewed dynamism in the tertiary and secondary sectors. Economic growth in the Union would be, in real terms, at 6.6% in 2019 as in 2020.

After a year of reporting slowing economic growth that is a cheerful and refreshing report. Indeed whilst more than a few would be screaming DEFLATION looking at the numbers below I welcome them.

The Council also noted the decline in the general level of consumer prices, with an inflation rate, year-on-year, of -1.0% in the third quarter of 2019, after -0.7% in the previous quarter, in combination with falling food prices, favored by abundant cereal production.

Firstly in spite of the fast rate if economic growth these are countries with plenty of poor people who will not only welcome lower food prices they may be a matter of life and death. Also low and indeed negative inflation can be combined with a good economic run and not need the economics establishment to rev up REM on their turntables.

It’s the end of the world as we know it
It’s the end of the world as we know it

Although there is a catch if the price falls are for products produced and exported.

Thus, price reductions were recorded for cashew nuts
(-23.5%), palm kernel oil (-17.2%), robusta coffee (-7.1%) and cotton (-4.2%). On the other hand,
increases were noted for petroleum (+ 8.8%), rubber (+ 6.5%) and cocoa
(+ 5.0%).  ( BCEAO 2nd Quarter)

There is however a de facto consequence of implicit Euro area membership.

To this end, they invited the member states to continue efforts aimed at bringing the budget deficit below the Community standard of 3.0% of GDP, in particular by widening the tax base and improving performance. as well as the efficiency of tax administrations.

In case you are wondering about the other component of the Stability and Growth Pact it doesn’t really apply at the moment.

Preliminary data point to an increase in total debt to
52.5 percent of GDP in 2018 from 50.1 percent in 2017. ( IMF)

However bond yields are much higher so there are debt servicing issues.

and in total debt service to 33 percent of
government revenue in 2018 from 26.4 percent in 2017. ( IMF)

 

Also the burden is rising.

It rose by 17½ percentage points of GDP over
the last 5 years to reach 52½ percent
at end-2018. ( IMF )

Trade Is A Problem

The IMF puts it like this.

The external current account deficit is estimated to have increased to 6.8 percent in 2018 from 6.6 percent of GDP in 2017. This increase was underpinned by strong public capital spending but also by worsening terms-of-trade
on the back of higher world oil prices.

This is an issue and points straight at the currency being too high which is a challenge for the CFA Franc because it is a fixed exchange rate.

Ch-Ch-Changes

Back to Reuters.

Under the deal, the Eco will remain pegged to the euro but the African countries in the bloc won’t have to keep 50% of their reserves in the French Treasury and there will no longer be a French representative on the currency union’s board.

Comment

In economic terms this is a case of meet the new boss same as the old boss. The switches above are more symbolic than real economic changes as the broad reality is that the Eco is pegged to the Euro. As we stand that is not going too badly with economic growth having been strong for some time.

Despite adverse terms-of-trade shocks and security concerns in some member-countries, real GDP growth is estimated to have exceeded 6 percent for the 7th consecutive year in 2018, fueled by strong domestic demand. ( IMF)

Inflation is also low,

But whilst it is an establishment fashion to look at the fiscal deficit and of course that is a Euro area obsession and some might argue fetish the real issue for me is elsewhere. It is the trade position where we see that whether you call the currency the CFA Franc or the Eco it is too high and as inflation is low maybe a devaluation is in order. Where have we heard that before concerning the Euro?

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Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

The Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019.

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.

Comment

In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

CPI inflation remained at 1.7% in September and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated energy and water prices.

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel

 

India has an economic growth problem

As 2019 has developed we have been noting the changes in the economic trajectory of India. Back on October 4th we noted this from the Reserve Bank of India as it made its 5th interest-rate cut in 2019.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

This was in response to this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

For India that was a slow growth rate for what we would call the second quarter as they work in fiscal years.

What about now?

Friday brought more bad news for the Indian economy as this from its statistics office highlights.

GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at `35.99 lakh crore, as against `34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at `33.16 lakh crore,
as against `31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.

The areas which did better than the average are shown below.

‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ ‘Financial, Real Estate and Professional Services’ and ‘Public Administration,
Defence and Other Services’.

The first two however slowed in the year before leaving us noting that the state supported the economy as you can see below.

