How is the Swedish experiment going?

These days the headline above no doubt has you thinking about an alternative approach to the Coronavirus pandemic. However, I would also like to remind you that Sweden was at the fore front of applying negative interest-rates to a country and in addition applied them into something of an economic boom. Or if you prefer they applied exactly the reverse of the old saying that the job of a central banker is to take away the punch bowl as the party gets going. Instead they decided to give it a refill.

The first perspective is that for all the past talk of a different approach they now seem to be in the same boat as the rest of us.

During the summer, a recovery was initiated, but in recent months the spread of infection has increased again and restrictions have been tightened in many countries. This setback shows the great uncertainty that the global economic recovery is still facing. The economic prospects for Sweden and abroad have been revised down, and the economy is expected to weaken again in the near term ( Riksbank)

Where do we stand?

This morning Sweden Statistics has updated us.

GDP increased by 4.9 percent in the third quarter, seasonally adjusted and compared with the second quarter. The recovery was mainly driven by increased exports of goods and household consumption following the historic decline in the second quarter. Calendar adjusted and compared with the third quarter of 2019, GDP decreased by 2.5 percent.

This is a relatively good performance compared to what we have become used to and as the paragraph above notes has been driven by this.

Household final consumption increased by 6.3 percent. Consumption of transports, as well as hotel and restaurant services contributed most to this increase……..Exports increased by 11.2 percent and imports increased by 9.2 percent. Overall, net exports contributed upwards to GDP growth by 1.1 percentage points.

The return of the hospitality sector boosted many economies in the third quarter and I note Sweden benefited from trade. Although if we look at the trade detail the numbers were heavily affected by the oil price.

Exports of mineral fuels and electric current decreased by 40 percent in value and by 10 percent in volume. The large difference between the value and volume trends is due to lower prices on petroleum products……….Imports of crude petroleum oils decreased by 45 percent in value and by 17 percent in volume.

The story shifts a little if we take a look at Sweden’s Nordic peers. This morning we have also learnt some more about Finland.

According to Statistics Finland’s preliminary data, the volume 1) of Finland’s gross domestic product increased in July to September by 3.3 per cent from the previous quarter. Compared with the third quarter of 2019, GDP adjusted for working days contracted by 2.7 per cent.

So for all the talk of differences of approach in fact the annual economic change in Finland and Sweden is well within the margin of error. Maybe the real difference here is that they have populations which are spread out.

Looking Ahead

We see that the retail sector saw some growth in October.

In October, the retail trade sales volume increased by 0.5 percent, compared with September 2020. Retail sales in durables increased by 0.9 percent and retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.1 percent.

This meant that the annual picture looked healthy.

In October, the year-on-year growth rate in the volume of retail sales was 3.6 percent in working-day adjusted figures. Retail sales in durables increased by 4.8 percent and retail sales in consumables (excluding Systembolaget) increased by 0.7 percent.

However that was then and this is now according to the Riksbank.

The growth forecasts for the coming six months
have therefore been revised down…. However, high-frequency data show signs that demand is now slowing down again…….GDP is expected to decline again during the fourth quarter and the situation on the labour market to deteriorate further. The forecast assumes that GDP growth will decline also for the first quarter of next year before it
picks up again both abroad and in Sweden during the second quarter.

The Swedes seem yo be preparing for a rough start to next year which does differentiate them as most have yet to get past a contraction in this quarter.

The Riksbank Response

You might think as an enthusiast for negative interest-rates the Riksbank would have rushed to deploy them in 2020. But we have got something rather different.

The repo rate is held unchanged at zero per cent and is expected to remain at this level in the coming years.

So they have cast aside a past central banking orthodoxy but joined in with a new one.The latter is the plan to apply ZIRP ( in this instance literally at 0%) and to say interest-rates will stay there for some years. So not quite as explicit as the US Federal Reserve which has guided towards a period of 3 years but essentially the same tune. The abandoned orthodoxy is the enthusiasm for negative interest-rates which leaves the Riksbank with quite a lot of egg on its face. After all they have applied negative interest-rates in a boom. Then raised them in a period of economic weakness ( unemployment was rising pre pandemic). Now they do not use them in a clear example of a depression.

By contrast they are more than happy to support any borrowing by the Swedish government.

To improve the conditions for a recovery, the Executive Board has decided to expand the envelope for the asset purchases by SEK 200 billion, to a total nominal amount of up to SEK 700 billion, and to extend the asset purchase programme to 31 December 2021. The Executive Board has also decided to increase the pace in the asset purchases during the first quarter of 2021, in relation to the fourth quarter of 2020.

They have also decided to interfere in the private-sector as well.

The Executive Board has moreover decided that the Riksbank will only offer to buy corporate bonds issued by companies deemed to comply with international standards and norms for sustainability.

So another central bank sings along with The Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

If they were an army this would be called mission creep.

Comment

As you can see the Riksbank seems to have pretty much abandoned the interest-rate weapon it previously waved with such abandon. There is an additional nuance to this if we shift from the domestic to the external situation. The Krona has been rising against the Euro. There have been ebbs and flows but the 11.2 of March 2020 has been replaced by 10.2 now. If we note that the Euro has also been firm then the Krona has had a strong 2020 and it is interesting that the Riksbank is ignoring this. Perhaps it thought more QE would help, but as I pointed out earlier this week pretty much everyone is at that game.

But like elsewhere the Riksbank is keen to make borrowing cheaper for its government in a new twist on the word independent. With Sweden being paid to borrow ( ten-year yield is -0.13%) no doubt the government is suitably grateful.

 

 

Does money supply growth feed straight into house prices?

I thought that I would look at things today from a slightly different perspective or to quote the French man in The Matrix series we shall investigate some cause and effect. Let me give you the latest news on the effect.

In Q3 2020, the rise in prices of second-hand dwellings in France (excluding Mayotte) weakened: +0.5% compared to Q2 2020 (provisional seasonally adjusted results), after +1.4% in Q2 and +1.9% in Q1 2019.

Over a year, the rise in prices continued: +5.2%, after +5.6% and +4.9%. As observed since the end of 2016, this increase was more important for flats (+6.5% over the year) than for houses (+4.2%). ( Insee)

The reality of the situation arrives when you look at the overall pattern. We saw negative interest-rates introduced by the ECB in June 2014 and large-scale QE begin in March 2015. After several years of falling house prices we then saw French annual house price growth move into positive territory towards the end of 2015. Since then the rate of growth has tended to rise and is now above 5%. The ECB and Bank of France will of course be noting this down as Wealth Effects a plan which is aided and abetted by the Euro area measure of inflation which conveniently omits owner-occupied housing completely. Apparently the twenty odd years they have had to do something about this is not long enough or something like that.

If we bring this right up to date I am nit especially bothered by the decline in quarterly growth in house prices. After all the background environment is for house price falls and the monetary easing we are about to look at has prevented them so far. Or in an amusing irony we can quote the word “counterfactual” back at the central bankers.

Money Supply

The growth here remains stellar as we look at the measure most affected by all the easing.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 13.8% in October, unchanged from previous month.

This is a consequence of buying some 25.5 billion Euros of bonds under the original QE programme ( PSPP) and some 62 billion under the new emergency pandemic one or PEPP. Just to mark you cards looking ahead the latter seems to have accelerated recently from around 15 billion per week to around 20 billion in a possible harbinger of the ECB December decision.

This is a game the ECB has been playing since 2015 when it got M1 growth as high as 11.7% which was part of the push on house prices we looked at above. Annual growth had fallen to around 7% before the last act of Mario Draghi last autumn pushed it back above 8% and now the pandemic response pushed it into double-figures. There is another issue here which was described by Kate Bush.

