Can we make any sense of the GDP data for Ireland?

Firstly let me wish everyone a Happy St.Patrick’s day as we also wait for England versus Ireland in the Six Nations rugby tomorrow. In that spirit let us immediately open with some good news. From the Irish Central Statistics Office or CSO.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

On a seasonally adjusted basis, constant price GDP for the fourth quarter of 2016 increased by 2.5 per cent compared with the previous quarter while GNP increased by 3.2 per cent over the same period.

What grew? Well pretty much everything.

Building and construction recorded an 11.4 per cent increase in real terms and manufacturing recorded a 1.8 per cent increase . The distribution, transport, software and communications sector increased by 7.8 per cent while the agriculture sector increased by 6.2 per cent, and other services by 6.0 per cent. Public administration and defence recorded an annual increase of 4.4 per cent.

Looking ahead

The good news theme continues as we peruse the business surveys.

The latest Investec Services PMI Ireland report shows that business activity continued to increase sharply during February, with the rate of expansion only slightly weaker than January’s seven-month high. The headline PMI came in at 60.6, versus 61.0 in the previous month.

As we look around we do not get many readings in the 60s so let us look at manufacturing.

The latest Investec Manufacturing PMI Ireland report shows a further solid improvement in business conditions, albeit the pace of growth has slowed for a second successive month. The headline PMI was 53.8 in February, down from 55.5 in the preceding month.

So good numbers especially in the services sector although with the nature of these surveys they are less reliable than in larger countries as we have seen before on occasion in Ireland with the example of a cut in pharmaceutical production ( Lipitor going off-patent) which was missed.

Also in the circumstances this raised a wry smile.

On the latter, we note that panellists again highlighted the UK as a particular source of demand.

Unemployment

A consequence of the better economic data has been this.

The seasonally adjusted unemployment rate for February 2017 was 6.6%, down from 6.7% in January 2017 and down from 8.4% in February 2016.

This represents quite an improvement on the 10.1% of February 2015 and a vast improvement of the 15.2% of January 2012. It is not yet back to the pre credit crunch lows, however, which were around 2% lower.

Inflation

Here is an interesting combination with the good news above as you see central bankers will have a mind block because Ireland has not had inflation for some time.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), increased by 0.3% compared with February 2016.

Actually I am slightly exaggerating but if we use the Irish CPI and base it at 100 in 2011 then it was 101.5 in 2016. Even worse for the inflationoholics who run central banks and of course the media who copy and paste such views it was possible for relative prices to change.

The sub index for Services rose by 2.0% in the year to February, while Goods decreased by 1.5%.

So if low/no inflation has been good for Ireland how does it feel about the European Central Bank determination to push it higher? I forecast good news from this back on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains.

Trouble

In spite of the official news being good there are signs of what Taylor Swift would call “Trouble, trouble,trouble” if you look below the headlines. The Irish Times pointed out this last December.

The fact that more than 6,000 people, including children, are now officially “homeless” and living in emergency accommodation in hotels, guesthouses and charity shelters is offensive……….It flows from policy decisions and political collusion that created a deeply unequal society.

Focus Ireland counted 7148 and pointed out that the number was up 40% over the past year and was likely to be under recorded. There are other issues in this sector as we look at the sale of property by the bad bank NAMA. Firstly the excellent NAMA Wine Lake is critical of the accountancy at play here.

NAMA acquired €74bn of loans for €32bn. The NAMA “profit” is on the €32bn acquisition price. We bailed out the banks for the €74bn-€32bn.

How is that going?

NAMA lost £190m on £4.5bn par value Project Eagle sale. How much will NAMA lose on (average of) €50m loans it will sell in next 24 hours?

Also there is the issue of all this apparently surplus property being traded around whilst people are homeless on an increasing scale.

House Prices

These are of course ignored by the consumer inflation numbers although of course not by anyone wanting to buy a house. Signs of problems are clear.

