The UK looks on course for some house price falls

As ever there is plenty of news about the UK housing market around but let us start with a consequence of government action which led to this reported by the BBC at the end of last week.

The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.

“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.

The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.

The BBC even provides a pretty good explanation of why this is a hot topic.

A combination of rising house prices, low interest rates enabling people to borrow more cheaply and government incentive schemes have been credited with driving all housebuilder shares higher.

In particular we find ourselves looking at a bonus scheme set at £4 compared to a payout based on one of £24 in case you wonder how we got to such an eye watering amount. But the real problem is that Help To Buy provided what is called in economic theory excess profits for housebuilders. We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect. So in turned into help for housebuilders profits and bonuses. Sadly it also showed the weakness of shareholders these days as only 48.5% of Persimmon shareholders voted against this at their annual general meeting, which begs the question of what would be enough greed to provoke a shareholder revolt.

What about now?

Here is the result of the latest Markit Household Finances survey.

UK households are generally projecting higher
house prices over the forthcoming 12 months in
October, but the degree of optimism regarding
property values dipped to the lowest since the
immediate aftermath of the EU referendum in July
2016.

Sadly for Markit recorded time seems to have started in July  2016 because if we look back we see some interesting developments. For example the reading in early 2014 at around 75 was the highest in that series. This means that those surveyed not only realised the UK economy was picking up but seemingly had figured out the determination of the Bank of England and UK government to drive house prices higher.

Also another piece of news hints at a change. From Financial Reporter.

The proportion of homes in England and Wales bought with cash fell to 29.6% in H1 2018, according to Hamptons International, the lowest figure since its records began in 2007.

In H1 2007, 33.6% of homes were purchased with cash, peaking in H2 2008 at 37.8%.

In H1 2018, 113,490 homes were cash purchases, totalling £25.3 billion in value according to Land Registry – the lowest level in five years and a drop of 21% compared to H1 2017.

You may not be heartbroken at the main reason why.

Hamptons International says the downward trend in the proportion of homes bought with cash reflects a drop off in investor and developer purchases. Countrywide data shows that in H1 2018 investors accounted for 24% of cash purchases, down from 32% in H1 2007 and a peak of 43% in H1 2008.

The same goes for developers who purchased just 2% of the homes bought with cash in H1 2018, down from 6% in H1 2007.

What about the house price indices?

The official data released last Wednesday told us this.

Average house prices in the UK have increased by 3.2% in the year to August 2018 (down from 3.4% in July 2018), remaining broadly stable at a national level since April 2018 .

So a welcome slowing from the period where annual growth remained about 5%. But the truth is that a lot of the change is represented by one place.

 The lowest annual growth was in London, where prices decreased by 0.2% over the year, down from being unchanged (0.0%) in the year to July 2018.

London has affected the area around it to some extent as well but much of the rest of the country has carried on regardless.

A somewhat different picture was provided on Friday by LSL Acadata.

At the end of September, annual house price growth stood at 0.9%, which is the lowest rate seen since April 2012, some
six and a half years ago.

They take the Land Registry data of which 35% is available now and have a model to project that as if 100% was in. They then update the numbers as for example around 80% should now be in for August. So taking what should be, model permitting, the latest data shows a much clearer turn in the market and they expect more.

Our latest outlook for the 2018 housing market suggests that the annual rate of house price growth will be in negative territory by the end of the year.

One reason for that is simply the trend is your friend.

This was the sixth month out of the last seven in which monthly rates have fallen, with the combined decline since February totalling some -2.0%. The average house price in England & Wales now stands at £302,626. This price is already some £2,240, or 0.7%, below the level of £304,866 seen last December, meaning that it will take a number of months of house price increases to make up this shortfall.

Also they point out that this has taken place in spite of the economic environment still being very house price friendly.

All this comes at a time when interest rates are at almost historic lows, mortgage supply is good, the number of people in work is higher than a year earlier, and average weekly earnings have increased by 2.4%, on a year-on-year basis. The housing market should be booming.

They would be even more bullish if they realised wage growth was 2.7% rather than 2.4%. There is also an element of “reality was once a friend of mine” below as we wonder what it would take for them to notice that this has been happening for some time?

