Will 2017 see an economic rennaisance for France?

This morning has opened with some better economic news for France as GDP ( Gross Domestic Product) growth was revised higher.

In Q1 2017, GDP in volume terms* rose barely less fast (+0.4%) than in Q4 2016 (+0.5%).

The French statistical service have put in it downbeat fashion and you have to read to the end to spot it as it is right at the bottom.

The GDP growth for Q1 2017 is raised from +0.3% to +0.4%.

There was also a good sign in the fact that investment was strong.

In Q1 2017, total GFCF accelerated sharply (+1.2% after +0.5%), especially that of enterprises (+1.9% after +0.9%)……Investment in manufactured goods was more dynamic (+1.6% after +0.4%), notably in equipment goods. Similarly, GFCF in market services accelerated sharply (+1.9% after +0.7%), notably in information-communication and business services.

However it was not a perfect report as there were signs of what you might call the British problem as trade problems subtracted from the growth.

Exports fell back in Q1 2017 (−0.8% after +1.0%), especially in transport equipment and “other manufactured goods”. Imports accelerated (+1.4% after +0.6%)………..All in all, foreign trade balance weighed down on GDP growth by −0.7 points, after a contribution of +0.1 points in the previous quarter.

If we look back there may be an issue building here as import growth was 4.2% in 2016 which considerably exceeded export growth at 2.1%. So it may well be true that the French are getting more like the British which is something of an irony in these times.

You may be wondering how there was any economic growth after the net trade deficit and that is because inventories swung the other way and offset it.

In Q1 2017, the contribution of changes in inventories to GDP growth amounted to +0.7 points (after −0.2 points at the end of 2016). They increased especially in transport equipment and “other industrial goods” (pharmaceuticals, metallurgy and chemicals).

The optimistic view on this is that French businesses are stocking up for a good 2017 with the danger being that any disappointment would subtract for growth later this year.

Also as feels so common in what we consider to be the first world the manufacturing industry continues to struggle.

Manufacturing output fell back (−0.2% after +0.7%), mainly due to a sharp decline in the coke and refined petroleum branch and a slowdown in transport equipment.

Looking ahead

The good news is that the private-sector business surveys are very optimistic at the moment.

The latest PMI data points to further strong growth momentum in the French private sector, with the expansion quickening to a six-year peak.

Of course France has been in a rough patch so that may not be as good as it reads or sounds so let us look further.

The service sector saw activity increase for the eleventh time in as many months. Moreover, the rate of expansion accelerated to a six-year high and was sharp overall. Manufacturing output also continued to rise markedly, albeit to a fractionally weaker extent than in April.

As you can see the service sector is pulling the economy forwards and manufacturing is growing as well according to the survey. Unusually Markit do not make a GDP prediction from this but we can if we note they think this for the Euro area which has a lower reading than France.

consistent with 0.6- 0.7% GDP growth.

So let us say 0.7% then and also remind ourselves that it has not been common in recent years for there to be an expectation that France will outperform its Euro area peers.

However this morning’s official survey on households did come with a worrying finale to the good news stream.

In May 2017, households’ confidence in the economic situation has improved anew after a four-month stability: the synthetic index has gained 2 points, reaching 102, above its long-term average and at its highest level since August 2007.

What could go wrong?

Unemployment

This has been the Achilles heel for France in the credit crunch era but this too has seen some better news.

In Q1 2017, the average ILO unemployment rate in metropolitan France and the overseas departments (excluding Mayotte) stood at 9.6% of active population, after 10.0% in Q4 2016.

The good news is that we see the unemployment rate finally fall into single digits. The bad news is that it mostly seems to be people who have given up looking for work.

The activity rate of people aged 15-64 stood at 71.4% in Q1 2017. It decreased by 0.3 percentage points compared to the previous quarter and a year earlier.

The business surveys are optimistic that employment is now improving as we see here.

Bolstered by strong client demand, French private sector firms raised their staffing numbers in May, thereby continuing a trend that has been evident since November last year. Furthermore, the rate of job creation quickened to a 69-month high.

Monetary policy

Yesterday we heard from ECB ( European Central Bank ) President Mario Draghi and he opened with some bombast.

Real GDP in the euro area has expanded for 16 consecutive quarters, growing by 1.7% year-on-year during the first quarter of 2017. Unemployment has fallen to its lowest level since 2009. Consumer and business sentiment has risen to a six-year high,

You might be wondering about monetary policy after such views being expressed but in fact we got this.

For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation.

Is that a Tom Petty style full speed ahead and “Damn The Torpedoes”? For now perhaps but there are two other influences. In terms of a tactical influence Mario Draghi will have noted the rise of the Euro since it bottomed versus the US Dollar in December last year and would prefer it to be lower than the 1.12 it has risen to. Also more strategically as we have discussed on here before he will be waiting for the Euro area elections to pass before making any real change of course in my opinion. That leaves us mulling once again the concept of an independent central banker as we note that economic growth is on the upswing in election year.

Thus France finds itself benefiting from 293.7 billion Euros of sovereign bond purchases meaning it can issue and be paid for it out to around the 6 years maturity and only pay 0.74% on ten-year bonds. This is a considerable help to the fiscal situation and the government. In addition there are the corporate bond purchases and the covered bond purchases to help the banks. The latter gets so little publicity for the 232 billion Euros on the ECB’s books. Plus we have negative interest-rates and a Euro exchange rate pushed lower.

Has monetary policy ever been so expansionary at this stage of the economic cycle?

