What is it about GDP in the first quarter these days?

The behaviour of the UK economy so far in 2017 has been something of a hot potato in debate as the numbers swing one way and then the other. Let me give you an example of a ying and yang situation . The downbeat ying was provided last week by the official data on UK retail sales.

The 3 months to March shows a decrease of 1.4%; the third consecutive decrease for the underlying 3 month on 3 month pattern……Looking at the quarterly movement, the 3 months to March 2017 (Quarter 1) is the first quarterly decline since 2013 (Quarter 4).

That was ominous for today’s GDP release as the consumer sector had been part of the growth in the UK economy. Our official statisticians crunched the numbers as to the likely effect.

The 3-month period ending March 2017 coincides with Quarter 1 (Jan to Mar) 2017 of the quarterly gross domestic product (GDP) output estimate. It marks the first negative contribution of retail sales to quarterly GDP growth since Quarter 4 (Oct to Dec) 2013, contributing negative 0.08 percentage points (to 2 decimal places).

However only yesterday there was a yang to the ying from the Confederation of British Industry or CBI.

Retail sales growth accelerated in the year to April, with volumes rising faster than expected, according to the latest monthly CBI Distributive Trades Survey.

Here is some more detail.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)…….Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%). Meanwhile sales volumes decreased in specialist food & drink (-43%) and furniture & carpets (-30%).

If we stay with the specifics of the CBI report its is fascinating to see clothing leading the charge again. Regular readers will recall that this was the state of play last autumn and at that time it was female clothing in particular. So ladies if you have rescued us yet again we owe you another round of thanks. In such a situation you would be the consumer of last resort as well as often the first!

But the issue here is how does this fit with the official data? There is one way it might work and it comes down to the timing of Easter which was later this year than last. Whilst the official data does make seasonal adjustments I have seen this miss fire before. Perhaps the clearest generic example of this is first quarter GDP in the United States which year after year has been lower than the trend for the other quarters hinting at a systematic issue.

House prices

If these have been leading the charge for UK economic growth then this morning’s news will disappoint.

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6%, the weakest since June 2013.

The date is significant as it was the summer of 2013 when the Bank of England lit the blue touch-paper for UK house prices with a new bank subsidy programme. The latest version of this called the Term Funding Scheme has risen in size to £57.5 billion.since its inception last August. Looking forwards if we allow for the obvious moral hazard this is hardly especially optimistic.

As a result, we continue to believe that a small increase in house prices of around 2% is likely over the course of 2017 as a whole.

The GDP data

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2017, the slowest rate of growth since Quarter 1 2016.

This was driven by the retail sales slow down and this.

Slower growth in Quarter 1 2017 was mainly due to services, which grew by 0.3% compared with growth of 0.8% in Quarter 4 (Oct to Dec) 2016……The services aggregate was the main driver to the slower growth in GDP, contributing 0.23 percentage points…….The main contributor to the slowdown in services was the distribution, hotels and restaurants sector, which decreased by 0.5%, contributing negative 0.07 percentage points to quarter-on-quarter GDP growth.

The services slow down will have had a big effect because it must be pretty much 80% of our economy by now. Officially it is 78.8%.

Actually much of the economy grew at this sort of rate.

Production, construction and agriculture grew by 0.3%, 0.2% and 0.3% respectively in Quarter 1 2017.

So a slowing on the end of 2016 but here is something to think about. UK GDP growth was 0.2% in the first quarter of 2016 so ironically it is better this year but also was 0.3% in 2015. Are we developing a similar problem to the US where it seems to be something of a hardy perennial situation and if so why?

Looking Forwards

As well as the more optimistic CBI retail sales report there was this from Monday.

The survey of 397 manufacturers found that domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

It is not the only body which is looking forwards with some optimism.

The UK economy slowed sharply in Q1, as signalled by PMI. March rise in PMI suggests Q1 GDP could be revised up from 0.3% to 0.4%………Note that Q1 GDP was based on a forecast of no service sector growth in March. PMI showed strengthening ( Chris Williamson of Markit ).

What about the individual experience?

We have settled on GDP per capita as a better guide and this was frankly poor this time around.

GDP per head was estimated to have increased by 0.1% during Quarter 1 2017.

This adds to an issue which the chart below highlights, guess which of the lines is our more recent experience?

For the people who think that their individual experience has not backed up the claims of improvement there is food for thought in that chart.

Is GDP underecorded?

Tim Worstall wrote a piece for CapX this week telling us this.

For it’s obvious to our own eyes, and when properly adjusted GDP shows it once again, that we’ve all got much richer these recent decades.

Okay why?

The CPI overstates inflation – and thus understates how quickly real incomes are rising……Of course the ONS and others do the best they can but the current estimate is that inflation is overstated by 1 per cent a year. Or real income rises understated by it of course.

There are some interesting points on goods which are free ( WhatsApp for example) and ignored by GDP.  However it completely misses out the cost of housing which in recent times has been a major inflationary force in my mind. Would you rather have housing or the latest I-Pad?

Care is needed as of course there were substantial gains in the past but on this logic we are all much better off than we realise. Really?

