UK Austerity and the next Governor of the Bank of England

Today brings into focus an area that has brought good news for the UK over the past couple of years. This has been the improvement in the public finances which rather curiously lagged the period where the economy recorded its fastest economic growth by around 2 years. Also some of the detail along the way has hinted at a better economic situation than that suggested by economic growth measured by Gross Domestic Product or GDP data. This swings both ways in my view as what were called the bond vigilantes will be happier with the state of play. But also those on the other side of the coin who would like more government spending and/or lower taxes would have fiscal room to do so.

Austerity

This has been a matter of debate for some time and let me start by saying there are several ways of looking at this. The harshest would be to actually cut government spending which we have not seen in the UK. Let me add more detail by pointing out that some areas clearly have but overall the story has nor been that as other areas spent more. The more realistic version seems to be restricting government spending in real terms which we have seen some of overall. If we look at it in terms of years then we have recorded on here two main phases firstly from around 2010 when the brakes were applied and from 2012/13 when the pressure on the spending brakes was loosened.

Also there was some tightening on the other side of the fiscal ledger of which the standout was the rise in Value Added Tax or VAT. There was a relatively brief cut from 17.5% to 15% but then a rise to 20% where in spite of the claims of a return to normal it is still at the supposedly emergency rate.

Having established some perspective let us look at this from the IPPR which compared us to these countries “This comprises Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain and Sweden.”.

We find that on average these countries spend 48.9 per cent of GDP on public spending, compared to just 40.8 per cent in the UK. Furthermore, whilst the UK’s spending has fallen by 7 percentage points – from around 47 per cent of GDP to 40 per cent of GDP – since the onset of austerity, the comparable fall across these countries is just 3 percentage points. Moreover, if the UK were to match their current levels of spending tomorrow it would be worth £2,500 per person per year, of which £1,800 would go towards social spending; meaning health, education and social security.

Okay if we break this down we see that the picture is more complex. Let me show you this by looking at the Euro area in total for 2018 for which we got figures yesterday. There the fiscal deficit was a mere 0.5% of GDP with spending at 46.8% and revenue at 46.3%. Furthermore many of the countries in the IPPR list ran fiscal surpluses in 2018

Germany (+1.7%), the Netherlands (+1.5%), Sweden (both +0.9%), Denmark (+0.5%). Austria (+0.1%).

So on that measure they are more fiscally austere than the UK which ran a deficit. As you can see things are more complex than they argue which is hinted at by the way they use tax revenue as a benchmark rather than total revenues which changes the numbers quite a bit. We have numbers for different periods but my 46.3% for the Euro area is rather different to the 41.1% for their sample and looks a swinging rather than a straight ball to me.

Of course spending is not a free good either. Could we match the spending tomorrow? Yes we could if we wished and for a while with bond yields where they are it would at first be no big deal, but even the IPPR realises it would have to come with this.

But in the UK, as IPPR has previously recommended, significant additional revenue could be raised through increasing the rate of corporation tax in line with the European average, reforming income tax but in a way that protects those on low and middle incomes, and changes to the way in which we tax wealth.

As to Corporation Tax I am dubious as one thing we have learned in the credit crunch era is the way multinationals pretty much choose where they pay tax or if you want the issue in one word, Ireland.

Moving on we see this and again the catch is that in the credit crunch era such Ivory Tower calculations are fine up in the clouds but down here at ground level they have often crumbled.

They find that the cumulative effect of austerity has been to shrink the economy by £100bn today compared to what it would have been without the cuts: that is worth around £3,600 per family in 2019/20 alone.

Today’s Data

The overall picture presented continues to be a strong one.

In the latest full financial year (April 2018 to March 2019), central government received £739.4 billion in income, including £558.6 billion in taxes. This was 5% more than in the previous financial year.

This again hints that the economy has been stronger than the GDP data suggests and follows the labour market theme of rising employment and higher real wages.

On the other side of the ledger the throwing around of the word austerity makes me uncomfortable when we are increasing spending in real terms.

Over the same period, central government spent £741.5 billion, an increase of around 3%.

Well unless you use the RPI as your inflation measure but even then it is roughly flat.

The combination meant this.

Borrowing in the latest full financial year (April 2018 to March 2019) was £24.7 billion, £17.2 billion less than in the previous financial year; the lowest financial year borrowing for 17 years.