Be running up that road
Be running up that hill
Be running up that building

The 13.8% growth in October is on a much larger amount. Indeed M1 passed 10 trillion Euros in size in October.

Broad Money

If we go wider in monetary terms we see a similar picture.

Annual growth rate of broad monetary aggregate M3 stood at 10.5% in October 2020, after 10.4% in September 2020

The pattern here is different as the previous moves had struggled to get annual growth much above 5% and now well you can see for yourself.Something of a wall of broad money going somewhere but not into the real economy. As you might expect some of this is the tsunami of narrow money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 9.4 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.4 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (up from 0.6 percentage point).

The ECB will be pleased with the last component of marketable instruments on two counts. Firstly it can point to it as a response to its actions. Secondly growth in such markets will no doubt lead to a growth in sinecures for past central bankers.

Things then get more awkward because it was only the day before yesterday we noted a  savings ratio of 13.5% in Germany on the third quarter. Well from the numbers below it looks as though businesses are saving too and doing it via their bank accounts.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 7.9% in October from 7.7% in September, while the annual growth rate of deposits placed by non-financial corporations decreased to 20.5% in October from 21.1% in September. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 7.3% in October from 8.2% in September.

It might be more accurate to say they have received money they cannot spend yet as we see a shift in monetary transmission. This is one of the clearest examples of what in economics is called excess money balances I have ever seen. Except right now neither supposed consequence of growth and inflation can happen much.

Credit

With the various support schemes in place it is hard to know what these numbers are really telling us. We do get a pointer to something we know is happening.

The annual growth rate of credit to general government increased to 20.3% in October from 18.9% in September, while the annual growth rate of credit to the private sector stood at 4.9% in October, unchanged from the previous month.

Credit is flowing to governments and some of it is being passed on.

Comment

We can now look more internationally and see examples of monetary policy affecting asset prices. The United States has given us two examples this week alone.

US home prices climbed the most on record in the third quarter as historically low mortgage rates drove outsized demand, the Federal Housing Finance Agency said in a Tuesday report.

Prices gained 3.1% from their prior-quarter levels, according to the report. The jump also places prices 7.8% higher than their year-ago levels. A seasonally adjusted monthly index of prices gained 1.7% in September. ( Business Insider)

And this.

The Dow Jones Industrial Average hit 30000 for the first time on Tuesday, after a rally of more than 60% from its March lows. ( WSJ)

We can also look to Japan where this morning’s Nikkei 225 close at 26,537 compares with more like 8,000 when the Abenomics experiment began.

The catch is that in terms of money supply there are lots of leads and lags in the system. So we can see some things clearly such as the rise in French house price growth but in other areas the rain has not yet gone. For example the CAC-40 has surged in response to the monetary easing but like the UK FTSE 100 is well below past peaks. Of course another asset market which is French sovereign bonds has gone through the roof such that France is being paid to borrow ( ten-year yield -0.34%) in an example of a direct impact.

Switching to the real economy there will be greater lags right now as the Covid-19 restrictions and lockdowns crunch economies regardless of monetary growth. But if you think about it that only raises the inflationary risks and it is not only the Euro area that puts a Nelsonian blind eye to likely developments.

“The government’s plan to replace RPI with CPIH is a clear case of using the wrong tool for the job…” Our CEO @stianwestlake on the news that the RPI will be aligned to the CPIH in 2030 ( Royal Statistical Society)

Happy Thanksgiving.

What is happening to the economy of Germany?

As both the largest economy and indeed the bellweather for the Euro area Germany is of obvious importance. This morning has brought us more up to date in the state of play. Firstly the statistics office has continued to update its data on the quarter just gone.

WIESBADEN – The gross domestic product (GDP) rose by 8.5% in the third quarter of 2020 compared with the second quarter of 2020 after adjustment for price, seasonal and calendar variations. Thus, the German economy could offset a large part of the massive decline in the gross domestic product recorded in the second quarter of 2020 due to the coronavirus pandemic. However, the price-, seasonally and calendar-adjusted GDP was still 4.0% lower in the third quarter of 2020 thanin the fourth quarter of 2019, that is the quarter before the global coronavirus crisis.

That is an improvement of the order of 0.3% on what was previously thought. This does in fact give us a partial V-Shape as you can see below.

In the circumstances that is a reasonably good performance and the statistics office puts it like this.

For the whole EU, Eurostat released a preliminary result of -4.3% for the third quarter of 2020. The United States also recorded a strong decline of their gross domestic product (-2.9%, converted figure) compared with the third quarter of 2019. In contrast, year-on-year GDP growth as published by the People’s Republic of China amounted to 4.9% in the third quarter.

There is another context which is that the German economy had previously been struggling. This began with the 0.2% decline at the opening of 2018 which was claimed to be part of the “Euro Boom”. Economic growth was a mere 1.3% in 2018 which then slowed to 0.6% in 2019 so we can see that there were pre pandemic issues.

The Breakdown

I thought that I would switch to the labour market for this and an ongoing consequence for other areas.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 4.0% over the same period.

I am using a measure of underemployment as the international definition of unemployment has simply not worked. Next we can switch to wages.

According to first provisional calculations, the compensation of employees was down by just 0.7% year on year, while property and entrepreneurial income fell sharply by 7.8%. On average, gross wages and salaries per employee fell by 0.4%, while net wages and salaries rose slightly by 0.5%.

So we see a familiar situation of income being supported by the furlough scheme although outside it there has been quite a hit. But as there have been restrictions on spending we see a surge in saving.

According to provisional calculations, the savings ratio was 13.5% in the third quarter of 2020.

We wait to see what will be the full economic impact of a surge in involuntary saving but here is the flip side.

Household final consumption expenditure at current prices, however, showed a decrease of 4.0%.

What about now?

This morning has brought the latest update from the Ifo Institute.

Munich, November 24, 2020 – Sentiment among German managers has deteriorated. The ifo Business Climate
Index fell from 92.5 points in October to 90.7 points in November. The drop was due above all to companies’
considerably more pessimistic expectations. Their assessments of the current situation were also a little worse.
Business uncertainty has risen. The second wave of coronavirus has interrupted Germany’s economic recovery.

It is the services sector which has taken the brunt of this.

In the service sector, the Business Climate Index dropped noticeably. For the first time since June, it is back in
negative territory. Assessments of the current situation are much less positive than they were. Moreover,
substantially more companies are pessimistic about the coming months. The indicators for hotels and
hospitality absolutely nosedived.

The one area which has managed some growth is manufacturing.

This month’s bright spot is manufacturing. The business climate improved here, with companies assessing their
current situation as markedly better. Incoming orders rose, albeit more slowly than last month. However,
expectations for the coming months turned notably less optimistic.

Although as you can see the new restrictions due to Covid-19 have affected expectations. But the picture for the overall economy was that things continued to improve in October but have now reversed. So the vaccine news has not impacted expectations there yet and the V-Shape above will see at least a kink. The general view is similar to that given yesterday by the Matkit business survey.

New lockdown measures to curb the spread of
coronavirus disease 2019 (COVID-19) led to an
accelerated decline in services activity across
Germany in November, latest ‘flash’ PMI®
from IHS Markit showed. However, the country’s
manufacturing sector continued to exhibit strong
growth, helping to support overall economic activity.

They did however hint that the Far East is helping German manufacturing.

which the survey shows is
benefitting for growing sales to Asia in particular.

