Can we Test and Trace for UK GDP?

Due to the economic impact of the Covid-19 pandemic we are even more keen than usual to peer under the bonnet of the economy. There is an irony in that in normal times I advise care with the monthly economic output or GDP data and there are obvious reasons to think that is exacerbated now. But we are where we are and here it is.

Monthly real gross domestic product (GDP) is estimated to have increased by 0.8% in May 2021 as coronavirus (COVID-19) restrictions continued to ease to varying degrees in EnglandScotland and Wales. This is the fourth consecutive month of growth, albeit slower compared with March (2.4%) and April (2.0%).

In ordinary times monthly growth of 0.8% would be at party levels but the main point here is that things look to have slowed from what we had in March and April. However we now have four months in a row of growth and some factors are shifting towards a more normal setting.

The service sector grew by 0.9% in May 2021 – accommodation and food service activities grew by 37.1% as restaurants and pubs welcomed customers back indoors following the easing of coronavirus restrictions.

The default setting for the UK is for growth in the services sector to lead the economy and it looks to be back. On a personal level I saw quite a bit of filming going on by the lake in Battersea Park earlier this week suggesting that industry is getting back into its groove although that is a couple of months ahead of the numbers today. For them we were told this.

Consumer-facing services grew by 3.2% as coronavirus restrictions continued to ease throughout May, with output levels now at the closest to their pre-pandemic level, at just 7.8% below. Despite growth in consumer-facing services, it is travel, transport and other personal services that continue to contribute to output remaining below pre-pandemic levels.

That can be broken down to this and at the end we see that the film industry looks to have been picking up in May as well.

Food and beverage services activities was the main contributor to the growth in consumer-facing services, growing by 34.0% in May 2021 as restaurants and pubs could serve the public indoors for part of the month. Strong growth means that the industry is now 9.4% below its pre-pandemic level (February 2020), but 0.3% above its August 2020 peak when the Eat Out to Help Out Scheme boosted consumer demand for bars and restaurants. Arts, entertainment and recreation also contributed positively to consumer-facing services growth, growing by 7.3%.

Education and Health

Two of the sectors most affected by the pandemic and it has led to quite a lot of issues as to how this is measured in economic terms and in particular for GDP.

education output contributed negatively to gross domestic product (GDP) in May 2021, as it fell by 0.5% compared with the previous month. Weighted attendance (taking into account the impact of remote learners) for May 2021 was approximately 91.6%, compared with 93.0% in April 2021.

Whilst in many ways this is worthy stuff there does anybody really believe that weighted attendance is accurate to a decimal point? Next up is health and for foreign readers there have been a lot of questions in the UK about the Test and Trace scheme and how effective it has been which provides a background to this.

Human health activities returned to growth, growing by 0.3% in May 2021. Output levels also remain high, driven by NHS Test and Trace services, and vaccine schemes across the UK.

The vaccine is rather different as it has been a success. The measurement is an issue because I have my doubts about how they get to this.

These adjustments are applied to both the government expenditure data as well as output data, and are applied only to volume data .

Reinforced by this bit.

we have used the latest available quarterly government data

Hang on this is a monthly series. I am not sure the detail improves things much as how accurate can it be?

the estimated cost to secure and manufacture vaccines for the UK and deploy vaccines in England, and testing and vaccination data, and estimated imports – and applied indicative volume adjustments to preserve the growth within the health sector and its impact on the economy, rather than applying an adjustment to preserve the level that could give an incoherent growth.

If we take it out of the figures we get quite a different pattern because March was then 1.3%, April was 2.4% and May 0.9%. So whilst growth is lower the pattern changes quite a bit because essentially GDP was assumed to surge in March via the above and we have taken just under half of it away since.

Another Disaster For the Markit PMI Survey

These matter not only in themselves but because central bankers rely on them. Regular readers may recall the Bank of England’s absent minded professor Ben Broadbent revealing this in the autumn of 2016 as he tried to explain how he had got things so wrong. That theme continues here as we note this.

LONDON, June 1 (Reuters) – A deluge of new orders helped to drive a record increase in British manufacturing activity last month as the economy began to recover from the COVID-19 pandemic, a survey showed on Tuesday.

The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to 65.6 in May from 60.9 in April.

Okay so this morning’s data showed quite a surge then?

The manufacturing sector remained broadly flat, contracting slightly for a second consecutive month, by 0.1%. Production in 6 out of the 13 manufacturing sub-sectors fell in May 2021.

So for the second month in a row they have predicted growth like a rocket and have seen a fall. Those who followed my analysis of how this went so badly wrong in Ireland will have a clue as in the case of the “pharmaceutical cliff” one large producer of a anti-cholesterol drug went off patent but was only one down tick in one hundred up-ticks, well here is the UK version.

 The largest contribution to the fall came from the manufacture of transport equipment, falling by 16.5%, as microchip shortages disrupted car production.

Didn’t pretty much everyone know that? The same happened in France and from this mornings release probably in Italy as well so as Britney would say it is a case of.

Hit me, baby, one more time


Returning to more like normal as lockdown eases seems to have had a negative effect here.

Construction output fell for a second consecutive month in May 2021, by 0.8%, following exceptionally strong growth in February and March, and an upwardly revised 0.7% decline in April 2021. Despite the fall, construction remains the only sector to have output levels at above its pre-coronavirus (COVID-19) pandemic level (February 2020).

I have long had my doubts about the measurement here and there was an official confession about problems a few years ago.


We can take a further perspective from this.

Overall, GDP grew by 3.6% in the three months to May 2021, mainly because of strong retail sales over the three months, increased levels of attendance as schools reopened from March, and the reopening of food and beverage service activities

Overall that is a solid performance but there is both a ying and a yang in the number below.

remains 3.1% below the pre-coronavirus (COVID-19) pandemic levels seen in February 2020.

So we are still well behind where we were in spite of the further progress we have made. So still a little sobering as we hope to get right back where we started from in say the winter of this year.

Mind you there is one area which has seen quite a surge.

Persimmon sales rose above pre-pandemic levels in the first half of 2021, as tax cuts and booming British house prices continued to benefit housebuilders.

The UK’s largest housebuilder said on Thursday that revenues reached £1.84bn in the first six months of 2021, outstripping the £1.75bn recorded in the same period of 2019. Persimmon’s sales had dropped to £1.2bn during the first half of 2020. ( The Guardian )

Rethinking The Dollar

I did an interview yesterday which from the comments placed already seems to have gone well.