Comment

The issue with first quarter growth was also true across the channel as the expectation and then the reality show below.

with 0.6% growth signalled for both Germany and France ( Markit )…….In Q1 2017, GDP in volume terms* slowed down: +0.3%, after +0.5% in Q4 2016 ( France Insee ).

So as we note the Bank of France was correct we await the US figures wondering what it is about first quarter GDP? For France this is not yet a sequence as last year was better but the UK and US seem trapped in a mire that appears to have a seasonal reappearance.

Looking ahead we were expecting higher inflation to bite on real incomes as 2017 progressed. As we stand a little of the edge of that has been taken off that impact. What I mean by that is the rise of the UK Pound £ to above US $1.29 helps with inflation prospects as does the fall in the price of a barrel of Brent Crude Oil to below US $52 per barrel. Of course they would need to remain there for this to play out.

Some posted some Blood Sweat & Tears lyrics a while back and they seem appropriate again.

What goes up, must come down
Spinning wheel got to go round
Talkin’ ’bout your troubles, it’s a cryin’ sin
Ride a painted pony, let the spinning wheel spin

The Greek crisis continues on its road to nowhere

Yesterday on my way to looking at the UK Public Finances I pointed out that Greece had a national debt to GDP ratio of 179% at the end of 2016. This came with some cheerleading from the Institutions ( they used to be called the Troika until the name became so damaged) and some of the media about a budget primary surplus of 4.2% of GDP although if we put debt costs back in the surplus shrinks to 0.7%. You may recall that the PSI or Private-Sector Involvement of 2012 was supposed to bring the debt position under control but the ongoing economic depression blew that out of the water as the economy tanked and debt rose.

A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make. Actually repayments is too strong a word as the debt will in fact be rolled from one Euro area institution to another. Bloomberg updates us on the issue.

The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months

It always turns out like this as this is a road we have been down more than once.

The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden.

This is all so familiar as we are always told there has been great success on reform yet somehow more is always needed! Also the debt burden needs easing yet again.

Debt relief

The problem here comes from the number below.

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros….. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

At the beginning of the saga Greece faced high interest costs as the theme was as US Treasury Secretary Timmy Geithner pointed out was one of punishment. This only made things worse as the economy shrunk further so the PSI was enacted. The flaw was that the ever-growing amount of debt held by the Euro area and IMF was excluded from any write-down as we muse the first rule of ECB club which is that it must always be repaid. As this ballooned an alternative more implicit rather than explicit debt relief programme was put in place . From the ESM ( European Stability Mechanism).

Moreover, the EFSF and ESM loans lead to substantially lower financing costs for the country. That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

It calculates the savings for Greece as follows.

Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.

You may note that Greece is always “saving” money and yet the debt burden gets worse. A clue to that is the section on economic progress which trumpets the current account, fiscal deficit and something which apparently the IMF needs to be told.

Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.

Somehow it misses out what now must be called the Great Economic Depression which has ravaged the Greek economy. Also is this one of the reforms?

The government is preparing to honor a pledge to offer permanent status to civil servants in key posts of the public sector, Kathimerini understands, with legislation boosting their rights expected to head to Parliament soon.

 

Also a board member showed the confusion with this sentence in a speech on the 6th of March.

As the Eurogroup chairman Jeroen Dijsselbloem said, there is no immediate liquidity squeeze over the next months, but that does not mean that Greece does not need money.

Er?

The medicine

In spite of where we stand this remains the same as the FT points out.

Greece agreed this month to adopt measures that would improve its primary budget surplus – before paying debt servicing costs – by 2 per cent of gross domestic product.

It is a bit like the old-fashioned treatment of bleeding the patient where it was reported a success but sadly the patient died isn’t it? As usual the rhetoric is being revved up and last night Prime Minister Tsipras was doing exactly that although I note he has passed the responsibility for the changes to the next government.

The measures would be divided roughly equally between cuts in pensions due to be made in 2019 followed by a sharp reduction of the income tax threshold in 2020. But they could be implemented earlier if the budget surplus target veers off-track.

What is the economic outlook for Greece?

The background is favourable as the overall picture for the Euro area is good. However the business surveys do not seem to have picked this up. From the Markit PMI.

At 46.7 in March, down from 47.7 in February, the latest figure signalled a seventh successive deterioration in Greek manufacturing sector conditions. The rate of decline accelerated from the previous month, and was marked overall. Underlying the latest contraction was a sharp fall in new order intakes

There is a clear difference here with the official data which tells us this for January and February combined.

3.7% (rise) in the Manufacturing Production Index.

The official view is pretty much what it has been for the last five years.

Looking forward, the Bank of Greece expects GDP to grow by around 2.5% in 2017, although a downward revision of the December 2016 forecasts is likely due to the negative carry-over effect of the sharp decline in output in Q4 2016 (attributed mainly to the decline in gross fixed capital formation and government consumption). Downside risks to the economic outlook exist related to delays in the conclusion of the second review of the Programme, the impact of increased taxation on economic activity and reform implementation.

The situation regarding bank deposits in Greece is complex because the definition has changed however I note that the ECB gave Greece an extra 400 million Euros of Emergency Liquidity Assistance last month. So the money which left in 2015 has remained abroad. The latest bank lending survey of the Bank of Greece tells us this.

