Could the UK target house price inflation and should we?

Yesterday brought news of a policy initiative from the Labour party on a subject close to my heart and was a subject which occupied much of my afternoon and evening. It also reminded me of the way that social media can have more than a few different but similar strands ongoing at the same time. So if I missed anyone out apologies but I did my best and did better at least that the respondent who seemed to think my name was Tom.

Here from The Guardian is the basis of the proposal.

The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes.

The shadow housing secretary, John Healey, is considering whether, under a Labour government, the Bank should be set an explicit target following a decade of runaway growth in the property market, with the aim of tackling the housing crisis.

The author of the idea is Grace Blakeley and I replied to her that there are various problems with this but let us set out her idea properly from her paper for the think tank the IPPR.

This would be equivalent to the remit the Monetary Policy
Committee has to control consumer price inflation. Under such a target the Bank of England should aim to keep nominal house price inflation at (say) zero per cent for an initial period – perhaps five years – to reset expectations,
and allow affordability to improve.

As I replied to Grace I am a fan of that in spirit but there are issues including one from the next sentence which I have just spotted.

It should then be increased to the same
rate as the consumer price inflation target of 2 per cent per year, meaning zero real-terms house price growth.

Er no that is not zero in real terms because if you are aiming for “affordability to improve” your objective must be for wage growth to exceed house price growth yet it does not apparently merit a mention there. If for example both consumer and house price inflation were on this target at 2% per annum you would be losing ground if wage growth was below that level.

How would this be enacted?

The target should be implemented using
macroprudential tools such as capital requirements, loan-to-value, and debt to-income ratios.

The first question is whether you could do this? Mostly a new policy regime could as we already have some moves in this direction from the Bank of England as pointed out in the paper.

The FPC recently implemented a
loan-to-income ratio of 4.5 per cent for 15 per cent of new mortgages,

The two catches as that this area is one where the truth can be and sometimes is hidden as those who recall the  “liar loans” era will know. Next is the concept of shadow banking or if I may be permitted a long word the concept of disintermediation where you restrict the banks so people borrow form elsewhere such as offshore or overseas.

These problems would be especially evident if you tried to implement this.

Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific.

That recognition is welcome but the scale of the issue troubles me. Let me give you some examples from right now where house prices are rising in much of the Midlands and Yorkshire as well as Northern Ireland whilst falling in and around London. Also as @HenryPryor pointed what the situation in Northern Ireland is very different to elsewhere.

Confirmation from that despite enjoying robust inflation in recent months, house prices in Northern Ireland remain some 41% 𝐥𝐨𝐰𝐞𝐫 than they were just prior to the start of the financial crisis in 2007.

Perhaps you could define Northern Ireland but is even it homogenous? A clear danger is that you end up with a bureaucratic nightmare with loads of different definitions and all sorts of border issues as well as increasing the likelihood of another form of disintermediation.

The relationship between the Bank of England and the government

A clear issue is that whilst the Bank of England can influence house prices it does not control them and the paper sets out areas where it is not in control.

House prices are also determined by other factors, not least the supply of housing, and therefore adoption of the target would need to be accompanied by a much more active housing policy. This might include public housebuilding, changes to planning policy, and curbs on overseas purchases of UK homes (Ryan-Collins et al 2017). The FPC should be able to request that the government do more with housing policy if it judges that it will be unable to meet its target through macroprudential tools alone.

The supply of housing is something we have discussed on here pretty much since I began writing articles and the theme has been that government’s of many hues have serially disappointed. The Ebbsfleet saga has been the headline in this respect. Also I have to say that the idea of the Financial Planning Committee needing to “request” help from government policy is welcome in one way but problematic in another. First it is a confession that macroprudential policies are far from a holy grail in this area. Second I can see many scenarios of which the main one would be an upcoming election when the government would simply pay lip service or worse ignore the “request”. Thus we would likely find ourselves singing along to Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

I do mostly agree with this part though and so does the Bank of England as otherwise it would not have introduced the Funding for Lending Scheme back in the summer of 2012.

It is also worth noting, however, that recent research has shown that the level of mortgage lending is the primary determinant of house prices (Ryan-Collins et
al 2017).