Or if you prefer our credit crunch era journey can be put like this.

In the latest full financial year (April 2018 to March 2019), the £24.7 billion (or 1.2% of gross domestic product (GDP)) borrowed by the public sector was less than one-fifth (16.1%) of the amount seen in the FYE March 2010, when borrowing was £153.1 billion (or 9.9% of GDP).

As a single month March was not one for austerity as it looks like departments made sure that they spent their annual budgets so if some potholes were filled in around your locale that is why.

 while total central government expenditure increased by 5.7% (or £3.5 billion) to £65.7 billion.

The explanation is rather bare but if we look at the ledger we see spending on goods and services was up by £1.9 billion. So maybe there was some Brexit stockpiling too.

Comment

The last decade has seen a lot of debate over the concept of austerity involving quite a lot of goalpost moving, so much so that it is fortunate designers give them wheels these days. Whereas we do know what real austerity has been as @fwred made clear yesterday,

Today’s craziest chart goes to Greece, with a primary surplus of 4.4% of GDP in 2018, beating an already insane target of 3.5%. Jaw-dropping for those of us old enough to remember the whole story.

Or as The Nutty Boys put it.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha

We have seen nothing like that but now face choices ahead as do we copy the Germand and go for a surplus? Or do we now pick out areas where we can spend more? With borrowing so cheap with our ten-year Gilt yield at 1.2% it is not expensive. As ever some care is needed as we have spent in some areas as I note in the IPPR paper than at 7.4% of GDP we spend the same on health as the countries they compare us too which completes something I recall Tony Blair aiming at back in the day.

Meanwhile this has hit the news. I have floated two candidates in Andrew Sentance and Ann Pettifor, but who would you suggest?

The search is on for a new Governor of the @bankofengland. Applications opened this morning for one of the most exciting jobs in world finance. Find out more here 👇https://t.co/0ibYcndhTI

— HM Treasury (@hmtreasury) April 24, 2019

Although if Yes Prime Minister has its usual accuracy the choice has already been made and this is just for show

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Are we on the road to a US $100 oil price?

As Easter ends – and one which was simply glorious in London – those of us reacquainting ourselves with financial markets will see one particular change. That is the price of crude oil as the Financial Times explains.

Crude rose to a five-month high on Tuesday, as Washington’s decision to end sanctions waivers on Iranian oil imports buoyed oil markets for a second day.  Brent, the international oil benchmark, rose 0.8 per cent to $74.64 in early European trading, adding to gains on Monday to reach its highest level since early November. West Texas Intermediate, the US marker, increased 0.9 per cent to $66.13.

If we look for some more detail on the likely causes we see this.

The moves came after the Trump administration announced the end of waivers from US sanctions granted to India, China, Japan, South Korea and Turkey. Oil prices jumped despite the White House insisting that it had worked with Saudi Arabia and the United Arab Emirates to ensure sufficient supply to offset the loss of Iranian exports. Goldman Sachs said the timing of the sanctions tightening was “much more sudden” than expected, but it played down the longer-term impact on the market.

 

So we see that President Trump has been involved and that seems to be something of a volte face from the time when the Donald told us this on the 25th of February.

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile! ( @realDonaldTrunp)

After that tweet the oil price was around ten dollars lower than now. If we look back to November 7th last year then the Donald was playing a very different tune to now.

“I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.” ( CNBC)

If we stay with this issue we see that he has seemingly switched quite quickly from exerting a downwards influence on the oil price to an upwards one. As he is bothered about the US economy right now sooner or later it will occur to him that higher oil prices help some of it but hinder more.

Shale Oil

Back on February 19th Reuters summarised the parts of the US economy which benefit from a higher oil price.

U.S. oil output from seven major shale formations is expected to rise 84,000 barrels per day (bpd) in March to a record of about 8.4 million bpd, the U.S. Energy Information Administration said in a monthly report on Tuesday……..A shale revolution has helped boost the United States to the position of world’s biggest crude oil producer, ahead of Saudi Arabia and Russia. Overall crude production has climbed to a weekly record of 11.9 million bpd.

Thus the US is a major producer and the old era has moved on to some extent as the old era producers as I suppose shown by the Dallas TV series in the past has been reduced in importance by the shale oil wildcatters. They operate differently as I have pointed out before that they are financed with cheap money provided by the QE era and have something of a cash flow model and can operate with a base around US $50. So right now they will be doing rather well.