In the year to January, residential property prices at national level increased by 7.9%. This compares with an increase of 7.9% in the year to December and an increase of 5.6% in the twelve months to January 2016.

If we look for some perspective we see this.

From the trough in early 2013, prices nationally have increased by 49.6%. In the same period, Dublin residential property prices have increased 65.2%………..Overall, the national index is 31.8% lower than its highest level in 2007. Dublin residential property prices are 32.4% lower than their February 2007 peak,

What might be wrong with the official data?

There is an obvious concern with GDP (Gross Domestic Product) rising by 21% in one quarter as it did at the opening of 2015. I have covered this before so this time let us examine the view of the Central Bank of Ireland from its Quarterly Bulletin.

However, this masked offsetting trends in the components of GDP, in particular investment and trade, which were not closely aligned with indicators of activity in the domestic economy, but were mainly accounted for by the off-shore activities of multinational firms.

If we return to the official data what did happen to recorded investment in Ireland in 2016?

On the expenditure side of the accounts (Table 3), capital formation rose strongly by 45.5 per cent during 2016.

There is more.

The potential for volatility in the measurement of Irish GDP reflects the fact that parts of the output recorded in Irish GDP now reflects activity which takes place in other countries.

When you consider that the numbers are supposed to represent Ireland and its economy this confession is really rather extraordinary.

In the trade data, for example, changes in the level of contract manufacturing abroad by multinational firms can have a significant impact on exports and imports.

If we look at the data for the last quarter of 2016 there is this.

On the expenditure side there was a decline in net exports of €17,396m (93.7 per cent) during the quarter, largely driven by higher imports (37.2 per cent).

Actually the higher investment and import numbers often represent the same things.

The central bank also looked at the economic impact of Aircraft Leasing where the sums are enormous even for these times.

Assuming that the industry in Ireland is to continue to account for some 50 per cent of the leased output (as per current estimates), this would imply approximately €1.4 trillion ($1.5 trillion17)in new assets – either acquired or via finance leases inward – held by the sector in Ireland

Yet in terms of actual action this generates ” a certain degree of employment and tax revenues ” in reality so how much then? Over 1200 and 300 million Euros a year which are no doubt very welcome but poses a question for measurement.

Comment

The Irish situation opens more than one can of worms. Has the economy grown in recent years? I think so but the data poses lots of questions and let me highlight this with something from the CSO. In response to the issues above it thinks that Net National Product or NNP may help because it allows for depreciation and thus takes out much of the cross-border flows. So is Ireland’s annual economic output 255.8 billion Euros ( GDP) or 202.6 billion Euros (GNP) or 141.1 billion Euros (NNP)? The numbers are for 2015 but also was economic growth 32.4% (GDP) or 24% or 6.4%?

Also how do we relate the national debt to economic output? Perhaps as we have discussed before the best measure is to compare it to tax revenue.

 

What are the economics of Scottish independence?

Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?

Economic growth

The Scottish government has published this data.

When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).

As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.

Looking ahead

The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.

To match the GDP growth rate of the small independent EU countries by 2017.

How is that going so far?

The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).

As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.

The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.

Ireland is proving a hard act to follow.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.

What about employment?

Good but not as good as England currently.

Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).

Natutral Resources

Crude Oil and Gas

Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.

It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.

Energy policy, and how oil revenue would be invested, was part of  the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “

I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.

The Fiscal Position

This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

This led to these numbers being reported.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).

Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

This adds to an issue I reported on back in my Mindful Money days in November 2013.

So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.

As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.

But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.

Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.

What currency?

This poses a few questions so let me repeat the issues with using the UK Pound.

1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.

2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.

3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.

4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.

5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?

6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.

Comment

Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.

New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.

We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.

Charlotte Hogg’s Resignation

Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.

http://www.bankofengland.co.uk/publications/Documents/news/2017/charlottehoggletter130317.pdf

 

http://www.bankofengland.co.uk/publications/Documents/news/2017/028.pdf

 

 

 

Is this the end of the beginning for Quantitative Easing?