Comment

There is a lot to consider here and let me again say that as regular readers will be aware I think that economic policy does need to take account of asset price booms and busts. The catch is in the latter part though because the very same Bank of England that you would be asking to reduce house price growth has been explicitly ramping it since the summer of 2012 and implicitly before then with the Bank Rate cuts and QE bond purchases that preceded it. So the current poachers would have to turn into gamekeepers. Would they? I have my doubts because as we look around the world central banks seem to fold like deck chairs when asset prices fall.

Next comes the issue of could this be done? To which the answer is definitely maybe as you could start on this road and at first your theories would apply. But if we look back to the past history of macroprudential policies there was a reason why they were abandoned and it is because they themselves lead to a boom and bust cycle and bringing things up to date I have doubts on these lines as well as I tweeted to Grace.

One of the problems of central banks in the modern era is that they have often ended up operating in a pro-cyclical fashion. How can you be sure with their poor Forward Guidance record that they can be counter cyclical?

It is easy to spot cycles in hindsight but looking ahead it is far harder as otherwise the aphorism that central banks have never predicted a recession would not keep doing the rounds.

Can we fix it? Yes we can make a start as I hinted at here.

Whilst I support the spirit of this in terms of including house prices. I would point out that the UK could change things by simply going back to the Retail Prices Index as an inflation target because it includes house prices.

Personally I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect. So in effect we would be reversing the changes made by Gordon Brown in the early part of the 2000s. Then off we go although something else would have to be changed as well as basically a clear out of current Bank of England policy makers.

you have the issue of it these days also supporting the economy as defined by GDP

Me on The Investing Channel

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Manufacturing and Production help to drive UK GDP growth

Today brings us up to date with the latest monthly data on the UK economy. the problem with this is as I feared that the numbers are in practice rather erratic.

Monthly gross domestic product (GDP) growth was 0.5% in January 2019, as the economy rebounded from the negative growth seen in December 2018.

Actually December recorded a -0.4% GDP growth rate so if you take the figures literally there was quite a wild swing. More likely is that some industries do not conform to a regular monthly pattern in the way we have seen the UK pharmaceutical industry grow overall but with a boom and bust pattern on a monthly basis.

There are areas where we see two patterns at once in the UK economy. For example Tesco has produced good figures already this morning.

Tesco has reported a 28.8% rise in full-year pre-tax profits to £1.67bn with revenue at the supermarket rising 11.2% to £63.9bn ( Sky News)

On the other hand this week has already seen this.

Ailing department store chain Debenhams has been rescued by its lenders after falling into administration.

Three years ago, the 166-strong chain was worth £900m, compared with £20m as of this week. ( BBC News)

Sadly the BBC analysis seems to avoid this issue highlighted by the Financial Times.

Debenhams troubles stem partly from a period of private equity ownership at the start of the millennium, when CVC, Merrill Lynch and TPG sold off freehold property, added debts and paid themselves large dividends.

It looks a case of asset-stripping and greed followed by over expansion which was then hit by nimbler retailers and the switch to online sales. Without the asset-stripping it would be still with us. Meanwhile the BBC analysis concentrates on Mike Ashley who put up £150 million and offered an alternative. I am no great fan of his business model with its low wages and pressure on staff but he does at least have one.

Wages

Speaking of wages there are several strands in the news so let us start with the rather aptly named Mr. Conn.

The chief executive of Centrica, the owner of British Gas, received a 44% pay rise for 2018, despite a difficult year in which the company imposed two bill increases, warned on profits and announced thousands of job cuts.

Iain Conn received a total pay package worth £2.4m last year, up from £1.7m in 2017, according to Centrica’s annual report. His 2018 packet was bolstered by two bonuses, each worth £388,000.  ( The Guardian )

Yet on the other side of the ledger we see things like this. From The Guardian.

Waterstones staff told how they have had to back on food in order to afford rent as they travelled across the country to deliver a 9,300-signature petition to the chain’s London headquarters, calling for the introduction of a living wage.

Mind you we seem to be making progress in one area at least.

Golden goodbyes for public sector workers will be capped at £95,000 in a clamp down on excessive exit payments, the government has confirmed. ( City-AM)

Although I note that it is something planned rather than already done, so the modern-day version of Sir Humphrey Appleby will be doing his or her best to thwart this. Here is his description of the 7 point plan to deal with such matters.

