Sweden sees its GDP plunge but also outperforms its peers

Sweden has been a regular topic on here due to the way its central bank conducted a type of economic test tube experiment, of which more later. That theme is also in play as we look to see the economic consequences of it avoiding the lockdowns which were prevalent in much of the rest of Europe. So if you like another form of test tube experiment which was potentially much more deadly. This morning Sweden Statistics began to bring us up to date.

Sweden’s GDP declined by 8.6 percent in the second quarter of 2020, seasonally adjusted and compared with the first quarter. This according to the preliminary compilation of the quarterly national accounts. Calendar adjusted and compared with the second quarter of 2019, GDP decreased by 8.2 percent.

The initial implication is that Sweden has indeed done better than the nearby Euro area but not by as much as some claimed along the way. However it is still very significant as we note an annual decline of 15% there. None the less we are still told this.

 The decrease in GDP is the largest single quarter drop in the directly comparable time series starting 1980.

We do not get a lot of detail but within it there is a glimmer of optimism.

Seasonally adjusted and compared to the preceding quarter the decrease is in large parts driven by falling exports and household consumption expenditure.

GDP numbers struggle with trade via their use of net trade and if imports held up that is a subtraction from the numbers when in this sort of situation it is a sign that the economy is doing better than elsewhere. So as (hopefully) exports recover as other economies do Sweden may also out perform in that phase.

Some caution with the accuracy of the numbers is provided by this and for those unfamiliar with the issue, there are in fact three different ways of calculating GDP.

Before balancing actual GDP growth from the expenditure approach was -9.0, with the corresponding figure for the production approach at -6.6 percent. Both these are growth rates compared to the corresponding quarter the previous year. Averaging the two give the final actual GDP growth of -7.8 percent.

Si we have a 2.4% difference which highlights an issue I raise from time to time. Not quite as bad as the one I observed in Portugal at one point in the Euro area crisis which approached 4%. At this time we could use them as a sort of confidence interval as in the GDP fall was between 6.6% and 9%. Of course that is far too sensible to become widely accepted.

In general it is the output version which is used and in my home country the UK for example the other two measures are adjusted to it. That has its flaws as it means trade flows which you pick up from expenditure numbers can be “adjusted”. But using the expenditure method has its issue as for example Japan has found itself producing unusually erratic numbers. For completeness there is also the income version. It is not a surprise for it to be missing initially as for example tax figures which take time are useful to give a full picture, and it is a shame Sweden looks like it ignores them.

Looking Ahead

In the circumstances any improvement is welcome.

In seasonally adjusted figures, private sector production increased by 0.7 percent compared with May 2020.

One might have hoped for more than that although a post lockdown bounce would have to reply on exports. Thus the annual picture is similar to the GDP one above.

Production in the industry sector decreased by 9.1 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures

As to the detail this is no great surprise.

The largest downward contribution to total private sector development came from the motor vehicle industry, which decreased by 16.7 percent in fixed prices and contributed -0.6 percentage points.

Nor I guess is this.

The largest upward contribution to total private sector development came from the chemical and pharmaceutical industry, which increased by 33.9 percent in fixed prices and contributed 0.8 percentage points.

Id we switch to the service sector we see a similar pattern.

Production in the services sector decreased by 8.4 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

However there was some news which will have the Riksbank popping a few champagne corks.

The largest upward contribution to total private sector development came from real estate services, which increased by 2.2 percent in fixed prices and contributed 0.3 percentage points.

Indeed with construction falling less than the other sectors the Riksbank will be able to stand proud at any central banker get togethers.

Production in the construction sector decreased by 4.3 percent in June 2020 compared with the corresponding month last year, in calendar adjusted figures.

Monetary Policy

Regular readers will understand why this is so.

At the same time, the repo rate is held unchanged at zero per cent.

But there are other areas which can be pumped up.

The framework for the asset purchases made by the Riksbank since the crisis began is being extended from SEK 300 billion to SEK 500 billion up to the end of June 2021. In September, the Riksbank will also begin purchasing corporate bonds.

You may enjoy this bit on the planned corporate bond purchases.

They shall be designed in a way that ensures a
broad and market-neutral impact on the Swedish corporate bond market and thereby on companies’ credit supply.

Market-neutral is the exact opposite of what will happen. Still I am sure the Riksbank has its reasons for supporting this area.

The real estate sector has been a driving force in the growth, representing around 45 percent of the primary volume.

Oh and as ever there are some tit bits for The Precious!

The Executive Board has further decided to cut interest rates and extend maturities on lending to banks.

The only surprise concerning money supply growth is that they have got broad money growing at pretty much the same rate as narrow money.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 16.5 percent in June, a decrease of 0.3 percentage points compared with May. M1 amounted to SEK 3 564 billion in June.

The growth rate of the broad monetary aggregate, M3, amounted to 15.4 percent in June, an increase of 0.8 percentage points compared with May. M3 amounted to SEK 4 170 billion in total in June.

Comment

There are two major contexts here. The first is the way that Sweden arrived at the pandemic in terms of monetary policy. The Riksbank panicked after being called “sado monetarists” bu Paul Krugman of the New York Times. Accordingly they cut interest-rates to -0.5% in a boom and then raised them to 0% as the economy slowed. Things got more awkward as we discovered that Sweden Statistics was not entirely sure about its unemployment measure. It found a flaw and reduced the unemployment rate from 7% to 6% and then the new measure rose to 7.3%.

In that sense both bodies were grateful for the pandemic but then Sweden which is often considered a leader took its own road on lockdown. We see that this meant the economy shrank by less but then did not recover much in production or services terms in June. However of course it was still relatively better off and this will be helped by the retail sales numbers released on Monday.

The retail trade sales volume increased by 3.9 percent in June 2020 compared with the same month a year ago. Retail sales in durables increased by 5.0 percent, while retail sales in consumables (excluding Systembolaget, the state-owned chain of liquor stores) increased by 0.2 percent. These figures are working-day adjusted and in fixed prices.

Although they now seem to have some problems with the retail sales numbers too.

Meanwhile I guess the Riksbank is scanning the report of every house sale.

She says, “hello, you fool, I love you
C’mon join the joyride”
Join the joyride ( Roxette )

 

 

Oh France! Oh Spain! Oh Italy!

After yesterday’s update from Germany we move onto the second, third and fourth largest economies in the Euro area, who rather curiously have produced their figures in that order this morning. So as we mull the fact that Germany accelerated the release of its GDP ( Gross Domestic Product) numbers at exactly the wrong time we also need to be ready for bad news.