Quarterly GVA at Basic Prices for Q2 2019-20 from this sector grew by 11.6 percent as compared to growth of 8.6 percent in Q2 2018-19. The key indicator of this sector namely, Union Government Revenue Expenditure net of Interest Payments excluding Subsidies, grew by 33.9
percent during Q2 of 2019-20 as compared to 22.2 percent in Q2 of 2018-19.

Regular readers will not be surprised what the weakest category was.

Quarterly GVA at Basic Prices for Q2 2019-20 from ‘Manufacturing’ sector grew by (-)1.0
percent as compared to growth of 6.9 percent in Q2 2018-19.

Also those who use electricity use as a signal will be troubled.

The key indicator of this sector, namely, IIP of Electricity registered growth rate of 0.4 percent during Q2 of 2019-20 as compared to 7.5 percent in Q2 of 2018-19.

In terms of structure the economy is 31.3% investment and 56.3% consumption. The investment element is no great surprise in a fast growing economy but it has been dipping in relative terms. The main replacement has been government consumption which was 11.9% a year ago and is 13.1% now as we get another hint of a fiscal boost.

Switching to a perennial problem for India which is its trade deficit we see that it was 3.8% of GDP in the third quarter of this year. That is a little better but there is a catch which is that it has happened via falling imports which were 26.9% of GDP a year ago as opposed to 24% now. So another potential sign of an internal economic slowing.

We can move on by noting that this time last year the GDP growth rate was 7% and that The Hindu reported it like this.

Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%, the government announced on Friday.

The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

4.5% growth is a recession?

Unemployment

The numbers are rather delayed am I afraid leaving us wondering what has happened since.

Unemployment Rate (UR) in current weekly status in urban areas for all ages has been estimated as 9.3% during January-March 2019 as compared to 9.8% during April- June 2018.

Inflation

This has been picking up as the Economic Times reports below.

Inflation touched 4.62%, according to the data released by the statistics office on Wednesday, compared to 3.99% in the month of September. Inflation, as measured by the Consumer Price Index (CPI), was 3.38% in October last year.

Sadly for India’s consumers and especially the poor much of the inflation is in food  prices as inflation here was 7.9%. Vegetables were 26.1% more expensive than a year before and it would seem the humble onion which is a big deal in India is at the heart of it. From India Today.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

For those wondering about any inflation in pork prices then the answer is maybe.The meat and fish category rose at an annual rate of 9.75%.

Manufacturing

We noted in the GDP numbers that there was a fall but this seems to have sped up at the end of the quarter as it fell by 3.9% in September on a year before driven by this.

The industry group ‘Manufacture of motor vehicles, trailers and semitrailers’ has shown the highest negative growth of (-) 24.8 percent followed by (-) 23.6 percent in ‘Manufacture of furniture’ and (-) 22.0 percent in ‘Manufacture of fabricated metal products, except machinery and equipment’ ( India Statistics)

Fiscal Policy

From Reuters last month.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7 per cent of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3 per cent of GDP.

Also there is this from the Economic Times.

In India, private debt in 2017 was 54.5 per cent of the GDP and the general government debt was 70.4 per cent of the GDP, a total debt of about 125 of the GDP, according to the latest IMF figures.

The ten-year bond yield is 6.5% showing us that India does face substantial costs in issuing debt.

Comment

We get another hint of the changes at play as we note this from the Reserve Bank of India in November and note that the result was 5%.

For Q1:2019-20, growth forecast was revised
down from 7.2 per cent in the November 2018 round
to 6.1 per cent in the July 2019 round.

As we look forwards it is hard to see what will shake India out of its present malaise.Of course if the daily news flow that the trade war is fixed ever turns out to be true that would help. But otherwise India may well still be suffering from the demonetarisation effort of a couple of years or so ago.

After the falls of last year the Rupee has been relatively stable and is now at 71.6 versus the US Dollar. A lower Rupee is something which gives with one hand ( competitiveness) and takes away with another ( cost of imports especially oil). But as it starts its policy meeting tomorrow the RBI will feel the need to do something in addition to changing its fan chart for economic growth ( lower) and inflation ( higher) giving us what is for India something of a stagflationary influence.

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Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.

Why?

If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?

Banks

As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.

Comment

It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?

 

 

 

 

The UK sees some welcome lower consumer,producer and even house price inflation

Today we complete a 3 day sweep which gives us most of the UK economic data with the update on inflation. Actually the concept of “theme days” has gone overboard with Monday for example giving us way too much information for it to be digested in one go. Of course the apocryphal civil servant Sir Humphrey Appleby from Yes Prime Minister would regard this as a job well done. Actually in this instance they may be setting a smokescreen over good news as the UK inflation outlook looks good although of course the establishment does not share my view of lower house price growth.