House prices

There was some further news to warm the cockles of Mario Draghi’s heart this morning.

In Q1 2017, the prices of second-hand dwellings kept increasing: +1.9% compared to the previous quarter (provisional seasonally adjusted results). The increase is virtually similar for flats (+1.9%) and for houses (+1.8%).

Over a year, the increase in prices was confirmed and strengthened: +3.0% compared to Q1 2016 after +1.5% the quarter before.

Up until now we have seen very little house price inflation in France and whilst the rate is relatively low it does look to be on the rise which represents a clear change. If you add this to the house price rises in Germany that I analysed on the 8th of this month then the ECB will be pleased if first-time buyers will not be.

Comment

It looks as though France is in a better phase of economic growth. This is certainly needed as we look at the unemployment rate issue but there is also another factor as this from French statistics indicates.

 2016 (GDP growth unchanged, at +1.1% WDA), 2015 (−0.2 points at +1.0%) and 2014 (+0.3 points at +1.0%)

As you can see the annual rate of economic growth has been essentially 1% as we note something of a reshuffle in the timing. Indeed in spite of a better couple of quarters the current annual rate of economic growth in France is you guessed it 1%! Somehow 1% became the new normal as we wait and hope for better news as 2017 develops. Should we get that then at this stage of the cycle I fear we may then be shifting to how long can it last?!

 

 

What next for the world of negative interest-rates?

There were supposed to be two main general economic issues for 2017. The first was the return of inflation as the price of crude oil stopped being a strong disinflationary force. The second was that we would see a rise in interest-rates and bond yields as we saw an economic recovery combined with the aforementioned inflation. This was described as the “reflation” scenario and the financial trade based on it was to be short bonds. However we have seen a rise in inflation to above target in the UK and US and to just below it in the Euro area but the bond market and interest-rate move has been really rather different.

Negative Official Interest-Rates

Euro area

These are still around particularly in Europe where the main player is the European Central Bank. This plays out in three main areas as it has an official deposit rate of -0.4%, it also has its long-term refinancing operations where banks have been able to borrow out to the early 2020s at an interest-rate that can also be as low as -0.4% plus of course purchasing sovereign bonds at negative yields. So whilst the rate of monthly bond purchases has fallen to 60 billion Euros a month the envelope of negative interest-rates is still large in spite of the economic recovery described earlier this week by ECB President Draghi.

As a result, the euro area is now witnessing an increasingly solid recovery driven largely by a virtuous circle of employment and consumption, although underlying inflation pressures remain subdued. The convergence of credit conditions across countries has also contributed to the upswing becoming more broad-based across sectors and countries. Euro area GDP growth is currently 1.7%, and surveys point to continued resilience in the coming quarters.

Indeed the economic optimism was turned up another notch by the Markit PMI business surveys on Tuesday.

The PMI data indicate that eurozone growth remained impressively strong in May. Business activity is expanding at its fastest rate for six years so far in the second quarter, consistent with 0.6- 0.7% GDP growth. The consensus forecast of 0.4% second quarter growth could well prove overly pessimistic………

That is better than “resilience” I think.

Sweden

This is one of the high fortresses of negative interest-rates as you can see from the latest announcement.

The Executive Board decided to extend the purchases of government bonds by SEK 15 billion during the second half of 2017 and to hold the repo rate unchanged at −0.50 per cent. The repo rate is now not expected to be raised until mid-2018, which is slightly later than in the previous forecast.

As you can see a move away from the world of negative interest-rates seems to have moved further into the distance rather than get nearer. If you look at the economic situation then you may quite reasonably wonder what is going on here?

Swedish economic activity is good and is expected to strengthen further over the next few years. Confidence indicators show that households and companies are optimistic and demand for exports is strong. The economic upturn means that the demand for labour is still strong.

We do not have the numbers for the first quarter but we do know that GDP ( Gross Domestic Product) increased by 1% in the last quarter of 2016. If you read the statement below then it gets ever harder to justify the current official interest-rate.

Rising mortgage debt is a serious threat to Sweden’s economy while regulators need to introduce tougher measures to strengthen banks against future shocks, the central bank said in its semi-annual stability report, published on Wednesday………Swedish house prices have doubled over the last decade. Apartment prices have tripled. Household debt levels – in relation to disposable income – are among the highest in Europe.

Switzerland

The Swiss National Bank feels trapped by the pressure on the Swiss Franc.

The Swiss franc is still significantly overvalued. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are necessary and appropriate to ease pressure on the Swiss franc. Negative interest has at least partially restored the traditional interest rate differential against other countries.

You may note that they are pointing the blame pretty much at the ECB and the Euro for the need to have an interest-rate of -0.75% ( strictly a range between -0.25% and -1.25%).

Denmark

As you can see Denmark’s Nationalbank has not moved this year either.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

The 2016 move left it a little exposed when the ECB cut again later than year but it remains firmly in negative interest-rate territory.

Japan

Until now we have been looking at issues surrounding the Euro both geographically and economically but we need to go a lot further east to see the -0.1% interest-rate of the Bank of Japan. Added to that is its policy of bond purchases where it aims to keep the ten-year yield at approximately 0%. So there is no great sign of a change here either.

 

The United States

Here of course we have seen an effort to move interest-rates to a move positive level but so far we have not seen that much and it has not been followed by any of the other major central banks. Indeed one central bank which is normally synchronised with it is the Bank of England but it cut interest-rates and expanded its balance sheet last August so it has headed in the opposite direction this time around.