In Q2 2020, GDP in volume terms declined: –13.8%, after –5.9% in Q1 2020. It is 19% lower than in Q2 2019.  ( Insee of France)

That is like two explosions going off with the 5.9% being credit crunch like but then it being followed by a much louder bang. The total of -19% is somewhat chilling.

We know the cause.

 GDP’s negative developments in first half of 2020 is linked to the shut-down of “non-essential” activities in the context of the implementation of the lockdown between mid-March and the beginning of May

But the beginning of the recovery seems understated.

The gradual ending of restrictions led to a gradual recovery of economic activity in May and June, after the low point reached in April.

In terms of the detail well everything in the domestic economy fell with one of the components being rather curious.

Household consumption expenditures dropped (–11.0% after –5.8%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –17.8% after –10.3%). General government expenditure also stepped back (–8.0% after –3.5%).

I wonder how they managed to find a category of government spending that fell?! Maybe it was stuff they could not buy as it was out of stock. But it rather sticks out as does this.

 Food expenditure slightly decreased (–0.5% after +2.8%).

In the UK we still seem to be spending more on food whereas France seems to have stocked up and then begun to de-stock.

Although the numbers are larger trade turns out to be a much smaller factor which reminds us that trade numbers are unreliable at the best of times and maybe nearly hopeless right now.

In Q2 2020, imports declined strongly (–17.3% after –10.3%), notably in manufactured goods. Exports fell in a more pronounced manner (–25.5% after –6.1%), in particular in transport equipment. All in all, foreign trade contributed negatively to GDP growth this quarter (–2.3 points after –0.1points).

Make of that what you will.

Spain

This starts especially grimly as the opening page tells us there has been a 22.1% fall in GDP. So let us look more deeply at the state of play.

The Spanish GDP registers a variation of -18.5% in the second quarter of 2020 compared to the previous quarter in terms of volume. This rate is 13.3 points lower than that registered in the first quarter.

which brings us to this.

The year-on-year change in the GDP stood at −22.1%, compared to −4.1% for the quarter
preceding.

That is a bit of a “Boom! Boom! Boom!” moment although notin an economic sense and the breakdown is as follows.

The contribution of domestic demand to year-on-year GDP growth is −19.2 points, 15.5 points lower than that of the first quarter. For its part, external demand represents a contribution of −2.9 points, 2.5 points lower than that of the previous quarter.

We get a sort of confirmation from all of this from the hours worked numbers which at the same time provide a critique of the unemployment data.

In year-on-year terms, hours worked decreased by 24.8%, rate 20.6 points lower than in the first quarter of 2020, and full-time equivalent positions down 18.5%, 17.9 points less than in the first quarter, which represents decrease of 3,394 thousand full-time equivalent jobs in one year.

Some areas saw not far off a collapse in demand, because of past issues the construction numbers stood out to me.

Household final consumption expenditure experiences a year-on-year decrease of 25.7%, 19.9 points less than in the last quarter. For its part, the final consumption expenditure of the Public Administrations presented an inter annual variation of 3.5%, one tenth less than that of the preceding quarter.
Gross capital formation registered a decrease of 25.8%, 20.5 points higher than that of previous quarter. The investment in tangible fixed assets decreases at a year-on-year rate of 30.8%, which it represents 22.4 points more than in the previous quarter. By components, the investment in homes and other buildings and constructions decreased 22.6 points, going from −8.3% to -30.9%, while investment in machinery, capital goods and weapons systems it decreases 23 points when presenting a rate of −32.3%, compared to −9.3% in the previous quarter.

The reason why that sector stands out is the way it affected the economy and the banks as the credit crunch rolled into the Euro area crisis.

Italy

We advance on Italy nervously because of its past record but the fall was in fact the smallest of these three.

 In the second quarter of 2020 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) decreased by 12.4 per cent with respect to the previous quarter and by 17.3 per
cent over the same quarter of previous year.

As to the breakdown well it was everything if we skip over a slightly bizarre focus on farming.

The quarter on quarter change is the result of a decrease of value added in agriculture, forestry and
fishing, in that of industry as well as in services. From the demand side, there is a negative contribution
both by the domestic component (gross of change in inventories) and the net export component.

Farming is of course very important but it hardly the main player in this context.

Comment

There are a lot of contexts to this so let us start with the national ones. Spain was the main “Euro Boom” beneficiary with annual economic growth reaching 4.2% in early 2015 but now we are reminded that it can be the leader of the pack in down as well as upswings. Italy has lost less but it is hard not to think that is because it has less to lose and this from  @fwred is rather chilling.

As the morning has developed we can now look at the overall picture for the Euro area.

In the second quarter 2020, still marked by COVID-19 containment measures in most Member States, seasonally
adjusted GDP decreased by 12.1% in the euro area and by 11.9% in the EU, compared with the previous quarter,
according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union.
These were by far the sharpest declines observed since time series started in 1995. In the first quarter of 2020,
GDP had decreased by 3.6% in the euro area and by 3.2% in the EU.

We can use the numbers to compare with the United States as the annual decline of 15% of the Euro area is larger than the 9.5% there. I think this is outside the margin of error but potential errors right now will be large.

There is a collective assumption that these things will bounce back and I am sure that some areas will. But there are others where it will not and if we think of the “girlfriend in a coma” it never seems to do that. Quarterly economic output in Italy was 417 billion Euros at the beginning of 2017 rising to 431 billion and now falling to 356 billion.

In the end this is the problem with all the can kicking. We have arrived at the next storm without fixing the damage caused by the last one. Where do you go when the official interest-rate is -0.6% and of course -1% for the banks?

Germany sees quite a plunge in economic output or GDP

After last night’s rather damp squib from the US Federal Reserve ( they can expand QE within meetings) the Euro area takes center stage today. This is because the leader of its economic pack has brought us up to date on its economy.

WIESBADEN – The gross domestic product (GDP) in the 2nd quarter 2020 compared to the 1st quarter 2020 – adjusted by price, season and calendar – by 10.1%. This was the sharpest decline since the beginning of quarterly GDP calculations for Germany in 1970. It was even more pronounced than during the financial market and economic crisis (-4.7% in the first quarter of 2009).

So in broad terms we have seen a move double that of the credit crunch which was considered to be severe at the time.  The economy had also contracted in the first quarter of this year which we can pick up via the annual comparison.

Economic output also fell year-on-year: GDP in the second quarter of 2020 was 11.7% lower than in the previous year after adjustment for prices (including calendar adjusted). Here, too, there had not been such a sharp decline even in the years of the financial market and economic crisis of 2008/2009: the strongest decline to date was recorded in the second quarter of 2009 at -7.9% compared to the same quarter of the previous year.

So the worst annual comparison of the modern era although by not as large an amount.