The demand for total loans remained also unchanged during the first quarter of 2017

Comment

This saga has been an economics version of Waiting for Godot. The price of Godot never arriving has been this.

The seasonally adjusted unemployment rate in January 2017 was 23.5% compared to 24.3% in January 2016 and the upward revised 23.5% in December 2016…….

Yes it has fallen a bit but if we compare to the pre credit crunch low of 7.9% you get an idea of the scale of the issue. Also this now defines long-term unemployment especially for the young ( 15-24 ) where nearly half ( 48%) are unemployed.

As the band strikes up a familiar tune and we see claims of reform and progress I think this from Elvis is appropriate for Greece.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds

 

 

A better year for the UK Public Finances ends with a disappointing March

Today we move onto the UK Public Finances but before we do so it is time for some perspective and as so often these days it is Greece that provides it. Let me explain with this from the Financial Times.

Greece’s primary budget surplus – which measures the country’s public finances when excluding debt repayments – hit 4.2 per cent last year, swinging dramatically from a deficit and far outperforming a creditor target of 0.5 per cent for 2016.

This provides two issues of which the first is the way that such data is manipulated, all our finances would be in great shape if we could exclude major repayments and outgoings! If we move to the total numbers we see how misleading this is and on the way learn how much Greece pays on its debt.

Separate figures from Eurostat today showed Greece’s overall public finances were also in healthy shape, boasting a surplus of 0.7 per cent.

My point is that the number above poses a challenge to the view that surpluses on public finances are unreservedly a good thing. On their own they are often a good sign but we need to look at other signals such as the cost.

an economy which has shrunk more than 25 per cent since 2008.

The latest improvement in the public finances that the Institutions are so keen on has come at this price as the Greek statistics agency tells us.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016,

The basic lesson of Euro area austerity and the drive for a series of budget surpluses is that it led to a collapse of the economy that is ongoing. A sign of that is the way that the national debt to GDP ( Gross Domestic Product) ratio had risen to 179% at the end of 2016. Indeed if we return to the FT nothing appears to have been learnt.

As it stands, Greece is committed to hit a 3 per cent surplus target for a decade after the end of its rescue in 2018.

A perspective on the UK

A major difference in the UK experience has been that we have seen economic growth. Yes quarterly economic output was initially hit hard as quarterly GDP fell from a pre credit crunch peak of £433.7 billion to £406.3 billion but it has risen since to £470.5 billion. Whilst we saw out budget finances plunge into a substantial deficit the growth has helped us reduce that and in a type of timing irony we reduced it to the Maastricht Treaty maximum of 3% of GDP in 2016. This led to us finally having a smaller deficit than France which was driven by our better economic growth performance. Moving onto our national debt it was at 89.2% of GDP using the European measuring rod.

So the overall experience has been of an improvement except of course it has been much slower than that promised as we were supposed to have a budget surplus by now. Much of that was caused by the fact that the 2 UK governments back then ( Labour and then the Coalition) lived in a fantasy world where the UK economy would grow at 3% per annum whereas 2011 and 12 for example were well below that. Remember the phase when there were concerns about a “triple dip”? Added to that whilst there have been cuts and people affected overall UK austerity has meant more of a reduction in the rate of growth of government spending as opposed to outright cuts.

The fiscal year to 2017

This morning’s update confirms much of the above and let me jump to a signal which we look at as a measure of economic growth.

In the latest full financial year, central government received £674.1 billion in income; including £507.0 billion in taxes. This was around 6% more than in the previous financial year.

So we see that the situation here indicates economic growth although we need to subtract a bit over 1% for the pension related changes to some National Insurance contributions rates. So far so good.

If we move to expenditure then as we note that year started with very little inflation there were increases in real terms.

Over the same period, central government spent £698.6 billion; around 2% more than in the previous financial year.

The combination of the two led to better news for the UK as shown below.

This meant it had to borrow £52.0 billion; £20.0 billion less than in the previous financial year (April 2015 to March 2016).

Meaning that we are now comfortably within the Maastricht criteria for this.

Initial estimates indicate that in the financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £52.0 billion or 2.6% of gross domestic product (GDP).

Let me present the improvement in a way that is against one of the media themes of these times. The theme that we do not tax companies faces a reality that half of the annual improvement came from higher Corporation Tax revenue. Of course there are tax dodging companies around…….

What about March itself?

The latest monthly data was more of a disappointment.

Public sector net borrowing (excluding public sector banks) increased by £0.8 billion to £5.1 billion in March 2017, compared with March 2016;

There were several factors at play here and let me start with one which will be in the back ground as we see inflation rise. That is that debt costs in March rose by £700 million due presumably to higher RPI ( Retail Price Index) based repayments. In addition to this Income Tax revenues fell and VAT receipts only nudged higher.

Care is needed on the monthly data but we may be seeing another sign of UK economic growth fading a bit here. This is of course consistent with other data such as the way that annual retail sales growth fell to 1.7% in March.

National Debt

The UK uses its own measure of this which in an episode of the television series, Surprise! Surprise! gives an answer lower than the international standard.