This theme has been reflected in the US bond market where we saw a rise in yields when President Trump was elected but I note now that not much has happened since. The ten-year Treasury Note now yields around 2.25% which is pretty much where it was back then. We did see a rise to above 2.6% but that faded away as events moved on. Even the prospect of a beginning of an unwinding of all of the bond holdings of the Federal Reserve does not seem to have had much impact. That seems extraordinarily sanguine to me but there are two further factors which are at play. One is that investors do not believe this will happen on any great scale and also that there is no rule book or indeed much experience of how bond markets behave when a central bank looks for the exit.

How much?

There was a time when we were regularly updated on the size of the negative yielding bond universe whereas that has faded but there is this from Fitch Ratings in early March.

Rising long-term sovereign bond yields across the eurozone contributed to a decline in outstanding negative yielding sovereign debt to $8.6 trillion as of March 1 from $9.1 trillion near year-end 2016.

The fall such as it was seemed to be in longer dated maturities.

The total of negative-yielding sovereign debt with remaining maturities of greater than seven years fell significantly to $0.5 trillion as of Mar. 1 from over $2.6 trillion on June 27 2016.

Since then German bond yields have moved only a little so the general picture looks not to be much different.

Comment

I wanted to point out today the fact that whilst it feels like the economic world has moved on in 2017 in fact the negative interest-rate and yield story has changed a lot less than we might have thought. It has fallen out of the media spotlight and perceptions but it has remained as a large iceberg floating around.

One of my themes has been that we will find out more about the economic effects of negative interest-rates as more time passes. Accordingly I noted this from VoxEU yesterday.

Banks throughout the Eurozone are reluctant to cut retail deposit rates below zero, wary of possible client reactions

That has remained true as time has passed and it seems ever clearer that the banking sector is afraid of a type of deposit flight should they offer less than 0% on ordinary retail savings. That distinguishes it from institutional or pension markets where as we have discussed before there have been lots of negative yields and interest-rates. Also if we look at average deposit rates there remain quite large differences in the circumstances.

For example, the average rate on Belgian deposits has dropped to 0.03%. If Belgians took their money across the border, they could get almost ten times that in the Netherlands (0.28%). In France even, rates average 0.43%.

If we move to household borrowing rates we see that there are much wider discrepancies as we wonder if at this level we can in fact call this one monetary policy?

The Finns borrow against 1.8%, the Irish pay 3.6%

Some of the differences are down to different preferences but as the Irish borrowing is more likely to be secured ( mortgages) you might reasonably expect them to be paying less. Oh and as a final point as we move to borrowing we note that rates are a fair distance from the official ones meaning that the banks yet again have a pretty solid margin in their favour, which is somewhat contrary to what we keep being told.

Greece, how long can it keep going like this?

Today’s topic reminds me of the famous quote by Karl Marx.

History repeats itself, first as tragedy, second as farce.

Sadly Karl did not tell us what to do on the 4th,5th and 6th occasions of the same thing as I note the news from Reuters on Friday.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

This sounds so so familiar doesn’t it which of course poses its own problem in the circumstances. This continues if we look at the detail.

The income tax exemption is reduced to 5,600-5,700 euros from 8,600 euros to generate revenues of about 1.9 billion euros. The lower threshold will mean an increased tax burden of about 650 euros for taxpayers.

Up to 18 percent cuts in main and supplementary pensions and freezing of benefits thereafter until 2022. The cuts will result in savings of 2.3 billion euros.

I do not know about you but if I was raising taxes in Greece I would not be raising them on the poorest as lowering the lower income tax threshold will hit them disproportionately. After all it was the very rich who helped precipitate this crisis by not paying tax not the poor. But the underlying principle’s are pretty much what we have seen since the spring of 2010 especially if we add in this part.

Sale of stakes in railways, Thessaloniki port, Athens International Airport, Hellenic Petroleum and real estate assets to generate targeted privatization revenue of 2.15 billion euros this year and 2.07 billion euros in 2018.

This reminds me of the original target which was for 50 billion Euros of revenue from privatisations by 2015. As you can see the objectives are much smaller now after all the failures in this area and of course these days assets in Greece have a much lower price due to the economic depression which has raged for the last 7 years. Back then for example the General Index at the Athens Stock Exchange was around 1500 as opposed to just below 800 now suggesting that this is yet another area where Greek finances are chasing their tail.

The same result?

Last week saw yet more sad economic news from Greece.

The available seasonally adjusted data indicate that in the 1 st quarter of 2017 the Gross Domestic Product (GDP) in volume terms decreased by 0.1% in comparison with the 4 th quarter of 2016, while it decreased by 0.5% in comparison with the 1 st quarter of 2016. ( Greece Statistics).

This meant that yet another recession had begun which will be a feature of the ongoing economic depression. Another feature of this era has been the official denials an example of which from the 8th of March is below.

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.

He was not alone as European Commissioner Pierre Moscovici was regularly telling us that the Greek economy had recovered. This means that as we look at the period of austerity where such people have regularly trumpeted success the reality is that the Greek economy has collapsed. The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

What is astonishing is that even after all the mishaps of 2015 with the bank run and monetary crisis there has been no recovery so far. The downwards cycle of austerity, economic collapse and then more austerity continues in a type of Status Quo.

Again again again again, again again again again

The Time Problem

The problem here is simply how long this has gone on for added to the fact that things are still getting worse or at best holding station in economic output terms. This means that numbers like those below have become long-term issues.