While current initiatives (Help-to-Buy and Stamp
Duty relief) have relatively minimal overall effect on prices, as government continues to ratchet up the initiatives, the
risk is that these in turn could simply add to the affordability problem by causing prices to rise

This has particularly affected younger people which they do seem to have noted.

highlighted the falls in home ownership amongst 25-34-year-olds over the last 20 years, despite endless government initiatives to rectify the situation. As the report notes “Since 1997, the average property price in England has risen by 173% after adjusting for inflation, and by 253% in London. This compares with increases in real incomes of 25- to 34-year-olds of only 19% and in (real) rents of 38%.”

Some night think that raising prices some 173% above inflation was quite enough to cause an affordability problem!

Comment

UK house prices have proved to be very resilient and I mean that in the commonly used version of its meaning, not the central banking one. I thought that the real wage decline in 2017 would send annual growth negative but so far it has resisted that. However the LSL data set suggests it may finally be quite near.

As ever the danger is of the UK establishment panicking just like they did in 2012/3 and pumping it up, one more time. Or as LSL Acadata put it.

Announcements on Help-to-Buy, Starter Homes and possibly a Rent-to-Own programme based around giving CGT relief to landlords have all been mooted.

Personally I think we have had way too many announcements and initiatives which via windfalls to existing house owners and especially house builders have made the situation worse rather than better. For now the Bank of England at least seems stymied but of course this is the one area where they can be both inventive and innovative.

 

 

 

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Much better UK public borrowing gives the Chancellor an extra Budget option

Sometime we find ourselves with the opportunity to look at things from a different perspective and learn from it and this morning is providing that. Let me illustrate with this tweet from @SunChartist.

Are 4.5 year high in Italian bond & 52 week high on Spanish bonds yields bullish Euro? Asking for a friend.

It did not need to draw my attention to the Italian bond market which has been falling again and set new lows for this phase today. In futures terms its BTP December contract is a bit over 118 which means the ten-year yield has reached 3.8%. I forget which investment bank said that between 3,5% and 4% was the point of no return. That is over dramatic in my opinion, but it is what Taylor Swift would call a sign of “trouble,trouble,trouble”.

There is now a hint of contagion as we note that the Spanish bond market is falling today and its equivalent yield is now 1.8%. Context is needed as it is less than half the Italian equivalent and rises were always likely as the ECB scaled back its purchases under its QE programme but a change none the less. However and this is my main opening thrust today there is a small or medium-sized island depending on your perspective which has seen its bonds doing well over the last week or so. It is the UK where the ten-year Gilt yield has fallen from above 1.71% to 1.53%. Again memes can be overdone but looked at in isolation there is a case for suggesting there has perhaps been what is called a flight to quality or a move towards a safe haven. Of course safer haven would be a better description for a market once described as being on a “bed of nitroglycerine” but however you spin it UK Gilts have been in demand.

I have looked at it this way because this week the media have been looking at it in a different way as this from the Financial Times highlights.

Even if Mr Hammond sticks to his current target of balancing the government’s books by the mid 2020s, government debt will fall only slowly as a proportion of GDP, because the long-term outlook for growth is so lacklustre.

Actually this misses out that the national debt to GDP ratio is falling which has been demonstrated by this morning’s official release.

Debt (Public sector net debt excluding public sector banks) at the end of September 2018 was £1,789.5 billion (or 84.3% of gross domestic product (GDP)); an increase of £3.4 billion (or a decrease of 2.4 percentage points) on September 2017.

As you can see we are seeing a fall and economic growth is lacklustre as the recent rally is not yet in the figures. In essence the outlook for the public finances is always poor if you have a weak economy. Anyone who did not know that has been taught it by the experience of Italy.

If we move onto the other parts of the FT quote there is the reference to the ongoing fantasy that the government has some plan to actually balance the books. Personally I think it has been surprised by the recent better figures as it was continuing the past philosophy of George Osborne where a balanced budget was perpetually 3/4 years away.

So in fact something which is being spun as unlikely is if we look at the facts above quite possible especially as we note that the UK Gilt market has not only ignore such reports it has rallied.

“Increasing borrowing is clearly the line of least resistance,” said Paul Johnson, the IFS’ director, noting that Conservative chancellors have historically been more likely to announce giveaways when the public finances were better than expected, than to raise taxes when finances were worse than expected.

Still there is something refreshing which is the acknowledgement of this, and the emphasis is mine.

debt could rise as a share of national income over the longer term, because periodic recessions would hit the public finances.

I do hope that this is not a one-off and that the IFS will continue on this road as I am reminded of a bit in the film Snatch which explains the economic consequences.

All bets are off!

Today’s Data

We had another month of improved figures.