This strategy has never failed us yet. Since our colleagues in the Treasury have already persuaded the Chancellor to spin the process out until 2008, we can be sure that, by then, there will be a new chancellor, a new prime minister and, quite possibly, a new government. At that point, the whole squalid business can be swept under the carpet. Until next time.

As for payoffs it is the ones for those at the top who are quite often switching jobs which need to stop as often it is merely a name change of their employer.

Today’s GDP data

This was good in the circumstances.

Monthly GDP growth was 0.2% in February 2019, after contracting by 0.3% in December 2018 and growing by 0.5% in January 2019. January growths for production, manufacturing, and construction have all been upwardly revised due to late survey returns.

As you can see December was revised up as was January although not enough in January to raise it by 0.1%. But it is an erratic series so let us step back for some perspective.

UK gross domestic product (GDP) grew by 0.3% in the three months to February 2019

Whilst we do not yet have the March data regular readers may recall that the first quarter in the UK ( and in the US at times) can be weak so this is better than it may first appear.

As ever services were in the van as we continue to rebalance in exactly the opposite direction to that proclaimed by the former Bank of England Governor Baron King of Lothbury.

The services sector was the largest contributor to rolling three-month growth, expanding by 0.4% in the three months to February 2019. The production sector had a small positive contribution, growing by 0.2%. However, the construction sector contracted by 0.6%, resulting in a small negative contribution to GDP growth.

Inside its structure this has been in the van.

The largest contributor to growth was computer programming, which has performed strongly in recent months.

Production

Thanks to the business live section of the Guardian for reproducing this from my twitter feed.

One possible hint is that production numbers for Italy and France earlier have been strongish, will the UK be the same?

It turned out that this was so.

Production output rose by 0.6% between January 2019 and February 2019; the manufacturing sector provided the largest upward contribution, rising by 0.9%, its second consecutive monthly rise……In February 2019, the monthly increase in manufacturing output was due to rises in 11 of the 13 subsectors and follows a 1.1% rise in January 2019; the largest upward contribution came from basic metals, which rose by 1.6%.

In the detail was something I noted earlier as pharmaceutical production was up by 2.5% in the last 3 months which put it 4.3% higher than a year ago in spite of a 0.1% fall in February.

But whilst this was a welcome development for February the overall picture has not been of cheer in the credit crunch era.

Production and manufacturing output have risen since then but remain 6.1% and 1.9% lower respectively for the three months to February 2019 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Things have been singing along with The Beatles since late 2012.

I have to admit it’s getting better (Better)
It’s getting better

but overall we are left mulling the John Lennon counter at the end of this line.

A little better all the time (It can’t get no worse)

Comment

This morning’s numbers were strong in the circumstances and confirm again my theme that we are growing at around 0.3/4% per quarter. Yet again the prediction in the Sunday Times that there would be no growth turned out to be a reliable reverse indicator. Of course there are fears for March after the Markit PMI business survey so as ever we await more detail.

As to stockpiling this has become an awkward beast because I see it being put as the reason for the growth, although if so why did those claiming this not predict it. Anyway I have done a small online survey of what people have been stockpiling.

Okay inspired by and her stockpiling of Scottish water we have from paracetamol for her dad for scare stories and dog has been burying treats

Meanwhile one area which has been troubled for many years continues to rumble on.

The total trade deficit (goods and services) widened £5.5 billion in the three months to February 2019, as the trade in goods deficit widened £6.5 billion, partially offset by a £0.9 billion widening of the trade in services surplus.

Perhaps there was some stockpiling going on there although as any departure from the European Union seems to be at Northern Rail speed those stockpiling may now be wondering why they did it?

 

 

Are negative interest-rates becoming a never ending saga?

Today brings this subject to mind and let me open with the state of play in Switzerland.

The Swiss National Bank is maintaining its expansionary
monetary policy, thereby stabilising price developments
and supporting economic activity. Interest on sight
deposits at the SNB remains at – 0.75% and the target
range for the three-month Libor is unchanged at between
– 1.25% and – 0.25%.

As you can see negative interest-rates are as Simple Minds would put it alive and kicking in Switzerland. They were introduced as part of the response to a surging Swiss Franc but as we observe so often what are introduced as emergency measures do not go away and then become something of a new normal. It was back on the 18th of December 2014 that a new negative interest-rate era began in Switzerland.