Public sector net debt (excluding public sector banks) was £1,729.5 billion at the end of March 2017, equivalent to 86.6% of gross domestic product (GDP); an increase of £123.5 billion (or 3.0 percentage points as a ratio of GDP) on March 2016.

On its measure the Bank of England with its bank friendly policies is responsible for a debt burden of some 5.9% of GDP.

Comment

This has been a long journey for the UK economy and we have already travelled beyond the promised end point which was a budget surplus. On this road we have seen economic growth but also rises in our national debt. Whilst the establishment talk has been of headwinds there is very little talk of the role played but the very low-level of government bond yields which have been reinforced by £435 billion of purchases by the Bank of England. This was reinforced in 2015/16 by the lower rate of inflation which kept our index/inflation linked debt costs low. The inflation gains are currently being reversed.

As to the position now we face the probability of growth fading a bit in 2017 as real incomes are hit by higher inflation. This will slow any further improvement in the public finances which is a shame after a relatively good year. Let me finish by putting our national debt in perspective because is we use the official number it is some 2.6 years of tax revenue.

 

 

The UK housing market looks ever more dysfunctional

Today has opened with some more news on the UK housing market so let us take a look at one perspective on it from The Express newspaper.

Britain’s property market booming as house prices hit record highs
BRITAIN’S property market is booming with house prices hitting a record high – and sales at their highest level for a decade, figures show today…..
Rightmove’s director and housing market analyst Miles Shipside said: “High buyer demand in most parts of the country has helped to propel the price of newly marketed property to record highs. There are signs of a strong spring market with the number of sales agreed achieved at this time of year being the highest since 2007.”

It is hard to know what to say about this bit.

Experts last night hailed the bricks-and-mortar bonanza as a key marker of the nation’s prosperity as we head towards the General Election.

What were the numbers?

Let us first remind ourselves that the Rightmove survey is based on asking rather than actual sale prices and then take a look via Estate Agent Today.

The price of property coming to the market has hit anoher record high, up 1.1 per cent over the past month according to Rightmove.

The increase is equivalent to £3,547 and takes the average asking price for homes new to the market to £313,655, exceeding the previous high of £310,471 set in June 2016.

The £3,547 in a month is of course much more than the average person earns although if we look back we see that it is lower than last year as Rightmove points out.

This month’s 1.1 per cent rise is also weaker than the average 1.6 per cent spring-boosted surge of the last seven years.

Why might that be?

“Strong buyer activity this month has led to 10 per cent higher numbers of sales agreed than in the same period in 2016. This large year-on-year disparity should be viewed cautiously as the comparable timespan in 2016 saw a drop in buy to let activity with the additional second home stamp duty” says Shipside ( of Rightmove)

Actually the year on year rate of increase has fallen to 2.2% although as pointed out earlier first-time buyers are facing a 6.5% rise. The idea that house price growth is fading is one of my 2017 themes and adds to this from the listings website Home earlier this month.

Overall, the website claims price rises are much more subdued this year than last. In April 2016 the annualised rate of increase of home prices was 7.5 per cent; today the same measure is just 3.0 per cent.

London

Here asking prices are falling according to Rightmove.

The price of property coming to market in Greater London is now an average of 1.5% cheaper than this time a year ago, a rate of fall not seen since May 2009. The fall is mainly driven by Inner London, down by 4.2% (-£35,504), while Outer London is up 1.7% (+£9,017). Since last month, asking prices in both Inner and Outer London have fallen, though again it is Inner London with a monthly fall of 3.6% that is dragging the overall average down. Outer London remains broadly flat, down 0.2% (-£1,177) on the month.

The prices of larger houses are seeing a drop.

The fall of 11.9% this month reflects volatility in one month’s figures in a smaller section of the market, but the annual rate of fall of 7.3% is a more reliable longer-term indicator of the challenges that this sector is facing.

but first-time buyers seem to be in the opposite situation.

Typical first-time buyer properties (two bedroom or fewer) are both up for the month (+1.3%) and for the year (+0.5%).

Perhaps the house price forecasts of former Chancellor George Osborne were for the sort of houses he and his friends live in.

However before I move on we do learn something from these asking prices but as Henry Pryor shows they seem to be a long way from actual sale prices.

Record lows for UK mortgage rates

There was this from Sky News on Friday.

A building society is launching Britain’s cheapest ever mortgage deal with a rate of 0.89% as competition between lenders intensifies.

The two-year deal offered by Yorkshire Building Society requires a deposit worth at least 35% of the value of the property. There is also a product fee of £1,495……Moneyfacts said the 0.89% rate was the lowest on its records going back to 1988.

This is a variable rate and a little care is needed as whilst it is an ex ante record it is not an ex post one. What I mean by that is that there were rates fixed to the Bank of England Bank Rate which ended up below this as it slashed interest-rates in response to the credit crunch. One from Cheltenham and Gloucester actually went very slightly negative.

The Mail Online seems to be expecting even more.

Experts say lenders are so desperate for business that rates could fall to as low as 0.5 per cent……..Santander’s cuts are expected to trigger an all-out price war, and deals will be slashed over the next fortnight as the big names fight for business.

