What is happening to house prices and rents in Ireland?

Yesterday brought us up to date with house price changes in the Euro area at least for the start of 2018. From Eurostat.

House prices, as measured by the House Price Index, rose by 4.5% in the euro area and by 4.7% in the EU in the
first quarter of 2018 compared with the same quarter of the previous year…….Compared with the fourth quarter of 2017, house prices rose by 0.6% in the euro area and by 0.7% in the EU in the first quarter of 2018.

As you might expect there are some swings from country to country but before we get there we see some interpretation of history.

House prices in the EU up 11 % since 2010

Actually they fell for a while due to the Euro area crisis and then responded to the “Whatever It Takes” measures.

Prices started growing again in 2014.

A particular disappointment to Mario Draghi must be that his home country Italy has ignored all his efforts to pump up house prices as they fell there by 0.4% over the last year and are down 15% since 2010. Meanwhile my attention was drawn to Ireland with its 12.3% rise in the latest year.

This is because the boom and then bust in Irish house prices took much of the banking system with it.  This meant via the usual privatisation of profits but socialisation of losses with respect to the banking system the Irish taxpayer found themselves in this situation described by its national debt agency NTMA.

That may bring Ireland’s high stock of debt – which at €213bn is more than four times its 2007 level – into sharp focus. Whilst our debt ratios are improving, our total nominal debt is still rising as we continue to borrow to pay interest.

This means that whilst the interest-rate or yield on Ireland’s bonds has fallen a lot mostly due to the bond buying or QE of the ECB (European Central Bank) there is a tidy bill to pay each year.

Almost irrespective of the external interest rate environment, we still expect Ireland’s annual interest bill to fall towards €5bn in the near term, from €6.1bn in 2017 and a peak of €7.5bn in 2014.

Ireland now only has an interest-rate of 0.81% on its ten-year benchmark bond so a fair bit lower than the UK which represents quite a change when we borrowed money to lend to theme to help them out.

House prices

The Irish statistics office or CSO brings us more up to date.

In the year to April, residential property prices at national level increased by 13.0%. This compares with an increase of 12.6% in the year to March and an increase of 9.5% in the twelve months to April 2017.

As you can see the pace has been picking up although it is no longer being quite so led by Dublin.

In Dublin, residential property prices increased by 12.5% in the year to April. Dublin house prices increased 11.7%. Apartments in Dublin increased 15.9% in the same period.

The reason why I raise the Dublin issue is that it has seen the widest swings as it had the biggest bubble then fell the most and then for a while picked back up more quickly. Or as it is put here.

From the trough in early 2013, prices nationally have increased by 76.0%. Dublin residential property prices have increased 90.1% from their February 2012 low, whilst residential property prices in the Rest of Ireland are 69.9% higher than the trough, which was in May 2013.

That is quite a surge is it not? Whilst the Dublin recovery started earlier nearly all of this fits with the “Whatever It Takes” policies and timing of the ECB, Of course it raises old fears as well although we are not back to where the bubble burst.

Overall, the national index is 21.1% lower than its highest level in 2007. Dublin residential property prices are 23.3% lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 26.1% lower than their May 2007 peak.

Oh and maybe another issue is having an impact.

The Border region showed the least price growth, with house prices increasing 9.3%.

Rents

We can track these down via the consumer inflation numbers and we get a hint here.

Housing, Water, Electricity, Gas & Other Fuels rose mainly due to higher rents and an increase in the price of home heating oil and electricity.

Looking into the detail we see that rents have risen by 7.4% over the past year and by 0.5% in May. The larger private-sector market is currently seeing a faster rate of rise but there must have been quite a chunky rise in public-sector rents at some point in the last year as they are up by 10.6% over that period.

Mortgage Interest-Rates

I found these hard to track down as the Central Bank of Ireland changed its reporting system but the Irish Consumer Price Index gives us a guide. It must have been designed in a similar way to the UK RPI as it includes mortgage interest-rates. The index for this was 143 when Mario Draghi was giving his “Whatever It Takes” ( to reduce mortgage rates) speech whereas in May it was 99.1.