Today sees the Bank of England reach a threshold and but not yet a rubicon. This is because of this which it announced on last month.

As set out in the MPC’s statement of 2 February, the MPC has agreed to make £11.6bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2017 of a gilt owned by the Asset Purchase Facility (APF).

This is an Operation Twist style manoeuvre where a Gilt matures and the Bank of England chooses to roll it forwards. Sometimes it does this a long way forwards as you see once a week a share of the funds have been put in what are called ultra-long Gilts which go out as far as 2068 ( of which it holds £1.54 billion). Creating an issue for our grandchildren and maybe great-grandchildren.  The details are shown below.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays. The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £775mn for each maturity sector.

There was a time when £775 million seemed a lot of money but in central banking terms these days that is plainly no longer so. This should have finished last Wednesday but the Bank of England chose not to act on that day, maybe it did not want to let go! But more seriously it avoids days of known political importance as a rule.

So a threshold has been reached but the Bank of England will be able to announce something on Thursday as last week another Gilt matured and some £6.1 billion of that will be able to be rolled forwards. So no doubt it will be time for Operation Twist to wake itself after only a few days of being asleep to start again!

Charlotte Hogg

Charlotte should logically be voting against any further Operation Twist style move if this exchange with the Treasury Select Committee was any guide.

Andrew Tyrie ” On balance do you think we would be better off unwinding it or letting it run off?”

Charlotte Hogg ” I don’t see the distinction between the two to be honest”

So it does not do any good either? I pointed this out on the first of this month.

If Charlotte actually believes what she says then I look forwards to her voting against any more QE which must be pointless as apparently Gilt prices and yields would be unaffected if it stopped.

As to her own position people are more worried about her dissembling that her apparent lack of competence if this from Deborah Orr in the Guardian is any guide.

The trouble is that few people are likely to believe that not mentioning her brother’s job was an oversight. Even if they do, her judgment is still in question.

This bit does however mine a theme we have discussed on here many times.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..Privileged people also run the risk of mistakenly believing that what’s good for them is good for everybody…….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Sadly however the article seems completely unaware of the performance of Charlotte when questioned about monetary policy.

Hogg is clearly regarded as tremendously bright and capable.

More problems for the UK establishment

If you are intervening in so many areas then the need for honesty confidence and trust rises and yet we are also in an era where more issues are emerging. From the Wall Street Journal.

On average, between April 2011 and December 2016, U.K. government-bond futures correctly anticipated the rise or fall that ultimately happened when economic data were published, according to an analysis prepared for The Wall Street Journal by Alexander Kurov, associate professor of finance at West Virginia University.

Of course bond markets move on other days but there is a particular concern on these days because of this.

“The more prerelease access you have, the more likely it is that these things are going to be leaked,” said Hetan Shah, executive director of the Royal Statistical Society, the U.K.’s professional body for statisticians that has campaigned for several years to end such access.

At 9:30 am the day before release quite a large number of people ( 118 on the labour  market report)  get the numbers according to the WSJ.

Corporate Bond QE

This will continue but is of a much smaller size as there is only £2 billion left out of a total of £10 billion.. Regular readers will recall that I pointed out when it began that the Bank of England would struggle to mount any operation on a large scale because UK corporates issue a substantial proportion of their debt in Euros and US Dollars because they are often international businesses.  This has led the Bank of England on this road as I pointed out in early November.

The Bank of England is boosting the UK economy by buying the corporate bonds of Total and Maersk Oh hang on….

I was told they were back buying Maersk bonds last week. Also there is the issue of subsidising larger businesses who can issue corporate bonds versus ones which are too small to be able to afford the costs. That is awkward when you are claiming you are boosting the economy.

The ECB

It too is in a zone where ch-ch-changes are ahead. I have written several times already explaining that with inflation pretty much on target and economic growth having improved its rate of expansion of its balance sheet looks far to high even at the 60 billion Euros a month due in April. But the issue was highlighted by this which was on the newswires last week. From the Financial Times.