We do not get an enormous amount of detail at this preliminary stage but there is some.

As the Federal Statistical Office (Destatis) further reports, both exports and imports of goods and services collapsed massively in the second quarter of 2020, as did private consumer spending and investments in equipment. The state, however, increased its consumer spending during the crisis.

Just like in the film Airplane they chose a bad time to do this…

Beginning with the second quarter of 2020, the Federal Statistical Office published GDP for the first time 30 days after the end of the quarter, around two weeks earlier than before. The fact that the results are more up-to-date requires more estimates than was the case after 45 days.

Although not a complete disaster as they would have been mostly guessing anyway. One matter of note is that 2015 was better than previously though and 2017 worse both by 0.3%. That is not good news for the ECB and the “Euro Boom” in response to its policies.

Unemployment

There has been bad but not unexpected news from the Federal Employment Agency as well this morning.

Unemployment rose by 2.0% compared to the previous month and by 27.9% year-on-year to 2.9 million. Underemployment without short-time work increased by 1.3% compared to the previous month and by 14.6% compared to the previous month. It is 3.7 million The unemployment rate is 6.3%, the underemployment rate is 7.9%.

Now things get a little more awkward as the statistics office has reported this also.

According to the results of the labor force survey, the number of unemployed was 1.97 million in June 2020. That was 39,000 people or 2.1% more than in the previous month of May. Compared to June 2019, the number of unemployed rose by 653,000 (+ 49.2%). The unemployment rate was 4.5% in June 2020.

What we are comparing is registered unemployment or if you prefer those receiving unemployment benefits with those officially counted as unemployed. Whilst we have a difference in timing ( July and then June) the gap is far wider than the change. The International Labour Organisation has some work to do I think…..

Being Paid To Borrow

Regular readers will be aware that this has essentially been the state of play in Germany for some time now. In terms of the benchmark ten-year yield this started in the spring of last year, but the five-year has been negative for nearly the last five years. That trend has recently been picking up again with the ten-year going below -0.5% this week. With the thirty-year at -0.12% then at whatever maturity Germany is paid to borrow,

This represents yet another defeat for the bond vigilantes because even Germany’s fiscal position will take a pounding from the economic decline combined with much higher public spending. But these days a weaker economy tends to lead to even lower bond yields due to expectations of more central bank buying of them.

ECB Monthly Bulletin

After the German numbers above we can only say yes to this.

While incoming economic data, particularly survey results, show initial signs of a recovery, they still point to a historic contraction in euro area output in the second quarter of 2020.

The problem is getting any sort of idea of how quickly things are picking back up. The ECB seems to be looking for clues.

Both the Economic Sentiment Indicator and the PMI display a broad-based rebound across both countries and economic sectors. This pick-up in economic activity is also confirmed by high-frequency indicators such as electricity consumption.

Meanwhile it continues to pump it all up.

The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion…………Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year……..The Governing Council will also continue to provide ample liquidity through its
refinancing operations. In particular, the latest operation in the third series of targeted
longer-term refinancing operations (TLTRO III) has registered a very high take-up of
funds, supporting bank lending to firms and households.

As to the last bit I can only say indeed! After all who would not want money given to you at -1%?

Comment

We now begin to have more of an idea about how much the economy of Germany has shrunk. Also this is not as some are presenting it because the economy changed gear in 2018 and the trade war of last year applied the brakes. Of course neither were on anything like the scale we have noted today. Whilst the numbers are only a broad brush they are a similar decline to Austria ( -10.7%) which gives things a little more credibility. Markets were a little caught out with both the Euro and the Dax falling as well as bond yields.

Looking ahead we can expect a bounce back in July but how much? The Markit PMI surveys seem to have lost their way as what does this mean?

The recovery in the German economy remained on
track in July, according to the latest ‘flash’ PMI® data
from IHS Markit

Which track?

“July’s PMI registered firmly in growth territory and
well above expectations, in a clear sign that
business conditions are improving across Germany
as activity and demand recover. Furthermore, for
an economy that is steered so much by exports, it
was encouraging to see manufacturers reporting a
notable upturn in sales abroad.”

I am not sure that anyone backing their views with actual trades are convinced by this. Of course things will have picked up as the lockdown ended but there will now be worries about this,

Germany records the highest number of new coronavirus cases in about six weeks ( Bloomberg)

So the recovery seems set to have ebbs and flows. Accordingly I have no idea how places can predict such strong bounce backs in economic activity in 2021 as we still are very unsure about 2020. I wish anyone ill with this virus a speedy recovery but I suspect that economies will take quite some time.

Money Supply Madness in the Euro area

This morning has brought a consequence of the actions of the European Central Bank into focus. In response to the Covid-19 pandemic it found itself out of interest-rate ammunition having already cut interest-rates to -0.6%. Or rather interest-rate ammunition for businesses and consumers as of course it has set a record low of -1% for The Precious! The Precious! So it found itself only able to employ more unconventional measures such as Quantitative Easing ( QE) and credit easing ( TLTROs). Of course it was already indulging in some QE which is looking ever more permanent along the lines such about by Joe Walsh.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

Money Supply

We have been observing the consequences of the above in this area for some months now. Today is no different.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May.

If we look back we see that it was 7.2% a year ago and then the extra monetary easing of the autumn of 2019 saw it rally to around 8%. So the new measures have pretty quickly had an impact. That has not always been true as regular readers will know. Also whilst we have seen an annual rate of 13.1% in the past ( late 2009 when the credit crunch hit) the money supply is much larger now. Mostly of course due to all the official effort pushing it up!

In terms of totals M1 pushed past the 9.7 trillion Euros barrier in June and also cash in circulation pushed past 1.3 trillion. Cash is not growing as fast as the rest but in other terms an annual growth rate of 9.7% would be considered fast especially as it has been out of favour as a medium of exchange for obvious possible infection reasons. More woe for the media reporting of it.

Broad Money

As you can see this is on the surge too.

The annual growth rate of the broad monetary aggregate M3 increased to 9.2% in June 2020 from 8.9% in May, averaging 8.8% in the three months up to June. The components of M3, showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at 0.7% in June, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) increased to 10.1% in June from 5.7% in May.

The relative move has been even stronger here as the annual rate of growth on a year before has doubled from 4.6%. In more recent terms it has risen from around 5.5% if we ignore the odd print at the end of 2019. As to the breakdown much of the growth (8.5%) is M1 and it is noticeable that M2 seems very out  of fashion these days. I guess with interest-rates so low why have your money deposited for longer terms? But M3 growth has picked up noticeably.  We should not be surprised as that is one of the main targets of ECB policy both implicitly via corporate bond purchases and explicitly such as the purchase of commercial paper.