The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.

Actually the -0.25% official rate lasted less than a month as on the 15th of January 2015 the minimum exchange rate of CHF 1.20 per euro was abandoned and the official interest-rate was cut to -0.75% where it remains.

Added to that many longer-term interest-rates in Switzerland are negative too. For example the Swiss National Bank calculates a generic bond yield which as of yesterday was -0.26%. This particular phase of Switzerland as a nation being paid to borrow began in late November last year.

The recovery

The latest monthly bulletin tells us this.

Jobless figures fell further, and in February the
unemployment rate stood at 2.4%.

There was a time when this was considered to be below even “full employment” a perspective which has been added to this morning and the tweet below is I think very revealing.

If we look at the Swiss economy through that microscope we see that in this phase the unemployment rate has fallen by 1%. Furthermore we see that not only is it the lowest rate of the credit crunch era but also for much of the preceding period as it was back around the middle of 2002.

So if we look at the Swiss internal economy it is increasingly hard to see what would lead to interest-rates rising let alone going positive again. This is added to by the present position as described by the SNB monthly bulletin.

According to an initial estimate, GDP in Switzerland grew
by 0.7% in the fourth quarter. Overall, GDP thus stagnated
in the second half of 2018, having grown strongly to
mid-year.
Leading indicators and surveys for Switzerland point to
moderately positive momentum at the beginning of 2019.

The general forecasting view seems to be for around 1.1% GDP growth this year. So having not raised interest-rates in a labour market boom it seems unlikely unless they have a moment like the Swedish Riksbank had last December that we will see one this year,

Exchange Rate

There is little sign of relief here either. There was a brief moment round about a year ago that the Swiss Franc looked like it would get back to its past 1.20 floor versus the Euro. But since then it has strengthened and is now at 1.126 versus the Euro. Frankly if you are looking for a perceived safe-haven then does a charge of 0.75% a year deter you? That seems a weak threshold and reminds me of my article on interest-rates and exchange rates from the 3rd of May last year.

However some of the moves can make things worse as for example knee-jerk interest-rate rises. Imagine you had a variable-rate mortgage in Buenos Aires! You crunch your domestic economy when the target is the overseas one.

Well events have proven me right about Argentina but whilst the scale here is much lower we have a familiar drum beat. The domestic economy has been affected but the exchange-rate policy has had over four years and is ongoing.

The Euro

Let me hand you over to the President of the ECB Mario Draghi at the last formal press conference.

First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the end of 2019……….These are decisions that have been taken following a significant downward revision of the forecasts by our staff.

For reasons only known to themselves part of the financial media persisted in suggesting that an ECB interest-rate rise was in the offing and it would be due round about now. The reality is that any prospect has been pushed further away if we note the present malaise and read this from the same presser.

negative rates have been quite successful in our monetary policy.

Although we can never rule out an attempt to continue to impose negative rates on us but exclude the precious in some form.

Sweden

Last December the Riksbank did start to move away from negative interest-rates. The problem is that they now find themselves wearing something of a central banking dunces cap. Having failed to raise rates in a boom they decided to do so in advance of events like this.

Total orders in industry decreased by 2.0 percent in February 2019 compared with January, in seasonally adjusted figures………..Among the industrial subsectors, the largest decrease was in the industry for motor vehicles, down 12.7 percent compared with January. ( Sweden Statistics yesterday)

Like elsewhere the diesel debacle is taking its toll.

The new registrations of passenger cars during 2019 decreased by 15.2 percent compared with last year. There were 27 710 diesel cars in total registered this year, a decrease of 26 percent compared with last year.

Anyway this is the official view.

As in December, the forecast for the repo rate indicates that the next increase will be during the second half of 2019, provided that the economic outlook and inflation prospects are as expected.

Japan

This is the country that has dipped its toe into the icy cold world of negative rates by the least but the -0.1% has been going for a while now.

introduced “QQE with a Negative Interest Rate” in January 2016 ( Bank of Japan)

If the speech from Bank of Japan Board Member Harida on March 6th is any guide it is going to remain with us.

I mentioned earlier that the economy currently may be weak, and the same can be said about prices.

Also he gives an alternative view on the situation.