Financial Conditions

These remain extraordinarily easy. There is the -0.5% deposit rate of the ECB with the -1% interest-rate for the banks. Then there is the enormous amount of bond buying which under the original programme ( PSPP) totaled some 562 billion Euros at the end of October. It is a sign of the times that there is another buying programme as well as the ECB tries to muddy the waters and as of the end of September it had bought another 125 billion.

Today Germany issues a two-year bond and it will be paid to do so as the yield is -0.75% as I type this. Furthermore this yield has been negative for over 5 years now as that state of play looks ever more permanent. Indeed with the thirty-year at -0.16% the whole yield curve is negative.

Switching to the Euro exchange-rate things are not so bright. If we take a long-term context Germany joined to get a weaker exchange-rate. However in recent times it has been rising and the effective index is at 121.5 or 21% higher than when the Euro began. Whilst November has seen a dip the index started 2020 at 115.

Comment

The context is that at the end of the third quarter the German economy had grown by 2.7% compared to the 2015 benchmark. But the news restrictions mean that it has “And it’s gone” to quote South Park. There are vaccine hopes for 2021 now but 2020 looks like being a year to forget.

This brings us to the role of the ECB which is already heavily deployed. Can it respond to the latest dip? Not in any timely way as we note the lags in the system. Also for Germany there is not a lot more that can be done in terms of interest-rates or bond yields as all are heavily negative. The wheels of fiscal policy are being oiled by this as well. Looking at it like that only leaves us with the Euro exchange-rate. Can ECB President Lagarde fire a “bazooka” at that? As I pointed out yesterday looking at the UK with all central banks easing that is easier to say than do.

Meanwhile returning to the world of finance there is this.

FRANKFURT (Reuters) – Germany’s blue-chip DAX index will expand to 40 from the current 30 companies with tougher membership criteria, exchange operator Deutsche Boerse said on Tuesday.

In general a good idea as it is too narrow an index for an economy the size of Germany, especially in the light of this.

The most recent departure was payments company Wirecard, which in a blow to Germany’s capital markets, filed for insolvency just two years after its promotion to the index. The payments company owed creditors billions in what auditor EY described as a sophisticated global fraud.

The perils of indexation?

 

 

The ECB faces problems from the Euro area banks as well as fiscal policy

This morning has brought us up to date on the state of play at the European Central Bank. Vice President De Guindos opened his speech in Frankfurt telling us this about the expected situation.

The pandemic crisis has put great pressure on economic activity, with euro area growth expected to fall by 8% in 2020. ……The tighter containment measures recently adopted across Europe are weighing on current growth. With the future path of the pandemic highly unclear, risks are clearly tilted to the downside.

So he has set out his stall as vaccine hopes get a relatively minor mention. Thus he looks set to vote for more easing at the December meeting. Also he rather curiously confessed that after 20 years or so the convergence promises for the Euro area economy still have a lot of ground to cover.

The severity of the pandemic shock has varied greatly across euro area countries and sectors, which is leading to uneven economic developments and recovery speeds……..And growth forecasts for 2020 also point towards increasing divergence within the euro area.

Looking ahead that is juts about to be fixed, although a solution to it has been just around the corner for a decade or so now.

The recent European initiatives, such as the Next Generation EU package, should help ensure a more broad-based economic recovery across various jurisdictions and avoid the kind of economic and financial fragmentation that we observed during the euro area sovereign debt crisis.

He also points out there has been sectoral fragmentation although he rather skirts around the issue that this has been a policy choice. Not by the ECB but bu governments.

 Consumers have adopted more cautious behaviour, and the recent tightening of restrictions has notably targeted the services sector, including hotels and restaurants, arts and entertainment, and tourism and travel.

Well Done the ECB!

As ever in a central banking speech there is praise for the central bank itself.

Fiscal support has played a key role in mitigating the impact of the pandemic on the economy and preserving productive capacity. This is very welcome, notwithstanding the sizeable budget deficits anticipated for 2020 and 2021 and the rising levels of sovereign debt.

This theme is added to by this from @Schuldensuehner

 Jefferies shows that France is biggest beneficiary of ECB’s bond purchases. Country has saved €28.2bn since 2015 through artificial reduction in financing costs driven by ECB. In 2nd place among ECB profiteers is Italy w/savings of €26.8bn, Germany 3rd w/€23.7bn.

Care is needed as QE has not been the only game in town especially for Greece which is on the list as saving 2,2 billion Euros a year from a QE plan it was not in! It only was included this year. But the large purchases have clearly reduced costs for government and no doubt makes the ECB popular amongst the politicians it regularly claims to be independent from. But there is more.

While policy support will eventually need to be withdrawn, abrupt and premature termination of the ongoing schemes could give rise to cliff-edge effects and cool the already tepid economic recovery.

It is a bit socco voce but we get a reminder that the ECB is willing to effectively finance a very expansionary fiscal policy. That is why it has two QE programmes running at the same time, but for this purpose the game in town is this.

 The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion.

There was a time when that would be an almost unimaginable sum of money but not know as if government’s do as they are told it will be increased.

The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions.

Oh and there is a bit of a misprint on the sentence below as they really mean fiscal policy.

This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy.

The Banks

These are a running sore with even the ECB Vice President unable to avoid this issue.

The pandemic has also weighed on the long-term profitability outlook for banks in the euro area, depressing their valuations. From around 6% in February of this year, the euro area median banks’ return on equity had declined to slightly above 2% by June.

Tucked away in the explanation is an admittal of the ECB’s role here so I have highlighted it.

The decline in profitability is being driven mainly by higher loan loss provisions and weaker income-generation capacity linked to the ongoing compression of interest margins.

The interest-rate cuts we have seen hurt the banks and this issue was exacerbated by the reductions in the Deposit Rate to -0.5% as the banks have been afraid of passing this onto the ordinary saver and depositor. Thus the Zero Lower Bound ( 0%) did effectively exist for some interest-rates.

This is in spite of the fact that banks have benefited from two main sweeteners. This is the -1% interest-rate of the latest liquidity programmes ( TLTROs) and the QE bond purchases which help inflate the value of the banks bond holdings.

Then we get to the real elephant in the room.

Non-performing loans (NPL) are likely to present a further challenge to bank profitability.

We had got used to being told that a corner had been turned on this issue even in Italy and Greece. Speaking of the latter Piraeus Bank hit trouble last week when it was unable to make a bond payment.

The non-payment of the CoCos coupon will lead to the complete conversion of the convertible bond, amounting to 2.040 billion euros, into 394.4 million common shares.

It is noted that the conversion will not involve an adjustment of the share price and simply, to the 437 million shares of the Bank will be added another 394.4 million shares at the price of 0.70 euros (closing of the share at last Friday’s meeting). ( Capital Gr).

There is a lot of dilution going on here for private shareholders as we note that this is pretty much a nationalisation.

The conversion has one month after December 2 to take place and the result will be the percentage of the Financial Stability Fund, which currently controls 26.4% of Piraeus Bank, to increase to 61.3%.

Meanwhile in Italy you have probably guessed which bank has returned to the news.

LONDON/MILAN/ROME (Reuters) – Italy’s Treasury has asked financial and legal advisers to pitch for a role in the privatisation of Monte dei Paschi BMPS.MI as it strives to secure a merger deal for the Tuscan lender, two sources familiar with the matter told Reuters on Friday.

The equivalent of a Hammer House of Horror production as we mull how like a financial vampire it keeps needing more.

Italy is seeking ways to address pending legal claims amounting to 10 billion euros (£9 billion) that sources say are the main hurdle to privatising the bank.