Although rather curiously the Irish Independent reports that many have not bothered to switch to lower mortgage-rates.

KBC Bank is due to tell the Oireachtas Finance Committee it has 36,000 residential customers paying variable rates, which are its most expensive home-loan option, when they could get a lower priced deal from a bank.

It comes after it emerged that more than 100,000 homeowners at Bank of Ireland and Permanent TSB are paying up to €3,000 more a year on their mortgages than they need to at the two banks.

Perhaps they do not realise they can get them as I recall Ireland having a situation where many could not switch due to the house price falls.

Comment

There is a fair bit to consider here and let me open by agreeing to some extent with Mario Draghi.

European Central Bank chief Mario Draghi has linked the current spike in Irish property prices to “the search for yield by international investors”.

Mr Draghi said the real estate market in the Republic and several other EU states was “overstretched” and vulnerable to “repricing”. ( Irish Times yesterday).

He cannot bring himself to say falls nor to acknowledge his own role in them being overstretched but he does have time to bring up the fall guy which is of course financial terrorists.

 being fuelled by cross-border financing and non-banks, and that it would be important to investigate whether new macro-prudential instruments should be introduced for non-banks, especially in relation to their commercial real estate exposures.

We can’t have banks losing profitable business can we? Speaking of macro-prudential so the 2015 measures did not work then which is not a surprise here but perhaps a suggestion from the UK might help.

Under such a target the Bank of England should aim to keep nominal house price inflation at (say)
zero per cent for an initial period – perhaps five years – to reset expectations, ( IPPR)

So the organisation which has pumped them up has the job of controlling them? Whilst the central planners would love this sadly it would not work and I say that as someone who thinks we badly need lower house prices and switching back to Ireland because of this sort of thing. From the Irish Examiner.

The scramble to find a home in the crisis-hit rental sector has led to people queuing to view a €900-a-month one-bedroom apartment on Cork’s Tuckey Street……..

Piet said last week they were the first people in a 50-person queue on MacCurtain Street and were refused the apartment because they did not have a reference letter with them.

Piet said the rental sector is a lot more expensive than it was a few years ago.

The average rental property in Cork has soared to above €1,210 a month — up almost 10% on last year.

“We pushed the boat out to €900 a month just to get somewhere nice. That is the very end of our budget,” said Piet.

Or to put it another way with both house prices and rents soaring the rentiers are quids ( Euros) in.

 

 

 

 

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What is driving bond yields these days?

Yesterday brought us an example of how the military dictum of the best place to hide something is to put it in full view has seeped into economics. Let me show you what I mean with this from @LiveSquawk.

HSBC Cuts German 10-Year Bond Yield Forecast To 0.40% By End-2018 From 0.75% Previously, Cites Growth Worries, German Political Tensions Among Reasons – RTRS

Apart from the obvious humour element as these forecasts come and go like tumbleweed on a windy day there is the issue of how low this is. Actually if we move from fantasy forecasts to reality we find an even lower number as the ten-year yield is in fact 0.34% as I type this. This poses an issue to me on a basic level as we have gone through a period of extreme instability and yet this yield implies exactly the reverse.

Another way of looking at this is to apply the metrics that in my past have been used to measure such matters. For example you could look at economic growth.

Economic Growth

The German economy continued to grow also at the beginning of the year, though at a slower pace……. the gross domestic product (GDP) increased 0.3% – upon price, seasonal and calendar adjustment – in the first quarter of 2018 compared with the fourth quarter of 2017. This is the 15th quarter-on-quarter growth in a row, contributing to the longest upswing phase since 1991. Last year, GDP growth rates were higher (+0.7% in the third quarter and +0.6% in the fourth quarter of 2017). ( Destatis)

If we look at the situation we see that the economy is growing so that is not the issue and furthermore it has been growing for a sustained period so that drops out as a cause too. Yes economic growth has slowed but even if you assume that for the year you get ~1.2% and it has been 2.3% over the past year. Thus if you could you would invest any funds you had in an economic growth feature which no doubt the Ivory Towers are packed with! Of course it is not so easy in the real world.