The Pound

This has been in a better phase with the Bank of England recording this in its Minutes last week.

The sterling exchange rate index had increased by around 3% since the previous MPC meeting

If they followed their own past rule of thumb they would know that this is equivalent to a 0.75% Bank Rate rise or at least used to be. Then they might revise this a little.

Inflationary pressures are projected to lessen in the near term. CPI inflation remained at 1.7% in September
and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated
energy and water prices.

As you can see they have given the higher value of the UK Pound £ no credit at all for the projected fall in inflation which really is a case of wearing blinkers. The reality is that if we switch to the most significant rate for these purposes which is the US Dollar it has risen by around 8 cents to above US $1.28 since the beginning of September. Actually at the time of typing this it may be dragged lower by the Euro which is dicing with the 1.10 level versus the US Dollar but I doubt it will be reported like that.

For today’s purposes the stronger pound may not influence consumer inflation much but it should have an impact on the producer price series. This was already pulling things lower last month.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Oil Price

The picture here is more complex. We saw quite a rally in the early part of the year which peaked at around US $75 for Brent Crude in May. Then there was the Aramco attack in mid=September which saw it briefly exceed US $70. But now we are a bit below US $62 so there is little pressure here and if we add in the £ rally there should be some downwards pressure.

HS2 and Crossrail

If you are looking for signs of inflation let me hand you over to the BBC.

A draft copy of a review into the HS2 high-speed railway linking London and the North of England says it should be built, despite its rising cost.

The government-commissioned review, launched in August, will not be published until after the election.

It says the project might cost even more than its current price of £88bn.

According to Richard Wellings of the IEA it started at £34 billion. Indeed there also seems to be some sort of shrinkflation going on.

These include reducing the number of trains per hour from 18 to 14, which is in line with other high-speed networks around the world.

Here is the Guardian on Crossrail.

Crossrail will not open until at least 2021, incurring a further cost overrun that will take the total price of the London rail link to more than £18bn, Transport for London (TfL) has announced.

According to the Guardian it was originally budgeted at £14.8 billion.

If we link this to a different sphere this poses a problem for using low Gilt yields to borrow for infrastructure purposes. Because the projects get ever more expensive and in the case of HS2 look rather out of control, How one squares that circle I am not sure.

Today’s Data

This has seen some welcome news.

The Consumer Prices Index (CPI) 12-month inflation rate was 1.5% in October 2019, down from 1.7% in September 2019.

Both consumers and workers will welcome a slower rate of inflation and in fact there were outright falls in good prices.

The CPI all goods index is 105.6, down from 106.0 in September

The official explanation is that it was driven by this.

Housing and household services, where gas and electricity prices fell by 8.7% and 2.2%, respectively, between September and October 2019. This month’s downward movement partially reflected the response from energy providers to Ofgem’s six-month energy price cap, which came into effect from 1 October 2019……Furniture, household equipment and maintenance, where prices overall fell by 1.1% between September and October this year compared with a fall of 0.1% a year ago.

That is a little awkward as the official explanation majors on services when in fact it was good prices which fell outright. Oh dear! On the other side of the coin have any of you spotted this?

The only two standout items were women’s formal trousers and branded trainers.

Perhaps more are buying those new Nike running shoes which I believe are around £230 a pair.

There was an even bigger move in the RPI as it fell by 0.3% to 2.1% driven also by these factors.

Other housing components, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.05 percentage points between September and October 2019. The effect mainly came from house depreciation………Mortgage interest payments, which decreased the RPI 12-month rate by 0.08 percentage points between September and October 2019 but are excluded from the CPIH

Regular readers will know via the way I follow Gilt yields that I was pointing out we would see lower interest-rates on fixed-rate mortgages for a time. Oh and if you look at that last sentence it shows how laughable CPIH is as an inflation measure as it blithely confesses it ignores what are for many their largest payment of all.

House Prices

There was more good news here as well.

UK average house prices increased by 1.3% over the year to September 2019, unchanged from August 2019.

So as you can see we are seeing real wage growth of the order of 2% per annum in this area which is to be welcomed. Not quite ideal as I would like 0% house price growth to maximise the rate of gain without hurting anyone but much better than we have previously seen. As ever there are wide regional variations.