The seasonally adjusted unemployment rate in February 2017 was 23.2% compared to 23.9% in February 2016 and the downward revised 23.3% in January 2017.

It is nice to see a fall but falls at the rate of 0.9% per annum would mean the unemployment rate would still be around 20% at the end of the decade following the “rescue” programme which I sincerely hope is not the “shock and awe” that Christine Lagarde proclaimed back then. If we move to the individual level there must be a large group of people who now are completely out of touch with what it means to work. I see a sign of this in the 25-34 age group where unemployment was 30.4% in February compared to 29.3% in the same month in 2012. This looks like a consequence of the young unemployed ( rate still 47.9%) simply getting older. As the female unemployment rate is higher I dread to think what the situation is for young women.

Meanwhile tractor production continues its rise apparently according to the German Finance Minister.

Schaeuble: Reforms Agreed By Greece Are Remarkable, Goal Is To Get Greece Competitive, It Is Not There Yet ( @LiveSquawk )

It reminds me of last summer’s hit song “7 Years” but after all this time if we had seen reform things would be better. The fact is that there has been so little of it. Putting it another way the IMF ( International Monetary Fund) has completely failed in what used to be its objective which was helping with Balance of Payments crises. Even after all the economic pain described above the Bank of Greece has reported this today.

Mar C/A deficit at €1.32 bln from €772.4 mln last year, 3-month C/A deficit at €2.53 bln from €2.37 bln last year ( h/t Macropolis )

QE for Greece

This is being presented as a type of solution but there are more than a few issues here. Firstly the reform one discussed above as Greece does not qualify. But also there is little gain for a country where its debt is so substantially in official hands anyway and the bodies involved ( ESM, EFSF) let Greece borrow so cheaply for so long. In fact ever more cheaply and ever longer as each debt crunch arrives. It would likely end up paying more for its debt in a QE world where it issues on its own and the ECB buys it later! So it could be proclaimed as a political triumph but quickly turn into a financial disaster especially as the ECB is likely to continue to taper the programme.

Also people seem to have forgotten that the ECB did buy a lot of Greek debt but more recently has been offloading it to other Euro area bodies who have treated Greece better than it did. One set of possible winners is holders of Greek government bonds right now who have had a good 2017 as prices have risen and yields fallen and good luck to them. But the media which trumpets this seems to have forgotten the bigger picture here and that if the hedge funds sell these at large profits to the ECB then the taxpayer has provided them with profits one more time.

Comment

So we arrive at yet another Eurogroup meeting on Greece and its problems. It is rather familiar that the economy is shrinking and the debt has grown again to 326.5 billion Euros in the first quarter of this year. There will be the usual proclamations of help and assistance but at the next meeting things are invariably worse. Is there any hope?

Well there is this from Greek Reporter.

The size of Greece’s underground economy — where transactions take place out of the radar of tax authorities — is estimated to be about one quarter of the country’s official GDP, according to University of Macedonia Professor Vassilis Vlachos….. Among the main factors contributing to the shadow economy increase, according to Vlachos, is the citizens’ sense that the tax burden is not distributed fairly and that there is a poor return in term of public services, as well as inadequate tax inspections……Based on the findings of the survey, participation in the shadow economy is at 60 percent for the general population and rises to 71.6 percent among the unemployed.

If he is correct then this is of course yet another fail for the Troika/Institutions. As to the official data there are some flickers of hope such as the recent industry figures and retail sales so let us cross our fingers.

 

Germany the currency manipulator?

Today gives us an opportunity to look again at the German economy. As we do so we see yet another situation where conventional analysis and media reporting is flawed. So often we read that Germany has in some way been defeated in its efforts to direct the policies of the ECB ( European Central Bank). The evidence for that are the regular bursts of rhetoric from the German Bundesbank against the policies of negative interest-rates and a balance sheet of the order of 4.5 trillion Euros. However this to my mind ignores a much larger victory Germany gained when it joined the Euro because it has achieved for itself a much lower and therefore more competitive exchange rate. It did so in a way which has avoided the barrage of “currency manipulator” allegations that have been fired at others because it was a type of stealth effort.

Also the impact of this move has been heightened by the credit crunch era. We find evidence for this if we look at Switzerland and the Swiss Franc which of the currencies we have is the most similar. How is it doing? Well let me hand you over to the Swiss National Bank. From Reuters yesterday.

The Swiss National Bank’s (SNB) policy of negative interest rates is not ideal but is nevertheless necessary in order to weaken Switzerland’s “significantly overvalued” currency, Chairman Thomas Jordan said on Thursday…………Jordan said negative interest rates, along with the central bank’s willingness to intervene in the currency were absolutely necessary in order to protect exporters from a stronger Swiss franc, which is a safe-haven currency in times of market stress.

So if the Swiss Franc is a safe haven currency what would a German Deutschmark be if it existed? I think we can be sure that its value would have soared in recent times which leads me back to the competitive advantage point. There is also an irony as we note that on Switzerland’s road Germany would have had negative interest-rates anyway and maybe more negative than now. Ouch! We find ourselves in some strange places these days. Also would it now be a hedge fund manager as it tried to find somewhere to put its currency reserves? This week raised a wry smile as Apple passed the US $150 mark as I thought that the Swiss National Bank would be one of those most pleased via its holdings. I guess if you have 695.9 billion Swiss Francs they burn a hole in your pocket or something like that.

The trade surplus

The opening paragraph of Tuesday’s trade figures hammer home a consequence of this.