Borrowing (Public sector net borrowing excluding public sector banks) in September 2018 was £4.1 billion, £0.8 billion less than in September 2017; this was the lowest September borrowing for 11 years (since 2007).

This meant that the deeper perspective continues to look good as well.

Borrowing in the current financial year-to-date (YTD) was £19.9 billion: £10.7 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

This was due to the fact that tax receipts are solid and spending increases have been below the rate of inflation.

In the current financial YTD, central government received £352.4 billion in income, including £265.6 billion in taxes. This was around 4% more than in the same period in 2017.

Over the same period, central government spent £368.0 billion, around 2% more than in the same period in 2017.

If we look into the detail we see that VAT receipts are strong being up £4.4 billion at £74.7 billion. Also Income Tax is doing well as it is up £5.8 billion at £81 billion in the tax year so far. Given the state of the UK housing market you will not be surprised to see that Stamp Duty receipts have fallen by £0.5 billion to £6.5 billion.

On the other side of the coin you could argue that the fall in spending is flattered by lower debt costs of £3.1 billion as the impact of past inflation rises washes out of index-linked Gilts to some extent.

Comment

As you can see the UK Gilt market has been on the opposite path to the rhetoric of the mainstream media and those presented by them as authorities. One way of looking at this is to consider the phrase “put your money where you mouth is”. But it is also true that markets are not always right which has been highlighted this year best by those who bought Italian bonds at a negative yield. That is not going to be so easy at the next investors conference “Wait, you actually paid to hold Italian bonds?”. It is also perhaps revealing to note that the media seems to have taken Paul Simon’s advice about the Gilt market rally.

No one dared
Disturb the sound of silence

It is, however also wrong to say it is plain sailing as whilst we have entered a better phase it could quickly change if the economy stopped ignoring the weakness in the monetary data. Actually some of the tax receipt data above hints the economy may have done better than we have been told. So on that note let me leave you with the words of Avril Lavigne.

Why’d you have to go and make things so complicated?
I see the way you’re
Actin’ like you’re somebody else, gets me frustrated

The Bank of England is facing the consequences of its own mistakes

Yesterday brought us some new insights into the thinking of the Bank of England and indeed the UK establishment. This was because what you might consider the ultimate insider gave evidence to Parliament as Sir John Cunliffe joined the Department of the Environment as long ago as 1980. Intriguingly his degrees and lecturing experience in English Literature apparently qualified him to high level roles in HM Treasury. So he is also an example of how HM Treasury established the Bank of England as “independent” but then took back control. Actually I think all the Deputy Governors have been at the Treasury at some point in their careers. Also if we return to his degree we see another feature of modern life where those on the lower rungs have to be highly qualified in their sphere whereas it is no issue at all for those at the top. That is because they are considered to be – by themselves if nobody else – so highly intelligent that qualifications are unnecessary.

Sir John gave us a warning about the future.

One pocket of rapid growth that the FPC is monitoring closely is in leveraged lending which appears to have been driven by strong investor demand for holding the loans,
typically in non-bank structures such as CLOs (collateralised loan obligation funds). Gross issuance of leveraged loans by UK non-financial companies reached a record level of £38 billion in 2017 and a further £30 billion has already been issued in 2018. And lending terms have loosened with only around 20% of leveraged loans now having maintenance covenants, which used to be standard for all loans. The global leveraged loan market is larger than – and growing as quickly as – the US subprime mortgage market was in 2006.

The Bank of England Financial Policy Committee of which Sir John is a member ( he has nearly as many jobs as George Osborne) also posted a warning according to BusinessInsider.

Leveraged lending to corporates has ballooned in recent years, with the global market reaching a value of around $1.4 trillion, according to recent estimates.

Thus we see the establishment at play. Let us note that the ground is being prepared to blame “Johnny Foreigner” and also that as Nicola Duke points out below another deflection technique is at play.

This is how central bankers prepare for the next financial crisis. They take no action while ensuring they have their excuses in order. “We warned you in 2018”.

Let us take her point and see what is actually being done and the answer as usual appears to so far be nothing.

The FPC is planning to assess any implications for banks in the 2018 stress test and we will also review how the
increasing role of non-bank lenders and changes in the distribution of corporate debt could pose risks to financial stability.

As ever this is reactive and frankly a lagged reactive at that. These bodies never act in advance and are invariably asleep at the wheel whilst it is taking place. Of course if their real role is merely to describe what has happened then I may have been mistaken about Sir John’s qualifications for the job as suddenly English Literature becomes useful.