Average house prices increased over the year in England to £251,000 (1.0%), Wales to £164,000 (2.6%), Scotland to £155,000 (2.4%) and Northern Ireland to £140,000 (4.0%).London experienced the lowest annual growth rate (negative 0.4%), followed by the East of England (negative 0.2%).

Comment

The “inflation nation” which is the UK has shifted into a better phase and I for one would welcome a little bit of “Turning Japanese” in this area. However the infrastructure projects above suggest this is unlikely. But for now we not only have a better phase more seems to be on the horizon.

The headline rate of output inflation for goods leaving the factory gate was 0.8% on the year to October 2019, down from 1.2% in September 2019…..The growth rate of prices for materials and fuels used in the manufacturing process was negative 5.1% on the year to October 2019, down from negative 3.0% in September 2019.

As I pointed out yesterday this will provide a boost for real wages and hence the economy. It seems a bit painful for our statisticians to admit a stronger £ is a factor but they do sort of get there eventually.

All else equal a stronger sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

Meanwhile let me point out that inflation measurement is not easy as I note these which are from my local Tesco supermarket.

Box of 20 Jaffa Cakes £1

Box of 10 Jaffa Cakes £1.05

2 packets of Kettle Crisps £2

1 packet of Kettle Crisps £2.09

Other supermarkets are available…..

 

 

There are major problems brewing in the Pacific for the world economy

It has been something of an economic tenet for a while now that the most dynamic part of the world economy is to be found in the Pacific region. However the credit crunch era has thrown up all sorts of challenges to what were established ideas and it is doing so again right now. The particular issue is what was supposed to be a strength which is trade and we saw another worrying sign on Wednesday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

That is South Korea as we continue our journey past 750 interest-rate cuts in the credit crunch era. Here is their answer to Carly Simon’s famous question, why?

Economic growth in Korea has continued to slow. Private consumption has slowed somewhat, while investment has remained weak. Exports have sustained their sluggish trend as the export prices of semiconductors, petroleum products and chemicals have continued to fall amid the weakening of global trade.

So we see that the economy has been hit by trade issues and that unsurprisingly this has hit investment but also that it has fed through into domestic consumption. Next we got further confirmation that they are blaming trade as we wonder what is Korean for Johnny Foreigner?

Affected mainly by worsening global economic conditions, the growth of the Korean economy is expected to fall back below the July projection…….. The downside risks include a spread of  global trade disputes, a heightening of geopolitical risks and a deepening global
economic slowdown.

We also see that the Korean government has already acted.

Among the upside risks to the growth outlook are an improvement in domestic demand thanks to a strengthening of government policies to shore up the economy and progress in US-China trade negotiations.

 

Quarterly economic growth has been erratic so far this year but Xinhuanet gives us an idea of the trend.

From a year earlier, the real GDP grew 2 percent in the second quarter. It was lower than an increase of 2.8 percent for the same quarter of 2017 and a growth of 2.9 percent for the same quarter of 2018.

Singapore

On the one hand the outlook is supposed to be bright.

Singapore has knocked the United States out of the top spot in the World Economic Forum’s annual competitiveness report. The index, published on Wednesday, takes stock of an economy’s competitive landscape, measuring factors such as macroeconomic stability, infrastructure, the labor market and innovation capability. ( CNN )

The good cheer was not repeated in this from the Monetary Authority of Singapore on Monday.

According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 0.1% year-on-year in Q3 2019, similar to the preceding quarter. In the last six months, the drag on GDP growth exerted by the manufacturing sector has intensified, reflecting the ongoing downturn in the global electronics cycle as well as the pullback in investment spending, caused in part by the uncertainty in US-China relations.

They are very sharp with the GDP number perhaps helped by being a City state. The future does not look too bright either if we look through the rhetoric.

On the whole, Singapore’s GDP growth is projected to come in at around the mid-point of the 0–1% forecast range in 2019 and improve modestly in 2020.

The Straits Times has fone a heroic job trying to make the data below look positive.

Non-oil domestic exports (Nodx) fell by 8.1 per cent in September, a somewhat better showing than the 9 percent fall in August, according to data released by Enterprise Singapore on Thursday (Oct 17).

This was the third month in a row where shipments improved, and the August figure – revised downwards from the 8.9 per cent fall previously reported – also marked a return to single-digit territory after five consecutive months of double-digit declines.

But many eyes will have turned to this bit.