Also it is not only oil these days.

Meanwhile, U.S. natural gas output was projected to increase to a record 77.9 billion cubic feet per day (bcfd) in March. That would be up more than 0.8 bcfd over the February forecast and mark the 14th consecutive monthly increase.

Gas production was about 65.5 bcfd in March last year.

Reinforcing my view that this area has a different business model to the ordinary was this from Reuters earlier this month.

Spot prices at the Waha hub fell to minus $3.38 per million British thermal units for Wednesday from minus 2 cents for Tuesday, according to data from the Intercontinental Exchange (ICE). That easily beat the prior all-time next-day low of minus $1.99 for March 29.

Prices have been negative in the real-time or next-day market since March 22, meaning drillers have had to pay those with pipeline capacity to take the gas.

So we have negative gas prices to go with negative interest-rates, bond yields and profits for companies listing on the stock exchange as we mull what will go negative next?

Economic Impact on Texas

Back in 2015 Dr Ray Perlman looked at the impact of a lower oil price ( below US $50) would have on Texas.

To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered.  Overall job growth in the state would be diminished, but not eliminated.  Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range.

Moving wider a higher oil price benefits US GDP directly via next exports and economic output or GDP and the reverse from a lower one. We do get something if a J-Curve style effect as the adverse impact on consumers via real wages and business budgets will come in with a lag.

The World

The situation here is covered to some extent by this from the Financial Times.

In currency markets, the Norwegian krone and Canadian dollar both rose against the US dollar as currencies of oil-exporting countries gained.

There is a deeper impact in the Middle East as for example there has been a lot of doubt about the finances of Saudi Arabia for example. This led to the recent Aramco bond issue ( US $12 billion) which can be seen as finance for the country although ironically dollars are now flowing into Saudi as fast as it pumps its oil out.

The stereotype these days for the other side of the coin is India and the Economic Times pretty much explained why a week ago.

A late surge in oil prices is expected to increase India’s oil import bill to its five-year high. As per estimates, India could close 2018-19 with crude import bill shooting to $115 billion, a growth of 30 per cent over 2017-18’s $88 billion.

This adds to India’s import bill and reduces GDP although it also adds to inflationary pressure and also perhaps pressure on the Reserve Bank of India which has cut interest-rates twice this year already. The European example is France which according to the EIA imports some 55 million tonnes of oil and net around 43 billion cubic meters of natural gas. It does offset this to some extent by exporting electricity from its heavy investment in nuclear power and that is around 64 Terawatt hours.

The nuclear link is clear for energy importers as I note plans in the news for India to build another 12.

Comment

There are many ways of looking at this so let’s start with central banks. As I have hinted at with India they used to respond to a higher oil price with higher interest-rates to combat inflation but now mostly respond to expected lower aggregate demand and GDP with interest-rate cuts. They rarely get challenged on this U-Turn as we listen to Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Next comes the way we have become less oil energy dependent. One way that has happened has been through higher efficiency such as LED light bulbs replacing incandescent ones. Another has been the growth of alternative sources for electricity production as right now in my home country the UK it is solar (10%) wind (15%) biomass (8%) and nukes (18%) helping out. I do not know what the wind will do but solar will of course rise although its problems are highlighted by the fact it falls back to zero at night as we continue to lack any real storage capacity. Also such moves have driven prices higher.

As to what’s next? Well I think that there is some hope on two counts. Firstly President Trump will want the oil price lower for the US economy and the 2020 election. So he may grow tired of pressurising Iran and on the other side of the coin the military/industrial complex may be able to persuade Saudi Arabia to up its output. Also we know what the headlines below usually mean.

GM all! We have hit the $100 oil headlines! This looks familiar ..🤔 pic.twitter.com/2rlMssXJJJ

— 𝕮𝖍𝖎 🛢️ (@chigrl) April 16, 2019

Podcast

UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 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. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,

Comment

As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

Me on The Investing Channel

Good to see UK wages rising much faster than house prices at last

Today feels like spring has sprung and I hope it is doing the same for you, or at least those of you also in the Northern Hemisphere. The economic situation looks that way too at least initially as China has reported annual GDP growth of 6.4% for the first quarter of 2019. However the industrial production data has gone in terms of annual rates 5.8%,5.9%,5.4%,5.7%, 5.3% and now 8.7% in March which is the highest rate for four and a half years. Or as C+C Music Factory put it.