He warns investors not to rule out that the ECB could raise rates while it is still in the process of tapering its stimulus spending.

Well of course it could! Indeed the Bank of England has suggested it would raise interest-rates towards 2% before it started to reverse its own QE purchases. But the confusion around is highlighted by this seemingly being an issue.

Comment

There is a fair bit to consider at this time when the central bankers face the issue of stopping their stimulus policies. The Federal Reserve of the United States has signalled it will raise interest-rates for a third time in this phase later this week. But the Bank of England and ECB have not even entered the foothills and are still easing. If we move on from policy plainly being inappropriate we face the issue of what will bond markets do when the largest buyers disappear? Well we are getting hints as this from the twitter feed of Bond Vigilantes suggests.

10 year Swiss Government bonds offer a positive yield again, having traded in negative territory for almost 18 months.

Something of a shift has already taken place in the US with its ten-year Treasury Note yield being at 2.56% but with the ten-year Gilt at a mere 1.21% there is quite gap these days. Real yields are getting ever more negative as inflation moves ahead. From the BBC.

SSE has become the latest “big six” energy supplier to raise its prices.

It said average electricity prices would rise by 14.9% from 28 April for 2.8 million customers. However, it will keep its gas prices unchanged.

 

 

 

The relationship between ECB policy and the economic performance of France

Today the Governing Council of the ECB (European Central Bank) meets to announce its monetary policy decisions. It does so in a very different environment to its more recent meetings because of the way that the economic winds of change have blown. What I mean by this is that the economic outlook is the brightest it has seemed for a while now. Also consumer inflation has risen to pretty much on target which poses a question for ECB policy going forwards as I have been pointing out for a while now, most recently last Friday. There is a clear contrast with the United States where expectations of an interest-rate rise this month are pretty much 100% now. Yet there is a problem as we note this from @fwred on the Atlanta Fed forecast for US economic growth.

Potentially HALF the growth rate of the euroarea in Q1.

This has led to hints of a change today this morning.

doesn’t plan to announce a new round of TLTROs, according to people familiar with the matter” ( @bondzilla )

So if true it will scrap a bank subsidy.

However I wish to take the opportunity of the second anniversary of the major QE program of the ECB to take a look at the impact it has had on France and its economy. It has provided a deposit rate of -0.4% a balance sheet heading towards 4 trillion Euros and thereby a lower level for the Euro although of course we can never judge any policy in isolation. The QE purchases have meant that 269 billion Euros of French government bonds have been bought easing its fiscal policy via the fact that it has some negative bond yields and only has a ten-year bond yield of 1,03%. So whilst that has become increasingly expensive vis a vis Germany it is also as Middle of the Road pointed out some years ago.

Chirpy, Chirpy, Cheep, Cheep, Chirp

The French economy

Lets look at it with a different twist as the particularly francophile Financial Times has looked at the French economic situation. It has done so on a political beat but for me the issue is monetary policy as over the period in question ( since 2012) it has been monetary policy that has been the main economic player in town.

The winner of this year’s election will inherit an economy that has been growing slowly but steadily since the 2008 financial crisis……..However, as the chart below shows, despite modest growth the country has underperformed relative to the likes of Germany, the UK and the US. Nevertheless, towards the end of Mr Hollande’s term things began to pick up. Growth last year reached 1.1 per cent, the fastest pace during his tenure — though it still fell well below the EU average of 1.8 per cent.

Let me just correct a factual error with this from the French statistical office.

On average over the year, GDP rose by 1.1%, practically as much as in 2015 (+1.2%).

So in annual terms not the fastest rate although it is quicker than 2012,13 and 14. In a way cheering an economic growth rate of ~1% poses its own question in an era where we have tentatively described the new normal as 2%. But if we skip the UK and US there is an issue in a currency union where growth is consistently below the average and the country which is considered with France at the heart of the Euro project which is Germany. The solution for that would be regional policy but quite how that would manifest itself I am not sure.