Santander has not actually cut yet and we will have to wait until tomorrow. If we look back the record low for a five-year fixed rate mortgage of 1.29% from Atom Bank lasted for about a week before the supply was all taken.

These mortgage rates have been driven by the policies of the Bank of England when it decided in the summer of 2013 that a Bank Rate of 0.5% and QE bond purchases were not enough. It began the Funding for ( Mortgage) Lending Scheme which has now morphed into the £55 billion Term Funding Scheme.  Thus banks do not need to compete for savers deposits leading to ever lower savings rates and they can offer ever cheaper mortgages. This is the reality regardless of the Forward Guidance given by Michael Saunders of the Bank of England on Friday. He gave vague hints of a possible Bank Rate rise, how did that work out last time? Oh yes they ended up cutting it!

Throughout this period we have been told that this is to benefit business lending so what happened to terms for it in February?

Effective rates on SMEs new loans increased by 11 basis points to 3.22% this month.

Also there was more financial repression for savers.

Effective rates on Individuals new fixed-rate bonds fixed 1-2 years fell by 19 basis points to 0.85%

Comment

The official view on the UK house price boom is that it has led to economic growth and greater prosperity. However that is for some as those who sell tale profits and of course there is some building related work. But for many it is simply inflation as they see unaffordable house prices and also rents. So there is a particular irony in some of the media cheerleading for higher prices for first time-buyers. With real wages now stagnating and likely to dip again how can they face rises in prices which are already at all-time highs.

The dysfunctional housing market seems to have some very unpleasant consequences foe those left out as the BBC reported earlier this month.

Young, vulnerable people are being targeted with online classified adverts offering accommodation in exchange for sex, a BBC investigation has found…….Adverts seen by BBC South East included one posted by a Maidstone man asking for a woman to move in and pretend to be his girlfriend, another publicising a double room available in Rochester in exchange for “services” and one in Brighton targeting younger men.

What are the economic prospects for France?

This weekend sees the first stage of the French Presidential elections which seem to be uncertain even for these times. A big issue will be economic prospects which will be my subject of today. But before I do let me send my best wishes to the victims of the terrorist attack which took place in Paris last night. If we move back to the economic situation we can say that the background in terms of the Euro area looks the best it has been for a while. From French Statistics.

In Q1 2017 the Eurozone economy is expected to grow at a similar pace as registered at the end of 2016 (+0.4%), then slightly faster in Q2 (+0.5%) before returning to +0.4% in Q3 2017. The main force behind the expansion in aggregate activity should be private consumption which benefits from the increase in disposable income and favourable labour market conditions and despite the upturn in inflation which is eroding household purchasing power. Moreover investment is forecast to strengthen, driven by improved expectations about near term outlook. Also investment in construction should accelerate. Finally, the positive international environment will likely reinforce external demand growth and exports.

As you can see according to them Goldilocks porridge seems pretty much exactly the right temperature as everything is expected to rise.

What about France itself?

 Some perspective

If we look back 2016 was an erratic year where quarterly economic growth was 0.6%,-0.1%,0.2% and then 0.4%. So whilst it began and ended well there was a near recession in the middle. Overall the growth at 1.1% was in fact less than the 1.2% of 2015 and it does pose a question as that is the level of economic growth which has caused such problems in both Italy and Portugal. Indeed if we look back we see that as 2011 opened quarterly economic output was 509 billion Euros whereas in the last quarter of 2016 it had only risen by 4,4% to 531.6 billion Euros ( 2010 prices).

This lack of economic growth has contributed to what is the major economic problem in France right now.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016……Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The fact so long after the credit crunch hit the unemployment rate is still in double-digits albeit only just echoes here. Also there is the issue of underemployment.

In Q4 2016, 6.2% of the employed persons were underemployed, a ratio decreasing by 0.1 percentage points quarter on quarter, and by 0.4 percentage points over a year. Underemployment mainly concerns people who have a part-time job and wish to work more.

Oh and if we return to the unemployment rate actually 10% is only a reduction because the previous quarter was revised higher. We could improve like that forever and remain at the same level!

The next consequence of slow/low economic growth can be found in the public finances.

At the end of 2016, the Maastricht debt accounted for €2,147.2 billion. It rose by €49.2 billion in 2016 after € +60.2 billion in 2015. It reached 96.0% of GDP at the end of 2016, after 95.6% at the end of 2015.

In essence this has risen from 65% pre credit crunch and the combination of an annual fiscal deficit and slow growth has seen it rise. France seems to have settled on an annual fiscal deficit of around the Maastricht criteria of 3% of GDP so to get the relative debt level down you can see how quickly it would need to grow.

What about prospects?

This morning’s business survey from Markit has been very positive.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 57.4, compared to March’s reading of 56.8. The latest figure was indicative of the sharpest rate of growth in almost six years.

The idea that elections and indeed referenda weaken economies via uncertainty may need to be contained in Ivory Towers going forwards.

The numbers provide further evidence that the French private sector remains resilient to political uncertainty around the upcoming presidential election. Indeed, business optimism hit a multi-year high in April, with a number of respondents anticipating favourable business conditions following its conclusion.

Even better there was hope of improvement for the labour market.