Things that make you go, hmm
Things that make you go, hmm
Things that make you go, hmm, hey
Things that make you go, hmm, hmm, hmm

In the UK we await the latest inflation data and we do so after another in a sequence of better wage growth figures. In its Minutes from the 20th of March the Bank of England looked at prospects like this.

Twelve-month CPI inflation had risen slightly in February to 1.9%, in line with Bank staff’s expectations
immediately prior to the release, and slightly above the February Inflation Report forecast. The near-term path
for CPI inflation was expected to be a touch higher than at the time of the Committee’s previous meeting,
though remaining close to the 2% target over the coming months. This partly reflected a 6% increase in sterling
spot oil prices, and the announcement by Ofgem on 7 February of an increase in the caps for standard variable
and pre-payment tariffs, from April, which had been somewhat larger than expected.

I do like the idea of claiming you got things right just before the release, oh dear! Also it is not their fault but the price cap for domestic energy rather backfired and frankly looks a bit of a mess. It will impact on the figures we will get in a month.

Prospects

Let us open with the oil prices mentioned by the Bank of England as the price of a barrel of Brent Crude Oil has reached US $72 this morning. So a higher oil price has arrived although we need context as it was here this time last year. The rise has been taking place since it nearly touched US $50 pre-Christmas. Putting this into context we see that petrol prices rose by around 2 pence per litre in March and diesel by around 1.5. So this will be compared with this from last year.

When considering the price of petrol between February and March 2019, it may be useful to note that the average price of petrol fell by 1.6 pence per litre between February and March 2018, to stand at 119.2 pence per litre as measured in the CPIH.

Just for context the price now is a penny or so higher but the monthly picture is of past falls now being replaced by a rise. Also just in case you had wondered about the impact here it is.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

If we now switch to the US Dollar exchange rate ( as the vast majority of commodities are priced in dollars) we see several different patterns. Recently not much has changed as I think traders just yawn at Brexit news although we have seen a rise since it dipped below US $1.25 in the middle of December. Although if we look back we are around 9% lower than a year ago because if I recall correctly that was the period when Bank of England Governor Mark Carney was busy U-Turning and talking down the pound.

So in summary we can expect some upwards nudges on producer prices which will in subsequent months feed onto the consumer price data. Added to that is if we look East a potential impact from what has been happening in China to pig farming.

Chinese pork prices are expected to jump more than 70 percent from the previous year in the second half of 2019, an agriculture ministry official said on Wednesday………China, which accounts for about half of global pork output, is struggling to contain an outbreak of deadly African swine fever, which has spread rapidly through the country’s hog herd.

That is likely to have an impact here as China offers higher prices for alternative sources of supply. So bad news for us in inflation terms but good news for pig farmers.

Today’s Data

I would like to start with something very welcome and indeed something we have been waiting for on here for ages.

Average house prices in the UK increased by 0.6% in the year to February 2019, down from 1.7% in January 2019 . This is the lowest annual rate since September 2012 when it was 0.4%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

This means that if we look at yesterday’s wage growth data then any continuation of this will mean that real wages in housing terms are rising at around 3% per annum. There is a very long way to go but at least we are on our way.

The driving force is this and on behalf of three of my friends in particular let me welcome it.

The lowest annual growth was in London, where prices fell by 3.8% over the year to February 2019, down from a decrease of 2.2% in January 2019. This was followed by the South East where prices fell 1.8% over the year.

As they try to make their way in the Battersea area prices are way out of reach of even what would be regarded as good salaries such that they are looking at a 25% shared appreciation deal as the peak. Hopefully if we get some more falls they will be able to average down by raising  to 50% and so on but that is as Paul Simon would say.

Everybody loves the sound of a train in the distance
Everybody thinks it’s true

One development which raises a wry smile is that house price inflation is now below rental inflation.

Private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to March 2019, up from 1.1% in February 2019……..London private rental prices rose by 0.5% in the 12 months to March 2019, up from 0.2% in February 2019.