Germany exported goods to the value of 118.2 billion euros and imported goods to the value of 92.9 billion euros in March 2017. These are the highest monthly figures ever reported for both exports and imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 10.8% and imports by 14.7% in March 2017 year on year.

So if you are looking for evidence of a lower currency leading to trade advantages it is hard to miss the persistent surpluses of Germany.

The foreign trade balance showed a surplus of 25.4 billion euros in March 2017. In March 2016, the surplus amounted to 25.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.6 billion euros in March 2017.

Indeed the statistics agency has an in focus highlight which rams this home.

According to Eurostat data, Germany had the highest export surplus among EU countries (257 billion euros) in 2016, as was the case in the previous years. Germany exported goods totalling 1,210 billion euros while the value of imports was 953 billion euros. Compared with the previous year, the export surplus rose by roughly 3% – in 2015, it had been 248 billion euros.

Interestingly we see that the idea of the Euro area having a large trade  surplus is true but that the vast majority of it is Germany as it was 257 billion out of 272 billion Euros in 2016.

Bond yields

The other gain for Germany from a combination of ECB policy and the credit crunch era is the extraordinary low level of interest it has to pay to issue new debt. Indeed this has frequently been negative in recent times meaning that Germany has been paid to issue its debt.  Some of that is still true as for example the yield on its five-year benchmark bond is -0.31% as I type this.

Even if it were to borrow for ten years then Germany would only have to pay 0.41% which I cannot say often enough is extraordinarily low. So it has clearly benefited from the 368 billion Euros of purchases of German debt by the ECB as we mull if there was a country which needed them less?

The catch is that it is mostly the German government that has benefited as it looks to run a fiscal surplus. As to the ordinary German well as I pointed out earlier this week first-time buyers will be much less keen as the easy monetary policy of recent years has led to something of a house price boom in Germany.

GDP and economic output

This morning’s official GDP data had a familiar drumbeat to it.

In addition, the development of foreign trade was more dynamic and contributed to growth as exports increased more than imports, according to provisional results.

The quarterly number was good and this impression was reinforced by the breakdown of the numbers.

. In the first quarter of 2017, the gross domestic product (GDP) rose 0.6% on the fourth quarter of 2016 after adjustment for price, seasonal and calendar variations……. Capital formation increased substantially. Due to the mild weather, fixed capital formation especially in construction, but also in machinery and equipment was markedly up compared with the fourth quarter of 2016.

Is the weather allowed to be a positive influence? Only in Germany perhaps as elsewhere its role invariably is to take the blame. There is an undercut to this though as we mull the individual experience and note that economic growth over the past year was 1.7%.

The economic performance in the first quarter of 2017 was achieved by 43.7 million persons in employment, which was an increase of 638,000 or 1.5% on a year earlier.

So whilst the employment rise is welcome we see that it very nearly matches the level of economic growth. Also if we look back to the data we are left wondering if the construction investment boom is related to the house price boom and the UK economic model is being copied to some extent.

Comment

The economic outlook remains bright for Germany if the Markit business or PMI surveys are any guide.

IHS Markit expects German economic growth to strengthen to 0.7% qr/qr in the first quarter, and the April PMI provides an early signal that expansion will remain strong in the second quarter.

So something along the lines of more of the same is expected although of course that was only one month of this quarter. If we look at the overall situation let us use a type of Good Germany: Bad Germany type of analysis that mimics Italy.

The good sees that the reforms of the past have enabled Germany to expand its economy post credit crunch such that GDP  reached 110. 02 last year compared to 101.66 in 2008. It has a substantial trade surplus and these days has an internationally rare fiscal surplus.

The trouble is that some of the latter points are also part of Bad Germany as we see how its adoption of the Euro has helped feed its trade surplus via a more competitive exchange rate. Also there is the issue that one of the problems pre credit crunch was world imbalances and the German trade surplus was one of them. Within the Euro area some will wonder if it would be helped by less fiscal austerity. Then we get to the issue of comparing the rise in employment with GDP growth, is Germany like the rest of us struggling for productivity growth with its implications for wages? Also as I pointed out earlier this week the rise in house prices will make first-time buyers wonder if they are indeed better off?

What is the problem with wage growth?

The problem with wages growth has been a long running theme of this website, also if we look back it is something which even preceded the credit crunch. Although of course the credit crunch has made it worse. The world of economics has been wrong-footed by this as the Ivory Towers as usual projected that it would be “the same old song” as the Four Tops told us. For example the UK Office for Budget Responsibility projected that wages growth in the UK would be 4.5% now, and if they had known how far that unemployment would fall would presumably have projected it even higher.

A contributor to this has been the concept of full employment. From Investopeadia.

Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time. Any remaining unemployment is considered to be frictional, structural or voluntary.

There were and amazingly still are concepts such as the “natural rate of unemployment” below which inflation was supposed to rise. The catch has been that as we have seen unemployment rates fall post credit crunch we have seen wages either rise weakly or stagnate. At best wage growth has been lower than expected and at worst we have seen it actually fall. Something has changed.

One factor in this is clearly that the old Ivory Tower way of looking at the labour market through the lens of official unemployment rates is flawed. The concept of “underemployment” has been developed whereby people work fewer hours than they would like or take a lower skilled job. This has become entwined with quite a few issues around the concept of self-employment which is often counted as a type of “full” employment when it is not. Indeed being fully employed is in fact in the UK something you think you are rather than being something properly defined. On this road we start to understand that the clouds have yet again gathered between the elevated heights of the Ivory Towers and the ground zero where the rest of us live and work.