Unemployment

The numbers here continue to be awkward to say the least.

unemployment continued to creep up to a high of more than 10 per cent, prompting the president — late in his tenure — to take more decisive steps to tackle what he labelled an “economic emergency”……..unemployment figures have shown only marginal improvements over the past year,

There are other worrying features of the French labour market as well.

The reforms have so far failed to break France’s two-tier labour market. Last year, 86.4 per cent of total hiring was into temporary jobs — and of those, 80 per cent were for contracts shorter than one month. Meanwhile, long-term unemployment remains stubbornly high: more than 45 per cent of the unemployed in France have been without a job for more than a year, the highest proportion since records began in 2003.

It is not a good time to be young in the French labour market either.

France’s youth unemployment rate is roughly double that of the UK and continues to rise — in contrast with a decline in most advanced economies. The story is similar for foreigners and those with lower levels of education.

Accordingly the quantity number unemployment remains poor in spite of all the monetary easing and a chill wind blows through if we add in the reforms promised because the situation has not changed all that much. Also “emergencies” seem to last these days don’t they as I think also of the UK “emergency” Bank Rate of 0.5% which somehow went even lower to 0.25%!

If you are employed in a permanent job in France you have better conditions and perhaps better pay than in the UK. But for those outside such a position the outlook is worse, although some aspects seem the same as “contracts for less than one month” are not a million miles away from zero hours contracts in principle.

The state

This is larger in France than in many other places.

But France still has one of the highest public spending ratios among advanced countries — at 57 per cent of GDP. Within that, health, social and pensions expenditure as a share of GDP remain comparatively high and have risen since 2012.

Of course there are beneficial consequences of this as many French people are proud of their health system. Whilst the ECB continues with its QE bond purchases the fact that the national debt to GDP ratio is 97.5% matters little but of course unless France finds some economic growth we are left with what happens if the ECB stops buying?

House Prices

Let me throw in something which is not mentioned by the FT. If you look at French houses prices they were in the autumn of 2016 where they were in the last quarter of 2007. I do not know about you but with all that has gone on in the credit crunch era that seems so much healthier than the UK situation. What do readers think?

There is a catch though ( as ever…) as we consider the mortgage books of the French banks.

Regulation and Taxation

The Financial Times struggled here to present an optimistic picture.

Despite attempts at simplification, French companies “are still faced with a high regulatory burden and fast-changing legislation”, according to a recent European Commission report………At 48 per cent, the labour tax wedge was the fifth highest in the OECD in 2015 and French corporation tax remains the highest in Europe.

Comment

There is much to consider here and there are of course problems with using GDP as a yardstick. It is a long way from perfect but in essence monetary policy in the Euro area has been trying to drive it higher using the excuse that it is bringing inflation back on target. But for France there has been an improvement but only to a growth rate of around 1% so far. The opening of 2017 looks better but can that be sustained for the several years required? Along that road the ECB would have all sorts of questions to answer if it maintained its stimulus.

Something that should particularly benefit French business is the corporate bond buying program but as it has bought more than 10% of Euro area corporate bonds already how long can it go on? For a start it is anti-competitive especially if you do not qualify.

 

The claims of Grecovery turned into a continuing economic depression for Greece

Today has started with something that has become all to familiar over the past 7 or so years. From Kathimerini.

Greek farmers protesting against bailout-related income cuts are clashing with riot police outside the agriculture ministry in central Athens.

Police fired tear gas to prevent farmers from forcing their way into the ministry building, while protesters responded by throwing stones.

This is of course the human side of the austerity regime which has been applied to Greece again and again and again.

Protesters are angry at increases in their tax and social security contributions, part of the income and spending cuts Greece’s left-led government has implemented to meet bailout creditor-demanded budget targets.

Yet sadly there is also a theme where some as in those at the higher echelons of society are more equal than others. From Keep Talking Greece.