So we move on with an uncomfortable feeling and not just be cause we are abandoning and old metric. There is the issue that we may be missing something. Was the credit crunch such a shock that we have yet to recover? Putting it another way if Forbin’s Rule is right and 2% recorded growth is in fact 0% for the ordinary person things fall back towards being in line.

Inflation

Another route is to use inflation to give us a real yield. This is much more difficult in practice than theory but let us set off.

 The inflation rate in Germany as measured by the consumer price index is expected to be 2.1% in June 2018. ( Destatis)

So on a basic look we have a negative real yield of the order of -1.7% which again implies an expectation of bad news and frankly more than just a recession. Much more awkward is trying to figure out what inflation will be for the next ten years.

This assessment is also broadly reflected in the June 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.7% in 2018, 2019 and 2020.  ( ECB President Draghi)

That still leaves us quite a few years short and after its poor track record who has any faith that the ECB forecast above will be correct? The credit crunch era has been unpredictable in this area too with the exception of asset prices. But barring an oil price shock or the like real yields look set to be heavily negative for some time to come. This was sort of confirmed by Peter Praet of the ECB on Tuesday although central bankers always tell us this right up to and sometimes including the point at which it is obviously ridiculous.

well-anchored, longer-term inflation expectations,

 

The sum of short-term interest-rates

In many ways this seems too good to be true as an explanation as what will short-term interest-rates be in 2024 for example? But actually maybe it is the best answer of all. If like me you believe that President Draghi has no intention at all of raising interest-rates on his watch then we are looking at a -0.4% deposit rate until the autumn of 2019 as a minimum. Here we get a drag on bond yields for the forseeable future and what if there was a recession and another cut?

QE

This has been a large player and with all the recent rumours or as they are called now “sauces” about a European Operation Twist it will continue. For newer readers this involves the ECB slowing and then stopping new purchases but maintaining the existing stock of bonds. As the stock of German Bunds is just under 492 billion Euros that is a tidy sum especially if we note that Germany has been running a fiscal surplus reducing the potential supply. But as Bunds mature the ECB will be along to roll its share of the maturity into new bonds. Whilst it is far from the only  player I do wonder if markets are happy to let it pay an inflated price for its purchases.

Exchange Rate

This is a factor that usually applies to foreign investors. They mostly buy foreign bonds because they think the exchange rate will rise and in the past the wheels were oiled by the yield from the bond. Of course the latter is a moot point in the German bond market as for quite a few years out you pay rather than receive and even ten-years out you get very little.

Another category is where investors pile into perceived safe havens and like London property the German bond market has been one of this. If you are running from a perceived calamity then security really matters and in this instance getting a piece of paper from the German Treasury can be seen as supplying that need. In an irony considering the security aspect this is rather unstable to say the least but in practice it has worked at least so far.

Comment

We find that expectations of short-term interest-rates seem to be the main and at times the only player in town. An example of this has been provided in my country the UK only 30 minutes or so ago.

Britain’s economic strength shows a need for higher interest rates, Mark Carney says. ( Bloomberg)

Mark Carney prepares ground for August interest rate hike from Bank of England with ‘confident’ economic view ( The Independent).

The problem for the unreliable boyfriend who cried wolf is that he was at this game as recently as May and has been consistently doing so since June 2014. Thus we find that with the UK Gilt future unchanged on the day that such jawboning is treated with a yawn and the ten-year yield is 1.28%. If you look at the UK inflation trajectory and performance than remains solidly in negative territory. So the view here is that even if he does do something which would be quite a change after 4 years of hot air he would be as likely to reverse it as do any more.