Even Colin Jackson would struggle with all the hurdles around Monte dei Paschi. Anyway we can confidently expect a coach and horses to be driven through Euro area banking rules.

If we look at the proposed solution we wonder again about the bailouts.

Although banks have stepped up cost-cutting efforts in the wake of the pandemic, they need to push even harder for greater cost efficiency.

So job losses and it seems that muddying the waters will also be the order of the day.

The planned domestic mergers in some countries are an encouraging sign in this regard.

A merger does reduce two problems to one albeit we are back on the road to Too Big To Fail or TBTF.

There is of course the ECB Holy Grail.

Finally, we also need to make progress on the banking union, which unfortunately remains unfinished. Renewed efforts are urgently required to improve its crisis management framework.

Just as Italy makes up its own rules….

Comment

We are now arriving at Monetary Policy 3.0 after number one ( interest-rates) and number two ( QE) have failed to work. In effect the role of monetary policy is to facilitate fiscal policy. It also involves a challenge to democracy as the technocrats of the ECB are looking to set policy for the elected politicians in the Euro area. However there are problems with this and somewhat ironically these have been highlighted by the Twitter feed of the Financial Times which starts with an apparent triumph.

Italy’s bond rally forces key measure of risk to lowest since 2018

So on a financial measure we have convergence. But if we switch to the real economy we get this.

‘There is no money left’: the pandemic’s economic impact is ‘a catastrophe’ for people in southern Italy who were already in a precarious situation

Switching to the banks we are facing the consequences of the Zombification of the sector as the same old names always seem to need more money. Although there has been more hopeful news for BBVA of Spain today albeit exiting the country where banks seem to be able to make money.

PNC to buy U.S. operations of Spanish bank BBVA for $11.6 billion ( @CNBC )

Although the price will no doubt if the speech above is any guide will be pressure to give a home to a Zombie or two.

Podcast

 

 

 

Central bank Digital Coins are to enforce negative interest-rates

The weekend just gone produced quite a lot of news. Another lockdown in the UK is in the offing and there is of course the not so small matter of tomorrow’s US election. But something that does not make such headlines was also very significant and it came from ECB President Christine Lagarde.

We’ve started exploring the possibility of launching a digital euro. As Europeans are increasingly turning to digital in the ways they spend, save and invest, we should be prepared to issue a digital euro, if needed. I’m also keen to hear your views on it.

Actually it looks as though they have already decided and are launching a public consultation as cover for the exercise. After all most will not understand what are the real consequences of this especially as it will be presented as being modern and something which is happening anyway. The Covid-19 pandemic has provided a push for electronic forms of payment which is really rather convenient for this purpose. So they have a good chance of getting support and if they do not well they will simply ignore it. I must say it is hard not to laugh at the “if needed” because it is the central bankers as I shall explain who need it and not the Euro areas consumers and savers.

The real problem is highlighted here.

The outbreak of the coronavirus pandemic came as a deep shock to all of us and warranted fast policy responses. I’m proud to say that we’ve delivered: our measures have been providing crucial support to the eurozone economy and to European citizens.

It is the first sentence which applies here although I have to say the tone deaf nature of “we’ve delivered” in the second is pretty shocking. The ECB already had problems with the Euro area economy as the “Euroboom” faded and growth was not only poor but the largest economy and indeed bell weather Germany was struggling. Then the pandemic hit and made everything worse.

The ECB’s Problem

This arises from the fact that in response to the issues above it has used so many monetary policy options. It was as long ago as June 2014 that it introduced negative interest-rates and there have been further reductions since. Its Deposit Rate is now -0.5% and via the TLTROs it has reduced its interest-rates for the banks to -1%. This is a crucial point in today’s narrative because they feel they cannot keep interest-rates at these negative levels without throwing some free fish to the banks. There is a lot of irony here because interest-rates were cut to help the banks but the supposed cure has turned out to be poison at the dosages required. You do not need to take my word for it just tale a look at bank’s share prices. For example my old employer Deutsche Bank has a share price which has nudged over 8 Euros this morning which is around half of what it was in early 2017 and well you do the maths in the fall from this.

The all-time high Deutsche Bank Aktiengesellschaft stock closing price was 159.59 on May 11, 2007. ( macrotrends.net )

So the banks are struggling with negative interest-rates as they are which poses a problem for a central bank wanted to go lower or in the new buzzword be “recalibrated”.

The Plan

Actually the ECB was part of a group of central banks which asked the Bank for International Settlements to look into this issue in January.

In jurisdictions where cash use is declining and digitalisation is increasing, CBDC could also play an important role in maintaining access to, and expanding the utility of, central bank money. ( CBDC = Central Bank Digital Coin)

As that is not a problem they are up to something else here. Also they are worried that it might make the problem they are supposed to stop worse.

There are two main concerns: first that, in times of financial crisis, the existence of a CBDC could enable larger
and faster bank runs; and second, and more generally, that a shift from retail deposits into CBDC
(“disintermediation”) could lead banks to rely on more expensive and less stable sources of funding.

In the end it is always about the banks in their role as The Precious. I think we get more of the truth here.

CBDC may offer opportunities that are not possible with cash. A convenient and accessible
CBDC could serve as an alternative to potentially unsafe forms of private money, offer users privacy, reduce
illegal activity, facilitate fiscal transfers and/or enable “programmable money”. Yet these opportunities may
involve trade-offs and unless these have a bearing on a central bank’s mandate (eg through threatening
confidence in the currency), they will be secondary motivations for central banks.

To my mind the opportunities are for central bankers and not for us.

The IMF lets the cat out of the bag

Back in February 2019 it told us this.

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession.

I am sure you have already spotted why the ECB is now on the case. As to cash it turns out it has a feature which makes central bankers hate it. This is simply that it offers 0% which as the IMF explains below is a barrier to central bank “innovation”,

When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

There is an irony in this as by doing nothing it has turned out to be a powerful tool. The central bankers will be furious at the advice given by the rather prescient Steve Miller Band.

Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run.

Banning a song usually only makes it more popular. That would also be true of cash I suspect.

Comment

As so often what we are told is very different to what is the plan. A central bank digital coin is a way of imposing even deeper negative interest-rates. The IMF gave a template for this below.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

This brings us back to the ECB which last week told us this.

this recalibration exercise will touch on all our instruments. It is not going to be one or the other. It is not going to be looking at one single instrument. It will be looking at all our instruments, how they interact together, what will be the optimal outcome, and what will be the mix that will best address the situation.

It fears that further interest-rate cuts could cause a bank run. I agree with that and have written before that somewhere around -1.5% to -2% seems likely to be the threshold. Thus any more cuts will bring them near that especially as the LTRO rate is already -1%. So in their view a new plan is required and some of you may already be mulling their existing plan to phase out the 500 Euro note which is their highest denomination.

Putting this another way they are worried by two developments. One is Bitcoin which potentially challenges the monopoly power of central banks and also the demand for cash is rising not falling. In the Euro area it was 1.33 trillion Euros in September as opposed to 1.2 trillion a year before.

Podcast

Can the ECB save the Euro area economy?

The last day or so has brought economic activity in the Euro area into focus. Last night brought a reminder that November was going to be difficult in France via all the reports of the traffic logjam in Paris as Parisians tried to find somewhere else to spend the new lockdown. We also had the ECB policy meeting of which more later as first we get to see what happened in the third quarter for the 2 biggest economies. France was first to release its numbers.

In Q3 2020, GDP in volume terms bounced back: +18.2% after –13.7% in Q2 2020. Nevertheless, GDP remained well below the level it had before the health crisis: measured in volume, compared to its level in Q3 2019 (year-on-year), GDP of Q3 2020 was 4.3% lower.