Greece’s ministers, lawmakers, mayors and other high-ranking public officials are able to enjoy generous tax reductions reaching up to 2,000 euros per year.

Even worse this was tucked away in a 2016 bill which did this.

The provision was included in the law to decrease or even cut the poverty allowance to thousands of low-pensioners.

Many of the problems could have been avoided if Greece had found a way to tax the wealthy. Yet they seem to continue on their not very merry way.

It appears that the former head of gas grid operator DESFA, Sotiris Nikas, granted himself a promotion that boosted his retirement lump sum by 100,000 euros to 258,000 euros, ( Kathimerini)

What about economic growth?

There was a familiar pattern to those who have followed the Greek economic depression as  From Keep Talking Greece.

Greece’s Prime Minister Alexis Tsipras was confident that the times of recession were over and that “Greece has returned back to growth” as he told his cabinet ministers……..After seven years of recession, Greece has returned to positive growth rates he underlined.

Reality was not a friend to Mr. Tsipras as soon after the Greek statistics office released this.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016, against the decrease of 0.4% that was announced for the flash estimate

Which meant this.

In comparison with the 4th quarter of 2015, it decreased by 1.1% against the increase of 0.3% that was announced for the flash estimate of the 4th quarter.

If we look at the pattern then it has turned out to be what economists call an “L” shaped recovery or in fact no recovery at all. What I mean by this is that the Greek economy as measured by GDP (2010 prices) peaked at 63.3 billion Euros as the output for the second quarter of 2007 and then fell to  46 billion Euros per quarter as 2013 started and is still there. Remember all those who proclaimed that so-called “Grecovery” was just around the corner? Well it was a straight road and in fact had a gentle decline as the latest quarter had a GDP of 45.8 billion Euros. Thus the Greek economic depression over the last decade has involved a contraction of economic output of 28%.

If you prefer that in chart form here it is.

Yet the Institutions as the Troika are now called stick their collective heads in the sand.From Amna on the 7th of February.

The recent IMF report saying that Greece’s debt load is unsustainable was “unnecessarily pessimistic,” Eurogroup President Jeroen Dijsselbloem said on Tuesday.

The banks

Where an economy is really in trouble then we can find a banking system which has had a type of heart attack and the Greek banking system did as Kathimerini points out.

the huge pool of NPLs ( Non Performing Loans) in Greece that now add up to 107 billion euros after their increase by 1.5 billion in the first couple of months of 2017.

As to the deposits in the banks they have yet to regain the losses of 2015. Care is needed about the many claims that bank deposits have plunged again as the numbers has seen some ch-ch-changes with the order of 6 billion Euros removed. Any way the recent peak at 179.1 billion Euros for domestic residents the the summer of 2014 compares with 130..9 billion Euros in January.

The main growth industry for Greek banks seems to be this.

Eurobank Financial Planning Services (FPS), is the second bad-loan management firm to obtain a license from the Greek authorities to operate in the local market. It follows the permit issued to Cepal, a joint venture by Alpha Bank and Aktua.

On my way to looking at past house prices I found the Bank of Greece 2008 Interim Report which told us this.

the Greek banking system remains fundamentally sound, safe and stable.

Oh and this.

In the euro area, the situation is less worrying than in the United States as far as financial stability is concerned; however, risks of a deterioration do exist.

House prices

It was only yesterday I was looking at the central role of house prices in the UK economy but in spite of a barrage of measures the ECB ( European Central Bank) has failed to influence them much at all.

According to data collected from credit institutions, nominal apartment prices are estimated to have declined marginally on average by 0.6% year-on-year in the fourth quarter of 2016, whilst in 2016 as a whole apartment prices fell on average by 2.2%, compared with an average drop of 5.1% in 2015. ( Bank of Greece )

Ironically that is the sort of medicine which would benefit the UK but for Greece there has been another feature of the economic depression where “apartment prices” have fallen by 40% since 2007.