So we have more overnight deposits backed up by more cash and more money market fund shares. There was also a noticeable slowing in June to 95 billion Euros as the growth rate ( Taking us to 13.89 trillion)

There is another way of looking at this and as usual let me remind you not to take these numbers too literally. That went horribly wrong in my home country back in the day.

the annual growth rate of M3 in June 2020 can be broken down as follows: credit to the private sector contributed 5.1 percentage points (down from 5.3 percentage points in May), credit to general government contributed 5.0 percentage points (up from 3.6 percentage points), net external assets contributed 1.0 percentage point (as in the previous month), longer-term financial liabilities contributed 0.3 percentage point (up from 0.0 percentage point), and the remaining counterparts of M3 contributed -2.0 percentage points (down from -0.9 percentage point).

It was only a few days ago I pointed out that the main role of the ECB these days seems to have become to make sure the Euro area government’s can fund themselves cheaply.

Credit

I consider this to usually be a lagging indicator but there are some points of note and the credit to governments leaps off the page I think.

 The annual growth rate of credit to general government increased to 13.6% in June from 9.8% in May, while the annual growth rate of credit to the private sector stood at 4.8% in June, compared with 4.9% in May.

Credit to government was -2% as recently as February so the pedal has been pushed to the metal.

The ECB will be troubled by the latter part of the numbers below.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 4.8% in June from 5.3% in May. Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.0% in June, unchanged from the previous month, while the annual growth rate of adjusted loans to non-financial corporations decreased to 7.1% in June from 7.3% in May.

Private-sector credit declined noticeably in the circumstances when adjusted but that seems to go missing in the detail. So let me help out.

New bank loans to euro area corporates slowed to €9bn in June, following a massive increase of €245bn over the previous three months. ( @fwred)

Putting it another way credit growth fell to 178 billion Euros in June of which 153 billion went to governments.

Comment

The response of the ECB to the Covid-19 pandemic has been to sing along with MARRS.

Brothers and sisters!
Pump up the volume
Pump that beat
Brothers and sisters!
Pump up the volume
We gonna get ya!

But just like their other moves of applying large interest-rate cuts and then negative bond yields it does not seem to be working. Back in the day I was taught this as “pushing on a string”. As a concept it is clear but in the intervening decades the monetary system has changed enormously. Personally I think the concepts of money and credit have merged in certain areas such as people paying for things with their phone. Another is the use of credit cards.

Putting it another way the economic impact is money supply multiplied by velocity with the catch being we do not know what velocity is. We can have a stab at what it was but right now we neither know what it is nor what it will be. So we know it has fallen over time undermining the central bank efforts making it push on a string but we can only say that looks like it is happening all over again, we cannot measure it with any precision.

Thus a likely consequence from this is inflation. We can see this in two ways. The official denials combined with increasingly desperate efforts to miss measure inflation. Or as the news overnight has highlighted and my subject of a few days ago, another high for the price of Gold.

Let me offer an olive branch to economics 101. How is the Euro rallying ( 1.17 versus the US Dollar). Well the US Money Supply is growing even faster.

Podcast

Today’s surveys show that any economic recovery in France remains distant

Today out focus shifts to the second largest economy in the Euro area as La Belle France takes centre stage. Let us open with the thoughts of the finance minister on the economic state of play.

PARIS (Reuters) – Recent economic indicators for France are satisfactory but too fragile to change the forecast for an 11% economic contraction this year, Bruno Le Maire said Thursday.

The Minister of the Economy, speaking to the National Assembly for the debate on the orientation of public finances for 2021, said he expected economic growth of 8% for France next year and expressed the will that the in 2022, activity returns to its levels preceding the crisis linked to the new coronavirus.

Only a politician could use the words “satisfactory” and “too fragile” in the same sentence and it is a grim one of a 11% decline in GDP ( Gross Domestic Product) for this year. This means that the expectations for France are worse than those for the Euro area as a whole.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively. ( ECB 16th July)

So around 3% worse which is interesting and I note that there is a similar pattern of predicting most but far from all of it returning in 2021. That is what you call making a forecast that is like an each-way bet where if you do recover no-one will care and if you do worse than that you highlight you did not expect a full recovery. The truth is that none of us know how 2020 will finish let alone what will happen next year. Maybe the quote below suffers from translation from French but “expressed the will?”

expressed the will that the in 2022, activity returns to its levels preceding the crisis

What does that mean? So let us move on knowing 2020 will be bad with a likely double-digit fall in economic output.

Right Here, Right Now

This morning has brought the latest in the long-running official survey on the economy.

In July 2020, the business climate has continued its recovery started in May. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 7 points. At 85, the business climate is however still significantly below its long-term average (100), and a fortiori below its relatively high pre-lockdown level (105).

The ending of the lockdown has seen a welcome rally of 7 points but sadly only to 85% of the long-term average. If we look back though I note it was recording a relatively high 105 which makes me mull this.

In Q1 2020, real gross domestic product (GDP)* fell sharply: -5.3% after -0.1% in Q4 2019, thus a revision of +0.5% compared with the first estimate published in April.

I think the relevant number is the contraction in the last quarter of 2019 and how does that relate to a relatively high reading. As the fall is only 0.1% we could argue the economy was flat lining but we still have a measure recording growth when there wasn’t any.

Going back to the survey we see a similar pattern but weaker number for employment.

In July 2020, the employment climate has continued to recover sharply from the April low. At 77, it has gained 10 points compared to June, but it still remains far below its pre-lockdown level.

Manufacturing

The position here is particularly bad.

According to the business managers surveyed in July 2020, the business climate in industry has continued to improve. The composite indicator has gained 4 points compared to June, after losing 30 points in April due to the health crisis. However, at 82, it remains far below its long term average (100).

Looking ahead the order book does not look exactly auspicious either.

In July 2020, slightly fewer industrialists than in June have declared their order books to be below normal. The balances of opinion on total and foreign order books have very slightly recovered. Both stand at very low levels although slightly higher than in 2009.

If we look back this measure had a recent peak around 112 as 2018 began. This represented quite a rally compared to the dips below 90 seen at times in 2012 and 13. But after that peak it began slip-sliding away to around 100 and now well you can see above.

Saving

Whilst debt hits the headlines the breakdown of the GDP data shows that it is not the only thing going on.

At the same time, household consumption fell (-5.6% after +0.3%), resulting in a sharp rise of the saving rate to 19.6% after 15.1% in Q4 2019.

The pandemic has seen higher levels of saving which has two drivers I think. Firstly many simply could not spend their money as so many outlets closed. Next those who can look like they have been indulging in some precautionary saving which is something of a disaster for supporters of negative interest-rates.