Yet again the expectations of analysts were wrong ( much too low) in spite of the fact that the theme was effective leaked by ECB President Lagarde in the press conference yesterday. After all she would have known the numbers.

Lagarde: As you know, the number for the third quarter will be coming out I believe tomorrow, and might surprise on the upside.

The bit that was a surprise to me was this at a time of large government intervention.

while general government expenditure slightly exceeded it (+0.4% year-on-year).

Moving on we saw Germany next to release its numbers.

WIESBADEN – The gross domestic product (GDP) rose by 8.2% in the third quarter of 2020 on the second quarter of 2020 after adjustment for price, seasonal and calendar variations……GDP in the third quarter of 2020 was down a price-ajusted 4.1% on the third quarter of 2019 (price- and calendar-adjusted: -4.3%).

So at this point we have a similar pattern with a fall of around 4% which means we are Looking at numbers around 1% worse that the USA. I note that Italy has fallen into the same pattern.

In the third quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 16.1 per cent with respect to the previous quarter, whereas it decreased by 4.7 per cent over the same quarter of 2019.

Both typically and sadly our Girlfriend in a coma has down slightly worse, but there is a need to take care as the numbers will be less accurate than usual due to collection difficulties. Also if there is ever a tear where seasonal adjustment will be inaccurate this is it and that is before we get to the impact of issues like this.

The third quarter of 2020 has had four working days more than the previous quarter and one working day
more than the same quarter of previous year.

More Trouble?

We got a hint of things turning for the worse from the German retail sales release.

WIESBADEN – According to provisional data, turnover in retail trade in September 2020 was in real terms 2.2% and in nominal terms 2.6% (both adjusted for calendar and seasonal influences) lower than in August 2020.

As you can see one of the factors driving the German economy forwards looks to have weakened at the end of the quarter. The annual comparison still looks strong but we need to take around 3% away from it to allow for the extra day.

In September 2020, the turnover in retail rose by 6.5% (real) and 7.7% (nominal) compared to the same month of the previous year, where the September 2020 had one day of sale more. In comparison to February 2020, the month before the outbreak of Covid 19 in Germany, the turnover in September 2020 was 2.8% higher.

What next for the ECB?

As I pointed out earlier the ECB will have been aware that the third quarter in isolation had outperformed. But it was also aware that the passage to the end of the year and maybe beyond was not. That has been confirmed by its survey of professional forecasters this morning.

However, due to the emergence of new COVID-19 cases in the recent weeks, many forecasters now assumed a weaker fourth quarter 2020 and that the economy would remain affected by restrictions (albeit not complete lockdowns) well into 2021.

That in essence is the shift we are seeing and let me add that it puts 2021 on a weak opening and also what if the lockdown cycle repeats again?

The ECB response was as we expected to kick the can to its next meeting.

The full Governing Council was in total agreement to analyse the current economic situation and to recognise and acknowledge the fact that risks are clearly, clearly tilted to the downside. We all acknowledge the role and the importance as a driving force of the pandemic and the increase of contagion, as well as the impact that containment measures will have on the economy. So it is with that recognition and that acknowledgement that we agreed, all of us, that it was necessary to take action, and therefore to recalibrate our instruments at our next Governing Council meeting. ( President Lagarde )

Perhaps the most revealing bit here was the shift of language as “tools” have morphed into “instruments”. That may turn out to be like the way “The Troika” became “The Institutions” as things went from bad to worse in Greece.

Then we got more from Christine Lagarde.

So the teams, the committees, staff members are already at work in order to do this recalibration exercise, and this recalibration exercise will touch on all our instruments. It is not going to be one or the other. It is not going to be looking at one single instrument. It will be looking at all our instruments, how they interact together, what will be the optimal outcome, and what will be the mix that will best address the situation.

I do love the way this is presented as a scientific enterprise! But suddenly quite a few extra things are in play via the mention of “all our instruments”. For example another interest-rate now looks to be in play. Maybe the ECB might buy more private-sector instruments such as equities too. Up to now it has only bought bonds,but should the equity market falls continue maybe it will spread its wings. I suggested back on March the 2nd that it could be the next central bank to but equities and it seems such thoughts have arrived at the Financial Times.

“New Instruments” If BOJ is the blueprint, ECB already buy government, corporates bonds and commercial paper. One thing missing… stock ETFs? ( Stephen Spratt)

Comment

We see that the ECB is strongly hinting that it is preparing what has become called a Bazooka although I suppose in the circumstances Panzerfaust may be better. But if we look at what is its main policy tool right now it is already pretty much flat out.

But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way. (Financial Times)

Actually to my mind the precise figures do not matter because if there is a miss match and bond yields start to rise I expect the ECB to raise its rate of purchases. The numbers above omit the 20 billion Euros a month of the pre-exisiting QE scheme but as I just said the principle here is that they will implicitly ( they do not buy in the primary market) finance the deficits.

The ongoing problem remains that there is never any exit strategy as highlighted from Japan earlier this week.

BOJ’S GOV. KURODA: THE ETF PURCHASES WILL CONTINUE TO BE A NECESSARY POLICY TOOL. ( @FinancialJuice )

 

 

 

 

 

 

Hard times for the economy and banks of Spain

We have an opportunity to peer under the economic bonnet of one of the swing states in the Euro area. We have seen Spain lauded as an economic success followed by the bust of the Euro area crisis and then it move forwards again. But 2020 has proven to be another year of economic trouble and that theme has been added to by this morning’s data release.

The monthly variation of the seasonally and calendar adjusted general Retail Trade Index (RTI)
at constant prices between the months of September and August, stood at −0.3%. This rate was 1.7 points lower than the previous month. ( INE)

So we have a fall when if we follow the official view of recoveries from the pandemic we should be seeing the opposite. Then we note that relative to August there has been a much larger decline. The breakdown is below.

By products, Food remained the same (0.0%) and Non-food products declined by 0.6%. If the latter is broken down by type of product, Household equipment decreased the most (−3.7%).

The one category which rose was personal equipment which was up 2.3%.

If we switch to the annual picture we see this.

In September, the General Retail Trade Index, once adjusted for seasonal and calendar effects, registered a variation of −3.3% as compared with the same month of the previous year. This rate was four tenths lower than the one registered in August.

In a by now familiar pattern car fuel sales are down by 9.2% and after them the breakdown is as follows.

If these sales are broken down by type of product, Food
decreased by 2.7%, and Non-food products by 3.1%.

So unlike in the UK the Spanish are not eating more. After the news we have looked it sadly it is no surprise that jobs are declining.

In September, the employment index in the retail trade sector registered a variation of −3.0%
as compared to the same month of 2019. This rate was three tenths above that recorded in August. Employment decreased by −4.9% in Service stations.

If we look at the structure of the sales we see that small chain stores have been hit hard with sales down 14.3% on a year ago meaning they are only 88.3% of what they were in 2015. There has been a switch towards large chain stores who are 2.4% up in September on a year ago and some 17% up on 2015.

Looking at the overall picture the “Euro Boom” has pretty much been erased as we note that retail sales in September are only 2.2% above 2015. These numbers are not seasonally adjusted and may give the best guide because if there has been a year not fitting regular patterns this is it. We get another clue from the numbers from the Canary Islands where volumes are 13.5% below a year ago and the overall index is at 87,5. I am noting that because it gives us a proxy for the tourism effect, or in this instance the lack of tourism effect. Regular readers will recall we feared that this would be in play when the Covid-19 pandemic started and we can see that it has.

Housing Market

The Bank of Spain and the ECB would of course have turned to these figures first.