But there is an elephant in the room which is way that the Bank of England itself has fed this. It slashed interest-rates in response to the credit crunch and even now they are only 0.75% or around 4% below where they were previously. It has deployed some £435 billion of conventional QE and £10 billion of corporate bond QE. Then in 2012 it did this too.

The Funding for Lending Scheme is designed to encourage banks and building societies to lend more to households and businesses. It does this by providing funding to these firms for an extended period, with the quantity of funding we provide linked to their lending performance.

So the system has been flush with cash or to be more technically accurate, liquidity. Can anybody be surprised that like the ship of state the monetary system is a leaky vessel? Or to use a word from a couple of decades or so ago we are seeing another form of disintermediation. But wait there is more.

Since the referendum, the Bank of  England has augmented these capital and liquidity buffers by making available more than £250 billion of liquidity and by lowering banks’ Counter-Cyclical Capital Buffer to facilitate an extra £150 billion of lending.

This is from a speech given by Chief Economist Andy Haldane which was liked so much it was if you recall published twice just to make sure we got the message. Well perhaps the leveraged loans industry did! We’ve got your backs lads ( and lasses). But wait there was even more.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature
rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption………And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

The Bank of England has claimed some 250,000 jobs were saved/created ignoring that it would have been perhaps the fastest response to a monetary policy change in history. That leads it into conflict with the ECB that thinks the response time slowed. But if we return to what we might label in this instance as disintermediation there have been two clear examples.

  1. A surge in unsecured lending pushing into annual growth in the double digits that is still above 8%
  2. Corporate lending now increasingly leveraged with underwriting standards dropping like a stone.

Peter Gabriel may have done this but the Bank of England merely repeated the same old song.

I’ve kicked the habit
shed my skin
this is the new stuff

I go dancing in, we go dancing in

Comment

There are plenty of familiar themes at play today as we look again at how the establishment operates. There is a clear asymmetry between the way a move sees even fantasies proclaimed as triumphs but failures get ignored. It is the same way that “vigilant” means asleep and “we will also review” means a review will be necessary as by then it will probably have blown up. Fortunately we can then claim to be experts and specialists ( in failure to quote Jose Mourinho ) and sit on the various committees set up to discover what went wrong? That will of course make sure that those asleep at the wheel do not get the blame, as long as they can manage to stay awake during the meetings of the new committee.

Meanwhile the UK economy continues to bumble along. Whilst today’s headline may appear not so good it is in fact pretty strong.

In September 2018, the quantity bought declined by 0.8% when compared with August 2018, due mainly to a large fall of 1.5% in food stores; the largest decline in food store sales since October 2015.

That made the Office of National Statistics uncomfortable enough to delay it to the third paragraph of the release. But actually with a little perspective and somewhat amazingly the UK consumer continues to spend.

In the three months to September 2018, the quantity bought in retail sales increased by 1.2% when compared with the previous three months………When compared with September 2017, the quantity bought in September 2018 increased by 3.0%, with growth across all sectors except department stores.

Presently in economic terms ( as opposed to political) the main dangers to the UK economy have been created by the Bank of England.

Core Finance TV

 

 

 

 

 

Inflation reality is increasingly different to the “preferred” measure of the UK

Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.

We are leaving carbon generation behind for a renewable future powered by cheaper green energy.

We will likely find that it is only cheaper if you use Hinkley B as your benchmark.

Inflation Trends

We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.

The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.

There has been a familiar consequence of this as the Congressional Budget Office explains.

To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
year.

The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.

The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.

As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.

Crude Oil

The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.

OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?

Today’s data

After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.

For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.

The OOH component annual rate is 1.0%, unchanged from last month.

As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.

This trend seems likely to continue as Generation Rent explains.

The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.

With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.

UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.

As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.

The all items RPI annual rate is 3.3%, down from 3.5% last month.

There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.

The Trend

This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.

The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.

So we have an upwards shift in the trend but it is back to energy and oil again.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Comment

It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.

The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.

Although on the other side of the coin came a familiar factor.

Partially offsetting upward contributions came from increases to electricity and gas prices.

Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.

Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.

Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.

Of hot air, wind power and UK real wages

Today brings us to the latest UK labour market data but before we get there we see two clear features of these troubled times. One is in fact a hardy perennial referred to in Yes Prime Minister by Jim Hacker over thirty years ago although he was unable to arrange one. From Kensington Palace..