National Debt

Having just looked at ying here is part of the yang.

In Q1 2020 the public deficit increased by 1.1 points: 4.8% of GDP after 3.7% in Q4 2019.

So we see that pandemic France was borrowing more and regular readers will have noted this from past articles. For the year as a whole France had its nose pressed against the Growth and Stability Pact threshold of 3% of GDP. I know some of you measure an economy by tax receipts so they were 1.275 trillion in 2019.

Moving to the national debt we see this.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Looking ahead this is the view of the Bank of France.

As a result of the wider deficit and the fall in GDP, government debt should rise substantially to 119% of GDP in 2020, from 98.1% in 2019, and should scarcely decline over the rest of the projection horizon. The average debt-to-GDP ratio for the euro area should also increase in parallel, but to a more limited extent (to 101% of GDP in 2022, easing to 100% by end-2022).

Comment

There are some familiar patterns of a sharp drop in economic output followed by plenty of rhetoric about a sharp recovery next year. However the surveys we have looked at show a very partial recovery so far so that the “V-shaped” hopium users find themselves singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Switching to the mounting debt burden it is a clear issue in terms of capital and if you like the weight of the debt. Also estimates of economies at around 120% of GDP went spectacularly wrong in the Euro area crisis. But in terms of debt costs then with a ten-year yield of -0.19% France is often being paid to issue debt. Although care is needed because the ECB does not buy ultra long bonds ( 30 years is its limit) meaning that France has a fifty-year bond yield of 0,58%. We should not forget that even the latter is very cheap, especially in these circumstances.

Also there is this from the head of the ECB Christine Lagarde.

In my interview with @IgnatiusPost

, I explained that price stability and climate change are closely related. Consequently, we must take climate-related risks into account in our central banking activities.

 

 

 

The role of the ECB is to finance Euro area governments rather than target inflation

Today opens with a Euro area summit. Although the summit is new the modus operandi is not.

There is also concern that most of the good news around any recovery is already baked in, as investors look towards this weekend’s EU leaders’ summit where there is some hope that some form of fudge can be achieved with respect to agreement over the €750bn recovery fund. ( CMC Markets )

Whether that is exactly the same sort of fudge we observed in the Greek crisis I am not sure but fudge does seem on the menu. Also in a manner that in the UK became associated with Gordon Brown the same thing keeps “coming around again” as Carly Simon would say.

This hope is tempered by the fact that the obstacles to an agreement remain high with 4-5 countries insistent that any grants be allocated with conditionality on the part of the countries receiving them. This is hardly unreasonable, but also suggests there will be no quick solution, with the probability that the can will get kicked down the road, as it always has done with these EU summits. ( CMC Markets )

This poses a question as the Euro fund was announced to a grand fanfare by President Von der Leyen. but it seems to have got stuck. This matters as we note that fiscal policy has been quite quickly deployed elsewhere during the Covid-19 pandemic. This is as awkward for the pronouncements of unity as something which was discussed in the comments section earlier this week.

Apple has been told it will not have to pay Ireland €13bn (£11.6bn) in back taxes after winning an appeal at the European Union’s second-highest court.

It overturns a 2016 ruling which found the tech giant had been given illegal tax breaks by Dublin.

The EU’s General Court said it had annulled that decision because there was not enough evidence to show Apple broke EU competition rules.

It is a blow for the European Commission, which brought the case. ( BBC News )

This exposes the issue over taxes where Ireland has in effect run as a tax haven within the Euro area for large corporates. The Netherlands does so in other ways which was exposed when Bono and U2 were found to be using it as a way of reducing the taxes they paid. There was a particular irony in an Irish band looking for lower taxes,although they did leave a clue.

But I still haven’t found
What I’m looking for
But I still haven’t found
What I’m looking for

The ECB

I did not do a build-up to yesterday’s policy meeting because the summer is in essence a “see you in six weeks” type of gig. I figured that was only going to be exacerbated by a President who openly reads from a crib sheet. Since the meeting there has been some matters of note. One is a type of signal of defeat.

ECB’S SCHNABEL: AS CLIMATE CHANGE POSES SEVERE RISKS TO PRICE STABILITY, CENTRAL BANKS ARE REQUIRED TO STRENGTHEN THEIR EFFORTS TO SUPPORT A MORE SUSTAINABLE ECONOMY. ( @FinancialJuice)

I do not know Isabel Schnabel so cannot say whether she is actually silly enough to believe what she says, or whether her recent appointment to the ECB Governing Board came with a tacit agreement she would too pretty much any party line? But the climate change diversion is plainly non-mandate and a clear diversion from the economic situation. That is grim as highlighted by this morning’s ECB survey.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively.

So if we follow the advice of Maxine Nightingale

We gotta get right back to where we started from

We see that it will not be until 2023 under this forecast and in fact worse if we look further.

These represent revisions from the previous round of -2.8 percentage points for 2020 and +1.4 and +0.7 percentage points for 2021 and 2022

So this year is now worse than they thought so they have improved 2021 and 22 to make it look not quite so bad. They do manage some humour as the deeper economic decline will now apparently lead to less and not more unemployment and there is a laugh out loud moment too.

At 1.4%, average longer-term expectations for real GDP growth were unchanged.

Also as the main role of the ECB right now is to finance government’s this part of President Lagarde’s crib sheet was especially relevant.

Therefore – and we don’t see it for the moment, frankly – but unless there were significant upside surprises, our baseline remains that we will use the entire envelope of the PEPP.

Just as a reminder as there are many policies in play.

We will continue our purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion.

However we quickly learned that the programme by President Lagarde to get everyone to sing from the same hymn sheet ( remember the picture of a rather grand dining table…) is having her usual success.

ECB policy makers didn’t agree on whether they expect to use the full amount of their 1.35 trillion-euro bond program, despite Lagarde subsequently saying that’s likely, sources say ( Bloomberg)

Italy

The ECB “sauces” issue has a conceptual element especially right now and to my mind we can highlight this by looking at the girlfriend in a coma.

Italy national debt at a new all time high +85,939 billion euro YOY to 2,5 trillion euro! That’s 152,9% to GDP. Thanks to the euro experiment pays record low interest on 10 year bonds . This whole system is so bankrupt or like Italians say: banca rotta

I like the phrase “banca rotta” and will be using it in future. But as we mull the upwards trajectory of the national debt which is almost as fast as economic output is dropping there is the role of the ECB in this. Due to its QE bond purchases Italy pays a mere 1.25% on its benchmark ten-year yield.