Following the introduction of QQE, the nominal GDP growth rate, which had been negative since the global financial crisis, has turned positive………Barring the implementation of both QE and QQE, Japan’s nominal GDP growth would have remained in negative territory this whole time since 1998.

Is it all about the nominal debt of the Japanese state then? Also he seems unlikely to want an interest-rate increase.

Rather, premature policy tightening in the past caused economic deterioration, a decline in both prices and production, and lowered interest rates in the long run.

Comment

We find that there are two routes to negative interest-rates. The first is to weaken the exchange-rate such as we have seen in Switzerland and the second is to boost the economy like in the Euro area. So external in the former and internal in the latter. It can be combined as if you wish to boost your economy a lower exchange-rate is usually welcome and this pretty much defines Abenomics in Japan.

As we stand neither route seems to have worked much. Maybe a negative interest-rate helped the Euro area and Japan for a while but the current slow down suggests not for that long. So we face something of an economic oxymoron which is that it is the very fact that negative interest-rates have not worked which explains their longevity and while they seem set to be with us for a while yet.

 

How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

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The UK productivity puzzle is mostly a result of outdated economics and statistics

Today has brought us two flashes of indirect insight on the issue of productivity and what has become called the productivity puzzle. In case you are wondered what that is here is the OECD from August last year.

Since the start of the Great Recession, labour productivity growth has been weak in the United Kingdom, weaker than in many other OECD countries. The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, was nearly 20% for output per hour at the end of 2016.

I am dubious about measures which use the bubbilicious boom for their trend but Ivory Towers love that. Also there is clearly an issue to consider and the OECD had a go at a breakdown.

Most of the UK productivity underperformance is structural rather than cyclical. Half of the productivity shortfall is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction.

Clearly the 5% productivity shortfall explained by the financial sector needs a much more thorough investigation as the ongoing weak state of the banks is due to the fact that their position was over reported on the pre crisis boom and thus so was productivity. Or as the OECD put it.

its steep increases in the run-up to the crisis.

But they do at least manage a minor swipe at the Zombie business era that has been supported by central bank QE.

weak corporate restructuring have both held back productivity improvements in the manufacturing sector.

Output Gap

Economic theory has had a real problem with this and let me give an example from Japan this morning. The Ivory Towers will tell you that wages should be soaring due to a tight labour market with unemployment at 2.3% and a number of jobs to applicants at a more than forty-year high. Meanwhile back on Earth.

Labour cash earnings dropped 0.8 per cent from a year ago, the ministry reported on Friday, compared with projections for them to advance 0.9 per cent. The reading for January was revised down to -0.6 per cent from 1.2 per cent………..

Real wages, which are adjusted for inflation, fell 1.1 per cent, compared with economists’ median forecast of 0.8 per cent.

The real wages figure for January was revised down to -0.7 per cent from 1.1 per cent. ( Business Times)

As you can see the output gap theory has had another complete failure as wages have failed to increase. This makes us mull productivity which is supposed to be strongly linked to wage growth and real wage growth especially. Also I am afraid we have another problem with official statistics as there has been a major revision after clear flaws were discovered such as only a third of the businesses in Tokyo with over 500 employees that were claimed to be sampled actually were. That adds to the problems seen elsewhere with official Japanese data such as the GDP numbers which is completely the opposite of stereotypes.

UK House Prices

These are beginning to offer a more hopeful perspective. The reason why I argue this is that in my opinion way too much economic effort in the UK has gone towards the housing sector where in many areas substantial capital gains have been available via owning a house. This led for quite some time to the boom in the buy-to-let sector and took both investment, attention and effort from other parts of the economy. This was fed by the various “Help To Buy” policies of the government and the multitude of efforts by the Bank of England to reduce mortgage rates and raise mortgage lending to get house prices higher.

Thus the numbers from the Halifax this morning are welcome as they show that things have slowed down.

The average UK house price is now £233,181 following a 1.6% monthly fall in March…….The more stable measure of annual house price growth rose slightly to 3.2% and is still within our expectation for the year.

You need to go through their numbers carefully to get to that as the monthly UK house prices series of the Halifax has become very erratic and has now gone 2.5%, -3% ,6% and now -1.6%. We thought the 5.9% rise in February was extraordinary at the time yet we now discover it was 6%! If we look at March compared to a year ago we see that there has been a 2.4% rise which seems to reflect better the numbers we get from elsewhere.