Their Royal Highnesses The Duke and Duchess of Sussex are very pleased to announce that The Duchess of Sussex is expecting a baby in the Spring of 2019.

Who says the UK has no plans for Brexit when a Royal Baby is in the process of being deployed?

Next comes some intriguing news from Scottish Power reported by the BBC like this.

Scottish Power to use 100% wind power after Drax sale

My first thought was to wonder what happens when the wind does not blow? Or only weakly as for example if we look at UK electricity production this morning where according to Gridwatch it is 5 GW out of a maximum of around 12.5 GW? There is little extra on this to be found in the detail.

Scottish Power plans to invest £5.2bn over four years to more than double its renewables capacity.

Chief executive Keith Anderson said it was a “pivotal shift” for the firm.

“We are leaving carbon generation behind for a renewable future powered by cheaper green energy. We have closed coal, sold gas and built enough wind to power 1.2 million homes,” he said.

As you can see the issue of when the wind does not blow gets entirely ignored in the hype. Indeed one part of its past production which could help to some extent by being used when the wind does nor blow which is hydro power has just been sold! As to the claims I see that this provides cheaper electricity that is rather Orwellian as we know that the green agenda is driving prices higher but tries to hide it. Still the good news for Scottish Power customers is that if all the statements are true then there will be no more price rises because energy costs are now pretty much fixed.

As you might expect raising such thoughts on social media leads to some flack. According to @Scottishfutball I am a stupid man although that tweet has now disappeared. Here is a longer answer to show the other side of the coin from Is anybody there on Twitter.

When the wind doesn’t blow they have hydroelectric power, wave power, solar, biomass, pumped hydro storage. Add in micro grids, battery storage and deferred demand and it’s very achievable.

The hydro power they just sold? And what’s “deferred demand”?

Wages

Here the news was a little better.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.1% excluding bonuses, and by 2.7% including bonuses, compared with a year earlier.

So we see that on this three-monthly measure total pay has risen at a 0.1% faster rate and basic pay by 0.2%. The balancing item here is bonuses which fell by 1.3% in August on a year before.

Let us take a look at this as the Bank of England wants us to. Here is its Chief Economist Andy Haldane from last week.

A year on, I think there is more compelling evidence of a new dawn breaking for pay growth, albeit with the
light filtering through only slowly……….Looking beneath the headline figures, evidence of an up-tick in pay is clearer still. Private sector pay growth (again excluding bonuses) has been grinding through the gears; it recently hit the psychologically-important 3% barrier. Private sector wage settlements so far this year are running at 2.8% and in some sectors, such as construction and IT, are running well in excess of 3%.

Someone needs to tell Andy that if an average is 3% some will be above and some will be below. Also is the growth 3% or 2.8%? But let us ignore those and Andy’s lack of enthusiasm for bonuses, no doubt influenced by his own personal experience. On this measure we see that private-sector pay growth is now 3.1% so another nudge higher and with July and August both registering 3.3% we could see another rise next time. The trouble is that whilst this is welcome we are back at the old central banking game of cherry picking to data to produce an answer you arrived at before you looked at it. Also one cannot avoid noting that the theory Andy so loves – and has led him regularly up the garden path over the past 5 years or so – would predict this wage growth to be more like 5%. Or to put it another way the view shown below seems not a little desperate and the emphasis is mine.

This evidence suggests the pulse of the Phillips curve has quickened as the labour market has tightened.
Unlike over much of the past decade, estimated wage equations are now broadly tracking pay.

So the new “improved” models are just the old ones in a new suit?

Some reality

If we switch to total pay we see that over the course of 2018 it is much harder to pick a clear pattern.  Whilst we are a little higher than a year ago as 2.7% replaces 2.4% it is also true that we opened the year at 2.8%. Next month should be better as the May 2% reading drops out but it is a crawl at best. If we switch to real wages we are told this.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.7% excluding bonuses, and by 0.4% including bonuses, compared with a year earlier.

Here comes my regular reminder that even such small gains rely on using an inflation measure that is not fit for purpose. This is because the CPIH measure relies on imputed rents which are a figment of statistical imagination and which, just by chance of course, invariably lower the reading. We will be updated on the inflation numbers tomorrow but it was 2.4% compared to the 2.7% of its predecessor ( CPI ) and the 3.5% of the one before that ( RPI)  as we try to detect a trend. Even using it shows that the last decade has been a lost one in real wage terms.

