What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. ( Mining.com)

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.

Comment

We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….

 

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A solid day for the UK economy or another trade disaster?

Today has opened with some positive news for the UK economy. The opening salvo was fired just after midnight by the British Retail Consortium.

In September, UK retail sales increased by 1.9% on a like-for-like basis from September 2016, when they had increased 0.4% from the preceding year……..On a total basis, sales rose 2.3% in September, against a growth of 1.3% in September 2016. This is above the 3-month and 12-month averages of 2.1% and 1.7% respectively.

So we have had 2 months now of better news on this indicator although it is a far from perfect guide to the official data series mostly because it combines both volumes and prices as hinted below.

September saw a second consecutive month of relatively good sales growth which should indicate welcome news for retailers and the economy alike. Looking beneath the surface though, we see that much of this growth is being driven by price increases filtering through, particularly in food and clothing, which were the highest performing product categories for the month.

Anyway for all the talk of price increases if you look at the figures they cannot have been that high and we have also got a small bit of good news on that front. From the BBC.

Car insurance premiums have dipped for the first time in more than three years, but the respite for drivers will be short-lived, analysis suggests.

Prices fell by 1%, or £9, in the third quarter of the year compared with the previous three months, according to price comparison website Confused.com.

Tourism

The lower value of the UK Pound £ seems to have given the UK economy something of a boost as well.

Tourism is booming in the UK with nearly 40 million overseas people expected to have visited the country during 2017 – a record figure.

Tourist promotion agency VisitBritain forecasts overseas trips to the UK will increase 6% to 39.7 million with spending up 14% to £25.7bn this year.

Also we seem to be holidaying more at home ourselves.

Britons are also holidaying at home in record numbers.

British Tourist Authority chairman Steve Ridgway said tourism was worth £127bn annually to the economy……From January to June this year, domestic overnight holidays in England rose 7% to a record 20.4 million with visitors spending £4.6bn – a rise of 17% and another record.

Over time this should give a boost to the UK trade figures which feel like they have been in deficit since time began! Especially if numbers like the one below continue.

Spending on UK debit cards overseas was down nearly 13% in August compared with the same month in 2016.

Production

If we move to this morning’s official data series we see that production is in fact positive.

In August 2017, total production was estimated to have increased by 0.2% compared with July 2017………In the three months to August 2017, the Index of Production was estimated to have increased by 0.9%……Total production output for August 2017 compared with August 2016 increased by 1.6%.

It is being held back by North Sea Oil & Gas output.

The fall of 2.0% in mining and quarrying was due mainly to oil and gas extraction, which fell by 2.1%. This was largely due to maintenance during August 2017.

The maintenance season is complex is we had a good June followed by weaker months so we do not know if this is part of the long-term decline in the area or simply the ebb and flow of the summer maintenance schedule.

Tucked away in the revisions was some good news as new data sources raised the index for the second quarter of 2017 from 101.6 to 102.1. We also saw a continuing of the trend towards services as production’s weighting in the UK economy fell from 14.65% to 13.95% or another example of the trend is your friend.

Manufacturing

This was the bright spot in the production data set with it rising by 0.4% on a monthly basis and by the amount below on an annual one.

with manufacturing providing the largest upward contribution, increasing by 2.8%

We actually beat France (2.7%) on a year on year and monthly basis which poses food for thought for the surveys telling us it was doing “far,far better ” as David Byrne would say. A driver of this is shown below and the numbers are on a three-monthly basis.

other manufacturing and repair provided the largest contribution, rising by 3.8%, due mainly to an increase of 13.1% in repair and maintenance of aircraft and spacecraft.

We are repairing spacecraft, who knew? If we look at the pattern we see that the official data seems to be catching up with what had previously been much more optimistic survey data from the CBI and the Markit business surveys.

Here is the overall credit crunch era situation which is now a little better than we thought before due to revisions and the recent manufacturing growth.

both production and manufacturing output have risen but remain below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.9% and 3.0% respectively in the three months to August 2017.

Construction

There were even some better numbers from this sector.

Construction output grew 0.6% month-on-month in August 2017, predominantly driven by a 1.7% rise in all new work……Compared with August 2016, construction output grew 3.5%

However I have warned time and time again about this data set and tucked away in the detail was a clear vindication of my scepticism.