What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.


Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.


Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved


An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.


The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )


Retail Sales in Italy are struggling again

Last night it was a case of Forza Italia after the success in reaching the Euro 2020 ( yes we all know it is 2021) football final. It was an especially ice cold final penalty from Jorginho who is having quite a summer. Sadly the economic news is not hitting such heights.

In May 2021 estimates for seasonally adjusted index of retail trade slightly increased by 0.2% in value terms, likewise volume rose by 0.4% in the month on month series.( Istat)

As you can see retail sales have improved but not by much although if we take a bit more perspective things look a bit better.

In the three months to May 2021 value of sales increased by 3.3% when compared with the previous three month period, while volume was up 3.5%.

Although that more positive view comes with the kicker of an apparent slowing which is rather familiar to followers of the Italian economy. The annual comparison has slowed from the 30% growth of the previous month but of course such figures are very distorted a bit like being in a hall of mirrors at a fun fair.

Year on year, value of retail trade continued its growth, increasing by 13.3% and volume sales grew by
14.1% comparing to May 2020, when non-essential retail stores were partially closed due to pandemic

But we can learn something from this.

Despite the growth, in May 2021 total retail
sales levels for both value and volume were still lower than pre-pandemic levels of February 2020.

The May volume index was at 99 where 2015 was 100. So volumes are below where they were when the index was set and if we look at May 2019 at 99.4 slightly below it. This is rather different to the chart presented because it is for values and not volumes. Italy has had some sales growth since 2015 but in essence the inflation seen takes it away as we convert to volumes. So we are back in “Girlfriend in a coma” territory.

The pattern of changes is similar to elsewhere it is just there is less of it in total.

Looking at the value of sales for non-food products, all sectors witnessed growth apart from Computers and
telecommunications equipment (-4.0%). The largest increase were reported for Clothing (+82.3%) and
Shoes, leather goods and travel items (+59.7%).

National Accounts

At the beginning of the month we learnt that the numbers suggested the situation would be better now.

Gross disposable income of consumer households increased by 1.5% with respect to the previous quarter, while final consumption expenditure decreased by 0.6%. As a consequence, the saving rate was 17.1%, 1.8 percentage points higher than in the last quarter of 2020. In real terms, gross disposalble income of consumer households increased by 0.9%.

So there is money available to be spent.

Whilst we are here we can note that the state has been supporting the economy too.

In the first quarter of 2021 the GG net borrowing to Gdp ratio was 13.1% (10.6% in the same quarter of 2020).

Taxes were 41.6% of GDP but expenditure was 54.8%. This leads us to the national debt which was 155.8% of GDP at the end of 2020 and as of April was 2.68 trillion Euros.


This is something that at first sight looks a positive highlighted by the most recent data.

In May 2021 the trade balance with non-EU27 countries registered a surplus of 4,767 million euro compared
to the surplus of 4.114 million euro in May 2020; excluding energy, the surplus was equal to 7,681 million
euro, up compared with a 5,201 million euro surplus in May 2020.

The annual comparisons are of course distorted but my initial point is that Italy has run a consistent surplus. We have to go back to April for the full figures including the EU but we remain at this point with what looks like a success economy via its trade surplus.

As ever care is needed because exports have risen since the Euro area crisis but there is a familiar point about under performance here. That is in this instance relative to its peers. But we do see weak internal demand from the pattern of retail sales we looked at earlier and that would feed into imports.

This brings us to one of the debates which is between whether it is good to have a trade surplus or a deficit? The answer mostly comes from the Talking Heads lyric “How did I get here”. A surplus can indicate a competitive economy and there are parts of the Italian economy that deserve that moniker. But in a 2018 paper from the LSE it was suggested that things may have hit trouble there. The emphasis is mine

Importantly, we find evidence that misallocation has increased more in sectors where the world technological frontier has expanded faster when, in the wake of Griffith et al, we measure the speed of technological change in a sector by the average change of R&D intensity in advanced countries. Relative specialisation in those sectors explains why, perhaps surprisingly, misallocation has increased particularly in the regions of Northern Italy, which traditionally are the driving forces of the Italian economy.

In terms of scale the issue was/is very significant.

With these definitions in mind, we study the universe of Italian incorporated companies over the period from 1993 to 2013. We find strong evidence of increased misallocation since 1995 (see Figure 3). If misallocation had remained at its 1995 level, aggregate TFP in 2013 would have been 18% higher than its current level. This would have translated into 1% higher GDP growth per year, which would have helped to close the growth gap with France and Germany.

TFP is their productivity measure or Total Factor Productivity.

Maybe it is linked to this issue.


The European Commission has just released an upbeat forecast starting with something not often written about Italy’s economy.

Economic activity proved more resilient than expected and increased slightly in the first quarter of this year,
despite stringent containment measures.

They now think this.

Performance data from the manufacturing sector and business and consumer surveys suggest that real GDP growth gained further momentum in the second quarter and should strengthen markedly in the second half of the year. On an annual basis, real GDP growth is expected to reach 5.0% in 2021 and 4.2% in 2022. The forecast for 2021 is significantly higher than in spring.

However one hope seems to be struggling if the retail sales numbers are a guide.

Private consumption is expected to rebound sizeably, helped by improving labour market prospects and the gradual unwinding of accumulated savings.

The overall picture looks very Japanese doesn’t it as we note the national debt, trade surplus and weak domestic demand? That brings us back to the Turning Japanese theme.

The Financial Times is bullish, however.

By April, goods exports were 6 per cent above January 2020 levels — the strongest growth rate of any major eurozone economy, compared with rates of less than 1 per cent in France and Germany. As a result, Italy’s goods trade surplus has surged since the start of the pandemic.

Although it is nice to see Italy outperform for once.

This is helping to ease the economic impact of the pandemic. Italy was the only major eurozone economy to grow in the first quarter of this year. Its output expanded by 0.1 per cent from the previous three months; by contrast, the eurozone as a whole logged a contraction of 0.3 per cent.

The problem for Italy remains that it does not grow much more than that in the good times.

The Reserve Bank of Australia decides to look away from surging house prices

We have an opportunity to take a look at a land which is both down under and a place where beds are burning, at least according to Midnight Oil. This is because the latest central bank to emerge blinking into the spotlight is the Reserve Bank of Australia or RBA. Here is its announcement.

  • retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points
  • continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4 billion a week until at least mid November
  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent.

Perhaps they thought that announcing the interest-rate decision last would take the focus off it. A curious development in that who expects a change anyway? A sort of equivalent of an itchy collar or guilty conscience I think. Along the way they have reminded us that they also have a 0% interest-rate and I guess most of you have already figured that it of course applies to The Precious.

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process.

As someone who has spent much of his career in bond markets I rather approve of starting with a bond maturity but what is taking place here is a little odd. This is because as time passes their benchmark of April 2024 is shortening as for example it is now 2 years and 9 months. For example that is below the minimum term that the Bank of England will buy ( 3 years) and also central banks have in general been lengthening the terms of their QE buying arguing that such a move increases the impact.

If you think the above is an implicit way of cutting QE there is then the issue that it has been extended until November although with around a 20% reduction in the rate of purchases. That is similar to the Bank of England.

As ever they think they can get away with contradicting themselves because the economy needs help apparently.

These measures will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.

But only a couple of sentences later it is apparently going great guns.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape.

So do all states of the economy require support these days?

The Economy

The latter vibe continues as we note this.

National income is also being supported by the high prices for commodity exports.

That boost may well carry on if the analysis in The Conversation turns out to be accurate.

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

So a windfall for Australia although they have omitted the “Dutch Disease” issue where the higher Aussie Dollar they mention deters other sectors of the economy such as manufacturing.

Another signal is going well according to the RBA.

The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1 per cent in May and more Australians have jobs than before the pandemic.

There may even be hope for some wages growth.

Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.

Although later it appears to think it will take quite some time.

The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

House Prices

The situation is in rude health from a central banking perspective.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

Well if you will pump it up as we note that “investors” are on the case.

The final draw-downs under the Term Funding Facility were made in late June. In total, $188 billion has been drawn down under this facility, which has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.

This is a type of copy cat central banking where the RBA has copied the policy which has juiced the UK housing market. Looking at the credit data there is a lot of investor activity as total mortgage credit for that category was 669 billion Dollars at the end of May as opposed to 1.258 trillion for owner-occupiers.

Anyway here is the consequence.

CoreLogic’s monthly home price index rose 1.9 per cent in June, led by 3 per cent growth in Hobart and 2.6 per cent in Sydney.

The index rose 13.5 per cent over the past financial year just ended, with Darwin (+21pc), Hobart (+19.6pc), Canberra (+18.1pc) and regional markets (+17.7pc) leading the way.

That is the strongest annual rate of growth recorded by CoreLogic nationally since April 2004.


Switching to the supposed target then things are in hand as long as you ignore the above.

In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023. In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.


There are quite a few familar themes here as we note that even recoveries these days need support rather than the old standard of taking away the punch bowl just before the party gets really started. I think we can safely say that the housing  market has the volume turned up if not to 11 very high. This means that for central bank action we return to the prophetic words of Glenn Frey and Don Henley of The Eagles.

“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

There is an Australian spin in the way that all roads here seem to lead to 2024. Is that a type of release valve? It looks like that at first but there is a catch. We have seen that central banks may reduce the rate at which they buy bonds under QE but they never reverse it. The one main effort by the US Federal Reserve was followed by it buying ever more. In the end central banking roads have so far ended at this destination.

Come on let’s twist again,
Like we did last summer!
Yeaaah, let’s twist again,
Like we did last year! ( Chubby Checker )

Where next for the economy of France?

Sometimes we find that one segment of news does fit more than one piece of the economic puzzle. This morning that has come from La Belle France.

In May 2021, output decreased in the manufacturing industry (–0.5%, after –0.1%), as well as in the whole industry (–0.3%, after +0.1%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (–6.9%), as well as in the whole industry (–5.6%). ( INSEE )

Late spring saw a couple of declines in manufacturing which caught out the forecasters mostly I would imagine because of this.

The easing of COVID-19 lockdown restrictions contributed
to a further strong improvement in business conditions in
the French manufacturing sector during May. Output and
new orders both increased at accelerated rates. ( Markit IHS PMI)

In fact they went further.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI®) – a single-figure
measure of developments in overall business conditions –ticked up to 59.4 in May from 58.9 in April, signalling a further substantial improvement in business conditions in the French manufacturing sector, and one that was the most marked since September 2000.

A reading of the order of 60 is supposed to be up,up and away growth not the contraction that was seen. Just in case it was some sort of quirk they rammed the output point home.

The trend in new orders was matched by that for output, with production increasing at the sharpest pace since January 2018.

Car Production

There was no magic bullet here as the main issue came from an area one should have been expecting after all the reports about chip shortages causing problems for modern vehicles, which use so many of them.

In May, output fell back sharply in the manufacture of transport equipment (–5.4% after –0.8%) due to shortages of raw materials in the automotive industry.

Manufacturing for the transport sector in France peaked in December of last year when it made 94.1 where 2015 equals 100. Since then it has been downhill with a very sharp fall of the order of 10 points in February and now we are at 76.2.

In terms of a breakdown we have this which compares to pre pandemic levels.

It slumped in the manufacture of transport equipment (−29.7%), both in the manufacture of other transport equipment (−30.0%) and in the manufacture of motor vehicles, trailers and semi-trailers (−29.2%).

So it is this sector with a little help from a 13.3% fall in the fuel sector that fas dragged things down. The other areas have done much better with some even managing a little growth.

Compared to February 2020, output declined more moderately in “other manufacturing” (−4.0%) and in the manufacture of machinery and equipment goods (−4.4%). Output was above its February 2020 level in mining and quarrying, energy, water supply (+1.9%) and in the manufacture of food products and beverages (+0.9%).

There have been some wild swings with of course the annual figures looking quite a triumph until you see what they are being compared with.

Over this one-year period, output bounced back sharply in the manufacture of transport equipment (+46.1%), in the manufacture of machinery and equipment goods (+35.4%) and in “other manufacturing” (+30.4%).

Overall Economy

After the above you might like to take the next bit with a pinch of salt as we see what Markit IHS tell us from their latest survey on the French economy.

We’ve witnessed a complete quarter of growth for the first
time since the pandemic began, and the growth
momentum needed to drive a sustained recovery is
likely to build as pent-up demand is released and operating capacities expand.