The number of mortgages constituted on dwellings is 19,825, 3.4% less than in August 2019. The average amount is 134,678 euros, an increase of 4.0%.

They will have been disappointed to see the number of mortgages lower but pleased to see an increase in mortgage size which offers the hope of more business for their main priority which is the banks and may even offer a hint of house price rises.

One factor of note is that if we look at the remortgage figures we see a different pattern in terms of fixed to floating mortgage rates than we have become used to.

After the change of conditions, the percentage of mortgages
fixed interest increases from 19.0% to 31.2%, while that of variable rate mortgages decreases from 80.4% to 59.7%.

As to house prices these are the most recent numbers.

The annual rate of the Housing Price Index (HPI) decreased one percentage point in the
second quarter of 2020, standing at 2.1%.
By housing type, the rate of new housing reached 4.2%, almost two points below that
registered in the previous quarter

So we still have growth and the central bankers will be happy with an index that is at 126.8 when compared with 2015. Their researchers will be busy enhancing their career prospects by finding Wealth Effects from this whilst nobody asks why all the emails from first-time buyers saying they cannot afford anything keep ending up in the spam folder.

Looking Ahead

Last month the Bank of Spain told us this.

Under these considerations, the economy’s output would fall by 10.5% on average in 2020 in scenario 1, and by up to 12.6% in the event that the less favourable epidemiological situation underlying the construction of scenario 2 were to
materialise. That said, the pickup in activity projected for the second half of this year, following the historic collapse recorded in the first half, would have a positive carry-over
effect on the average GDP growth rate in 2021, which would reach 7.3% in scenario 1, while remaining at 4.1% in scenario 2,

With the pandemic storm clouds gathering around Europe we look set for scenario 2 of a larger decline in GDP followed by a weaker recovery. Also if you are in an economic depression then how long it lasts matters as much as how deep the fall is.

In any event, at the end of 2022, GDP would stand some 2 percentage points (pp) below its pre-crisis level in
scenario 1, a gap that would widen to somewhat more than 6 pp in scenario 2.

It is a bit like wars which are always supposed to be over like Christmas and like a banking collapse where we are drip fed bad news. Speaking of the banks there is plenty of bad news around. We can start with the Turkish situation.

Turkish debt held by European banks via BIS – $64 billion in Spanish banks. – $24 billion, in French banks. – $21 billion, in Italian banks. – $9 billion, in German banks. ( DailyFX )

Then there was also this earlier this week. The Spanish consumer association took th banks to court over past mortgage fees.

Those affected do not need to initiate an individual lawsuit, with the costs and time that this entails, but can directly benefit from the success of the Asufin class action lawsuit.

So, as previously indicated, those 15 million mortgages may recover up to an average of 1,500 euros without the need to litigate. ( El Economista)

I doubt that is the end of the story but it is where we presently stand.

Comment

The situation looks somewhat grim right now and it has consequences.If we look at the labour market we have learned that unemployment as a measure is meaningless so here is a better guide.

Total hours worked would fall very sharply on average in 2020: by 11.9% in scenario 1 and 14.1% in scenario 2. Although the rise in this variable, which began
with the easing of lockdown, would continue over the rest of the projection horizon, the total number of hours worked at the end of 2022 would still be 4.5% and 8.3% lower than before the COVID-19 crisis under scenarios 1 and 2, respectively. ( Bank of Spain)

Also the public finances will be doing some heavy lifting.

.As regards public finances, it is estimated that the general government deficit will increase sharply in 2020, to stand at 10.8% and 12.1% of GDP in each of the two scenarios considered…….Public debt, meanwhile, would increase in 2020 by more than 20 pp in scenario 1 and by
some 25 pp in scenario 2, to stand at 116.8% and 120.6% of GDP, respectively.

Of course debt affordability fears are much reduced when some of your bonds can be issued at negative yields and even the ten-year is a mere 0.17%.

As to the banks the eyes of BBVA and Banco Santander will be on developments in Turkey right now.

Me on The Investing Channel

The ECB has found itself pushing on a string

Our focus today shifts to the Euro area where to quote Todd Terry there is indeed “something going on”. We find that the European Central Bank can influence one area of the economy and here it is.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, increased to 13.8% in September from 13.2% in August.

For newer readers wondering if this is high then the answer is yes. The ECB did not reach such annual rates of growth in either of its two main pushes. So the slashing of interest-rates in response to the credit crunch and later the imposition of negative interest-rates and mainstream QE bond purchases did not reach this level of percentage expansion. The next context is that the narrow money supply is much larger now so in terms of Euros around ( on this measure) the push is a real shove.

If we look back we see that there has been a two-stage move with the initial one beginning on the 18th of September last year with the interest-rate cut to -0.5% and the restarting of QE bond purchases. It is hard not to have a wry smile at the thought that back then Mario Draghi was setting policy for his successor Christine Lagarde in a revealing summary of the competence of someone he knows well. Life has sure moved on in the meantime as she is now in a full blown crisis! This move raised M1 growth from 7% to 8% in broad terms. The turbocharger was applied in March and we have gone to three months in a row of growth over 13%. Let me give you an example of the turbocharger in action and remember these are just for last week.

ECB PSPP (EUR): +6.733B To 2.309T (Prev -1.883B To 2.303T) –

CSPP: +2.208B To 241.524B (Prev +2.137B To 239.316B) – CBPP: +722M To 287.426B (Prev -81M To 286.704B) – ABSPP: -206M To 29.173B (Prev +222M To 29.379B) – PEPP: +16.264B To 616.856B (Prev +15.858B To 600.592B)

Firstly apologies for the alphabetti spaghetti, I am sure the names sound grand when they make them up. The original QE programme is at the top and added nearly 7 billion Euros and the emergency one at the bottom added a bit over 16 billion. They also bought over 2 billion Euros of Corporate Bonds. But in total as the ECB supplied Euros in return for the bonds roughly 26 billion was added to the money supply in one week.

Velocity

I often get asked about this and the concept here is to attempt to measure what happens to the money supply. We cannot measure it directly so the proxy is usually our measure of economic output called Gross Domestic Product. The credit crunch era has seen plenty on monetary expansion but only weak GDP growth so velocity has been singing along with Alicia Keys.

I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

This has in the past been described as being like pushing on a string.

If we now bring this up to date we see that Velocity has had a shocker with narrow money growth of a bit over 12% combined with GDP growth of nearly minus 12%. There will be quite a swing in the third quarter as we see quite a bounce back but looking ahead to this quarter things are getting worse again. I have previously suggested the Euro area may contract again this quarter and with the implementation of ever more restrictions in response to the Corona Virus pandemic the economic clouds are gathering. Yesterday brought more news on this front from a country which has had relative success in dealing with the pandemic.

German Chancellor Angela Merkel is planning a nationwide “lockdown light” which could force the closure of bars, restaurants and public events, according to Bild newspaper.

Merkel is expected to push for the measure in a meeting with regional leaders on Wednesday where additional curbs are likely to be decided on. ( Euronews).

Belgium seems to be in a pretty awful mess and playing a new version of Catch-22.

Now 10 hospitals have requested that staff who have tested positive but do not have symptoms keep working.

The head of the Belgian Association of Medical Unions told the BBC they had no choice if they were to prevent the hospital system collapsing within days.

I never thought I would be analysing money velocity in this way but it will be another plunge if as looks likely now the economy shrinks again with M1 growth of the order of 13%.

Broad Money

The heat is on here too.

The annual growth rate of the broad monetary aggregate M3 increased to 10.4% in September 2020 from 9.5% in August, averaging 10.0% in the three months up to September.