What that tells us is not as clear as you might think because the numbers are lagged. Our statisticians keep the exact lag a secret but I believe it to be around nine months. So whilst we would expect rents to be pulled higher by the better nominal and real wage data the official rental series will not be showing that until the end of the year

Comment

The development of real wages in housing terms is very welcome. Of course the Bank of England will be in a tizzy about wealth effects but like so often they are mostly for the few who actually sell or look to add to their mortgage as opposed to the many who might like to buy but are presently priced out. Also existing owners have in general had a long good run. Those who can think back as far as last Thursday might like to mull how house price targeting would be going right now?

Moving to consumer inflation then not a lot happened with the only move of note being RPI inflation nudging down to 2.4%. The effects I described above were in there but an erratic item popped up and the emphasis is mine.

Within this group, the largest downward effect came from games, toys and hobbies, particularly computer games

If a new game or two comes in we will swing the other way.

Looking further up the line I have to confess this was a surprise with the higher oil price in play.

The growth rate of prices for materials and fuels used in the manufacturing process was 3.7% on the year to March 2019, down from 4.0% in February 2019.

So again a swing the other way seems likely to be in play for this month.

Meanwhile,what does the ordinary person think? It is not the best of news for either the Bank of England or our official statisticians.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in November.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.

Will the UK labour market data prove to be a better guide than GDP again?

It was a week or so ago that we took an in-depth view on UK productivity and yesterday the Financial Times was on the case. As ever they open with what is their priority.

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

There are a few begged questions here as for example the particularly weak period for UK productivity was in 2013/14 well before Brexit and in fact late 2017 or so was a relatively good period for it. The next part is more soundly based I think.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Indeed we have had a problem here but I am afraid that the Conference Board then gets a little carried away as it veers towards Fake News territory.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

The UK employment performance is something we follow month by month and has been really good since about 2012 so I am afraid that Bart is barking up the wrong tree. If we look at matters from the perspective of the UK employment rate it has risen from 70.1% at the end of 2011 to 76.1% now. On a chart going back to 1971 there is only one period where it rose faster ( 87-89) and that sadly then led to a bust.

Here are the numbers from the Conference Board and you may spot the holes in this yourselves.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

So the “Not even employment is growing quickly any more” is also a “buoyant jobs market”! I note that rather than being hit by Brexit as originally claimed productivity last year was in line with the post credit crunch average, We end up with an expected weak 2019 leading to low productivity growth. If that makes you fear for Italy and Germany which at the moment have worse output prospects than us well apparently not.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, said the Conference Board.

If we use the OECD and compare ourselves in 2018 we did better than Italy ( -0.2%) Spain ( -0.3%) and Germany (0%) but worse than France (0.6%) albeit only slightly.

Investment

This has been a troubled area recently for the UK economy as the Brexit uncertainty has seen a drop in business investment. But it would seem that if we ever get over that hill money will be arriving from different quarters.

The United Kingdom has snatched the top spot in a survey that ranks how attractive countries are as investment destinations over the coming year.

Despite “continued uncertainty stemming from its intention to leave the European Union”, the UK knocked the United States off its perch, which it had held since 2014, according to the data conducted by accountancy firm EY. ( Daily Telegraph)

Of course that is a different definition of investment usually focusing more on the financial sector.

Today’s Data

Unfortunately for the rhetoric of the Conference Board above but fortunately for UK workers our official statisticians have released this.

Estimates for December 2018 to February 2019 show 32.72 million people aged 16 years and over in employment, 457,000 more than for a year earlier. This annual increase of 457,000 was due entirely to more people working full-time (up 473,000 on the year to reach 24.15 million)……The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.4%) and the joint-highest figure on record.

If we compare the annual rate above to the latest three-monthly one we see that job growth may even have sped up.

The level of employment in the UK increased by 179,000 to a record high of 32.72 million people in the three months to February 2019.

Considering the level of employment we are now at then this are pretty impressive numbers. If we switch to hours worked they are up by 2.1% on a year ago which again is strong. As GDP growth seems lower there may well be an issue here again for productivity growth but not for the opposite to the reason given by the Conference Board.

Wages

In the period since the quantity numbers for the UK economy turned for the better we have waited quite a long time for the quality or wages numbers to also do so. But more recently we have seen better news.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.5%, before adjusting for inflation, and by 1.6%, after adjusting for inflation, compared with a year earlier.

If we look at the more comprehensive category we note that bonuses are pulling up the numbers which may be a hopeful sign. As to the real wage figures whilst I believe we now have some growth sadly it is not as high as claimed due to the flaws in the inflation number used. For some perspective the Retail Prices Index grew by 2.5% in the year to February as opposed to the 1.8% recorded by the Imputed Rent influenced CPIH. So real wage growth is more like 1% I would argue.