Bank of France

Its projections are upbeat and tell us this.

After dropping markedly in 2020, French economic activity is experiencing a strong rebound in 2021. Following a start to the year marked by ongoing public health restrictions, the phased lifting of the lockdown and acceleration of the vaccination campaign should allow the economy to recover in earnest in the second half. According to our economic surveys, economic activity started to recoup lost ground in the second quarter, despite the emergence of supply difficulties in certain sectors. It should rebound particularly strongly in the third and fourth quarters, as the gradual easing of the public health restrictions leads to strong household consumption growth.

In terms of specific numbers we get this.

In 2021, GDP is projected to expand by 5¾% in annual average terms (which is higher than the euro area average of 4.6%). It should then grow by 4% in 2022 and by 2% in 2023

Which means this.

Activity should start to exceed pre-Covid levels as of the first quarter of 2022, which is one quarter earlier than foreseen in our March projections.

A lot of this is  the by now familiar idea of the savings that have been built up mostly involuntarily will be spent.

The strong GDP growth should essentially be driven by domestic demand in 2021 and 2022, both from consumption and investment. Household purchasing power was on the whole preserved in 2020, and should start to rise again in 2021 and 2022. Household consumption and investment spending are expected to accelerate further in 2022 thanks to the excess savings accumulated previously.

They are a little more specific here and as they do not say the savings ratio was previously 4-5%.

and the household saving ratio should decline from 22% in the second quarter of 2021 to 17% in the final quarter of the year, and then to below its 2019 level in 2022 and 2023

We can also put this “wave” in terms of Euros.

After reaching EUR 115 billion at the end of 2020, the financial savings excess is expected to rise at a more moderate pace in 2021, thanks to the fall in the household saving ratio , and should peak at up to EUR 180 billion at end-2021.


If we remain in the territory of the Bank of France there are various different stories in play. It tells us this.

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) has risen significantly in recent months, climbing from 0.8% in February 2021 to 1.6% in April 2021.

We can update that to 1.8% in May continuing the upwards move which Isabel Schnabel of the ECB wants more of.

higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics,

Well it can be found in the Markit survey.

Finally, survey data revealed intensifying price pressures
during June. Cost inflation reached a 17-month high,
linked to greater supplier fees and shortages of inputs. The
combination of strong demand and rising expenses led firms to hike their selling charges in June. Furthermore, the rate of output price inflation was the steepest in almost a decade.

Or if they take a look at the cost of buying a house.

In Q1 2021, the house prices in metropolitan France continued to rise, but slowed down a bit: +1.3% compared to the previous quarter with seasonnally adjusted (s.a.) data, after +2.3% in Q4 2020. Year on year, house prices increased this quarter (+5.5% after +5.8%).


The situation is officially positive backed up by today’s PMI survey. But the official manufacturing data driven by the problems in the transport sector suggest a doubt. To that we can add this.

PARIS, July 4 (Reuters) – Health Minister Olivier Veran on Sunday urged as many French people as possible to get a COVID-19 vaccine, warning that France could be heading for a fourth wave of the epidemic by the end of the month due to the highly transmissible Delta variant.

That would be awkward just after this.

France lifted the last of its major restrictions on Wednesday, allowing unlimited numbers in restaurants, at weddings and most cultural events, despite fast-rising cases of the Delta variant. ( the national news)

So we wait and see what happens next especially in these areas.

and the start of a return to normal in tourism and aeronautics, France’s stronghold export sectors ( Bank of France)


Should we raise taxes to deal with the new debt?

The establishment response to the Covid-19 pandemic was to reach for the fiscal policy button and press it. This was in addition to what are called the fiscal stabilisers where more unemployment benefits are paid and less tax is collected. So for example we saw the furlough scheme deployed on a grand scale which was both a new venture and an adventure for the UK. Actually we got some news on it only yesterday.

provisional figures show that the number of employments on furlough has decreased by 1.2 million from 30 April to 2.4 million on furlough at 31 May 2021, down from 3.5 million on 30 April. (These figures do not sum exactly due to rounding.) Numbers on CJRS last peaked at 5.1 million in January and have fallen since. ( HMRC)

In case you were wondering the main falls were as you might expect.

across all more detailed industry sectors, the beverage serving activities group saw the largest reduction in jobs on furlough between 30 April and 31 May: a decrease of 179,700. This was followed by the restaurants and mobile food service activities group which saw a reduction of 133,000.

But for our purposes today the main impact was that these were rather different numbers to what the Office for National Statistics had told us.

The proportion of UK businesses’ workforce who are reported to be on furlough has decreased to 6% (approximately 1.5 million people) in early June 2021; this is the lowest level reported since the furlough scheme began.

It does go into June but as you can see has given us a very different answer as this seems to have misfired.

This number is based on multiplying the BICS weighted furlough proportions by HM Revenue and Customs (HMRC) Coronavirus Government Retention Scheme (CJRS) official statistics eligible employments1 for only those industries covered by the BICS sample.

It posts a warning about economic statistics but also for today it suggests that the path of public borrowing is going to be higher than we were thinking based on the ONS data.

Social Care

The news above may have rattled things a bit at HM Treasury which is always nervous about this sort of thing. A sort of institutional memory if you like. This presumably led to this from the Financial Times.

New health secretary Sajid Javid is to form a powerful alliance with chancellor Rishi Sunak to insist that major reform of England’s creaking social care system must be funded through higher taxes.

Presumably aides for the two politicians wrote the “powerful alliance” bit for the FT. Then we get to the crux of the matter.

Boris Johnson has promised to fix the social care funding crisis — with annual costs estimated at up to £10bn — but his reluctance to raise taxes has caused tensions with Sunak, who wants to tackle the £300bn deficit accumulated during the coronavirus pandemic.

So this is the crux of the matter and is why we have seen other tax raising moves floated such as reduction in the tax relief on personal pensions for higher-rate payers. That has various problems though. Firstly it does not apply to those imposing it as they usually have taxpayer funded final or average salary pensions. Next the pension structure has taken various hits around the areas of likely returns and especially the very low level of annuity rates. We have seen it appear before as a suggestion and then disappear although of course the deficit is larger now.

Indeed the drumbeat may even have reached The Sun.

NEARLY 2.5 million Brits are still on furlough as the scheme winds down — with the total bill reaching £66billion.