Japan’s problem

Weak wages growth has been one of the features of the “lost decade(s)” for the Japanese economy and accordingly it was one of the objectives of the policies of Prime Minister Shinzo Abe to reverse this. So let us examine today’s data as reported by Reuters.

Japan’s March real wages fell at the fastest pace in almost two years, pressured by meagre nominal pay hikes and a slight rise in consumer prices,

The detail is not good.

Inflation-adjusted real wages dropped 0.8 per cent in March from a year earlier to mark their biggest rate of decline since June 2015, labour ministry data showed on Tuesday (May 9)….In nominal terms, wage earners’ cash earnings fell 0.4 per cent year-on-year in March, also notching the biggest rate of decrease since June 2015.

If we continue the themes expressed above then if we imagined that we were inhabitants of an Ivory Tower we would be projecting fast wage growth. From Japan Macro Advisers.

The demand/supply balance in the Japanese labor market continues to remain tight. The unemployment rate remained steady at 2.8% in March 2017, matching the lowest rate since June 1994. Japan is likely to be at its full employment status, with only frictional unemployment remaining in the labor market.

Full employment with no wage growth and maybe even falls in real wages? Actually this is perhaps even worse for the concept of a natural rate of unemployment.

NAIRU, the Non-Accelerating-Inflation-Rate of Unemployment rate, was considered to lie between 3.5% and 4.5% in Japan.

So wages should be rising and doing so quite quickly whereas in reality they are not rising at all. Indeed contrary to the hype and media reporting they have been falling in the period of Abenomics  as the 103.9 of 2013 has been replaced by the 100.7 of 2016 where 2015 =100. The slight nudge up in 2016 has been replaced by falls so far in 2017.

This from Morgan Stanly only last month already seems like it is from a parallel universe.

Record low unemployment rates are pushing up salaries,

The Bank of Japan regularly tells us that wages will rise next year and Governor Kuroda stated this again only on Friday, but so far next year has never arrived.

Is Japan are forerunner for us and should we be singing along with The Vapors one more time?

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 United States

A month ago US News reported this from US Federal Reserve Chair Janet Yellen.

“With an unemployment rate that stands at 4.5 percent, that’s even a little bit below what most of my colleagues and I would take as a marker of where full employment is,” Yellen said. “I’d say we’re doing pretty well.”

Yet on Friday the Bureau of Labor Statistics told us this.

In April, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $26.19. Over the year, average hourly earnings have risen by 65 cents,
or 2.5 percent.

So we are at what we are told is pretty much full employment and we are below the natural rate of employment ( 5.6% according to the Congressional Budget Office) and yet pay growth is still rather weak. It has been so for a while.

http://www.epi.org?p=117112&view=embed&embed_template=charts_v2013_08_21&embed_date=20170509&onp=75850&utm_source=epi_press&utm_medium=chart_embed&utm_campaign=charts_v2

The other issue is that in spite of us apparently being at full employment the level of wage growth is not a lot above inflation with the US CPI being at 2.4% and the Personal Consumption Expenditure being at 1.8%. Something is not right here and we do perhaps get some more perspective by looking at both the underemployment rate in the US ( 8.6%) and the way that the participation rate has fallen.

The UK

The situation here as I have been pointing out pretty much each time the data is released is very good in terms of the quantity measures as we see falling unemployment and rising employment but poor on the price or wages measure. This has been illustrated somewhat ironically by one of the failures of the Bank of England. Remember when it made an issue of the unemployment rate falling below 7%?

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%,

There was a clear implication there that it expected economic changes as we moved below that threshold such as higher wage growth. Of course this was abandoned very quickly as unemployment fell sharply leaving the Bank of England’s spinners and PR people with plenty of work. But with the unemployment rate now well below 7% and indeed being 4.7% then wages should be rising quickly as we are well below the rate at which it was expected by our central banking overlords and masters. Er no, as you see wage growth for total pay was 2.3% back then and is 2.3% now. In terms of exact numbers that is happenstance but in terms of theme and principle it is yet another sign that the economic world has seen ch-ch-changes.

Comment

We are seeing something of a shift in the economic tectonic plates. Some of this is welcome as we see a strong recovery in levels of employment and falls in unemployment. However the other side of this coin is that wage growth is weak and in my home country the UK real wages have in spite of the economic recovery are still short of where they were a decade ago. It was only yesterday when I noted the German housing market getting like us well today it is our labour market which has mimicked theirs! Weak wage growth with low unemployment is rather Germanic and in fact is something we aimed at, well until we got it anyway.

Until now I have left out productivity which is an important factor in real wage growth as we wonder if the switch to a mainly service based  economy has neutered it? But there have been issued here as this morning’s working paper from the ECB indicates and its analysis applies much wider than just in the Euro area.

Higher labour productivity growth is a key factor in raising living standards in advanced economies……..Recent labour productivity growth in the euro area has, however, been low – by both historical and international standards – albeit against the backdrop of a generalised slowdown in global labour productivity growth…………..Over the period 2008-16, annual growth in euro area labour productivity per person employed slowed to an average of around 0.5% (based on a three-year moving average), from an average of around 1.1% over the course of the decade to 2007

 

Negative interest-rates and QE have created a house price boom in Germany

A feature of these times is that is called easy monetary policy and this is particularly true in the Euro area. There the European Central Bank has a deposit rate of -0.4% and is undertaking asset or bond purchases of 60 billion Euros a month as well. This means that as of last week over 1.8 trillion Euros of bonds have been bought including some 216 billion Euros of covered bonds which support banks and then mortgage lending. Last week we discovered that some countries “have been more equal than others” in terms of where this 1.8 trillion Euros has ended up. From the ECB.