Electronics products weighed down Nodx, shrinking 24.8 per cent year-on-year in September, following a 25.9 per cent contraction in August.

China

This morning has brought the news we were pretty much expecting.

China’s economic growth slowed in the third quarter amid weak demand at home and as the trade war with the U.S. drags on exports.

Gross domestic product rose 6% in the July-September period from a year ago, the slowest pace since the early 1990s and weaker than the consensus forecast of 6.1%. Factory output rose 5.8% in September, retail sales expanded 7.8%, while investment gained 5.4% in the first nine months of the year. ( Bloomberg ).

Back on the 21st of January I pointed out this.

The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

The numbers have been slipping away ever since although Bloomberg tries to put a brave face on it. After all you fo not want to upset the Chinese as you might find yourself like the NBA.

Even with the slowdown, year to date growth of 6.2% suggests the government can hit its 6% and 6.5% for 2019.

Actually M1 money supply growth picked up after January to as high as 4.4% but has now fallen back to 3.4%. So the easing has helped and we are not looking at an “end of the world as we know it” scenario in domestic terms but rather caution.

Before I move on let me point out the consequences of the African swine fever outbreak in the pig industry.

Of which, livestock meat price up by 46.9 percent, affecting nearly 2.03 percentage points increase in the CPI (price of pork was up by 69.3 percent, affecting nearly 1.65 percentage points increase in the CPI), poultry meat up by 14.7 percent, affecting nearly 0.18 percentage point increase in the CPI. ( China Bureau of Statistics )

Japan

Overnight the Cabinet Office has informed us that the Bank of Japan is getting ever further away from its inflation target.

  The consumer price index for Japan in September 2019 was 101.9 (2015=100), up 0.2% over the year before seasonal adjustment, and the same level as  the previous month on a seasonally adjusted basis.

They will of course torture the numbers to find any flicker so if you here about furniture and household utensils ( up 2.7%) that will be why.

Next month the issue will be solved by the Consumption Tax rise but of course that takes money out of workers and consumers pockets at a time of economic trouble. What could go wrong?

Comment

As you can see there are plenty of signs of economic trouble in the Pacific region. Many of these countries are used to much higher rates of economic growth than us in the west. According to Bloomberg Indonesia is worried too.

Indonesia‘s central bank has room to cut interest rates further, perhaps as soon as next week, says its deputy governor

Then of course there is the Reserve Bank of Australia which is cutting interest-rates at a rapid rate. In fact Deputy Governor Debelle gave a speech in Sydney updating us on his priority.

The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the housing market is the Australian economy.[1] That clearly is not the case. But at the same time, developments in the housing market, both the established market and housing construction, have a broader impact than the simple numbers would suggest.

 

 

Good News on UK inflation but not on house prices or for those predicting Cauliflower inflation

This morning has opened with some bad news for the Office for National Statistics and the UK Statistics Authority. They have placed what little credibility they have left on what is called the Rental Equivalence method where you use fantasy imputed rents as a way of measuring owner-occupied inflation. Apart from the obvious theoretical flaws there have been all sorts of issues with actually measuring rents in the first place which led to one of the worst things you can have in statistics which is a “discontinuity” leading to a new method being required. It tells us that rental inflation is of the order of 1% per annum. So let me hand you over to a new report from Zoopla released today.

Average rents increased by 2% to stand at £876 in the 12 months to the end of September……..But despite the overall improvement in affordability, the rate at which rents are rising has accelerated from 1.3% a year earlier to reach a three-year high of 2%, although it still remains below the 10-year average of annual growth of 2.3%

Regular readers will be aware that I have posted research from the Royal Statistical Society website which argued that the official measure of rental inflation is around 1% per annum too low. The reason for this is an incorrect balance between new and old rents. Zoopla with their measure suggests that a rise in rental inflation has been missed by the official data. There is a logic to this for those of us who think that rents are influenced by wages growth as we have seen a rise in wages growth over this period.

Affordability

Whilst the official measure of rental inflation is in yet more disarray we should tale time to welcome this.

Our director of research and insights, Richard Donnell, said: “Renting is more affordable today than the 10-year average. This follows weak rental growth over the last three years, and an acceleration in the growth of average earnings.”………..As a result, the typical renter now spends 31.8% of their earnings on rent, down from a peak of 33.3% in 2016, according to our inaugural Rental Market Report, which records trends in the often-neglected private rented sector.

Propaganda

In a rather ironic twist the establishment has been trying to bolster its case. Here is Mike Hardie of the ONS in Prospect Magazine from earlier this month.