The annual growth rate for 2016 has been revised from 2.4% to 3.8% and the leading contribution to this increase is infrastructure, which itself has been revised from negative 9.2% to negative 3.2%.

The ch-ch-changes are far too high for this series to be taken that seriously and this is far from the first time that this has happened.

Trade

This invariably brings bad news as here we go again.

Between the three months to May 2017 and the three months to August 2017, the total UK trade (goods and services) excluding erratic commodities deficit widened by £2.9 billion to £10.8 billion.

The bit that has me bothered about this series apart from its “not a national statistic” basis is this when we have reports from elsewhere that exporting is doing well as we have seen earlier today from the manufacturing and tourism news.

total trade (goods and services) exports decreased by 1.4% (£2.1 billion) ( in the latest 3 months).

Also it is hard to have much faith in primary income and investment position data which has been revised enormously especially in the latter case. I know we have got used to large numbers but a change of £500 billion?

The trade figures themselves have been less affected but surely the tuition fees change was known and should have been anticipated?

The biggest revision is in 2012 (£4.0 billion), with the inclusion of tuition fees having the greatest impact, followed by the inclusion of drugs data into the estimates of illegal activities.

Comment

Let us start with the good news which is that the data in the last 24 hours for the UK economy has been broadly positive. This is especially true if we compare it with the REM style “end of the world as we know it” which manifests itself in so much of the media. Also it is good that the UK Office for National Statistics has a policy of reviewing and trying to improve its data.

The bad news is that some of the large revisions lately bring into question the whole procedure. I mentioned last week the large upwards revision in UK savings which changed the picture substantially there which was followed by unit on labour costs being estimated as growing annually by 1.6% and then 2.4%. We now look at the construction sector which has given good news today and the balance of payments bad news. Both however have seen such large revisions that the true picture could be very different.

It is hard to believe that even those in the highest Ivory Towers could have any faith in nominal GDP targeting after the revisions but it pops up with regularity.

 

When will the UK banks ever fully recover from the credit crunch?

We are now more than a decade away from the first real crisis of the credit crunch era in the UK. That came on the 14th of September 2007 when Northern Rock applied for and received a liquidity support facility from the Bank of England as customers queued at its various branches in an effort to withdraw their deposits. Let us have a brief smile at this from the statement back then.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

It was in fact so solvent that it was nationalised early in 2008! In fact we see another feature of the crisis highlighted by this from the BBC back then.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Hence the advent of more modern definitions of the word temporary as of course the bad part of Northern Rock still is in public hands.

Royal Bank of Scotland

In October 2008 RBS joined the bail out party. From the UK Government.

The Government is making capital investments to RBS, and upon successful merger, HBOS and Lloyds TSB, totaling £37 billion.

“Successful merger” eh?! I will look at Lloyds later but let us continue with RBS which in a clear example of failure was never actually nationalised as the UK establishment indulged its fantasy that enormous investments could be at arm’s-length. Indeed as the National Audit Office ( NAO ) tells us below the government in fact ended up have to have other goes at backing RBS,

To maintain financial stability at the height of the financial crisis, the government injected a total of £45.5 billion into the Royal Bank of Scotland (RBS) between October 2008 and December 2009.

Oh and….

The government intended to return RBS to the private sector as soon as possible

The NAO also calculated a cost for the investment.

The overall investment was equivalent to 502 pence per share.

Although if all the costs are factored in the cost gets even higher.

We have calculated that if the costs of financing the intervention are also taken into account, the government would have had to sell the shares at 625 pence each to break even.

Still with the UK economy having had 4 years of solid economic growth and stock markets around the world at or near all time highs then RBS must be benefiting surely? No as the price this morning is 272 pence per share. This makes even the 2015 sale of some shares look good.

On 4 August 2015, the government sold 630 million shares in RBS (5.4% of the bank) to institutional investors, reducing government’s holding to 72.9%.1 The shares sold for 330 pence each. This represented a 2.3% discount to the market price and raised £2.1 billion.