A conceptual issue here is that governments seem to have lost the power to raise rates for income tax. In the past the response would be to add a penny or two to the basic rate or to raise higher rates. They do seem able not to raise the various thresholds and thus get more money via people getting wage rises but that is about it. So a passive rather than an active move.

They are now thinking of a different route which is a specific tax for a policy.

Javid is sympathetic to a Japanese-style levy on the over-40s to fund social care, according to colleagues, while the Treasury is looking at whether a dedicated tax could be introduced.

The UK does not do this although some still think that National Insurance contributions do pay for the NHS and pensions. Whilst they do help there is no direct link at all as it just goes into one big pot and is then spent. One reason for this is that they do not want people objecting to specific areas such as conscientious objectors saying no to their taxes going to defence.

Actually using a Japanese example rams it  home as they have struggled to raise taxes at all as the two attempts with the Consumption Tax have taken quite some time partly because they have torpedoed the economy. So we may have a touch of The Vapors in more than one respect.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Oh and I did say that HM Treasury loves this sort of thing.

Nick Macpherson, Treasury permanent secretary from 2005 to 2016, told the Financial Times that now was a good time to introduce a new tax.

They miss out the bit that they always think that! He even has a PR line ready

“The public want greater NHS capacity and a better social care and this can’t be financed by fiddling around the edges of the tax system,” he said. “A social solidarity charge payable by all adults at a rate of 2 to 3 per cent of their income could put the health and social care sector on a sustainable footing.”

He has even dropped the over-40s bit in what no doubt seems a cunning plan to a Treasury Mandarin.

But we return to the question posed by The Jam.

And the public gets what the public wants

Or is it?

And the public wants what the public gets


The Chancellor is trying to have his cake and eat it here as he tries to manoeuver around this.

Johnson has so far insisted the Conservatives should honour their 2019 election manifesto commitment to freeze the rates of the “big three” taxes: income tax, national insurance and value added tax.

The undercuts to this are that whilst we are borrowing very heavily there are contexts. For example we can borrow very cheaply as the 50-year yield is 1.04% as I type this. As we stand there is more of a risk from higher inflation and our topic of yesterday nudging debt costs higher via our index-linked debt.

Also there is the swerve of our times via all the Bank of England QE purchases where some £808 billion as of the end of June has been if not wiped from the ledger (and there are roads where that is true) charged at a Bank Rate of 0.1%. That is one of the reasons why they are so reluctant to increase it.

Next is the fact that the UK economy is growing quickly and recovering the lost ground. Here though there is a catch, because once we do will we return to the slow growth we had before? That is not so hopeful for the public finances as we find ourselves returning to the Turning Japanese theme.

Will UK inflation exceed 5%?

The last 24 hours have seen the inflation debate move on in the UK and some of that has happened in the last ten minutes as the speech by Governor Andrew Bailey has been released. Many of the issues are international ones and trends so let me open by taking a look at what the Riksbank of Sweden has announced today.

Both in Sweden and abroad, the recovery is proceeding slightly faster than expected and the Riksbank’s forecasts have been revised up somewhat.

So like the Bank of England it has been caught out but its view attracted my attention because it is somewhat different.

Inflation has varied to an unusually large degree during the pandemic. This is partly due to energy prices but also to measurement problems and people’s changed consumption patterns during the pandemic. Inflationary pressures are still deemed moderate and it is expected to take until next year before inflation rises more persistently.

Not the inflation technicalities which are a generic but the fact they expect it next year which is different to the US view for example of “transitory” from now. We already ready know from one Fed member that “transitory” has gone from 2/3 months to 6/9 but more next year is a different view. Also “persistently” is the sort of language that will get you banned from central banking shindigs.

Andy Haldane

The Bank of England’s chief economist gave us his view on inflation trend yesterday which started with philosophy.

The first, nearer-term, is discomfort at whether continuing monetary stimulus is consistent with central banks hitting their inflation targets on a sustainable basis.

The fact he is publicly asking the question means he thinks it isn’t. But then we get the gist of his views for 2021.

With public and private financial fuel being injected into a macro-economic engine already running hot, the result could well be macro-economic overheating. When resurgent, and probably persistent, demand bumps up against slowly-emerging, and possibly static, supply, the laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion.

As you can see he too uses the word “persistent” and does so twice, which is about a revolutionary as a 32 year bank insider can get I think. Then we see significantly added into the mix.

This we are now seeing, with price surges across a widening array of goods, services and asset markets. At present, this is showing itself as pockets of excess demand. But as aggregate excess demand emerges in the second half of the year, I would expect inflation to rise, significantly and persistently.

Actually aggregate excess demand is not what it was. What I mean by that is the change to us predominantly being a service economy means that there is a much wider range of responses to demand now.

For instance, hairdressing and personal grooming inflation was strong in particular, at an annual rate of 8%, and saw a 29 year high.

This is one example ironically in a way from Governor Bailey’s speech where there is a clear limit as hairdressers can work harder but only so much. Whereas other areas in the services sector may not be far off no limits at all. Oh and after him being on TV during the England game versus Germany I suspect we are onto the 2021 look now.

Pent-up demand, essential need, or recreating the early 1990s David Beckham look, I leave that to others to judge.

Returning to Andy Haldane his musings lead him to conclude this.

By the end of this year, I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.

That has been reported as 4% which is not quite what he said but by the time one converts it from CPI to Retail Prices Index ( a 1%+ rise as for example it was 1.2% in May) we arrive at the 5% of my headline.

What does Governor Bailey think?

The opening part of the section on the economic recovery illustrates something of a closed mind on the subject.

what conclusions can we draw on the temporary nature of the causes of higher inflation

The next bit is a type of PR after thought.

and what should we look out for to judge if those causes might be more sustained?

Under his plan we look set to go to stage four of the Yes Minister response which is “It’s too late now”. One area where there is plenty of inflation is in the use of the word temporary.

There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.

Those dealing in shipping costs seem much less clear about that.

International #container #freight rates cont. their almost vertical ascent with the Drewry global composite rising to $8k some 6X the normal rate. Routes out of China surging on #SupplyChains disruptions, some temporarily triggered by Covid-19 outbreaks reducing loadings ( @Ole_S_Hansen)

Another problem is that the Bank of England has under estimated both the UK economy recovery and consequent inflation.

CPI inflation rose to 2.1% in May, just above the MPC’s target and above where we thought it would be in the MPC’s May forecast.