If we look at the month of February alone then we see that at 3.2% the number is lower but the monthly numbers are erratic. The growth has been pulled higher by the construction sector which has seen wages rise by 4.6% over the year to February and pulled lower by manufacturing which saw growth of a mere 1.9%. Although it was not an especially good February for them a factor in the overall rise in UK wage growth has come from the public-sector where the circa 1% of a couple of years ago has been replaced by 2.6% over the three months to February.

Comment

As ever there is much to consider here. The picture presented by our official statisticians is as good as it has been for quite some time. With employment at these high levels in some ways it is a surprise it continues to rise at all. For wages the picture is different but is now brighter than it has been for some time. Although if we look for perspective there is still if not a mountain quite a hill to climb.

For February 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at: £465 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £8 lower than the pre-recession peak of £473 per week for March 2008.

Using a more realistic inflation measure than the officially approved CPIH only makes the perspective darken along the lines sung about by Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

Moving to productivity I would remind readers of my analysis of the subject from the 5th of this month. As to the Conference Board analysis well the idea of UK employment growth being weak has had a bad 7 years and there is an irony as of course it has been that pushing productivity growth lower. Looking ahead will the labour market numbers prove to be a better guide to the economic situation than the output or GDP ones like in 2012? Only time will tell…….

Less welcome is the new way of presenting the numbers which frankly is something of a mess.

Central bankers are warming us up for more inflation again

A feature of the credit crunch era is the repetition of various suggestions from governments and central banks. One example of this has been the issue of Eurobonds which invariably has a lifespan until the nearest German official spots it. Another has been the concept of central banks overshooting their inflation target for a while. It is something that is usually supported by those especially keen on ( even more) interest-rate cuts and monetary easing so let us take a look.

Last Wednesday European Central Bank President Mario Draghi appeared to join the fray and the emphasis is mine.

Well, on your second question I will answer saying exactly the same thing. We don’t tolerate too low inflation; we remain fully committed to using all necessary instruments to return inflation to 2% without undue delay. Likewise, our inflation aim doesn’t imply a ceiling of 2%. Inflation can deviate from our objective in both directions, so long as the path of inflation converges towards our medium-term objective. I believe I must have said something close to this, or something to this extent a few other times in the past few years.

Nice try Mario but not all pf us had our senses completely dulled by what was otherwise a going through the motions press conference. As what he said at the press conference last September was really rather different.

In relation to that: shouldn’t the ECB be aiming for an overshoot on inflation rather than an undershoot given that it’s been below target for so long?

Second point: our objective is an inflation rate which is below, but close to 2% over the medium term; we stay with that, that’s our objective.

As you can see back then he was clearly sign posting an inflation targeting system aiming for inflation below 2%. That was in line with the valedictory speech given by his predecessor Jean-Claude Trichet which gave us a pretty exact definition by the way he was so pleased with it averaging 1.97% per annum in his term. So we have seen a shift which leads to the question, why?

The actual situation

What makes the switch look rather odd is the actual inflation situation in the Euro area. Back to Mario at the ECB press conference on Wednesday.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months.

So we find that inflation is below target and expected to fall further in 2019. This was a subject which was probed by one of the questions.

 It’s quite clear that the sliding of the five-year-to-five-year inflation expectations corresponds to a deterioration of the economic outlook. It’s also quite clear that as the economic outlook, especially the economic activity slows down, also markets expect less pressure in the labour market, but we haven’t seen that yet.

The issue of markets for inflation expectations is often misunderstood as the truth is we know so little about what inflation will be then. But such as it is again  the trend may well be lower so why have we been guided towards higher inflation being permitted.

It might have been a slip of the tongue but Mario Draghi is usually quite careful with his language. This leaves us with another thought, which is that if he is warming us up for an attitude change he is doing soon behalf of his successor as he departs to his retirement villa at the end of October.

The US

Minneapolis Fed President Neel Kashkari suggested this in his #AskNeel exercise on Twitter.

Well we officially have a symmetric target and actual inflation has averaged around 1.7%, below our 2% target, for the past several years. So if we were at 2.3% for several years that shouldn’t be concerning. #AskNeel

Also he reminded those observing the debate on Twitter that the US inflation target is symmetric and thus unlike the ECB.