The shadow economy

The shadow or unrecorded economy has seen a few name changes in recent times but I have been trying to find out more about it in Greece since the crisis began. Yesterday there was a flash of light from Bloomberg.

When Maria’s employer, a large communications company in Athens, gave her additional tasks at one of its new units, it told her she wouldn’t be paid for the work in euros.

“I was informed that this extra payment of 150 euros per month would be in coupons that I can use in supermarkets,” said the 45-year-old, declining to provide her last name for fear of losing her job.

So as the austerity grip tightens more slips through the net.

Payments in kind are among practices companies are using in Greece as they seek to cap payroll costs, undermining efforts to balance the books of the country’s cash-strapped social security system………By some estimates, the so-called black market already accounts for as much as a quarter of Greece’s economy.

What we would like to know is how much the size of the shadow economy has grown. The fact that it has grown seems beyond doubt but how much?

Comment

As the Greek economic depression heads towards the decade mark where even “lost decade” simply does not cut it there have been many themes. A sad one I found in the 2008 Bank of Greece report which told us about structural reform, yes the same structural reform that is still being promised now.

Some time ago I wrote about the “Roads To Nowhere” in Portugal which were empty because of the high tolls charged. Well here is a view on Greece.

It’s often cheaper to fly to Berlin than pay the road tolls for a small car from Thessaloniki (Greece’s 2nd city) to Athens…….The insanely priced and ever growing road toll network in Greece is a major drag on economic development.Roads too expensive for many to use (h/t @teacherdude )

International Women’s Day

Let me mark this with the exchange between Sarah Jane of Sky News and Lord Heseltine.

Lord Heseltine: ‘She’s got a man-sized job to do’ : ‘It’s a woman-size job now’ ( about Prime Minster Theresa May)

This led to some humour from Charlie Reynolds

If I was Michael Heseltine’s mother’s dog I’d watch my step today

 

 

 

 

Would the Bundesbank of Germany raise interest-rates if it could?

At the heart of the Euro area economy is Germany but as we have discussed before it has something of an irregular heartbeat in the way it affects its Euro area partners. For example as I pointed out on the 9th of January it is a deflationary influence on them via its balance of payments surplus.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

One does not wish to be critical of it for its relative economic success but there are clear side-effects as well as benefits from it. One is the trade position above another is that fact that its membership of the Euro makes its exchange-rate higher.. For all the talk and indeed promises of economic convergence the fact is that many Euro area countries have economies with little in common with Germany. For example later this year Italy seems likely to move into economic growth territory for its membership of the Euro which is very different to the German situation. Let us investigate the German economy.

Inflation

On Wednesday this was released by the Federal Statistics Office.

The inflation rate in Germany as measured by the consumer price index is expected to be 2.2% in February 2017. Such a high rate of inflation was last measured in August 2012. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 0.6% on January 2017.

The Euro area standard measure was also 2.2% although it rose by 0.7% on the month. We have a complete switch on the disinflationary period just passed which showed low and at times falling inflation for goods prices as they rose by 3.2%. These were led by energy at 7.2% and food at 4.4%.

This was reinforced only yesterday by this.

the index of import prices increased by 6.0% in January 2017 compared with the corresponding month of the preceding year. This was the highest increase of a yearly rate of change since May 2011 (+6.3%). In December and in November 2016 the annual rates of change were +3.5% and +0.3%, respectively. From December 2016 to January 2017 the index rose by 0.9%.

As you can see there are inflationary pressures in the system and it looks as though imported raw materials will impact the system especially the price of oil which was approximately half the rise. If German economic policy was set by the Bundesbank then there is no way it would have a negative interest-rate in the face of such pressure.

Consumption

This has traditionally been a weaker link in the German economy and that seems to be continuing as the numbers below have an extra day in them compared to last year.

According to provisional data turnover in retail trade in January 2017 was in real terms 2.3% and in nominal terms 4.5% larger than that in January 2016.

We do get a like for like update on a monthly basis.