Moreover, the rate of job creation quickened to a 68-month peak. Both manufacturers and service providers continued to take on additional staff, with the pace of growth sharper at the former.

However a little caution is required as we were told by this survey that there was manufacturing growth in February as the index was 52.2 but the official data told us this.

In February 2017, output diminished for the third month in a row in the manufacturing industry (−0.6% after −0.9% in January). It decreased sharply in the whole industry (−1.6% after −0.2%). Manufacturing output decreased slightly over the past three months (−0.3%)…..Over a year, manufacturing output also edged down (−0.5%)

Bank of France

In a reversal of the usual relationship the French central bank is more downbeat than the private business surveys as you can see below.

In March, industrial production rose at a less sustained pace than in February.

Whilst it describes the services sector as dynamic I note that its index for manufacturing fell from 104 in February to 103 in March leading to the overall picture described below.

According to the monthly index of business activity (MIBA), GDP is expected to increase by 0,3% in the first quarter of 2017. The slight revision (-0,1 point) of last month estimate does not change the overall perspective for the year.

The cost of housing

This is very different to the situation across La Manche ( the Channel) and a world apart from the Canadian position I looked at yesterday.

In Q4 2016, house prices slightly decreased compared to the previous quarter (−0.3%, not seasonally adjusted data) after two quarters of increase. This slight downturn was due to secondhand dwellings (−0.4%). However, the prices of new dwellings grew again (+0.7%).

Indeed some more perspective is provided by the fact that an annual rate of growth of 1.9% is presented as a rise!

Year on year, house prices accelerated further in Q4 2016 (+1.9% after +1.4% in Q3 and +0.7% in Q2). New dwelling prices grew faster (+2.9% y-o-y) than second-hand dwelling prices (+1.8%).

Not much seems to be happening to rents either.

In Q1 2017, the Housing Rent Reference Index stood at 125.90. Year on year, it increased by 0.51%, its strongest growth since Q2 2014.

Just for perspective the index was 124.25 when 2013 began so there is little inflation here.

Comment

There is much that is favourable for the French economy right now. For example the European Central Bank continues with very expansionary monetary policy with an official interest-rate of -0.4% and 60 billion Euros a month of QE bond purchases. The Euro as an exchange-rate is below the level at which it started although only by 6%. So France finds that it gets a boost from very low debt costs as the recent rise in them only leaves the ten-year yield at 0.83%.

So 2017 should be a good one although there is the issue of why other countries have out-performed France. We only have to look south to see a Spain where economic growth has been strong. A couple of years of that would help considerably. But as I type that I am reminded of some of the comments to yesterday’s article especially the one saying house prices in Barcelona are on the march again. To get economic growth these days do we need booming house prices? This leads into my argument that we are calling what is really partly inflation as growth. The catch is that the numbers tell people they are better off but then they find housing ever more expensive and increasingly frequently unaffordable. As we stand France does better here but is that at the cost of higher unemployment?

 

 

 

 

House price growth in Toronto poses quite a problem for Canada

One of the economic themes of these times has been the boom in asset prices caused by ultra easy monetary policy and the way that establishment’s present this as “wealth effects” leading to economic growth when in fact some and often much of this is in my opinion inflation. For example those investing in government bonds have benefited from rises in prices and this is presented as a “wealth effect” but on the other side of the coin someone taking out an annuity faces much lower yields and much lower income from a set sum. Yet the “wealth loss” for them is not counted. There is also the issue of house prices where again rises are presented as an economic benefit which for some they are but both first-time buyers and those wishing to trade up in the market face higher prices.

The house price issue is one which has dogged economic comment about Canada and merited a substantial mention by the Bank of Canada last week. This is significant because central banks  look away from such matters until they feel they have no other choice. The emphasis is mine.

Housing activity has also been stronger than expected. We have incorporated some of this strength in a higher profile for residential investment, although we still anticipate slowing over the projection horizon. The current pace of activity in the Greater Toronto Area (GTA) and parts of the Golden Horseshoe region is unlikely to be sustainable, given fundamentals. That said, the contribution of the housing sector to growth this year has been revised up substantially. Price growth in the GTA has accelerated sharply in recent months, suggesting that speculative forces are at work. Governing Council sees stronger household spending as an upside risk to inflation in the short-term, but a downside risk over the longer term.

What is happening to house prices in Toronto?

Canada Statistics has an index for the price of new houses.

On the strength of price increases for new houses in Toronto, the NHPI rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010.

Chart 2 Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase
The metropolitan region of Toronto posts the highest year-over-year price increase

Chart 2: The metropolitan region of Toronto posts the highest year-over-year price increase

Toronto recorded an 8.6% year-over-year price increase, the largest among the metropolitan areas surveyed, followed by Victoria (+6.3%), St. Catharines-Niagara (+6.2%), and Windsor (+6.2%). The gain for Windsor was the largest reported since January 1990.

Care is needed with such measures as for example the UK has hit trouble. So let us look further, the editorial of the Toronto Sun told us this yesterday.

house prices are skyrocketing in Toronto (the price of an average detached home is now over $1 million and has risen 33% in the past year)

The Toronto Life has something that is even more eye-catching.