As you are probably expecting much of the shove here came from the narrow money we have just looked at.

the narrower aggregate M1 contributed 9.4 percentage points (up from 9.0 percentage points in August), short-term deposits other than overnight deposits (M2-M1) contributed 0.4 percentage point (up from 0.1 percentage point) and marketable instruments (M3-M2) contributed 0.6 percentage point (up from 0.4 percentage point).

The ECB will be pleased to see a pick-up in the rate of growth of “marketable instruments” although in these times this could also be for reasons which are not good.We can apply a similar line of thinking to this perhaps.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 7.8% in September from 7.5% in August.

In theory the ECB would welcome this but it is more of a residual item than a cause. What I mean bu that is that is that furlough type payments have been combined with an inability to spend in many areas leading to a rise in savings. We have seen that pretty much everywhere. So it is hardly a surprise to see bank deposits rising.as they are part of this.

Credit

This is is a lagging rather than leading indicator but there was a possible wind of change here.

the annual growth rate of credit to the private sector stood at 4.9% in September, compared with 5.0% in August.

Comment

If we look at what we would normally expect then the rise in narrow money growth should be impacting the economy towards the end of this year and into 2021. The problem is that the economic push is colliding with more Corona Virus restrictions. Just looking at the money supply suggests a bright economic run but in reality official forecasts are going to need their red pen.

If we look into the detail we see that much of the push is also related to government action.

The annual growth rate of credit to general government increased to 18.8% in September from 16.5% in August,

That is from the M3 series and we get another perspective into things we have already noted. Governments are spending heavily leading to deposits rising in one area and the ECB via QE financing much of it to prevent any drain on the money supply from the borrowing. We had got used to some of that but the difference now is the scale as we mull how much of an impact the ch-ch-changes have on the economic consequences of a money supply boost.You may like to look up Goodhart’s Law at this point.

Moving on there is another cloud in the sky because the traditional response of banks to a downturn seems to be in play.

Banks tightened their criteria for approving loans to enterprises and consumers as well as the terms and conditions on the credit they did approve, the survey showed. They expected further tightening in the fourth quarter. ( Reuters)

So for the ECB it is time to consider the advice provided by Bananarama.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results.

 

 

Greece rearms but what about the economy?

These times does have historical echoes but in the main we can at least reassure ourselves that one at least is not in play. However Greece is finding itself in a situation where in an echo of the past it is now boosting its military. From Neoskosmos last month.

Greece’s new arms procurement program features:

  • A squadron 18 Rafale fighter jets to replace the older Mirage 2000 warplanes
  • Four Multi-Role frigates, along with the refurbishment of four existing ones
  • Four Romeo navy helicopters
  • New anti-tank weapons for the Army
  • New torpedoes for the Navy
  • New guided missiles for its Air Force

The Greek PM also announced the recruitment of a total of 15,000 soldier personnel over the next five years, while the Defence industry and the country’s Armed Forces are set for an overhaul, with modernisation initiatives and strengthening of cyberattack protection systems respectively.

Some of this will provide a domestic economic boost with the extra 15,000 soldiers and some of the frigate work. Much will go abroad with President Macron no doubt pleased with the orders for French aircraft as he was calling for more of this not so long ago. As a major defence producer France often benefits from higher defence spending. That scenario has echoes in the beginnings of the Greek crisis as the economy collapsed and people noted the relatively strong Greek military which had bought French equipment. Actually a different purchase became quite a scandal as bribery and corruption allegations came to light. The German Type 214 submarines had a host of problems too as the contract became a disaster in pretty much every respect.

The driving force behind this is highlighted by Kathimerini below.

Turkey’s seismic survey vessel, Oruc Reis, was sailing 18 nautical miles off the Greek island of Kastellorizo on Tuesday morning. The vessel, which had its transmitter off, was heading northeast and, assuming it continues its course at its current speed, it was expected to reach a point 12 nautical miles off Kastellorizo by around noon.

The catch is that many of the defence plans above take many years to come to fruition and Greece is under pressure from Turkey in the present.

The Economy

At the end of June the Bank of Greece told us this.

According to the Bank of Greece baseline scenario, economic activity in 2020 is expected to contract substantially, by 5.8%, and to recover in 2021, posting a growth rate of 5.6%, while in 2022 growth will be 3.7%. According to the mild scenario, which assumes a shorter period of transition to normality, GDP is projected to decline by 4.4% in 2020 and to increase by 5.8% and 3.8%, respectively, in 2021 and 2022. The adverse scenario, associated with a possible second wave of COVID-19, assumes a more severe and protracted impact of the pandemic and a slower recovery, with GDP falling by 9.4% in 2020, before rebounding to 5.7% in 2021 and 4.5% in 2022.

As it turns out it is the latter more pessimistic scenario which is in people’s minds this week. As I regularly point out the forecasts of rebounds in 2021 and 22 are pretty much for PR purposes as we do not even know how 2020 will end. This is even more exacerbated in Greece which has been forecast to grow by around 2% a year for the last decade whereas the reality has been of a severe economic depression.

The projection of a 9.4% decline would mean that we would then be looking at a decline of around 30% from the peak back in 2009. I am keeping this as a broad brush as so much is uncertain right now. But one thing we can be sure of is that historians will report this episode as a Great Depression.

What about the public finances?

There is a multitude of issues here so let us start with the latest numbers.

In January-September 2020, the central government cash balance recorded a deficit of €12,860 million, compared to a deficit of €1,243 million in the same period of 2019. During this period, ordinary budget revenue amounted to €30,312 million, compared to €35,279 million in the corresponding period of last year. Ordinary budget expenditure amounted to €41,332 million, from €37,879 million in January-September 2019.

Looking at the detail for September there was quite a plunge in revenue from 5.2 billion Euros last year to 3.8 billion this. Monthly figures can be erratic and there have been tax deferrals but that poses a question about further economic weakness?

If we try to look at how 2020 will pan out then last week the International Monetary Fund suggested this.

The Fund further anticipates the budget deficit this year to come to 9% of GDP, matching the global average rate, while the draft budget provides for 8.6% of GDP. In 2021 the deficit is expected to return to 3% of GDP rate, as allowed for by the general Stability Pact rules of the European Union, the IMF says, bettering the government’s forecast for 3.7% of GDP. ( Kathimerini)

As an aside I do like the idea that the Growth and Stability Pact still exists! That is a bit like the line from Hotel California.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

Actually it has only ever applied when it suited and I doubt it is going to suit for years. Anyway we can now shift our perspective to the national debt.

However, on the matter of the national debt, the government appears far more optimistic than the IMF. The Fund sees Greek debt soaring to 205.2% of GDP this year, from 180.9% in 2019, just as the Finance Ministry sees it contained at 197.4%. ( Kathimerini)

I do like the idea of it being “contained” at 197.4% don’t you? George Orwell would be very proud. So we can expect of the order of 200%. Looking ahead we see a familiar refrain.

For 2021 the government anticipates a reduction of the debt to 184.7% of GDP, compared to 200.5% that the IMF projects before easing to 187.3% in 2022 and to 177% in 2023. ( Kathimerini)

This is a by now familiar feature of official forecasts in this area which have sung along with the Beatles.

It’s getting better all the time

Meanwhile each time we look again the numbers are larger.

Debt Costs

This has been a rocky road from the initial days of punishing Greece to the ESM ( European Stability Mechanism) telling us how much it has saved Greece via Euro area “solidarity”

Conditions on the loans from the EFSF and ESM are much more favourable than those in the market. This saves Greeces around €12 billion every year, or 6.7 percent of its economy: a substantial form of solidarity.