So a loss but less of a loss than we would see now. Except let us return to a fundamental problem which is that things are supposed to be better now! Or as the International Financing Review put it back in 2012.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Still along the way some have at least managed to keep a sense of humour as I pointed out on the 30th of November last year.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS ( @BlueBullet January 2014).

Yesterday we saw a change in the official response as Sky News reported this.

RBS Chairman has told Sky News taxpayers will not get all of their money back from Government’s bailout following the 2008 financial crisis.

I have a real problem with this which is that any form of honesty takes about a decade. This is far from a UK only problem as foreign bank bailouts have seen their share of misrepresentations and outright lies as well. The problem is the cost as let us start with the £12 billion Rights Issue of 2012 which was based on a prospectus that must have had more holes in it than a swiss cheese. We have seen many scandals which never seem to quite come to fruition as official reports remain a secret. Yet we are forever told that the bailouts were to raise trust in the banks.

Lloyds Bank

This had a more successful effort at selling the shares previously owned by the UK taxpayer. We even got our money back although care is needed as saying that assumes the money was pretty much free which back then it certainly was not. However over the weekend other problems have dogged Lloyds Bank and we are back to bailed out banks behaving badly. Here is the Financial Times on the financial scandal that unfolded at the Reading HBOS  ( Halifax Bank of Scotland) branch.

Yet Lloyds showed little interest in finding out what happened. Not only did the bank brush off Reade’s warnings at the time, but other victims who unearthed evidence of wrongdoing were treated equally dismissively. Far from calling in the police or regulatory authorities, Lloyds maintained right up until the trial’s conclusion that its own internal inquiries had revealed no sign of any criminality.

In other words the bank was able to behave for quite a long time as it was above the law and in fact even now seems able to be its own judge and jury in spite of the fact that it is plainly unfit to do so.

Nothing else can explain the fact that the task of examining Lloyds’ conduct has been given to . . . Lloyds. The bank has commissioned a former judge, Dame Linda Dobbs, to review its response to the Reading incident and whether it complied with all applicable rules and regulations. When complete, this will not be made public and will go only to the board, with a copy being dispatched to the Financial Conduct Authority.

Simply shameful.

Barclays

Barclays escaped an explicit bailout via an investment from the Qataris. That investment provoked all sorts of issues as it appeared some shareholders (them) were more equal than others. As Reuters put it in June.

The SFO charged Varley, Jenkins, the ex-chairman of its Middle East investment banking arm, Kalaris, a former CEO of the bank’s wealth division and Boath, a former European head of financial institutions, after investigating a two-part fundraising that included a $3 billion loan to Qatar.

What could go wrong with lending to someone who buys your shares? Oh and you pay some sweeteners as well. Let us move on noting that Barclays is also in court with Amanda Staveley who arranged another share deal with Abu Dhabi. Added to this is the fact that the current chief executive Jes Staley responded to a whistle-blower by attempting to unmask the person making the claim, thus breaking the most basic tenet of how to deal with such a situation.

The current state of play is summed up by this in the Financial Times.

Two years ago, Mr McFarlane set a target of doubling Barclays’ share price. But since then it has fallen by more than a quarter. The chairman has told colleagues he aims to stay at least until the shares regain their lost ground.

The words of Lawrence Oates seem both appropriate and inappropriate.

“I am just going outside and may be some time.”

As he faced troubles with courage and self-sacrifice we watch bankers facing trouble with denial and self-aggrandisement.

Comment

The bank bailouts were presented as saving the economy but as time has gone by we are increasingly faced with the issue that in many ways “the precious” has been prioritised over the rest of the economy. The claim of building trust in the system has had Fleetwood Mac on the sound system.

Tell me lies
Tell me sweet little lies
If I could turn the page
In time then I’d rearrange just a day or two
Close my, close my, close my eyes
But I couldn’t find a way
So I’ll settle for one day to believe in you
Tell me, tell me, tell me lies
Tell me lies

Now we find that there has been some progress ( Lloyds back in the private sector and some parts of Northern Rock and Bradford and Bingley sold) but also a long list of failures. How was nobody at the top responsible for some of the largest examples of fraud in human history? We are forever being told the world was “saved” but the reality was that it was what continue to look like zombie banks were saved at the cost of ossifying our economic system. To my mind it is one of the causes of our productivity problem.