In the May forecast they said it would be below 2% in both the second and third quarters. I do not know about you but I would not be assuring people inflation will be temporary when these are in play.

 Further up the supply chain, food input prices were up, and producer input inflation was around a 10-year high.

Also if we look at the absolute disaster area the concept of rebalancing was for his predecessor it is brave and perhaps courageous to deploy it again.

Over time, this should lead to an easing of inflation as spending is redirected towards sectors with more spare capacity. But, initially, that rebalancing may be uneven.

I note that he is already tilling the ground should he be wrong.

His first point is no more than stating he might be wrong ( rather likely on his track record). Next up we get this.

Second, we could see demand pressures on either side of the most likely outcome.


Third, we could also see wage pressures arising if the number of people in work or seeking work does not return to pre-Covid levels, and inactivity remains at a higher level. A return of labour supply is therefore important.

The last sentence is rather curious in the circumstances. And finally.

Fourth, a further challenge would arise if these temporary price pressures have a more persistent impact on medium-term inflation expectations, which shift to a higher level inconsistent with the target.

That is a type of psychobabble as it is based on what exactly?


We have here the two main courses of the inflation debate with a side order from the Riksbank. The main debate has been about this year and it is the first to break ranks about 2022.  If we start with the Governor’s view we see the asymmetry problem repeated yet again.

It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.

So if things go well you wait and if they are not going well you wait too, oh hang on.

Over the last sixteen months we have used monetary policy decisively to respond to an unprecedented crisis which was disinflationary.

Decisively on one side and on the other “we watch” is the new “vigilant”.

But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level.

There is also an elephant in the room that everyone seems to be ignoring in the same manner as the UK inflation target does. So let us remind ourselves of how we started Tuesday.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide).

Also remember inflation will be higher when the tax cuts ( VAT and Stamp Duty) expire.

Let me end with some good economic news via Sky but with the kicker that it is in an area that has proved highly inflationary.

Nissan announces £1bn ‘gigafactory’ boosting electric car production and creating thousands of jobs.

The Covid Pandemic poses new challenges for the use of GDP

This week has brought rather a flurry of news about UK GDP as we have changed this century and today the last quarter. Let us start with this morning’s headline.

UK gross domestic product (GDP) is estimated to have decreased by 1.6% in Quarter 1 (Jan to Mar) 2021, revised from the first estimate of a 1.5% decline.

The level of GDP is now 8.8% below where it was pre-pandemic at Quarter 4 (Oct to Dec) 2019, revised from a first estimate of 8.7% below.

So a marginal downgrade but not much in the scheme of things. However there is a fair bit going on below the surface including something which I was the first to point out last summer.

Nominal GDP fell by a revised 0.2% in Quarter 1 2021, while the implied deflator increased by 1.4%. Compared with the same quarter a year ago, the implied GDP deflator increased by 4.8%, mainly reflecting an increase in the implied price change of government consumption.

The nominal GDP issue is a consequence so let us zero in on a cause which is the way that the widest inflation measure in the economy has been bounced around by the way we measure real government consumption. Compared to other inflation measures a quarterly rise of 1.4% and an annual one of 4.8% is a lot. For example we were being told back then there was very little consumer inflation.

The Consumer Prices Index (CPI) rose by 0.7% in the 12 months to March 2021, up from 0.4% to February.

Education Education Education

The famous phrase from former Prime Minister Tony Blair has echoed in the GDP numbers.

The downward revision in education output reflects a monthly reprofiling of education output across the first quarter of 2021 because of updated attendance data, and estimates reflecting the effect of remote learners.

We end up with an Alice Through The Looking-Glass situation caused by this.

In volume terms, the measurement of education output is based on cost-weighted activity indices.

In theory a good idea but in practice this has happened.

have required us to keep innovating…….we have reviewed and aligned our measurement approaches …….We have also adapted our measurement for the further school closures and change in policy regime in the first few months of 2021,

Whilst these are worthy efforts you get big swings as for example the initial impact of the changes was to reduce the numbers by £2.3 billion or to reduce that quarters GDP by 0.5%. This time around the change had a smaller impact but it was still this.

The move to remote learning for the majority of pupils was the largest contributor to the 2.1% fall in services output in Quarter 1 2021

Education went from -0.86% to -1.06% in the services numbers via the latest revision.

Nominal GDP

There is a bit of a defeat here for the methodology as we are guided towards ones with no inflation measure or deflator at all.

Nominal GDP estimates – which may be more comparable –show that Canada and the United States are now above their Quarter 4 2019 levels.

There are two sides to this as for example it makes no difference ( okay 0.1%) for Japan as you might expect, But if you compare the UK with Spain it makes an enormous difference. Using the real GDP numbers we have both seen falls of around 9% but using nominal GDP the UK has seen a fall of 3% and Spain 8.7%.


These numbers regularly see significant revisions and we have both the pandemic and the final Brexit move to add to the issues. So we are about as uncertain as we ever are about the latest numbers so let me switch to another issue highlighted in the deeper series.

The UK’s net international investment position liability position narrowed by £56.4 billion to £582.9 billion as the revaluation impact on UK debt securities decreased the value of UK liabilities more than the fall in the value of UK assets.

They do their best but they simply do not know this as it gets worse as you delve deeper.

In Quarter 1 2021, the gross asset and liability positions decreased by £446.5 billion and £502.8 billion respectively. This was mostly because of a large decrease in financial derivative activity as market volatility continued to recede from the height of the coronavirus (COVID-19) pandemic.

So I suggest you take any investment position data with the whole salt cellar. The numbers depend entirely on assumptions which frankly have a tenuous grip on reality and sometimes not even that.


There has been a deeper review of things and it has led to this which does feed into one of my themes. That is that things were not as good pre credit crunch as was recorded at the time.

average annual volume GDP growth over the period 1998 to 2007 is now 2.7%, revised down from 2.9%; average annual volume GDP growth stands at 2.0% from 2010 to 2019, revised up from 1.9%.

A factor in play here has been something I have mentioned before which has been the work of Diane Coyle on inflation in the telecoms sector.

In addition, we have introduced new ways of removing the effects of price changes in both the telecoms and clothing industries. These mean ‘real’ GDP (where we’ve removed the impact of price changes) grew a little less than we previously estimated in the years before the financial crisis and a little more in the years after it.