A recent House of Lords Economic Affairs Committee inquiry highlighted that the strategy was not working, with RPI use remaining widespread. In March, David Norgrove, chair of the UK Statistics Authority, wrote to the then chancellor of the exchequer requesting his consent to bring the methods of RPI into line with CPIH.

Meanwhile back in reality here is the actual point the EAC made.

We disagree with the UK Statistics Authority that RPI does not have the potential to become a good measure of inflation.

The truth is that out official statisticians have deliberately not updated the RPI and then blamed it. Next from the EAC came something that was incredibly damning for the official approach.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Returning to the official view in Prospect Magazine there seems to have been an outbreak of amnesia on this subject.

Our headline consumer prices measures, which include the Consumer Prices Index (CPI) and CPI plus owner occupiers’ housing costs (CPIH), for the most part reflect the change in price of acquiring goods and services—in other words, we record the advertised price for an apple or a new car.

Also that explanation is exactly what they do not do with owner occupied housing costs! In a further twist you may note that even their example backfires. Because of the proliferation of rental and leasing deals in the car market it is one area where you probably should now use a rental model and even a small imputed bit.

Regular readers will know I have been a fan of the new Household Cost Indices suggested by John Astin and Jill Leyland. However I note from the Prospect Magazine article that the development process that is taking ages is neutering them.

we also capture mortgage interest costs, which are excluded from other measures of inflation, such as CPI and CPIH.

No mention of house prices which were in the original prospectus and were one of the strengths of the measure? Also take a guess as to which inflation measure right now does have mortgage costs? It is the officially villified RPI.

I am afraid this could not be much more transparent. I have contacted both Prospect Magazine and its editor on Twitter to request a right of reply but so far nether have responded.

Today’s Data

There was some good news as inflation did not rise.

The all items CPI annual rate is 1.7%, unchanged from last month.

As it happens the CPIH measure comes to the same answer in spite of 17% representing a lot lower number that does not exist in CPI.

The OOH component annual rate is 1.1%, unchanged from last month…..Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to September 2019, unchanged since May 2019.

I will leave explaining that to the official number-crunchers but we have returned to my original point that as well as the theoretical problems in using fantasy imputed rents they do not seem able to measure rents properly. If they had the data they could delve into it but in another error they do not.

An especially welcome development was this.

The all items RPI annual rate is 2.4%, down from 2.6% last month.

Especially as on the month prices actually fell.

The all items RPI is 291.0, down from 291.7 in August.

It might be best to keep that quiet or the deflationistas will be back spinning along with Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

The Trend Is Your Friend

If we look at the producer price output data the future is bright.

The headline rate of output inflation for goods leaving the factory gate was 1.2% on the year to September 2019, down from 1.7% in August 2019.

Even better news comes further up the chain.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Here is the main factor at play.

Crude oil provided the largest downward contribution to the annual rate of input inflation.

Comment

If we start with today’s figures we have received some welcome news as inflation was expected to rise. Indeed those who follow the RPI have just seen a fall which changes the real wages picture positively although of course we await the wages data for September. Should the UK Pound £ remain in a stronger phase ( it is over US $1.27 as I type this) then it and the lower oil price we looked at above will give UK inflation a welcome downwards push. Mind you as we observe those factors it is hard to avoid wondering how the economists surveyed thought inflation would be higher!

As we step back we are reminded of the utter shambles created by the use of rental equivalence and today it has come from an unusual source. If we look into the detail of the RPI we see this.

Mortgage interest payments, where average charges rose this year but fell a year ago; and  House depreciation, with the smoothed house price index used to calculate this
component rising this year by more than a year ago.

As it happens not much difference to the rental measure but to get imputed rents into CPIH at a weight of 17% other things had to be reduced and RPI fell because it does not have this effect amongst other things.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.28 percentage points between August and September 2019. The effect came mainly from air fares; sea fares; second-hand cars; games, toys and hobbies and equipment for sport and open-air recreation; food and non-alcoholic
beverages; and fuels and lubricants. This was partially offset by a widening effect from furniture and furnishings, carpets and household textiles.

You see another flaw in the CPI style methodology is that via the way better off people spend more it represents people about two-thirds of the way up the income stream as opposed to the median.

Cauliflower

Remember when the lack of UK Cauliflowers was going to make us have to pay much more for ropey ones? Below is the one I bought for 59 pence last week.