Excess liquidity has been persistently concentrated within a group of banks located in a limited number of higher-rated countries, i.e. around 80-90 % of excess liquidity is being held in Germany, France, the Netherlands, Finland and Luxembourg (see Chart 1) and even their country shares have been fairly stable across time.

It is fascinating that a country geographically as small as Luxembourg merits a mention. But Reuters updates us on the two main beneficiaries.

The study shows that 60 percent of the money spent by the ECB and national central banks on buying bonds ends up in Germany, where sellers, mainly UK banks, have their accounts. France accounts for a further 20 percent.

Okay and the consequence of this is?

But the fact that the money keeps accumulating in the bloc’s richest countries rather than flowing where it is needed the most risks undoing some of the ECB’s efforts and shows the European Union’s objective to create a banking union is still far from reached.

This makes me wonder about asset prices in the main beneficiary Germany as after all these QE ( Quantitative Easing) policies are claimed to have “wealth effects”.

House Prices in Germany

Let us step into the TARDIS of Dr.Who and go back to February of 2014 when the Financial Times reported this.

House prices in Germany’s biggest cities are overvalued as much as 25 per cent, the Bundesbank warned on Monday, adding to fears that international investment has helped to fuel a property bubble in the eurozone’s largest economy. The German central bank said that residential real estate prices in 125 cities rose by 6.25 per cent on average last year. In October, it reported that property prices in the biggest German cities were 20 per cent overvalued, suggesting the problem is getting worse.

If we move forwards to March 2016 then this from Bloomberg is eye-catching.

German house prices went nowhere for years. Recently they’ve grown faster than the UK.

So what had they done?

House prices have increased 5.6 percent a year over the past five years, according to UBS, which is double the average annual rate of increase since 1970.

As we see in so many other places the rises were concentrated in the major urban areas.

Prices are rising particularly fast in urban areas, where young people increasingly want to live. A gauge of advertised apartment prices in seven major cities including Frankfurt and Berlin rose 14.5 percent in 2015, the most since 2000, according to Empirica, a research institute.

As to “wealth effects” there was something else which is somewhat familiar to say the least.

So far the biggest beneficiaries have been Germany’s listed residential landlords. Cheap debt has enabled them to snap up housing portfolios and smaller rivals, thereby achieving cost savings through scale

What about now?

The Bundesbank calculates its own house price index which covers 127 cities and it rose by 8.3% in 2016 following 7.6% in 2015 and 5.7% in 2014. So according to its own index then prices must be very overvalued now if they were already overvalued back in 2014. Putting it another way the index which was set at 100 in 2011 was at 141.4 at the end of 2016. So quite a rise especially for a nation which has little experience of this as for example the period from 2004 to 2007 which saw such booms in the UK,Spain and Ireland saw no change in house prices in Germany.

In January my old employer Deutsche Bank looked forwards and told us this.

In 2017, we therefore expect rents and property prices in the major German cities, and across the country as a whole, to rise substantially once again…….Munich remains the most dynamic German city when it comes to property, with its fast-rising population and historically low vacancy rate likely to lead to further price increases for many years to come.

There is an element of cheerleading here which of course is a moral hazard issue for banks reporting on property prices which will not be shared by first time buyers in Germany. Those in Berlin will have particular food for thought.

Property prices in Berlin are now twice as high as they were in 2005 and have reached the level of some of the major cities in western Germany.

As of the latest news Europace have constructed an hedonic (quality adjusted) index which rose by 7.6% in the year to March.

What about rents?

These have risen but not by much if the official data is any guide. The rent section of the official Euro area CPI measure rose at an annual rate of 1.6% in March. Although Frankfurt seems to be something of an exception as Bloomberg reports.

The monthly cost of a mid-range two-bedroom apartment in Germany’s financial capital rose 20 percent in 2017 from a year earlier, while the cost of an equivalent living space in London fell by 8 percent, according to a Deutsche Bank study.

Frankfurt rent rises will of course be particularly painful for Deutsche Bank employees.

Comment

There is a fair bit to consider here but what is unarguable is that the easy monetary policy of the ECB has been associated with house price rises. These are noticeable in international terms but are particularly noticeable in a country which escaped any pre credit crunch boom. Also if we use the Bundesbank data above house prices rose by 41.4% in the period 2011-16 whereas real wages only rose by 6.6% ( Destatis) which is quite a gap! I think we know how first- time buyers must feel and yes there is a fair number as whilst Germany has fewer owner occupiers in proportionate terms than the UK they still comprise 51.9% of the housing market.

It is hard to avoid the thought that this house price boom is what central bankers would call a “wealth effect” from their policies, especially if we note that the liquidity seems to have mostly headed to Germany. Of course some of that will be the equivalent of a company name plate on the door but some will be genuine. Meanwhile as we note wealth transfers and inflation there is of course the near record high bond prices and the highs in the Dax 30 equity index seen last week.

 

 

 

How are the bank and Alitalia bailouts going in Italy?

It is time again to dip into the delightful country that is Italy as one of the features of life there makes the news. The saga of the national airline Alitalia has been going on for the best part of a couple of decades but has now reached something of a climax. Here is Sky News on the subject.

Shareholders in Alitalia have voted unanimously for the airline to enter administration, in a deal with the Italian government that would allow it to keep flying.