Calendar and seasonally adjusted (Census X-12-ARIMA), sales in January 2017 were 0.8% lower than in December 2016 and 0.2% lower in nominal terms.

If we look back to 2010 and mark it at 100 we see that January 2017 was at 106.1 which shows the German economy is not powered by retail sales.

Economic output

This has been a better phase for Germany as this official data shows.

The economic situation in Germany in 2016 thus was characterised by solid and steady growth (+0.7% in the first quarter, +0.5% in the second quarter and +0.1% in the third quarter). For the whole year of 2016, this was an increase of 1.9% (calendar-adjusted: +1.8%).

I am not sure that 0.7%,0.5%, 0.1% and then 0.4% is steady but it was solid! To be fair it was more consistent in annual terms although if we look further at the year it had a feature you might not expect.

government final consumption expenditure was up by as much as 3.2%.

Also Germany did shift a little in terms of one of the world economic issues which is the balance of payments surplus.

exports of goods and services rose by 3.3% compared with the previous year. There was however a larger increase in imports (+4.5%) in the same period. Consequently, the balance of exports and imports had a downward effect, in arithmetical terms, of –0.2 percentage points on GDP growth compared with the previous year.

There was also another sign of a German economic strength ticked away there.

the economic performance in the fourth quarter of 2016 was achieved by 43.7 million persons in employment, which was an increase of 267,000, or 0.6%, on a year earlier.

This performance allowed the headline writers some click bait. From the Guardian.

Germany overtook the UK as the fastest growing among the G7 states during 2016. Europe’s largest economy expanded at the fastest rate in five years, showing growth of 1.9% last year.

Of course the numbers are not precise to 0.1% after all if they were then this adjustment from 2014 as matters such as military expenditure and Research and Development saw new rules would not be necessary.

The conceptual changes have led to an increase in the level of the German GDP, amounting to roughly 3%

Public Finances

These were very strong in spite of the rise in spending.

A strong economic backdrop has helped Germany post a record budget surplus of €23.7bn in 2017 ( they mean 2016), fuelled by higher tax revenues, rising employment and low debt costs. It was the highest budget surplus since reunification in 1990 and the third successive year the government has had a budget surplus.

The old argument is of course that it would help the European and world economy if Germany loosened the public purse strings. This would also presumably reduce the balance of payments surplus in a beneficial double-whammy. The catch in terms of Euro area rules is that the national debt to GDP ratio is at 69.4% above the (supposed) 60% limit although of course rather good compared to the vast majority of its peers.

Looking ahead

The immediate future certainly looks bright for German manufacturing.

The PMI rose from 56.4 in January to 56.8 in February, the highest since May 2011. The increase in the headline figure reflected the output, new orders and suppliers’ delivery times components, while employment and stocks of purchases also made positive overall contributions. The current 27-month sequence of improving manufacturing conditions is the longest observed in over eight-and-a-half years. (Markit)

This led to an improvement also in forecasts for the year as a whole.

The survey results suggest that manufacturing will contribute to a strengthening in overall economic growth in the first quarter. IHS Markit currently expects q/q growth of at least 0.6% in Q1, up from 0.4% in Q4 last year, and is forecasting a 1.9% rise in GDP over 2017 as a whole.”

This has been reinforced by the service sector survey which has just been released.

the rate of expansion in total business activity accelerated and was slightly stronger than the trend shown over 2016 as a whole. Moreover, new business rose at the fastest rate since February 2016 and employment growth was the strongest since June 2011.

Comment

Let me leave you all with a question. The US Federal Reserve is hinting ever more strongly at an interest-rate rise this month although of course we await th words of Janet Yellen later. But in 2016 the German economy grew more quickly than the US one and may well do so this year. It also has inflation above target. Where would German interest-rates be if the Bundesbank was back in charge?

If you want a real mind game then imagine where a new German Mark would be and the implications from that?!

 

 

 

 

2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.

Spain

January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.

Belgium

The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,

Egypt

A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.

Comment

There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.