The theory has some success in the US as well. We have seen rises in the official interest-rate and more seem to be on the way. The intriguing part of the response is that US yields seem to be giving us a cap of around 3% for all of this. Even the reality of the Trump tax cuts and fiscal expansionism does not seem to have changed this.

Is everything based on the short-term now?

As to why this all matters well they are what drive the cost of fixed-rate mortgages and longer term business lending as well as what is costs governments to borrow.

 

 

Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.

If the Euro area outlook is so good how do you explain Deutsche Bank?

This morning we have the opportunity to take a look at the latest forecasts of the European Central Bank. After a frankly rather turgid opening it tells us this.

The euro area economic expansion remains solid and broad-based across countries and sectors, despite recent weaker than expected data and indicators.

The broad-based part rather echoed the words of its President Mario Draghi in April except the direction of travel was somewhat different.

When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

Actually very quickly today’s ECB version seems not quite so sure as it covers nearly all the possible bases.

 The latest economic indicators and survey results are weaker, but remain consistent with ongoing solid and broad-based economic growth.

Having discussed how much central banks love wealth effects this week several times already it would be remiss of me not to point out these bits.

 Private consumption is supported by ongoing employment gains, which, in turn, partly reflect past labour market reforms, and by growing household wealth. ………Housing investment remains robust.

Moving onto the numbers here are the specific forecasts.

The June 2018 Eurosystem staff macroeconomic projections for the euro area foresee annual real GDP increasing by 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020.

So a bit lower for this year. So  in essence the first quarter of 2018 was the template for the rest of the year. The ECB will have its fingers crossed about this on two counts. The first comes from the reality of this.

the Governing Council will continue to make net purchases under the APP at the current monthly pace of €30 billion until the end of September 2018. The Governing Council anticipates that, after September 2018, subject to incoming data confirming its medium-term inflation outlook, it will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and then end net purchases.

It will fear criticism of this should the economy slow. My critique is deeper as we mull how much of the recent better economic times for the Euro area has been driven by the extraordinary monetary policy of nearly 2 trillion Euros of government bond purchases and negative interest-rates? The irony is that the more successful the ECB has been the deeper the hole it is in. The situation is even worse if you think that the side-effects of this may reduce longer-term growth prospects for example by continuing to prop up what are zombie banks.

Deutsche Bank

Did I mention zombie banks?

Some of the new fears may have been driven by the mention of £29 trillion of derivatives being dependent on Brexit by Bank of England Governor Carney yesterday. After all the fact your own derivative book has been rumoured to be twice that size will hardly calm worries about this area.

Then there are the issues highlighted by Fitch Ratings a week ago.

Deutsche Bank’s ratings and the Negative Outlook reflect Fitch’s view that the bank faces substantial execution risk in its restructuring, which aims to strengthen its business model, stabilise earnings and further strengthen risk controls.

There have to be questions based around the fact that the domestic market situation as in the German economy has been strong so why is Deutsche Bank suffering? With house prices growing at an annual rate of around 4% you would think if you look at the story for the German and indeed Euro area economy that DB should be blooming. But instead it is struggling yet again.

If we move to its bonds which are used as capital or CoCo’s there has been a clear change this year. The 6% coupon one was yielding 4.4% in early February as opposed to the 9.7% today. Still less that early 2016 but of course then the economic outlook was different.

Inflation

The story here has been changing as highlighted by this earlier from @LiveSquawk .

German Baden-Wuerttemberg June CPI M./M: 0.2% (prev 0.5%) German Baden-Wurttemberg June CPI Y/Y: 2.4% (prev 2.3%)

This is one of the higher numbers but there have been other rises around such as the one in Italy rising to 1.5%. Whilst the detail is for Italy’s own inflation measure it does highlight the main player here.

The acceleration of the growth on annual basis of All items index was mainly due to prices of Non-regulated energy products (from +5.3% to +9.4%).