That is remarkable in several respects. Firstly it went above 7% in the Euro area crisis as opposed to 3% this time around. Yet pretty much everything is worse now. The pandemic has dropped absolute output levels to new lows but even worse we know that Italy struggles to grow at all and maybe makes 1% per annum on a sustained basis. The National Debt has consequently risen as the Euro area authorities desperately try to redact all mentions of the 120% to GDP level they established in the Greek crisis.

So the ECB has to keep buying Italy’s debt or as Coldplay put it.

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

Comment

The ECB campaign to present itself as green champions seems to have fallen at the first hurdle.

And Fourth, ECB officials can be mindful of the environment when conducting work business. In Jan the Press Conference talked environment and then all GC members flew immediately to Davos (which is accessible by train.) Greening the portfolio is not enough. ( @GeneralTheorist)

Perhaps they are too important for such niceities in the same manner that President Lagarde was too important to go to jail when she was found guilty of negligence in a fraud case.

As to the day job then the role of the ECB is basically to finance government spending. After all the rhetoric of the previous Governor Jean-Clause Trichet that the inflation target has been hit ( 1.97%) has been replaced by an average of 0.7%. Maybe negative interest-rates and QE  takes you further away from it and not nearer to it, especially when you make sure that the asset prices that do rise are kept out of the inflation measure.

More generally there are deeper issues here. The conceptual one is worldwide and has been the subject of my work on here which you could summarise as where is the exit strategy? As we keep diving deeper. These are made worse in the Euro area as whilst there are weaknesses for example in the US the Federal structure was able to act quickly whereas the Euro area is still debating.

But as it is Friday let me offer you a Matrix style blue pill from this morning’s ECB working paper.

First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the
account of post-meeting communications about risks to price stability and to growth significantly
enhances the modelling of its reaction function.

Although there is also this.

Good Morning from #Italy where Italian Euro is 30% overvalued vs German Euro when measured by Nutella purchasing power parity (Price for almost homogeneous product Nutella): The 750g jar costs about €7.50 per kg in Italy vs €5.20/kg in Germany. ( @Schuldensuehner )

If Lagarde expects disinflation then we should fear inflation….

Today brings the economy of the Euro area in to focus. Over the weekend we heard from the President of the European Central Bank or ECB.

(Bloomberg) — European Central Bank President Christine Lagarde said the euro zone faces about two years of downward pressure on prices, but could see a turnaround after that because the coronavirus crisis will accelerate the transformation of the economy.

There is an obvious issue in forecasting 2 years ahead when we struggle to know what will happen in two weeks. Even worse is Christine Lagarde’s record as according to her both Greece and Argentina were going to grow in such a timescale when in fact their economies collapsed. Her policies are also doing the best they can to slow the transformation of the economy via the support of zombie banks and companies.

The reality is that the forecast is to justify decisions that have already been taken.

In the meantime, the central bank will need to keep its monetary policy exceptionally loose, and financial instruments will need to be developed that allow the economic transformation to be funded, she said.

Also there is an opportunity to find a scapegoat for an effect of her policies.

Still, she warned that pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.

You also might think that she would be too busy with the day job to take on other things but apparently not.

“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said. “We won’t do it in one day, but we must question in every domain, stress test by stress test.”

Also on Friday the ECB released this.

They’re here! We’ve just received the first banknotes featuring President Lagarde’s signature. The €5 and €10 notes will be the first with the new signature to enter into circulation, starting next week. Those with the signature of former presidents will remain legal tender.

Sadly they have ignored my suggestion that some of the notes should have been orange to mark the occasion.

German Manufacturing

This is something of a bellweather for the Euro area economy and trade. So let’s start with the positive bit.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), real (price adjusted) new orders increased by a seasonally and calendar adjusted 10.4% in May 2020 compared with April 2020.

As I am sure you were expecting the annual comparison whilst better than April’s -36.9% remains grim.

 Compared with May 2019, the decrease in calendar adjusted new orders amounted to 29.3%

If we go to the underlying index then total orders are at 71.1% of the 2015 average. There is a clear geographic pattern to this.

Domestic orders increased by 12.3% and foreign orders rose by 8.8% in May 2020 on the previous month. New orders from the euro area went up 20.9%, and new orders from other countries increased by 2.0% compared with April 2020.

Also I did start with a mention of a bellweather.

New orders in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, new orders were still more than 47% lower than in February 2020.

We can also look at turnover.

According to provisional results, price-adjusted turnover in manufacturing in May 2020 went up a seasonally and calendar adjusted 10.6% on the previous month…….

Compared with February 2020, the month before restrictions were imposed due to the corona pandemic in Germany, turnover in May 2020 was 23.5% lower in seasonally and calendar adjusted terms.

Again the car industry has been heavily affected and of course 2019 was considered a ropey year at the time.

Turnover in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, it was still nearly 47% lower than in February 2020.

Construction

We have learned that the Purchasing Managers Indices have their issues but here is this morning’s update.

The IHS Markit Eurozone Construction Total Activity Index rose sharply from 39.5 in May to 48.3 in June, indicating the weakest decline in construction activity across the eurozone since February amid a relaxation of measures designed to control the coronavirus disease 2019 (COVID-19) pandemic. Survey data showed France and Italy recorded construction output growth, while Germany posted a further marked decline.

Let us move on noting that Germany seems to be struggling across a few areas.

Retail Sales

Having seen the sad news about Ennio Morricone let is look at first the good.

In May 2020, when Member States began easing the COVID-19 containment measures, the seasonally adjusted
volume of retail trade increased by 17.8% in the euro area and by 16.4% in the EU, compared with April 2020,
according to estimates from Eurostat.

The bad is that volume is only 102% of the average for 2015 so the Euro  boom has gone for now and also this.

In May 2020 compared with May 2019, the calendar adjusted retail sales index decreased by 5.1% in the euro
area and by 4.2% in the EU.

The ugly is Greece which saw retail sales collapse as to return to my opening theme Christine Lagarde predicted “Shock and Awe”. Just to show how big the move was if we stay with 2015 as our benchmark then April 2007 was 167% of it as opposed to the 74.7% of this April. That is how you define an ongoing depression which sadly has been pushed even deeper by the economic impact of the Covid-19 virus pandemic. Also after all the reform rhetoric of the IMF and Euro area authorities I note that Greece has not yet produced numbers for May in this area.

Zombie! Zombie! Zombie!

This morning has seen the release of a ECB working paper which has made me mull those famous song lyrics, why? Well we get an official denial.

As regards the distribution of the funds, in contrast to the common perception about take-up in
central bank operations in crisis times, we do not find strong evidence that TLTRO funds end up
importantly with financially weak banks. If anything, banks with a larger capital buffer take up more.

You may note the use of “strong evidence” “importantly” and “if anything”. To which we can add “dominant” below.