Yes, i think we should really live the symmetric target and not tap the brakes prematurely. This is why I’ve been arguing for more accommodative monetary policy. But we are undertaking a year long review of various approaches so I am keeping an open mind. #AskNeel

As you can see with views like that the Donald is likely to be describing Neel Kashkari as “one of the best people”.  If we move to the detail there are various issues and my initial one is that inflation tends to feed on itself and be self-fulfilling so the idea that we can be just over the target at say 2.3% is far from telling the full picture. Usually iy would then go higher. Also if your wages were not growing or only growing at 1% you would be concerned about even that seemingly low-level of inflation.

If we consider the review the US Fed is undertaken we see from last week’s speech by Vice Chair Clarida a denial that it has any plans to change its 2% per annum target and we know what to do with those! Especially as he later points out this.

In part because of that concern, some economists have advocated “makeup” strategies under which policymakers seek to undo, in part or in whole, past inflation deviations from target. Such strategies include targeting average inflation over a multiyear period and price-level targeting, in which policymakers seek to stabilize the price level around a constant growth path.

As the credit crunch era has seen inflation generally be below target this would be quite a shift as it would allow for quite a catch-up. Which of course is exactly the point!

Comment

Central bankers fear that they are approaching something of a nexus point. They have deployed monetary policy on a scale that would not have been believed before the credit crunch hit us. Yet in spite of the negative interest-rates, QE style bond purchases and in some cases equity and property buys we see that there has been an economic slow down and inflation is generally below target. Also the country that has deployed monetary policy the most in terms of scale Japan has virtually no inflation at all ( 0.2% in February).

At each point in the crisis where central bankers face such issues they have found a way to ease policy again. We have seen various attempts at this and below is an example from Charles Evans the President of the Chicago Fed from back in March 2012.

My preferred inflation threshold is a forecast of 3 percent over the medium term.

We have seen others look for 4% per annum. What we are seeing now is another way of trying to get the same effect but this time looking backwards rather than forwards.

There are plenty of problems with this. Whilst a higher inflation target might make life easier for central bankers the ordinary worker and consumer faces what economists call “sticky” wages. Or in simple terms prices go up but wages may not and if the credit crunch is any guide will not. My country the UK suffered from that in 2010/11 when the Bank of England “looked through” consumer inflation which went above 5% with the consequence of real wages taking a sharp hit from which they have still to recover.

Next comes the issue that in the modern era 2% per annum may be too high as a target anyway. In spite of all the effort it has been mostly undershot and as 2% in itself has no reason for existence why not cut it? Then we might make progress in real wage terms or more realistically reduce the falls. That is before we get to the issue of inflation measures lacking credibility in the real world as things get more expensive but inflation is officially recorded as low.

Meanwhile central bankers sing along to Marvin Gaye.

‘Cause baby there ain’t no mountain high enough

Podcast

 

 

Are world equity markets front-running expected central bank buying?

Sometimes we get an opportunity to both take some perspective and also to observe what is considered by some to be cutting edge. So let us open with the perspective of the general manager of the Bank for International Settlements.

Growth cannot depend on monetary policy, Agustín Carstens tells CNBC.

I am sure that many of you are thinking that it is a bit late ( like a decade or so) to tell us now.. Interestingly if you watch the video he says in reference to the Euro area that monetary policy “cannot be the only solution for growth”. This reminds me of the statement by ECB President Mario Draghi that it QE was responsible for the better Euro area growth phrase in 2016 to 17. It also brings me to my first official denial of the day.

Some analysts said a tiered rate would make room for the ECB to cut its deposit rate farther — a prospect that one source said was nowhere near being discussed. ( Reuters )

You know what usually happens next….

Asset Markets

This is an area that central banks have increasing moved into with sovereign and corporate bond buying. But in the same Reuters article I spotted something that looked rather familiar.

TLTRO III, a new series of cheap two-year loans aimed at banks, was unveiled in March as a tool to help lenders finance themselves, particularly in countries such as Italy and Portugal. But policymakers now increasingly see it as a stimulus tool for a weakening economy, the sources said.

With the growth outlook fading faster than feared, even hawkish policymakers have given up pricing the loans at the private market rate. Some are even discussing offering the TLTROs at minus 0.4 percent, which is currently the ECB’s deposit rate, the sources said.