So the ECB has what it wants with inflation until you look at the detail. That tells us that as we have discussed many times QE has had a surprisingly low impact on inflation over time ( partly because asset prices are omitted) but the oil price is invariably a major player. Right now with the oil price above US $77 for a barrel of Brent Crude and the Euro below 1.16 versus the US Dollar the heat is on in this respect. This hurts the Euro area economy via real wages and also because it is an energy importer. If this has you confused then simply forecast that inflation will be the same.

This assessment is also broadly reflected in the June 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.7% in 2018, 2019 and 2020.

Also German inflation prospects will be helped by this.

You can now cop the adidas Germany jersey for 30 percent off: ( @highsnobiety )

Money Supply

Here there is a little cheer as the ECB went to press with the state of play being this.

The monetary analysis showed broad money growth gradually declining in the context of reduced monthly net asset purchases, with an annual rate of growth of M3 at 3.9% in April 2018, after 3.7% in March and 4.3% in February.

Whereas yesterday at least in nominal terms things were a little better.

Annual growth rate of broad monetary aggregate M3 increased to 4.0% in May 2018 from 3.8%
in April (revised from 3.9%) …… Annual growth rate of narrower aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.5% in May from 7.0% in April

The rub comes when you start to allow for inflation.

Comment

The recent period has been one where the ECB and in particular its President Mario Draghi has been able to portray it/himself as a “master of the universe”. The fall in oil prices lead to lower inflation meaning it had an opportunity to push the monetary pedal to the metal whilst claiming it was simply trying to hit its target. Of course this made it extremely popular with politicians as their borrowing costs fell and the economic outlook changed. Sticking with the politicians theme though the clouds gather. As the appointment of the Spanish politician and former minister Luis de Guindos begs various questions. For a start the claim of “political independence” and I do not mean parties here I mean the political class resuming control of monetary policy. Next is the issue of skills and competence which was highlighted when at the most recent press conference President Draghi pointed out they have not found any specific roles for him yet.

Now we enter a more difficult phase as for example being a banking regulator made not be fun if DB continues to weaken or the Italians continue to interpret the rules for their own banks. Next comes the issue of the economic situation which is summed up below I think.

ABN Amro now expect the ECB to raise its deposit rate in December 2019 (Prev. September 2019) by 10bps to -0.3% ( @RANSquawk )

So the outlook is so bright they can only raise interest-rates by 0.1% in 18 months or so? Also there is the implied insanity that changing interest-rates by 0.1% achieves anything apart from employment for a few sign writers.

 

Me on Core Finance

Greece is still in an economic depression meaning the debt remains

This morning the Greek Prime Minister flies to the UK for an official visit so let us welcome him, According to Alexis Tsipras it comes at a significant time.

After eight years, we managed to solve the problem of Greek debt. A debt that we did not create. A debt we inherited from the forces of the old regime. From the old Greece of oligarchy, corruption, interdependence, and offsets of power.

The debt is solved? But wait there is more.

With an honest and prudent fiscal policy that will respect our commitments, but at the same time put an end to the austerity and to all that we have experienced, to the injustices we have experienced in the past.

Austerity is over? Well that lasts two short paragraphs.

the fact that the primary surplus will remain at 3.5% for those years, ie from 2019 to 2022.

There is one more issue at hand.

With his Eurogroup decision yesterday, he creates new data for the day after, as Greek debt, Greek public debt, is at last sustainable.

As to the issue of austerity that does not appear to be going so well according to developments this morning.

Members of the union of Greek hospital workers, POEDIN, on Monday morning blocked the entrance to the Finance Ministry on Nikis Street near Syntagma Square, protesting austerity with a black banner bedecked with ties. ( Kathimerini)

What about the debt?

My long-running theme that this will be a case of “To Infinity! And Beyond” can take a bow as it gets ten years nearer. From the Eurogroup.

Further extension of the grace period for the loans of the European Financial Stability Facility (some 100 billion euros) by 10 years and an extension of the average maturing period by a decade.