For August 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was: £523 per week in nominal terms, up from £508 per week for a year earlier……..£492 per week in constant 2015 prices, up from £489 per week for a year earlier, but £30 lower than the pre-downturn peak of £522 per week for February 2008.

As you can see even using the new somewhat deflated inflation number there will be another lost decade for real wages at the current rate of progress.

Comment

Today has mostly been a journey of comparing wish-fulfillment with reality, or the use of liberal quantities of hopium. Still perhaps it will be found at a fulfillment center, whatever that is. From CNBC.

Tech giant Amazon is set to install solar panels at its fulfillment centers across the U.K.  ( H/T @PaulKingsley16 )

If we switch back to the Bank of England which of course is also full of rhetoric on the climate change front, as after all someone has to offset all the globetrotting of Governor Carney, we return to wages again. Actually it has reined in its views quite a bit.

The rise in wages projected by the Bank is, to coin a phrase, limited and gradual. Private sector pay is
assumed to rise from 3% currently to around 3 ¾% three years hence, or around 25 basis points per year.

The catch is the implied assumption that we will always grow because any slow down would then knock real wages further. But even on that view once we allow for likely inflation it looks as if there will be only a little progress at best.

 

 

 

 

 

The UK economy puts on an economic growth spurt

Today brings us to a pretty full data set on the UK economy with the headline no doubt the monthly GDP ( Gross Domestic Product) number. This week has brought news on a sector which is often quite near to me and has been a strength we have been regularly noting. From the Financial Times.

Tax relief for UK-made movies, television series and video games is fuelling a production boom that has transformed Britain into a global hub of filmed entertainment, according to a report by the creative industries. The tax incentives have sparked a rush of inward investment as Hollywood studios and other international production companies cash in on British talent — the latest Star Wars movie was made in the UK, alongside top television series such as The Crown and Poldark.

So we should try to be nice to any luvvies that we meet as whilst they are prone to ridiculous statements they are providing a much-needed economic boost. Here is some more detail on the numbers.

The new report commissioned by the British Film Institute found that an estimated £632m in UK tax relief for the creative industries in 2016 led to £3.16bn in production spending on films, TV programmes, animation and video games — a 17 per cent increase on 2015. The industries’ “overall economic contribution” to Britain came to £7.9bn in 2016, which included £2bn in tax revenues.

Since 2016 the numbers have boomed further and the local reference is due to the fact that Battersea Park in particular is regularly used by the film industry. Much of this is a gain as I recall one cold Sunday night when the filming must have disturbed very few. However it is not all gravy as there is also a tendency to use it as a lorry and caravan park for work going on elsewhere.

Bank of England and Number Crunching

There was some numerical bingo from the Financial Policy Committee yesterday. The headline was that the UK has some £69 trillion of financial contracts with European Union counterparties which need some sort of deal for next March.Or if you prefer a derivatives book of the size of Deutsche Bank.

Also we for the assertion that debt has fallen since 2008 which looked better on their chart via comparing it ( a stock) with annual GDP (a flow). They seem to have forgotten public debt which has risen and more latterly even their data poses a question.

Borrowing by UK companies from UK banks has also been subdued, rising by just 2.7% in the past year……. household mortgage borrowing increased by only 3.1% in the year to August, broadly in line with household disposable income growth.

Both are growing a fair bit faster than the economy and of course much faster than real wages.Mind you someone has probably got promoted for finding an income number which has grown as fast, or a lifetime free pass to the cake and tea trolley.Would it be rude to point out they seem to have forgotten unsecured credit is rising at an annual rate of 8%+ as they seem to have missed it out?

UK economic growth

The number released today backed up quite a multitude of my themes. There was the evidence of a growth spurt for the UK economy, various examples of monthly GDP data being so unreliable that you have to question its introduction, and finally even evidence that the monetary slow down has hit the economy! Let us open with the latter.

The month-on-month growth rate was flat in August 2018. (UK GDP)

That looked rather grim until it was combined with something that was much better news.

Rolling three-month growth increased by 0.7% in August 2018, the same rate of growth as in July 2018. These were the highest growth rates since February 2017. The growth continued to pick up from the negative growth in April 2018,

Suddenly the picture looked very different as we got confirmation that it was a long hot summer for the UK in economic as well as weather terms. Some of that was literal as the utility industry saw rises in electricity consumption which looks to have been driven by the use of air conditioning in the unusual heat. If we look at the breakdown we see something familiar in that the major part was the services sector (0.42%), we got some production growth (0.1%) and the construction sector was on a bit of a tear (0.18%),

If we return to the travails and troubles of the monthly series we see this.

Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

That opens a can of worms. Because whilst you can argue compared to the total number for GDP the changes are minor the catch is that these numbers are presented not as totals but first and second derivatives or speed and acceleration. At these levels the situation becomes a mess and let me illustrate by switching to the American style of presentation. UK GDP rose at an annualised rate of 4.8% in July followed by annualised rate of growth of 0% in August, does anybody outside the Office for National Statistics actually believe that?

Putting it another way we can see a clear issue in the main player which is services I think.

The Index of Services was flat between July 2018 and August 2018…………The 0.7% increase in the three months to July 2018 is the strongest services growth since the three months to December 2016.

So it went from full steam ahead to nothing? The recent strength has been driven by computer programming so let us hope that has been at the banks especially TSB.

Production

This had some welcome snippets.

The rise of 0.7% in total production output for the three months to August 2018, compared with the three months to May 2018, is due primarily to a rise of 0.8% in manufacturing, which displays widespread strength throughout the sector with 10 of the 13 sub-sectors increasing.

As so often we find that the ebbs and flows are driven by the chemicals and pharmaceuticals sector which had a good quarter followed by a decline in August.

Construction

The official data seems to have caught up with crane-ometer ( 40 between Battersea Dogs Home and Vauxhall) although it too supposedly hit trouble in August.

Construction output increased by 2.9% in the three months to August 2018, as the industry continues to recover following a weak start to the year………Construction output declined by 0.7% between July and August 2018, driven by falls in both repair and maintenance and all new work which decreased by 0.6% and 0.8% respectively.

Comment

We see that the UK economy had a remarkably good summer. Actually it seems sensible to smooth it out a bit and shift some of it into August but if we were to see quarterly growth of 0.5% or so that is pretty solid in the circumstances. We are managing that in spite of weak monetary data and disappointing growth from some of our neighbours, although if the recent IMF forecasts are any guide France is in a surge.

Speaking of surges Andy Haldane of the Bank of England has given a speech today and yet again pay growth is just around the corner. Pretty much like it has been since he became Bank of England Chief Economist . You might have thought his consistent record of failure would have meant he was a bad choice as the new UK productivity czar but of course in Yes Prime Minister terms he is the perfect choice.

Sir Humphrey Well, what is he interested in? Does he watch television?
Jim Hacker: He hasn’t even got a set.
Sir Humphrey: Fine, make him a Governor of the BBC.

Meanwhile his own words.

That is quite sobering if, like me, you have never moved job

Higher bond yields and higher inflation mean higher national debt costs

The last week or so has brought a theme of this blog back to life and reminds me of the many years I spent working in bond markets. They have spent much of the credit crunch era being an economic version of the dog that did not bark. Much of that has been due to the enormous scale of the QE ( Quantitative Easing) sovereign bond buying policies of many of the major central banks. The politicians who came up with the idea of making central banks independent and then staffing them with people who were anything but should be warmly toasted by their successors. The successors would never have got away with a policy which has benefited them enormously in terms of ability to spend because of lower debt costs.

Italy

However the times are now a-changing and this morning has brought more bad news on this front from Italy. The BTP bond future for December has fallen to 120 which means it has lost a bit over 7 points over the last ten or eleven days. Putting that into yield terms it means that the ten-year yield has reached 3.5% which has a degree of symbolism. A factor in this is described by the Financial Times.

The commission issued its warning to the Five Star and League governing coalition after Rome deviated from the EU’s fiscal rules by proposing a budget deficit equivalent to 2.4 per cent of gross domestic product instead of the 1.6 per cent previously mooted by the finance minister Giovanni Tria. Although the new plans keep Italy under the EU’s 3 per cent deficit threshold, the country’s high debt levels — the highest in the eurozone after Greece — means Rome is required to cut spending to bring debt levels gradually lower.

However the chart below tells us that in fact you can look at it from another point of view entirely.

Actually I think that the situation is more pronounced than that as the ECB has bought 356 billion Euros worth. But you get the idea. It is hard not to think that a major factor in the recent falls is the halving of ECB QE purchases since the beginning of this month and to worry about their end in the New Year. In case you were wondering why the share prices of Italian banks have been tumbling again recently? The fact they have been buying in size in 2018 when one of the trades of 2018 has been to sell Italian bonds gives quite a clue.