Sale of the Week: The $2.7-million house that proves asking prices are meaningless in Summerhill

Ah too high eh? Nope.

The listing agents say they priced the house at what they thought was market value. Eight offers came in, after which the agents gave everyone the chance to improve. Seven did, and the sellers accepted the offer with the fewest conditions and best price, for more than $750,000 over asking. This may not have been a complete fluke: two other houses on Farnham Avenue have sold in the $2.5-million price range in the past year.

You have to question the listing agents there of course but it is an interesting price for a house which is very smart inside but does not look anything special from the front. We do get perhaps more of a realistic perspective from yesterday’s “sale of the week” as we have a comparison.

Previously sold for: $659,000, in 2007

Okay and now.

The sellers made the easy decision to go with the highest offer, at more than $400,000 over asking, $1,656,000.

Yesterday the Royal LePage house price survey told us this.

In the first quarter, the aggregate price of a home in the Greater Toronto Area increased 20.0 per cent to $759,241, while the price of a home in the City of Toronto rose 17.0 per cent to $763,875. Home prices also increased significantly in the surrounding GTA regions, with suburbs such as Richmond Hill, Oshawa,Vaughan, Markham and Oakville posting increases of 31.5 per cent, 28.2 per cent, 25.8 per cent, 23.2 per cent and 23.1 per cent to $1,209,741, $500,105, $985,534, $970,216 and $987,001

What about monetary policy?

According to the Bank of Canada it is very expansionary or loose.

The neutral nominal policy rate in Canada is estimated
to be between 2 .5 and 3 .5 per cent, 25 basis points
lower than previously estimated

If we maintain a straight face at the chutzpah and indeed fantasy that they know that to that degree of accuracy we can see that with an official interest-rate of 0.5% they are some 2.5% below neutral.

If we look at the exchange-rate then there was another boost as the trade-weighted Loonie or CERI fell from the low 120s in 2011/12 to a low of 89 as 2016 opened. It then rallied a little and over the year from March 2016 has in fact started at 95 and ended there. There are two issues here that need to be noted. Firstly this is an effective exchange rate with an elephant in the room as the US Dollar is 76.2% of it! Secondly due to its plentiful stock of raw materials the currency is often at the mercy of commodity price movements.

Moving to the money supply we see that the taps are open pretty wide. The broad measure has seen its annual rate of growth rise from the 4.5% of late 2010 to 7.7% in February of this year. There was a dip in narrow money growth in March but it is still increasing at an annual rate of 9%.

Household debt

Canada Statistics tells us this.

Total household credit market debt (consumer credit, and mortgage and non-mortgage loans) reached $2,028.7 billion in the fourth quarter. Consumer credit was $596.5 billion, while mortgage debt stood at $1,329.6 billion.

If we compare to incomes we see this.

Household credit market debt as a proportion of adjusted household disposable income (excluding pension entitlements) edged up to 167.3% from 166.8% in the third quarter. In other words, there was $1.67 in credit market debt for every dollar of adjusted household disposable income.

On the other side of the ledger that was something to please the Bank of Canada.

National wealth, the value of non-financial assets in the Canadian economy, rose 1.4% to $9,920.0 billion at the end of the fourth quarter. The main contributors to growth were real estate and natural resources. The value of real estate grew by $93.0 billion while the value of natural resource wealth increased $29.4 billion.

Although the rest of us will wonder how much of that $93 billion is from the Toronto area?

Comment

There is a lot to consider here as whilst the word bubble is over used it is hard to avoid thinking of it as we look at Toronto and its housing market. If we look at wages growth it has been slowing from around 3% to 0..9% in Canada in terms of hourly wages so it is not any sort of driver. The price moves are if anything even more extreme than seen in London.

If we move to the economics then if you own a property in Toronto and want to move elsewhere you have a windfall gain and good luck to you. A genuine wealth effect. But against that all new buyers are facing rampant inflation and there are clear wealth losses for them. We are back to a society of haves and have note here,

A big factor is we see another place where foreign funds are flowing in and like in the other cases we are left to mull this from Transparency International.

Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners.

Canada is of course far from alone in such worries.

Meanwhile the Bank of Canada finds itself not far off irrelevant which is awkward to say the least for a central planner. Of course where it is relevant it is making things worse.

 

 

The rally of the UK Pound from the lows matches a 1.25% Bank Rate rise

Yesterday was a day where we discovered a few things. For example we learned that  Prime Minister Theresa may was not going to be the new Dr. Who nor the new manager of Arsenal football club as we discovered that she was in fact trying to launch a General Election. I say trying because she needs to hurdle the requirements of the Fixed Term Parliament Act later today although if she does I presume it will fade into the recycle bin of history. Let us take a look at the economic situation.

The outlook

Rather intriguingly the International Monetary Fund or IMF published its latest economic outlook. There was good news for the world economy as a whole.

With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018.

There was particular good news for the UK economy.

Growth in the United Kingdom is projected to be 2.0 percent in 2017, before declining to 1.5 percent in 2018. The 0.9 percentage point upward revision to the 2017 forecast and the 0.2 percentage point downward revision to the 2018 forecast reflect the stronger-than-expected performance of the U.K. economy since the June Brexit vote,

However this was problematic to say the least for Christine Lagarde who after the advent of Donald Trump is now the female orange one.