This is more significant than it might seem as this particular can had already taken quite a bit kicking. But even that has turned out not to be enough. Let us remind ourselves that back at the time of the original “Shock and Awe” bailout the target for this was 120% of GDP ( Gross Domestic Product). Whereas now the latest public debt bulletin tells us the debt is not only 343.7 billion Euros but it rose by 15 billion Euros in the first quarter of this year. That being so we are looking at 187% now.

Next there was some good news but you may note it is being handed out in packets presumably in return for the correct behaviour.

Return to the Greek coffers of the profits that national central banks in the eurozone have from Greek bonds (ANFAs and SMPs), currently amounting to some 4 billion euros. This money will be returned to Athens in two equal tranches every year, starting in December 2018 up to June 2022

Whilst I am no great fan of these bailouts the paragraph above does allow me to point out some Fake News championed by former Finance Minister Yanis Varoufakis earlier this month.

It is now official: The only euro area country that will NOT benefit even by a single euro from the ECB’s 2.4tr QE program designed to defeat deflation will be the one country that suffered the worst deflation by far: Greece! The waterboarding never ends!

He was so incompetent that it is not impossible he is unaware that the ECB holds quite a bit Greek debt still and much of the rest of it is owned by the ESM/EFSF. So Greece had its own earlier equivalent of QE which regular readers will know was called the Securities Markets Programme or SMP. As of the end of last year it still held some 9.5 billion Euros of Greek debt. Then there are the two SPVs which sadly are not Spectrum Pursuit Vehicles from Captain Scarlet.

We have seen disbursements of €245 billion, when I add up the Greek Loan Facility, EFSF and ESM loans.

I am amazed that Yanis still gets so much airtime.

One way that this particular show is managing to stay on the road is this.

The ESM is prepared to disburse €15 billion to Greece after national procedures have been completed. €9.5 billion will go into a dedicated account for the cash buffer, and this will cover post-programme financing needs, until the year 2020. The remaining €5.5 billion will go to the segregated account to cover immediate debt servicing needs.

As you can see the wheels are being oiled so that the show can stay on the road for the next couple of years which is about how it goes, Triumph is proclaimed and then we go through it all again a couple of years later which of course is another triumph. Sadly that cycle has yet to end.

Meanwhile there is always European Commisioner Pierre Moscovici.

But I am also proud to have always been with the Greek people over the years, against austerity and Grexit.

He of course missed the soup kitchens bit and does he mean breath-taking rather than breathe below?

Like Ulysses back to Ithaca, Greece is finally reaching its destination today, ten years after the beginning of a long recession. She can finally breathe, look at the path she has traveled and contemplate again the future with confidence.

Of course it wouldn’t be Pierre without this.

The greatest danger of this odyssey has been the monster called Grexit!

Comment

Let me now introduce the most damning statistic of the so-called triumphs and it is provided by the Greek statistical agency. The pre credit crunch peak for Greece was the exactly 65 billion Euros of GDP ( 2010 prices) produced in the third quarter of 2007. This was replaced by just under 50 billion Euros a decade later and the third quarter last year remains the best since in total unadjusted GDP.  So a lost decade where there has been a great depression wiping out some 23% of output which of course has been the real “monster” which is why Commisioner Moscovici is so keen to create fake ones.

The consequences of this can be seen in many areas.

The seasonally adjusted unemployment rate in March 2018 was 20.1% compared to the 22.1% in March 2017 and the downward revised 20.6% in February 2018.

This compares with between 8% and 10% pre credit crunch. The youth (15-24) unemployment rate is 43.2% reminding us of how many must reach 24 having never had a job and even worse never had any hope of one. Another consequence is this.

According to the results of the 2017 Survey on Income and Living Conditions, persons at risk of poverty or social exclusion represent 34.8% of the total population (3,701,800 persons), recording a decrease compared to the previous year (3,789,300 persons representing 35,6% of
the total population).