It is clear to me that this industry has seen one of the clearest cases of regulatory capture that you could wish not to see.

 

 

 

 

Will car loans be the canary for UK unsecured credit?

Yesterday the news hounds clustered around one piece of economic news as they caught up at least tangentially with something we have been looking at for some time. From the Society of Motor Manufacturers and Traders.

UK new car market falls for sixth consecutive month in September – down -9.3% to 426,170 units. First time the important September market has fallen in six years.

This will have had an impact in various areas as for example if you happened to be an unreliable boyfriend style central banker looking for a reason to cancel a proposed Bank Rate rise for the third time you might think you have struck gold. However we were expecting trouble because as I pointed out on the 22nd of August there had to be a reason why manufacturers were offering what they call incentives but we call price cuts?

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

That issue has been added to by the uncertainty over what is going to happen to older diesels of the sort I have.

Confusion surrounding air quality plans has inevitably led to a drop in consumer and business demand for diesel vehicles, which is undermining the roll out of the latest low emissions models and thwarting the ambitions of both industry and government to meet challenging CO2 targets.

Back in the day I was told my Astra was efficient and low emission but let us move on whilst noting that official credibility in this area is very low. Registrations had been falling for 6 months compared to the year before so that we now find we have stepped back in time to 2014.

Year-to-date, new car registrations have fallen -3.9%. But, overall, the market remains at a historically high levels with over 2 million vehicles hitting UK roads so far this year.

What does this mean?

This is more of a consumption issue for the UK economy than a production or manufacturing one. You see in the year to August some 78.4% of UK car production was for export so whilst there is a downwards impact it is more minor than might otherwise be assumed. Ironically a fall in UK demand affects producers abroad much more as this from the European body indicates.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

For example Germany exported 809,853 cars to the UK in 2015 according to its trade body. Actually it may not be the best of times to be a German car manufacturer. From Automotive News Europe.

FRANKFURT — New-car registrations in Germany fell 3.3 percent in September as continued uncertainty over the future of diesel-powered cars hit demand.

The issue is complex as much manufacturing these days is of parts rather than complete cars. For example the UK engine industry has had a good 2017 but it is more domestic based so it will need more months like August if it is to carry on in such a manner.

Engine production rises 11.9% in August with more than 150,000 made for export and home markets. Overseas demand drives growth in the month, up nearly 20% compared with last year.

So we advance on knowing that there will be an effect on consumption and a likely smaller one on manufacturing although the latter is more unpredictable. What we will see is a reduction in imports which will boost GDP in an almost faustian fashion as the other factors lower it.

Car loans

So far there is nothing to particularly worry a central banker as after all it is not as if manufacturing or consumption are as important as banking is to them. However there is a catch and maybe the car manufacturers have been brighter than you might otherwise think. From the 18th of August.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.

Now if we return to the real world the concept of prudential regulation is of course very different as after all it was not that long ago that so many banks needed large bailouts. But have the car manufacturers been very cunning in making themselves look like “the precious” as in the banks?

So much of the car market has gone this way that you could question what registration actually means? It used to mean a car was bought but these days is vastly more likely to mean it has been leased.

The FLA is the leading trade association for the motor finance sector in the UK. In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

Today we were updated on how this is going?

New figures released today by the Finance & Leasing Association (FLA) show that new business volumes in the point of sale (POS) consumer new car finance market fell by 8% in August, compared with the same month in 2016, while the value of new business was up by 2% over the same period.

So in nominal terms they are doing okay so far but the real numbers are down. The response has been the normal “extend and pretend” of the finance industry where trouble is on the horizon.

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

So as the Bank of England Financial Policy Committee Minutes observed earlier this week if we look back there has been quite a party.

Growth in UK consumer credit had slowed a little in recent months but remained rapid at 9.8% in the year to July 2017. This reflected strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans. Growth of consumer credit remained well above the rate of growth in household disposable income.

So that is now slowing and likely will be accompanied by falling used car prices as time progresses. Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower. Ironically this could easily be the sort of deflation scenario that central bankers are so afraid of as we note the risk of both falling volumes and prices. That is bad for debt which of course the car companies are carrying plenty of.