The TLTRO funds do not end up dominantly with financially weak banks.

Indeed is weak banks are no big deal it makes you wonder why they bothered with this?

In addition, applying different lending benchmark requirements to banks depending on their deleveraging pressure appears to have been important to have take-up also by deleveraging banks.

or this.

namely by reducing the TLTRO interest rate and expanding the amount and types of eligible collateral.

This has become even for these times a big deal.

This paper asks what characterises and incentivises individual banks to take this “funding for
lending” which peaked at EUR 762 billion and what role the parameters of the scheme play.

Comment

Today’s article has been topped and tailed by the ECB and its activities. In the middle we have noted the effect of the lockdowns and pandemic. But if we look ahead the issue switches to what type of future it wants? For all the rhetoric the Euro area was already struggling highlighted by the way that the end of QE lasted for about 9 months. Curious as according to Christine Lagarde things are well placed.

Europe is in an excellent position to join this transition, according to Lagarde. The continent has the world’s largest circular economy and ecological innovation sector while the euro is the first currency used for the issuing of green bonds, she noted. ( Brussels Times)

Perhaps going round in circles is not the best analogy. Still there is time to be a control freak because it has gone so well?

However, this would not be enough and an economic policy framework that allows the required financing to be mobilized will need to be put in place, according to Lagarde.

Podcast

 

The Euro area unemployment rate is much higher than the 7.4% reported today

A clear feature of the economic landscape post the Covid-19 pandemic is mass unemployment. We should firstly note that this is and will continue to create quite a bit of suffering and angst. Also that all the easing policies of the central banks over the past decade or so were supposed to avoid this sort of thing. But if the system was a rubber band it had been stretched towards breaking point and now all they can do is pump it all up even more. But for our purposes there is another issue which is that we have little idea of either how much unemployment there is or how long it will last. Let me illustrate by looking at the numbers just release by Italy.

The Italian Job

As you might expect employment fell in May.

On a monthly basis, the decline of employment (-0.4%, -84 thousand) concerned more women ( 0.7%, 65 thousand) than men (-0.1%, -19 thousand), and brought the employment rate to 57.6% (-0.2 p.p.)…….With respect to the previous quarter, in the period March – May 2020, employment considerably decreased (-1.6%, 381 thousand) for both genders.

 

Also unemployment rose.

In the last month, also unemployed people grew (+18.9%, +307 thousand) more among women (+31.3%, +227 thousand) than men (+8.8%, +80 thousand). The unemployment rate rose to 7.8% (+1.2 percentage points) and the youth rate increased to 23.5% (+2.0 p.p.).

Now the problems begin. Firstly I recall that last time around we were told the unemployment rate was 6.3% which has seen a substantial revision to 6.6%. There my sympathy is with the statisticians at a difficult time. But for the next bit we have to suspend credulity.

In the last three months, also the number of unemployed persons decreased (-22.3%, -533 thousand), while a growth among inactive people aged 15-64 years was registered (+6.6%, +880 thousand).

If we look further back we just compound the issue.

On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons (-25.7%, -669 thousand) and a growth of inactive people aged 15-64 (+8.7%, +1 million 140 thousand).

As I pointed out last month the issue is how unemployment is defined.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

The definition fails when you have a lockdown as some cannot go to work and others quite reasonably think that there is no point. If we assume that the rise in activity is all a type of hidden unemployment then we get an unemployment rate of 12.4% in Italy. Our estimate will be far from perfect so let us say we think it has risen from ~11% last in April to more like 12% in May.

An even grimmer situation is shown by youth unemployment. The official reading is bad enough.

the youth rate increased to 23.5% (+2.0 p.p.).

But if we apply the same methodology we get to a rather chilling 46.3%. The inactivity category here is huge at 4.6 million which I hope is pretty much students. I have to confess that I am reminded of the Yes Prime Minister quote from the 1980s that education was mostly extended to reduce the unemployment numbers. Anyway it is a blunt number but frankly will be much nearer than the official one. Also there will be many young Italians who have had little hope of a job post credit crunch as it was and it just got worse.

What we do learn is how few people are surveyed for these numbers.

The number of interviewed households for May 2020 is about 17,000 (almost equal to 35,500 individuals) and is
approximately 10% lower than the average number of interviews used for the production of estimates related to a
four-weeks month.

Spain

If we switch to the Ministry of Labour we get a barrage of numbers.

Unemployment is reduced in all sectors except agriculture and among claimants “without previous employment”
There are fewer unemployed registered in ten autonomous communities
In June 308,985 more contracts were signed than in the previous month
Almost six million people received SEPE benefits in May.

These numbers look both more useful and realistic. Things started to get better last month with around 309,000 new jobs but the Furlough scheme count in May of 6 million gives a perspective. Also unemployment edged higher.

The registered unemployment in the offices of the State Public Employment Service (SEPE) has increased by 5,107 people compared to the previous month. This represents an increase of 0.1%, which deepens the trend of slowing down the growth rate of unemployment that began in May.

So we end up with this.

The total number of unemployed persons registered in the SEPE offices amount to 3,862,883.

There is an irony in using registered unemployment numbers as they fell into disrepute due to the way they can be manipulated and fiddled. But right now they are doing better than the official series. El Pais summarises it like this.

The total number of jobseekers in Spain has risen to 3.86 million, the highest figure registered since May 2016……The rise in unemployment for June is the first increase seen since 2008, just months before the fall of Lehman Brothers and the year of the financial crisis. The increase in contributors to the Social Security system for the month is also the smallest since 2015.

So we see that there are also still around 2.1 million people on the furlough scheme. In total these benefits were paid out.

In May, the SEPE paid 5,526 million euros in benefits, of which 3,318 million were dedicated to paying ERTE benefits and 2,208 million to unemployment benefits, both at the contributory and assistance level.

If we use these numbers are plug them into the official unemployment series we end up with an unemployment rate of 16.8%.

Euro Area

This morning’s official release tells us this.

In May 2020, a third month marked by COVID-19 containment measures in most Member States, the euro area seasonally-adjusted unemployment rate was 7.4%, up from 7.3% in April 2020……..Eurostat estimates that 14.366 million men and women in the EU, of whom 12.146 million in the euro area, were unemployed in May 2020. Compared with April 2020, the number of persons unemployed increased by 253 000 in the EU and by 159 000 in the euro area.

Unfortunately we do not have an update on inactivity so we can have a go at getting a better picture. We are promised more but not until next week.

To capture in full the unprecedented labour market situation triggered by the COVID-19 outbreak, the data on
unemployment will be complemented by additional indicators, e.g. on employment, underemployment and potential
additional labour force participants, when the LFS quarterly data for 2020 are published.