Even worse that survey looks as though it is looking a relative poverty and of course the situation has shifted lower. In fact last week was a grim week at the statistics office.

Material deprivation for children aged up to 17 years, in 2017 amounts to 23.8%, in comparison with 11.9% in
2009.

The minor improvement needs to be set against the 11% for the measure below in 2009.

In 2017, 22.1% of the population aged 18-64 years was in severe material deprivation with
a decrease of 1.6 percentage points compared to 2016

Looking ahead even the rose-tinted spectacles of the European Commission are not especially upbeat.

Real GDP is now forecast to grow by 1.9% in
2018 and 2.3% in 2019, revised down compared to
the 2018 winter forecast.

This is a bigger issue than you might immediately think as following such a depression Greece should be having a “V” shaped recovery but instead has an “L” shaped one. The next bit really is from an Ivory Tower high in the clouds.

suggests that households may be more financially
stretched than previously assumed

For what it is worth ( they are in a bad run) the Markit PMI thinks that manufacturing is in a bad run. Next we have the issue of how much the ongoing Euro area slow down will affect things in Greece. We have seen the numbers fall apart before.

Let me finish by wishing Greece well and some ying and yang. First the extraordinary from Vicky Pryce.

Long-suffering Greek friends here in Athens puzzled by UK complacency about brexit economic hit

But next a reminder of the glorious beauty to be found there.

https://twitter.com/search?q=greece&src=typd

Trade Wars what are they good for?

This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.

Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )

This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.

While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.

The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.

Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.

According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.

 Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.

The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?

Thinking ahead

Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.

In April 2018 the euro area current account recorded a surplus of €28.4 billion.

Which means this.

The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.

 

 

So the Euro area has a big current account surplus and it is growing.

This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion

There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.

Trade what is it good for?

International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.

Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.

Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)

Although like in so many other areas things are not what they were.

However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.

Although last year was a good year for trade according to the WTO.

World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
in 2016.

How Much?

Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.

About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Actually there were further gains too.

When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.

So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.

Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.

Comment

This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.

Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,

That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.

Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.

These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.

This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.

So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.

 

 

 

 

 

 

Rising inflation trends are putting a squeeze on central banks

Sometimes events have their own natural flow and after noting yesterday that the winds of change in UK inflation are reversing we have been reminded twice already today that the heat is on. First from a land down under where inflation expectations have done this according to Trading Economics.

Inflation Expectations in Australia increased to 4.20 percent in June from 3.70 percent in May of 2018.

This is significant in several respects. Firstly the message is expect higher inflation and if we look at the Reserve Bank of Australia this is the highest number in the series ( since March 2013). Next  if we stay with the RBA it poses clear questions as inflation at 1.9% is below target ( 2.5%) but f these expectations are any guide then an interest-rate of 1.5% seems well behind the curve.

Indeed the RBA is between a rock and a hard place as we observe this from Reuters.

Australia’s central bank governor said on Wednesday the current slowdown in the housing market isn’t a cause for concern but flagged the need for policy to remain at record lows for the foreseeable future with wage growth and inflation still weak.

Home prices across Australia’s major cities have fallen for successive months since late last year as tighter lending standards at banks cooled demand in Sydney and Melbourne – the two biggest markets.

You know something is bad when we are told it is not a concern!

If we move to much cooler Sweden I note this from its statistics authority.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.1 percent in May 2018, up from 1.9 percent in April 2018. The CPIF increased by 0.3 percent from April to May.

So Mission Accomplished!

The Riksbank’s target is to hold inflation in terms of the CPIF around 2 per cent a year.

Yet we find that having hit it and via higher oil prices the pressure being upwards it is doing this.

The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent and assesses that the rate will begin to be raised towards the end of the year, which is somewhat later than previously forecast.

Care is needed here as you see the Riksbank has been forecasting an interest-rate rise for some years now but like the Unreliable Boyfriend somehow it keeps forgetting to actually do it.