They hope this will allow them to allow for inflation more accurately.

To give an example, when previously estimating the value of goods produced from a furniture maker over time we would measure the value of the tables being sold, remove the cost of the wood, then adjust for inflation by removing the changing cost of the tables only. Under the new system we will separately be removingthe impact of inflation from the changing cost of the wood and the changing cost of the tables, giving an improved and more detailed estimate of changes in the economy.

That will be interesting to follow but sadly will not help with the education issue because the problem there is that there is no price in the first place.

Also  this change should help with the issue I reported to the Bean Review which was over the lack of detail in services data and trade especially.

we will also introducea new Financial Services Survey, which will give much more detailed information about the activities and outputs of the financial sector, which makes up around 7% of GDP.


As you can see there is much more doubt than we are usually told and we can take a sideways look at another issue. Remember my official complaint about the claimed surge in wages? Well it would appear that the GDP numbers agree with me.

Wages and salaries increased by 0.4% in Quarter 1 2021,

Looking at this series wages growth over the past year is 3% in nominal terms as opposed to the 4.5% in the average earnings series.

Let me switch now to a subject in the news if you follow military matters which in my opinion is an issue for GDP.

New light tanks that have so far cost the army £3.2 billion have been withdrawn for a second time after more troops reported suffering hearing loss during trials,has learnt.All trials involving the Ajax armoured vehicle were paused in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient. ( The Times)

This may end up being a debacle like the Nimrod programme. But how do you measure it in GDP terms? For the income version it is easy as people have been paid so you count it. But for the output version we face the prospect that there will not be any. If you are feeling generous you might make an R&D allowance but of what 10% of what has been spent…. It seems some aspects of military procurement love their Arcade Fire.

If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again

UK house prices surge again

One economic story of the Covid-19 pandemic has been the surge in house prices.Only yesterday we took a look at the way the US Federal Reserve is trying to manage public expectations.  Today we see a further challenge for the vigilant Bank of England.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide)

As you can see they have had a go at doing the Bank of England’s job for it with the mention of what we prefer to call exit effects. But the final sentence rather torpedoes that effort as it points out prices are up nearly 5% since March.

The Nationwide has another go here.

Despite the increase in house prices to new all-time highs,
the typical mortgage payment is not high by historic
standards compared to take home pay, largely because
mortgage rates remain close to all-time lows.

The problem is that for the more thoughtful that is a reminder that mortgage rates and hence interest-rates cannot rise by much without causing what Taylor Swift would describe as “trouble,trouble,trouble”. Also it is kind of them to point out that mortgage payments are a third of take-home pay reinforcing the insanity of the targeted inflation measure ( CPI) ignoring this area. Also in spite of their efforts to tell us everything is fine they cannot avoid a consequence in terms of capital required.

However, house prices are close to a record high relative to
average incomes. This is important because it makes it even
harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time
buyer’s income.

Stamp Duty

We got a hint of what will happen when the holiday here is over from Scotland.

But conditions were more muted in Scotland, which saw a
modest increase in annual growth to 7.1% (from 6.9% last
quarter) and was also the weakest performing part of the UK.
This may reflect that the stamp duty (LBTT) holiday in
Scotland ended on 31 March.

So still growth but much slower reminding us that such holidays simply seem to add any tax gain to prices. So the real winners are in fact existing owners.

By contrast Northern Ireland at 14% and Wales at 13.4% led the rises and would presumably be higher now if we had June numbers rather than quarterly ones.


The Nationwide points out that there has been anther official effort to juice the mortgage market.

The improving availability of mortgages for those with a
small deposit (and the continued availability of the
government’s Help to Buy equity loan scheme) is helping
some people over the deposit hurdle, but it is still very
challenging for most.

Maybe that was in play at least in part in the latest mortgage data from the Bank of England.

Net mortgage borrowing bounced back to £6.6 billion in May. This followed variability in the previous couple of months in anticipation of the reduction in stamp duty ending, which has been extended to the end of June. Net borrowing was £3.0 billion in April, following a record £11.4 billion of net borrowing in March

So a bounce back from these numbers compared to April.

Net borrowing in May was slightly higher than the monthly average for the six months to April 2021 and above the average of £4.2 billion in the year to February 2020.

So a combination of the stamp duty extension and an attempt to make more low deposit mortgages available has pumped up the volume.

If we look further down the chain we see this.

Approvals for house purchases increased slightly in May to 87,500, from 86,900 in April. They have fallen from a recent peak of 103,200 in November, but remain above pre-February 2020 levels. Approvals for remortgage (which only capture remortgaging with a different lender) rose slightly to 34,800 in May, from 33,400 in April. This remains low compared to the months running up to February 2020.

So a small rise and Neal Hudson has looked back for some perspective on them.

Mortgage approvals for house purchase were still 32% higher than recent average (2014-19) in May.


These are another factor in the game because we have seen them soar in the pandemic era as some received furlough payments whilst having lower bills ( no commuting) and less ability to spend due to lockdown. In spite of the increased freedoms it still seems to be happening.

Households deposited an additional £7.0 billion with banks and building societies in May. The net flow has fallen in recent months, and compares to an average net flow of £16.5 billion in the six months to April 2021  and a series peak of £27.6 billion in May 2020. The flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion. ( Bank of England)

So there is money potentially available for house purchase deposits from this source as prospective buyers boost savings or perhaps the bank of mum and dad is more flush with funds.

Whilst we are on the subject of saving we saw more from another source as people who could increased their rate of mortgage repayment.

Gross lending was a little higher at £24.2 billion, while gross repayments dropped to £18.9 billion.

That was of course another example of central bank policy misfiring as a type of precautionary saving acted in the opposite direction to the hoped for one. We see this a lot well except in central banking research.

Consumer Credit

If we look back to the heady pre credit crunch days we can recall that even this area was deployed to boost housing credit as people were able to sign their own income chits. More recently that has been unlikely as we have seen falls but of you hear feet hammering on the floor earlier it was probably at the Bank of England as staff rushed to be first to inform Governor Andrew Bailey about this.

However, for the first time since August 2020, consumers borrowed more than they paid off in May, with net borrowing of £0.3 billion.

We even got some detail from the numbers which is rare. Regular readers will know I have been keen to track car finance movements but we only get an occasional glimpse behind the curtains.