Comment

As you have seen earlier this is a “Houston we have a problem moment” for unemployment data as it rigorously calculates the numbers on the wrong football pitch. It creates problems highlighted by this tweet from Silvia Amaro of CNBC.

#unemployment in the euro zone came in at 7.4% in May. At the height of the debt crisis it reached 12.1%. #COVIDー19

That creates the impression things are much better now when in fact they may well be worse. Without the furlough schemes they certainly would be. What we fo not know is how long it will last?

 

Is Japan the future for all of us?

A regular feature of these times is to compare our economic performance with that of Japan. That has propped up pretty regularly in this crisis mostly about the Euro area but with sub-plots for the US and UK. One group that will be happy about this with be The Vapors and I wonder how much they have made out of it?

I’m turning Japanese, I think I’m turning Japanese
I really think so
Turning Japanese, I think I’m turning Japanese
I really think so.

The two basic concepts here are interrelated and are of Deflation and what was called The Lost Decade but now are The Lost Decades. These matters are more nuanced that usually presented so let me start with Deflation which is a fall in aggregate demand in an economy. According to the latest Bank of Japan Minutes this is happening again.

This is because aggregate demand is
highly likely to be pushed down by deterioration in the labor market and the utilization rate of conventional types of services could decline given a new lifestyle that takes into
consideration the risk of COVID-19.

The latter point echoes a discussion from the comments section yesterday about an extension to the railway to the Scottish Borders. Before COVID-19 anything like that would come with a round of applause but now there are genuine questions about public transport for the future. There is an irony close to me as I have lived in Battersea for nearly 3 decades and a tube line there has been promised for most of that. Now it is on its way will it get much use?

This is a difficult conceptual issue because if we build “White Elephants” they will be counted in GDP ( it is both output and income), but if they are not used the money is to some extent wasted. I differ to that extent from the view of John Maynard Keynes that you can dig and hole and fill it in. If that worked we would not be where we are now. In the credit crunch we saw facets of this with the empty hotels in Ireland, the unused airport in Spain and roads to nowhere in Portugal. That was before China built empty cities.

Inflation Deflation

There is something of a double swerve applied here which I will illustrate from the Bank of Japan Minutes again.

Next, the three arrows of Abenomics should continue to be carried out to the fullest extent until the economy returns to a growth path in which the annual inflation
rate is maintained sustainably at around 2 percent.

A 2% inflation target has nothing at all to do with deflation and this should be challenged more, especially when it has this Orwellian element.

It is assumed that achievement of the price stability target will be delayed due to COVID-19
and that monetary easing will be prolonged further

It is not a price stability target it is an inflation rate target. This is of particular relevance in Japan as it has had stable prices pretty much throughout the lost decade period. It is up by 0.1% in the past year and at 101.8 if we take 2015 as 100, so marginal at most. The undercut to this is that you need inflation for relative price changes. But this is also untrue as the essentially inflation-free Japan has a food price index at 105.8 and an education one of 92.7.

Policy Failure

The issue here is that as you can see above there has been a complete failure but that has not stopped other central banks from speeding down the failure road. It is what is missing from the statement below that is revealing.

: the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19); an ample provision of
yen and foreign currency funds without setting upper limits; and active purchases of assets such as exchange-traded funds (ETFs).

No mention of negative interest-rates? Also the large-scale purchases of Japanese Government Bonds only get an implicit mention. Whereas by contrast the purchase of equities as in this coded language that is what “active purchases of assets such as exchange-traded funds (ETFs)” means gets highlighted. The 0.1% will be happy but as any asset price rise is omitted from the inflation indices it is entirely pointless according to their stated objective. No wonder they keep failing…

This matters because pretty much every central bank has put on their running shoes and set off in pursuit of the Bank of Japan. Ever more interest-rate cuts and ever more QE bond buying. Perhaps the most extreme case is the ECB (European Central Bank) with its -0.5% Deposit Rate and large-scale QE. On the latter subject it seems to be actively mirroring Japan.

The ECB may not need to use the full size of its recently expanded pandemic purchase program, Executive Board member Isabel Schnabel says ( Bloomberg)

This is a regular tactic of hinting at reductions whereas the reality invariably ends up on the Andrea True Connection road.

More! More! More!

Staying with the Euro area the ECB has unveiled all sorts of policies and has a balance sheet of 6.2 trillion Euros but keeps missing its stated target. We noted recently that over the past decade or so they have been around 0.7% per year below it and that is not getting any better.

In June 2020, a month in which many COVID-19 containment measures have been gradually lifted, Euro area annual inflation is expected to be 0.3%, up from 0.1% in May ( Eurostat )

Real Wage Deflation

This to my mind is the bigger issue. It used to be the case ( in what was called the NICE era by former Bank of England Governor Mervyn King) that wages grew faster than wages by 1-2% per annum. That was fading out before the credit crunch and since there have been real problems. The state of play for the leader of the pack here has been highlighted by Nippon.com.

Wage growth in Japan is also slow compared with other major economies. According to statistics published by the Organization for Economic Cooperation and Development, the average Japanese annual wage in 2018 was the equivalent of $46,000—a mere 0.2% increase on the figure for 2000 ($45,000).

They mean 2% and everyone else seems to be heading that way.

This increase is significantly smaller than those recorded in the same period in the United States ($53,900 to 63,100), Germany ($43,300 to 49,800), and France ($37,100 to 44,500).

The UK has gone from around $39,000 to the same as France at $44.500.

There is an obvious issue in using another currency but we have the general picture and right now it is getting worse everywhere.

Comment

The answers to the question in my title unfold as follows. In terms of central bank action we have an unequivocal yes. They have copied Japan as much as they can showing they have learnt nothing. We could replace them with an AI version ( with the hope that the I of Intelligence might apply). Related to this is the inflation issue where all the evidence is that they will continue to fail. We have here an example of failure squared where they pursue policies that do not work in pursuit of an objective which would make people worse rather than better off.

That last point feeds into the wages issue which in my opinion is the key one of our times. The Ivory Towers of the central banks still pursue policies where wages growth exceeds inflation and their models assume it. Perhaps because for them it is true. But for the rest of us it is not as real wages have struggled at best and fallen at worst. This is in spite of the increasingly desperate manipulation of inflation numbers that has been going on.

So we see different elements in different places. The Euro area is heading down the same road as Japan in terms of inflation and apart from Germany wages too. The UK is an inflation nation so that part we are if not immune a step or two away from, but that means our real wage performance is looking rather Japanese.

There is also another sub-plot.

30y gilt yield < 30y JGB yield ( Divyang Shah )

The Investing Channel