These days the European Central Bank is also in the game with Greece now part of its QE bond buying programme. So its ten-year yield is a mere 0.83% and costs of new debt are low.

Comment

I have several issues with all of this. Let me start with the basic one which is that the shambles of a “rescue” that collapsed the economy was always vulnerable to the next downturn.I do not just mean the size of the economic depression which is frankly bad enough but how long it is lasted. I still recall the official claims that alternative views such as mine ( default and devalue) would collapse the economy. The reality is that the “rescue” has collapsed it and people may live their lives without Greece getting back to where it was.

Next comes the associated swerve in fiscal policy where Greece was supposed to be running a primary surplus for years. This ran the same risk of being vulnerable to the economic cycle who has now hit. We are now told to “Spend! Spend! Spend!” in a breathtaking U-Turn. Looking back some of this was real fantasy stuff.

 In 2032, they will review whether additional debt measures are needed to keep Greece’s gross financing needs below the agreed thresholds ( ESM)

Mind you the ESM still has this on its webpage.

Now, these programmes have started to bear fruit. The economy is growing again, and unemployment is falling. After many years of painful reforms, Greece’s citizens are seeing more jobs opening up, and standards of living are expected to rise.

Shifting back to defence we see that another burden is being placed on the Greek people in what seems a Merry Go Round. Reality seldom seems to intervene much here but let me leave you with a last thought. What sort of state must the Greek banks be in?

 

 

The Netherlands continues to see house prices surging

Today gives us the opportunity to look at several issues. Sadly the initial opening backdrop is this.

Dutch prime minister Mark Rutte announced yesterday that the Netherlands is going into “partial lockdown”, due to the sharp rising numbers of coronavirus infections. From Tuesday evening, all bars and restaurants will be closed for at least one month. Buying alcohol after 10PM is forbidden. Hotels remain open, as well as bars and restaurants in the airport, after the security check. ( EU Observer).

So we see that another squeeze is being put on the economy To put this another way the Statistics Netherlands report below from Monday now looks rather out of date.

The economic situation according to the CBS Business Cycle Tracer has become less unfavourable in October. However, the economy is still firmly in the recession stage. Statistics Netherlands (CBS) reports that, as of mid-October, 10 out of the 13 indicators in the Business Cycle Tracer perform below their long-term trend. Measures against the spread of coronavirus have had a major impact on many indicators of the Tracer.

If we look at the situation we see that it was a pretty stellar effort to have a reading of 0.56 in April but the number soon plunged to its nadir so far of -1.95 and the latest reading is -1.21.

The picture for trade, investment and manufacturing is as you might expect.

In August 2020, the total volume of goods exports shrank by 2.3 percent year-on-year. Exports of petroleum products, transport equipment and metal products decreased in particular. Exports of machinery and appliances declined as well.

The volume of investments in tangible fixed assets was 4.5 percent down in July 2020 relative to the same month last year. This contraction is smaller than in the previous three months and mainly due to lower investments in buildings and machinery.

In August 2020, the average daily output generated by the Dutch manufacturing industry was 4.0 percent down on August 2019. The year-on-year decrease is smaller than in the previous four months.

Along the way we see how this indicator was positive in April as some of it is lagged by around 3 months. That is also highlighted by the consumer numbers.

In July 2020 consumers spent 6.2 percent less than in July 2019. The decline is smaller than in the previous four months. Consumers again spent less on services but more on goods.

Unemployment

Yesterday’s official release told us that the unemployment data in the Netherlands are as useless as we have seen elsewhere.

In September 2020, there were 413 thousand unemployed, equivalent to 4.4 percent of the labour force. Unemployment declined compared to August and the increase seen in recent months has levelled off. In the period July through September, the number of unemployed increased by a monthly average of 3 thousand. From June to August, unemployment still rose by 32 thousand on average per month, with the unemployment rate going up to 4.6 percent.

There is a clear case for these numbers to be suspended or better I think published with a star combined with an explanation of the problem.

We do learn a little more from the hours worked data although as you can see they are a few months behind the times.

Due to government support measures, job losses were still relatively limited in Q2 at -2.7 percent, but the number of hours worked by employees and self-employed fell significantly and ended at a total of 3.2 billion hours in Q2 2020. Adjusted for seasonal effects, this is 5.7 percent lower than one quarter previously.

GDP

This was better than the Euro area average in the second quarter.

According to the second estimate conducted by CBS, gross domestic product (GDP) contracted by 8.5 percent in Q2 2020 relative to the previous quarter. The decline was mainly due to falling household consumption, while investments and the trade balance also fell significantly. Relative to one year previously, GDP contracted by 9.4 percent.

House Prices

Here we have something rather revealing and ti give you a clue it will be top of the list of any morning meeting at either the Dutch central bank or the ECB.

In August 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 8.2 percent higher than in the same month last year. This is the highest price increase in over one and a half years.

Yes house prices are surging in a really rather bizarre sign of the times.

House prices peaked in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. The index reached a new record high in August 2020; compared to the low in June 2013, house prices were up by 51 percent on average.

This gives us a new take on the “Whatever it takes” speech by ECB President Mario Draghi in July 2012. Because if we allow for the leads and lags in the process it looks as though it lit the blue touchpaper for Dutch house prices. It puts Dutch house prices on the same timetable as the UK where the Bank of England acted in the summer of 2012 and the house price response took around a year.

The accompanying chart will also warm the cockles of any central banking chart as the house price index of 107.2 in September 2016 ( 2015 = 100) becomes 143.4 this August. Actually in the data there is something which comes as quite a surprise to me.

According to The Netherlands’ Cadastre, the total number of transactions recorded over the month of August stood at 19,034. This is almost 3 percent lower than in August 2019. Over the first eight months of this year, a total of 148,107 dwellings were sold. This represents an increase of over 5 percent relative to the same period in 2019.

More transactions in 2020 than 2019? I know such numbers are lagged but even so that should not be true surely?

Inflation

One might reasonably think that with all that house price inflation that inflation full stop might be on the march.

In September, HICP-based prices of goods and services in the Netherlands were 1.0 percent up year-on-year, versus 0.3 percent in August.

the answer is no because the subject of house price rises is ignored on the grounds that they are really Wealth Effects rather than price rises.That, of course throws first-time buyers to the Wolves. In fact if I may use the numbers from Calcasa first-time buyers can be presented as being better off.

On average, 13.6% of net household income was required to service housing costs in the second quarter of 2020, compared to mid-2008 when housing costs represented 27.0% of net income.

Such numbers have the devil in the detail as averages hide the fact that first-time buyers are being really squeezed.

Comment

The Netherlands is an economic battleground of our times.If we start with the real economy we see that there was a Covid-19 driven lurch downwards followed by hints of recovery. Sadly  the recovery now looks set to be neutered by responses to the apparent second Covid wave. The last quarter of 2020 could see another contraction.

Yet if we switch to the asset prices side the central bank has been blowing as much hot air into them it can. Bond prices have surged with bond yields negative all the way along the spectrum ( even the thirty-year is -0.21%), So we start with questions for the pensions and longer-term savings industry. Then we arrive at house prices which are apparently surging. You almost could not make that up at this time! The inflationary impact of this is hidden by keeping the issue out of the official inflation measure or if really forced using rents for people who do not pay rent. Meanwhile their other calculations include gains from wealth effects boosting the economy.

If we look forwards all I can see is yet another easing move by the ECB with more QE this time maybe accompanied by another interest-rate cut. I fail to see how this will make things any better.