The increase in net consumer credit reflected an additional £0.4 billion of ‘other’ forms of consumer credit, such as car dealership finance and personal loans. Credit card lending remained weak compared to pre-February 2020 levels, with a net repayment of £0.1 billion.


The monetary push from the Bank of England goes on as we note the reason for the Nationwide being able to claim that mortgage repayments are affordable.

The rate on the outstanding stock of mortgages remained unchanged at a series low of 2.07%……..The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 2 basis points to 1.90% in May.

It was no surprise we saw a nudge higher in May but since then not much has happened in terms of bond yields and hence fixed-rate mortgages. As to supply of mortgages we saw the Bank of England funnel cash to the banks only for the furlough schemes to mean they had plenty of new deposits too.

As ever Bank of England research is focused on this area and if you read between the lines you see that banks rip customers off if they can. Their way of explaining that is highlighted below.

What drives these patterns of customer choices and price dispersion? We show that customers facing large price dispersion are typically those borrowing large amounts relative to both their income and the value of their house. These tend to be younger customers, and are more likely to be buying a house for the first time. Lenders thus price discriminate, offering menus with greater price dispersion to customers who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere.


Are US house prices facing a boom and then bust?

This morning has brought a curious intervention from the President of the Boston Federal Reserve. Eric Rosengren has been interviewed by the Financial Times and gets straight to it.

A senior Federal Reserve official has warned that the United States cannot afford a “boom-and-bust cycle” in the housing market that would threaten financial stability, referring to growing concern about the central bank’s rising property prices.

The curious bit starts with the boom element which seems pretty clear from the development of house prices so far this year.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 13.2% annual gain in March, up from 12.0% in the previous month. The 10-City Composite annual increase came in at 12.8%, up from 11.7% in the previous month. The 20-City Composite posted a 13.3% year-over-year gain, up from 12.0% in the previous month.

I guess he must be grateful that Boston is not one of the leaders of the pack.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in
March. Phoenix led the way with a 20.0% year-over-year price increase, followed by San Diego with a
19.1% increase and Seattle with a 18.3% increase.

Although with prices rising at an annual rate of 14.9% it is above the average. Also we see that the monthly rate of increase is on a bit of a charge.

Before seasonal adjustment, the U.S. National Index posted a 2.0% month-over-month increase, while
the 10-City and 20-City Composites both posted increases of 2.0% and 2.2% respectively in March.

Also these moves are very large in historical terms.

“More than 30 years of S&P CoreLogic Case-Shiller data put these results into historical context. The
National Composite’s 13.2% gain was last exceeded more than 15 years ago in December 2005, and
lies very comfortably in the top decile of historical performance. The unusual strength is reflected
across all 20 cities.

So this is unequivocally a boom so in that sense we are half way there.

What else did he say?

He raised a dangerous issue from the Fed’s point of view.

“It’s very important for us to get back to the 2 percent inflation target, but the goal is for that to be sustainable,” Eric Rosengren, president of the Boston Federal Reserve, told the Financial Times. And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate..

The reason why it is dangerous is that real estate is not in the inflation target the much more friendly owners equivalent rent of residencies is instead and it is growing at an annual rate of 2.1% and has been rising at a monthly rate of 0.2% to 0.3%. So very different to the house prices it is supposed to proxy and of course it does not exist and is never paid. So they are at risk of being accused of making the numbers up because in this instance they have and at 23.8% of the index by weight it is a significant amount.

Rather curiously for the FT which is a vociferous supporter of the rental equivalence above it puts the boot into it via the number below.

According to data from the National Association of Realtors last week, the median price of existing home sales rose 23.6 percent year on year in May, topping $350,000 for the first time.

Even Rosengren himself cannot dodge the flying bullets.

Rosengren said that in the Boston real estate market, it has become common for cash-only buyers to prevail in bidding competitions, and that some have refused home inspections to gain an advantage with sellers.

It is kind of him to make my point for me because the more cash-only buyers there are the more my case that house prices should be in the inflation index gets strengthened.

It is hard not to have a wry smile as we note he is not bothered much about the poor buyers who may be over paying but instead focuses his concern on the precious.

“You don’t want a lot of glut in the housing market,” Rosengren said. “I would just highlight that boom and bust cycles in the real estate market have occurred in the United States many times, and around the world, often as a source of financial stability concerns.”

A Problem

This comes from Fed policy which has been at the minimum house price friendly. The most explicit form of this is below and the emphasis is mine.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

The Fed has been chomping away on these and now owns some US $2.35 trillion dollars worth. Even in these inflated times that is a lot of money and as to its effect let me take you back to January 2009 and the then Chair Ben Bernanke.

 Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation.  Lower mortgage rates should support the housing sector.

That is as near as we will get to an official admission that the plan was to sing along with Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

These days the official Fed statement is much more euphemistic and circumspect.

These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Taper Talk

We remain in the dance where they are talking about possibly doing something at some unspecified date.

Federal Reserve officials are now beginning to discuss reducing bond purchases. “When appropriate” to begin that process, Rosengren said, purchases of mortgage-backed securities should be reduced at the same rate as Treasury purchases. This means that direct support for housing finance will end more quickly.

“This means that we will stop buying MBS before we stop buying Treasuries,” he said.

So he would reduce the programmes dollar for dollar which adds another level to this as rather than simply stopping purchases he would start to turn the tap off. So this saga seems set to run and run which is revealing. Maybe we might reach the end of the beginning this year.

Given the rapid recovery, Rosengren said, “It is likely that the conditions to consider whether we have made more substantive progress before the start of next year will be met.”

We finish with that central banking standard of the two-handed economist.

“There is a great deal of uncertainty in the forecast,” Rosengren said. Some people will grow very fast [and] The terms of the tightening policy may apply sooner. And other people will think the recovery will be a little slower.”


This is what you call a hot potato. The US Federal Reserve threw everything it had at the US housing market in March 2020 and is now being forced to at least acknowledge the consequences. It can no longer get away with only pointing to claimed wealth effects as many see this.

U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.

Through this lens.

More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%……..The Americans who gained the most during 2020 were the ones who had much more wealth to begin with. Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.

From that we can answer my question at the top of this piece. We have yes to the boom but the Federal Reserve response to any bust will be “over my dead body” which means that they have made the same mistake as they did in the credit crunch.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby ( Elvis Presley)


A different tack this week as I was interviewed by Jana Hlistova for The Purse Podcast.