That looks rather like the Funding for Lending Scheme which I mentioned yesterday as the way the Bank of England fired up the UK housing market from 2012 onwards. Essentially if you give banks plenty of cheap funding you get a lot of rhetoric about lending to business ( small ones in particular) but the UK experience was that it declined and mortgage lending rose. This was because mortgage rates fell quite quickly by around 1% and according to the Bank of England the total impact rose as high as 2%.

Thus in my opinion the ECB is considering singing along to the “More,more,more” of Andrea True Connection in relation to this.

House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the fourth
quarter of 2018 compared with the same quarter of the previous year.

This is one area where the ECB has managed to create some inflation and may even think that the lack of growth in Italy ( -0.6%) is a sign of its economic malaise. Although you do not have to know much history to mull the 6.7% in Spain and 7.2% in Ireland.

Equities

Regular readers will be aware that the Swiss National Bank and the Bank of Japan started buying equities some time ago now. There are differences in that the SNB is doing so to diversify its foreign exchange reserves which became so large they were influencing the bond markets ( mostly European) they were investing in. So it has bought foreign equities of which the most publicly noted it the holding in Apple because if you invest passively then the larger the company the larger the holding. If we note the Apple Watch this must provide food for thought for the Swiss watchmaking industry.

Japan has taken a different route in two respects in that it buys funds ( Exchange Traded Funds or ETFs) rather than individual equities and that it buys Japanese ones. Also it is still regularly buying as it  bought  70.500,000,000 Yen’s worth on Tuesday, Wednesday and Thursday this week. Whereas buying by the SNB in future will be more ad hoc should it feel the need to intervene to weaken the Swiss Franc again.

Now let us move to Federal Reserve policymaker Neel Kashkari

No. #AskNeel https://t.co/cwwV62JsRI

— Neel Kashkari (@neelkashkari) April 11, 2019

So an official denial! Also you may note that he has left some weasel room as he has not rejected the Japanese route of indirectly buying them. This is common amongst central bankers as they leave themselves an out and if they fear they might need to introduce a policy that will attract criticism they first deny they intend to do it to give the impression they have been somehow forced.

For a lighter touch @QTRResearch translated it into Trumpese so that the man who many think is really running the US Federal Reserve gets the picture.

Kashkari: We’re not buying stocks, who said anything about buying stocks, we’re definitely not buying stocks, we’d never buy stocks.

It was,of course, only last week that ended with the CIO of BlackRock suggesting that the ECB should purchase equities and no doubt he had a list ready! I suppose it would sort of solve this problem.

ECB will ask Deutsche Bank to raise fresh funds for merger: source ( Reuters)

Although of course that would not open just one can of worms but a whole cupboard full of them. But when faced with a problem the ECB regularly finds itself singing along with Donald Fagen.

Let’s pretend that it’s the real thing
And stay together all night long
And when I really get to know you
We’ll open up the doors and climb into the dawn
Confess your passion your secret fear
Prepare to meet the challenge of the new frontier

Comment

Now let us switch to markets as we remind ourselves that they have developed a habit of front-running or anticipating central bank action. Sometimes by thinking ahead but sometimes sadly via private briefings ( I hope the ECB has stopped them). However you spin it @Sunchartist made me think with this.

*Softbank Group Prices Japan’s Biggest Ever Yen Corporate Bond ¥500 Billion 1.64%

Aramco, Softbank, LYFT, Pinterest, Uber

The gravy train.

Or as Hipster on Twitter put it.

So Uber and Lyft will have a combined market cap of ~$150BN with a combined net loss of ~$3BN

Next there is the issue of something that is really rather uncomfortable.

It’s official: This is an all-time record year for corporate stock buybacks.

Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowes’s. Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity. ( CNBC)

This makes me uncomfortable on several counts. It is the job of a board of directors to run a business not to be punters in its shares. This is especially uncomfortable if their bonuses depend on the share price. Frankly I would look to make that illegal. As to them knowing the future how has that worked out for Boeing? To be fair to CNBC they did highlight a problem.

So the critics of corporate buybacks and dividend raises are correct. It is a form of financial engineering that does not do anything to improve business operations or fundamentals………. obsessing over ways to boost stock prices helps the investing class but not the average American.

Perhaps nothing has been done about this because it suits the establishment after all think of the wealth effects. But that brings inequality and the 0.01% back into focus.