As to the overall reliability of the Halifax data well let me quote anteos who commented on the last set of numbers from them as follows.

So, just as the annual indicie was heading towards negative territory, up comes a 5.9% increase.
Very similar to Decembers figures which were then reversed the following month. If I was a betting man, a big negative value will pop up next month.

Chapeau.

Productivity Data

There was something of an irony as I searched for the update here.

404 – The webpage you are requesting does not exist on the site

That was not entirely hopeful for productivity as the UK Office for National Statistics and leads into the official enquiry into out data which is ongoing. Sadly the leadership seem lost in a world of click bait and telling us that tractor production is rising. When we got the numbers they posed another problem.

Labour productivity for Quarter 4 (Oct to Dec) 2018, as measured by output per hour, decreased by 0.1% compared with the same quarter a year ago; this is the second successive quarterly fall following the decrease of 0.2% seen for the previous quarter.

If we look back it is the fall in the third quarter which is the most concerning as GDP growth was particularly strong at 0.7%. For the year just gone we had some growth but not much.

In 2018, labour productivity measured as output per hour grew by 0.5% compared with the previous year, with increases in both services and manufacturing of 0.8% and 0.3% respectively.

This meant that the overall picture in the credit crunch era is this.

Labour productivity increased by 0.3% in Quarter 4 2018 compared with the previous quarter. This increase left productivity 2.0% above its pre-downturn peak in Quarter 4 2007,

So not much allowing us to update the OECD style analysis above.

Productivity in Quarter 4 (Oct to Dec) 2018, as measured by output per hour, was 18.3% below its pre-downturn trend – or, equivalently, productivity would have been 22.5% higher had it followed this pre-downturn trend.

Comment

The first problem with the productivity puzzle is whether we can measure it with any degree of accuracy. As we have seen from the Japanese wages and UK house price data above both official and private-sector data have serious issues. This spreads wider and in my opinion is highlighted by this.

In Q4, public service productivity increased by 0.8% on the previous quarter, driven by unusually strong growth in output (1.3%)

It is my opinion that we have very little idea about public sector output and therefore even less about its productivity. Also there are areas we might not always be keen on higher productivity. Returning to the numbers I helped Pete Comley with some technical advice when he wrote his book on inflation and here is what he discovered about the government sector.

The upshot of that review is that estimates inflation on government expenditure no longer use real cost inflation (like wage increases, rises in raw materials costs, etc.) but instead use measures of quality (such as the number of GCSE grades A-C) to calculate the deflator.

So that is a mess.

Also there is a clear problem with the concept of productivity in the services sector. This is because we are often measuring intangible things rather than the tangible of manufacturing. The extraordinary changes for example in the world of information and communications are mostly only captured if there is a price change. I note the paper from Diane Coyle and others that suggested even these were wrong and the situation was much better ( lower prices and higher output). Also I have pointed out before as well as giving evidence to the Sir Charles Bean enquiry, that the UK trade release has at most a couple of pages on services out of the 30 or so with no geographical or sectoral breakdown. This matters even more as we rebalance towards services with growth in the index of services some 21% over the past decade.

Also there has been a shift towards self-employment which makes the numbers less reliable as we know even less about that area.

Finally it would be nice for us to get some capital productivity figures to compare with the labour ones.

Me on The Investing Channel

 

 

 

India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

What is happening with US house prices and its economy?

Sometimes it helps to look back so let us dip into Yahoo Finance from the 17th of December last year.

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

So we see what has in many places become a familiar pattern as housing markets lose some of their growth. There was and indeed is a consequence of this.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

I think he means wages when he says “home income growth” but he is making a point which we have seen in many places where house price growth has soared and decoupled from wage growth. This has been oil by the way that central banks slashed official interest-rates which reduced mortgage-rates and then also indulged in large-scale bond buying which in the US included Mortgage-Backed Securities to further reduce mortgage-rates. This meant that affordability improved as long as you were willing to look away from higher debt burdens and the implication that should interest-rates rise the song “the heat is on” would start playing very quickly.

Or if you wish to consider that in chart form Yahoo Finance helped us out.