The move was approved by investors days after the airline’s staff rejected a proposed restructuring that would have seen 1,700 of them lose their jobs – with the rest subject to salary cuts of around 8%.

The business model was not viable and Etihad Airlines who own 49% of the airline were unwilling to put in any more cash without reforms. I guess the same sort of reforms which ECB ( European Central Bank) President Mario Draghi asks for at each monetary policy press conference in the one certainty in it. So the Italian state had to step up as Reuters explains.

The government appointed three commissioners to assess whether Alitalia can be restructured, either as a standalone company or through a partial or total sale, or else liquidated.

Rome also threw the airline a short-term lifeline by guaranteeing a bridge loan of 600 million euros ($655 million) for six months to see it through the bankruptcy process.

So another 600 million Euros is being added to the Italian national debt I guess as we wonder if 6 months will be long enough to get us to the other side of the upcoming election. Also there is an element to this saga that makes Alitalia sound rather like a bank.

Outraged at repeated bailouts that have cost taxpayers more than 7 billion euros over a decade, many Italians are urging the government to resist the political temptation to rush to its rescue again.

Speaking of banks

If we think of Italian banks it is hard not to wonder what is happening about the nationalisation about Monte dei Paschi di Siena? After all it was supposed to start at the beginning of the year although there were many problems as I pointed out back then as will in be a bailout or a bail in? According to Il Sole there are ch-ch-changes afoot.

According to certain estimates reviewed by Il Sole, raising the number of job cuts to 5,000 would have a €654 million effect on costs (around half a billion more than the October plan,) the equivalent of 18% of 2016’s costs. This would significantly improve the 54.5% cost/income ratio that the bank had established as a goal for 2019; now, it seems that this could be achieved by 2021.

So the number of job cuts is pretty much doubled which is being sugared by extending the plan a couple of years, or the sort of thing applied to Greece when the numbers do not add up. Also the non performing loans ( let us hope that they do not include Alitalia now ) have not been sorted as putting them in the rescue fund Atlante is so 2016.

Another decisive element, obviously, is the management of the €29 billion in gross non performing loans that still weigh on the bank: many options are being considered, but at the moment the most realistic one calls for Atlante to acquire around €500 million of a junior tranche.

Times must be hard if Atlante is the best option as views like this from Nicholas Zennaro on The Market Mogul have been replaced by write-offs and losses.

The investment in Atlante could not only generate significant profits but also create positive side effects and support a more positive perception of big banks in Italy.

Actually only yesterday Il Sole was looking at another job for Atlante.

 the three banks will be recapitalized (from the Resolution Fund, then by “healthy” banks) for 450 million. The other condition was the sale of approximately 2.2 billion euros of impaired loans, to which the Atlas Fund will be charged.

They are referring to what now seems to be called Ubi Banca.

Meanwhile in something of a dizzying whirl as some banks are moved into Atlante from the state others are heading in the opposite direction. This is Il Sole via Google Translate last month on Banco Popalare and Veneto Banca.

the share in public hands will probably exceed 70% , While – as confirmed by three different sources at Il Sole 24 Ore – Quaestio’s fund ( Atlante) should be at 20-25%, leaving crumbs of crumbs on small members, already marginalized by the increases of a year ago.

Apologies for the clunky translation but I think you can all figure what happened to existing shareholders. But this looks like a game of pass the parcel with everybody hoping that the music never stops. Indeed I wonder if any real progress has been made.

The situation is fluid because regulators have not yet agreed with prices and how NPL will be disposed of and what will be the consequent erosion of the 3.9 billion of net assets currently available to banks,

This is all quite a mess as we wonder if this will be a bailout or a bail-in and what will happen to the bondholders? These are supposed to take the strain now but the fact that ordinary Italian savers were miss sold some of these bonds means that the government is twisting and turning to try to avoid that. It has created a type of paralysis which seems to be speading. What can happen to bonds well Alitalia did give us a clue?

I wonder who the holders are/were? No doubt someone is already suggesting that the ECB should buy them all……

The unemployment problem

The paralysis described above seems to lead into this as we saw yet another disappointment yesterday as follows.

In March 2017, 22.870 million persons were employed, unchanged over February 2017. Unemployed were 3.022 million, +1.4% over the previous month….. unemployment rate was 11.7%, +0.1 percentage points over the previous month,

This is supposed to be an economic recovery driven by negative interest-rates and some 1.8 trillion Euros of bond purchases and yet unemployment rises and not falls. There was better news on youth unemployment but look at the level of it.

Youth unemployment rate (aged 15-24) was 34.1%, -0.4 percentage points over February 2017

Comment

The Italian system seems ossified creating something of a zombified banking sector and indeed national airline. This means that even in a much better phase for the Euro area with economic growth just reported of 0.5% in the first quarter of this year that unemployment in Italy rises instead of falls. It represents quite a failure in the circumstances for the level of unemployment to be 29,000 higher than last year.

Yet there are areas where Italy shows excellent management skills. Allegri has taken Juventus to the Champions League semi-finals and Claudio Ranieri took little Leicester to English Premier League triumph last year. As we stand Antonio Conte’s Chelsea  lead this year with 4 games to go. What of course is lacking in the banking story is the sort of decisive action that he took when switching to three at the back. The exact opposite of paralysis. If men like these were in charge then it is hard to avoid the feeling that we would see more news like that below rather than more “girlfriend in a coma” worries.

The rate of growth in manufacturing output reached the highest for six years in April, having accelerated for the third month in a row