If we switch to the consequences for debt costs then a rough rule of thumb is to multiply the 3.5% by the national debt to GDP ratio of 1.33 which gives us 4.65%. In practice this takes time as there is a large stock of debt and the impact from new debt takes time. For example Italy issued 2 billion Euros of its ten-year on the 28th of last month at 2.9%. So a fair bit less than now although much more expensive that it had got used too. This below from the Italian Treasury forecasts gives an idea of how the higher yields impact over time.

The redemptions in 2018 are approximately €184 billion (excluding BOTs) including approximately
€3 billion in relation to the international programme……..the average life of the stock of
government securities, which was 6.9 years at the end of 2017.

Oh and the tipping point below has been reached. From the Wall Street Journal.

Harvinder Sian, a bond strategist at Citigroup, thinks a 10-year yield of 3.5%-4% is now the tipping point, after which yields jump toward the 7% reached at the height of the last euro crisis

Personally I am not so sure about tipping point as the “gentlemen of the spread” ( with apologies to female bond traders) have been selling it at quite a rate anyway.

 

The United States

Here bond yields have been rising recently and let us take the advice of President Trump and look at what has happened during his term of office. Whilst back then Newsweek was busy congratulating Madame President Hilary Clinton my attention was elsewhere.

There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.

We see that it has risen in the Trump era to 3.4% although maybe not by as much as might have been expected. However if we look to shorter maturities we see a much stronger impact.For example the two-year now yields some 2.9% and the five-year some 3.07%. So if you read about flat yield curves this is what is meant although it is not (yet) literally true as there is a 0.5% difference. Thus the US now faces a yield of circa 3% or so looking ahead. This does have an impact as the New York Times has pointed out.

The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs.

In terms of numbers this is what they think.

Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs. Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.

If we switch to the Congressional Budget Office it breaks down some of the influences at play here.From its September report.

Outlays for net interest on the public debt increased by $62 billion (or 20 percent), partly because of a higher rate of inflation.

The CBO points out a factor the New York Times missed which is that countries with index-linked debt are also hit by higher inflation. As the US has some US $1.38 trillion of these it is a considerable factor.

Also the US is borrowing more.

The federal budget deficit was $782 billion in fiscal year 2018, the Congressional Budget Office estimates,
$116 billion more than the shortfall recorded in fiscal year 2017………The 2018 deficit equaled an estimated 3.9 percent of gross domestic product (GDP), up from 3.5 percent in
2017. (If not for the timing shifts, the 2018 deficit would have equaled 4.1 percent of GDP.)

Higher bond yields combined with higher fiscal deficits mean more worries about this factor.

At 78 percent of gross domestic product (GDP), federal
debt held by the public is now at its highest level since
shortly after World War II. If current laws generally
remained unchanged, the Congressional Budget Office
projects, growing budget deficits would boost that
debt sharply over the next 30 years; it would approach
100 percent of GDP by the end of the next decade and
152 percent by 2048 . That amount would
be the highest in the nation’s history by far.

I counsel a lot of caution with this as 2048 will have all sorts of things we cannot think of right now. But the debt is heading higher in the period we can reasonably project and I note the CBO is omitting the debt held by the US Federal Reserve so that QE would make the figures look better but the current QT makes it look worse.

Comment

Debt costs and the associated concept of the mythical bond vigilantes have been in a QE driven hibernation but they seem to be showing signs of waking up. If we look at today’s two examples we see different roads to the destination. If we look at the road to Rome we see that the longer-term factor has been the lost decades involving a lack of economic growth. This has made it vulnerable to rising bond yields and which means that the straw currently breaking the camel’s back has been what is a very small fiscal shift. It is also a case of bad timing as it has taken place as the ECB departs the bond purchases scene.

The US is different in that it has a much better economic growth trajectory but has a President who has also primed the fiscal pumps. Should it grow strongly then the Donald will win “bigly” as he will no doubt let us know. However should economic growth weaken or the long overdue recession appear then the debt metrics will slip away quite quickly. That is a road to QE4.

Returning back home I note that UK Gilt yields are higher with the ten-year passing 1.7% last week for the first time for a few years.So the collar is a little tighter.The main impact on the UK came from the rise in inflation in 2017 leading to higher index-linked debt costs. This was the main factor in our annual debt costs rising by around £10 billion between 2015/16 and 2017/18.