That is a chart to gladden a central bankers heart as it shows that the policy measures enacted turned house prices around and led to strong growth in them. The double-digit growth of late 2013 and early 2014 will have then scrambling up into their Ivory Towers to calculate the wealth effects. But the problem is that compared to wage growth they moved away at 8% per annum back then and the minimum since has been 2% per annum. That means that a supposed solution to house prices being too high and contributing to an economic crash has been to make them higher again especially relative to wages.

What about house price growth now?

Yesterday provided us with an update.

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled solutions provider, today released the CoreLogic Home Price Index (HPI) and HPI Forecast for February 2019, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4 percent year over year from February 2018. On a month-over-month basis, prices increased by 0.7 percent in February 2019.

So there has been a slowing in the rate of growth which is reflected here.

“During the first two months of the year, home-price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This is the opposite of what we saw the last two years when price growth accelerated early.

Looking ahead they do however expect something of a pick-up.

“With the Federal Reserve’s announcement to keep short-term interest rates where they are for the rest of the year, we expect mortgage rates to remain low and be a boost for the spring buying season. A strong buying season could lead to a pickup in home-price growth later this year.”

That gives us another perspective on the change of policy from the US Federal Reserve. So far its U-Turn has mostly been locked at through the prism of equity prices partly due to the way that President Trump focuses on them. But another way of looking at it is in response to slower house price growth which was being influenced by higher mortgage rates as the Federal Reserve raised interest-rates and reduced its bond holdings. This saw the 30-year mortgage-rate rise from just under 4% to a bit over 4.9% in November, no doubt providing its own brake on proceedings.

What about now?

If we look at monetary policy we see that perhaps something of a Powell Put Option is in place as at the end of last week the 30-year mortgage rate was 4.06%. Now bond yields have picked up this week so lets round it back up to say 4.15%. Even so that is quite a drop from the peak last year.

There is also some real wage growth according to the Bureau of Labor Statistics.

Real average hourly earnings for all employees increased 1.9 percent, seasonally adjusted, from February 2018 to February 2019. The change in real average hourly earnings, combined with a 0.3-percent decrease in the average workweek, resulted in a 1.6-percent increase in real average weekly earnings over this 12-month period.

In terms of hourly earnings the situation has been improving since last summer whereas the weekly figures were made more complex by the drop in hours worked meaning we particularly await Friday’s update for them.

Moving to the economy then recent figures have been a little more upbeat than when we looked at the US back on the 22nd of February but not by much.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q1 and 1.6% for 2019:Q2..News from this week’s data releases left the nowcast for 2019:Q1 unchanged and decreased the nowcast for 2019:Q2 by 0.1 percentage point.

Of the main data so far this week we did not learn an enormous amount from the retail sales numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2
percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018.

As these are effectively turnover rather than real growth figures a monthly fall is especially troubling but January had been revised higher.

Comment

We are observing concurrent contradictory waves at the moment. The effect from 2018 was of a slowing economy combined with monetary tightening in terms of higher mortgage-rates. More recently after the policy shift we have seen mortgage-rates fall pretty sharply and since last summer a pick-up in wage growth. So we can expect some growth and maybe we might even see a phase where wage growth exceeds house price growth. But it would appear that the US Federal Reserve has shifted policy to keep asset (house and equity) prices as high as it can so it may move again,

As to the overall picture this from Corelogic troubles me.

According to the CoreLogic Market Condition Indicators (MCI), an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 35 percent of metropolitan areas have an overvalued housing market as of February 2019. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).

Only 35% overvalued? Look again at the gap between house price rises and wage rises in the Yahoo chart above. So if we look backwards very few places must have been overvalued just before the crash. Also times are hard for younger people.

Frank Martell, president and CEO of CoreLogic. “Our research tells us that about 74 percent of millennials, the single largest cohort of homebuyers, now report having to cut back on other categories of spending to afford their housing costs.”

I am not sure that goes with the previous research. Also if the stereotype has any validity times for millennials in the US are grim or should that be toast?

The price for Hass avocados from Michoacán, Mexico’s main avocado producing region, increased 34 percent on Tuesday amid President Trump’s calls to shut down the U.S.-Mexico border ( The Hill).

Let me end with a reminder from CoreLogic that averages do not tell us the full story.

Annual change by state ranged from a 10.2 percent high in Idaho to a -1.7 percent low in North Dakota