. Asset prices in the UK (and, to a lesser degree, the rest of the EU) would likely fall in the aftermath of a vote for exit…..In the limited scenario, GDP growth dips to 1.4 percent in 2017, and GDP is almost fully at its new long-run level of 1.5 percent below the baseline by 2019. GDP growth falls to -0.8 percent in 2017 in the adverse scenario,

There was more.

On this basis, the effects of uncertainty seem to be universally negative, and potentially quite strong and persistent, even if ultimately temporary.

In fact asset prices rose and the uncertainty had no effect at all. Of course the long-term remains uncertain and ironically the IMF after being too pessimistic has no become more optimistic just as the factor which is likely to affect us is around, that is of course higher inflation. Oh and the UK consumer spent more and not less.

If we stick with the higher inflation theme there is this from Ann Pettifor today.

UK govt promotes usury: interest on student debt rises later this year from 4.6% to 6.1% = RPI + 3%.

That is the same UK establishment which so regularly tells us that CPIH ( H= Housing Costs via Imputed Rents) is the most “comprehensive” measure of inflation so is it not used? Also if we look other UK interest-rates we see Bank Rate is 0.25% and the ten-year Gilt yield is 1.02% so why should student pay 5/6% more please? Even worse much of that debt will never be repaid so it is as Earth Wind & Fire put it.

Take a ride in the sky
On our ship, fantasize

So can anybody guess the first rule of IMF Fight Club?

UK Pound £

There was an immediate effect here and as so often it was completely the wrong one as the UK Pound £ dropped like a stone. Well done to anyone who bought down there as it then engaged some rocket engines and shot higher and at one point touched US $1.29. For those unfamiliar with financial market behaviour this was a classic case of stop losses being triggered as so many organisations had advised selling the UK Pound that the trade was very over crowded. My old employer Deutsche Bank was involved in this as it has been cheerleading for a lower Pound £ at US $1.21, Ooops.

So we only learn from yesterday’s move that the rumours a lot of organisations had sold the UK Pound £ were true. As they looked to cover their positions the momentum built and we saw a type of reverse flash crash.

If we take stock we see the following which is that the UK Pound £ is now some 10.1% lower than a year ago against the US Dollar at US $1.282. As it sits just below 1.20 versus the Euro it is now only down some 5% on where it was a year ago. If we move to the effective or trade-weighted exchange-rate we see that at 79.1 it is some 6.7% lower than the 84.8 it was at a year ago. What a difference a day makes? Of course what we never have is an idea of what the permanent exchange rate will be or frankly if there is any such thing outside the economic theories of the Ivory Towers but if we stay here the outlook will see some ch-ch-changes. For example a little of the prospective inflation and likely economic slow down will be offset.

If we stay with inflation then there are other influences which are chipping bits off the oncoming iceberg. I have previously discussed the lower price for cocoa which offers hope for chocoholics and maybe even a returning Toblerone triangle well there is also this from Mining.com.

The Northern China import price of 62% Fe content ore plunged 5% on Tuesday to a six-month low of $61.50 per dry metric tonne according to data supplied by The Steel Index. The price of the steelmaking raw material is now down by more than a third over just the last month.

Shares and bonds

The UK Gilt market is extraordinarily high as we mull the false market which the £435 billion of QE purchases by the Bank of England has helped create. As someone who has followed this market for 30 years it still makes an impact typing that the ten-year Gilt yield is as low as 1.04%. This benefits various groups such as the government and mortgage borrowers but hurts savers and as I noted earlier does nothing for student debt.

The UK FTSE 100 fell over 2% but that was from near record levels. I do not know if this is an attempt at humour but the Financial Times put it like this.

The surging pound has pushed Britain’s FTSE 100 negative for the year

So a lower Pound £ is bad as is a higher £? Anyway they used to be keen on the FTSE 250 because they told us it is a better guide to the UK domestic economy which has done this.

So more heat than light really here because if we take a broad sweep the changes yesterday were minor compared to the exchange-rate move

House prices

Perhaps the likeliest impact here is a continuation of low volumes in the market as people wait to see what happens next. It seems likely that foreign buyers may wait and see as after all it is not a lot more than a month, so we could see an impact on Central London in particular.

In a proper adult campaign issues such as money laundering and the related issue of unaffordable house prices would be discussed. But unless you want to go blue in the face I would not suggest holding your breath.

Comment

The real change yesterday was the movement in the UK Pound £ which will have been noted by the Bank of England. I wrote only recently that some of it members would not require much to vote for more monetary easing such as Bank Rate cuts and of course should the UK Pound £ move to a higher trajectory that gives them a potential excuse. I do not wish to put ideas in their heads but since the low the rise in the UK Pound £ is equivalent to five 0.25% Bank Rate rises according to the old rule of thumb.

By the time you read this most of you will know the British and Irish Lions touring squad and as a rugby fan I look forwards to today’s announcement of the squad and even more to the tour itself. However just like economic statistics there seems have been an early wire about the captain.

By contrast the General Election announcement came much more out of the blue.