I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ ( Michael McDonald )

Anyway it is a case of watch this space as even they have real food for thought right now as they face the situation below with negative interest-rates.

Economic activity in Sweden is still strong and inflation has been close to the target for the past year.

US Inflation

The situation here is part of an increasingly familiar trend.

The all items index rose 2.8 percent for the 12 months ending May, continuing its upward trend since the beginning of the year. The index for all items less food and
energy rose 2.2 percent for the 12 months ending May. The food index increased 1.2 percent, and the energy index rose 11.7 percent.

This was repeated at an earlier stage in the inflation cycle as we found out yesterday.

On an unadjusted basis, the final demand index moved up
3.1 percent for the 12 months ended in May, the largest 12-month increase since climbing 3.1 percent in January 2012.

In May, 60 percent of the rise in the index for final demand is attributable to a 1.0-percent advance in prices for final demand goods.

A little care is needed as the US Federal Reserve targets inflation based on PCE or Personal Consumption Expenditures which you may not be surprised to read is usually lower ( circa 0.4%) than CPI. We do not know what it was for May yet but using my rule of thumb it will be on its way from the 2% in April to maybe 2.4%.

What does the Federal Reserve make of this?

Well this best from yesterday evening is clear.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

If we start with that let me give you a different definition of accommodative which is an interest-rate below the expected inflation rate. Of course that is off the scale in Sweden and perhaps Australia. Next we see a reference to “strong labo(u)r market conditions” which only adds to this. Putting it another way “strong” replaced “moderate” as its view on economic activity.

This is how the New York Times viewed matters.

The Federal Reserve raised interest rates on Wednesday and signaled that two additional increases were on the way this year, as officials expressed confidence that the United States economy was strong enough for borrowing costs to rise without choking off economic growth.

Care is needed about borrowing costs as bond yields ignored the move but of course some may pay more. Also we have seen a sort of lost decade in interest-rate terms.

The last time the rate topped 2 percent was in late summer 2008, when the economy was contracting and the Fed was cutting rates toward zero, where they would remain for years after the financial crisis.

Yet there is a clear gap between rhetoric and reality on one area at least as here is the Fed Chair.

The decision you see today is another sign that the U.S. economy is in great shape,” Mr. Powell said after the Fed’s two-day policy meeting. “Most people who want to find jobs are finding them.”

Yet I note this too.

At a comparable time of low unemployment, in 2000, “wages were growing at near 4 percent year over year and the Fed’s preferred measure of inflation was 2.5 percent,” both above today’s levels, Tara Sinclair, a senior fellow at the Indeed Hiring Lab, said in a research note.

So inflation is either there or near but can anyone realistically say that about wages?

Mr. Powell played down concerns about slow wage growth, acknowledging it is “a bit of a puzzle” but suggesting that it would normalize as the economy continued to strengthen.

What is normal now please Mr.Powell?

Comment

One of my earliest themes was that central banks would struggle when it comes to reducing all the stimulus because they would be terrified if it caused a slow down. A bit like the ECB moved around 2011 then did a U-Turn. What I did not know then was that the scale of their operations would increase dramatically exacerbating the problem. To be fair to the US Federal Reserve it is attempting the move albeit it would be better to take larger earlier steps in my opinion as opposed to this drip-feed of minor ones.

In some ways the US Federal Reserve is the worlds central bank ( via the role of the US Dollar as the reserve currency) and takes the world with it. But there have been changes here as for example the Bank of England used to move in concert with it in terms of trends if not exact amounts. But these days the Unreliable Boyfriend who is Governor of the Bank of England thinks he knows better than that and continues to dangle future rises like a carrot in front of the reality of a 0.5% Bank Rate.

This afternoon will maybe tell us a little more about Euro area monetary policy. Mario Draghi and the ECB have given Forward Guidance about the end of monthly QE via various hints. But that now faces the reality of a Euro area fading of economic growth. So Mario may be yet another central bank Governor who cannot wait for his term of office to end.