Term Funding Scheme

The problem is that the bubble in car finance has been fed by the easy credit policies of the Bank of England. Last August it gave all this another push with its Bank Rate cut and extra QE. But personally I think the real push came from the Funding for Lending Scheme of the summer of 2013 which is now the larger Term Funding Scheme. It went into the mortgage market and some washed into the car market and here we are. Unless we were all going to have 2 cars each there had to be a limit.

Comment

So we see issues in the real economy of a nudge lower to consumption and a smaller impact on production with ironically a fall in imports. However as we see lower prices and lower volumes the real issue is how the credit market which has built up copes. We are of course told it is “resilient” and that the Bank of England is “vigilant” and the latter may for once be true as after all it hardly wants word to get around that it was there 3/4 years ago with some matches and a can of petrol! How about QE for car production? Oh and a government scrappage scheme for diesels as well…….

 

 

Will the Spanish economic boom be derailed by separatism?

There is a truism that political problems invariably follow economic ones. If that is true in Spain at the moment then there has been quite a lag as it was several years ago now that the consequences of the Euro area crisis reached a crescendo. If we look back we see the economy as measured by GDP peaked at 103.7 in 2008 and then fell to 100 in the (benchmark) 2010 as the credit crunch hit. But then the Euro area crisis hit as GDP fell to 96.1 in 2012 and 94.5 in 2013 and the latter year saw the unemployment rate rise above 26%. So that was the nadir in economic terms as a recovery began and saw GDP rise again to 95.8 in 2014 and then 99.1 in 2015 followed by 102.3 in 2016.  So we see that in essence there has been something of a lost decade as earlier this year the output of 2007 was passed as well as a recent strong recovery. If economics was the driver one might have expected political issues to arise in say 2014.

What about now?

At the end of last week the Bank of Spain published its latest projections for the economy. Firstly it is nice to see that they have fallen in line with my argument that the lower oil price provided a boost to the Spanish economy mostly via consumption.

In particular, compared with the expansionary fiscal policy stance of the period 2015‑16 and the declines in oil prices observed between mid‑2014 and 2016 Q1

Of course that is a clear contradiction of the official inflation target of 2% per annum being good for the economy but I doubt many will point that out. You may note that they try to cover off the consumption rise as a response to the crunch.

Moreover, the expansionary effect resulting, in recent years, from certain spending (on consumer durables) and investment decisions being taken after their postponement during the most acute phases of the crisis is expected to gradually peter out.

Factoring in everything it expects this.

Indeed it is estimated that, in 2017 Q3, GDP growth could have decelerated somewhat, as anticipated in the June projections. As a result of all the above, it is estimated that, after growing by 3.1% this year, GDP will grow by 2.5% in 2018 and by 2.2% in 2019.

A driver of the economic growth seen so far has been export success.

Accordingly, for example in 2016, GDP growth was more reliant on the external component than had been estimated to date.

Also there are hopes that this will continue.

The data on the Spanish economy’s external markets in the most recent period have been more favourable than was expected a few months ago.

Although there is a worry which will be familiar to readers of my work.

owing to the exchange rate appreciation effect,

Oh and there is a thank you Mario Draghi in there as well!

by the continuing favourable financial conditions.

What could go wrong? Well……

Turning to the risks surrounding these GDP growth projections, on the domestic front, the political tension in Catalonia could potentially affect agents’ confidence and their spending decisions and financing conditions

This issue is currently playing out in the banking sector where some are fearful of no longer being backed by the Bank of Spain and hence ECB. Banco Sabadell has just announced it will have a board meeting this afternoon to consider moving its corporate address to Alicante in response. Of course if you wanted custom in Catalonia this is not the way to go about it as we mull the words of the Alan Parsons Project.

I just can’t seem to get it right
Damned if I do
I’m damned if I don’t

What about the business surveys?

Firstly the Euro area background is the best it has been for some time.

The final September PMI numbers round off an impressive third quarter for which the surveys point to GDP rising 0.7%.
The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull.

However that sort of economic growth has been something of a normal situation for Spain in recent times. Let us look at the detail for it.

New orders rose across the service sector for the fiftieth month running, with the latest expansion the strongest since August 2015. Where an increase in new business was recorded, this was attributed by panellists to improving economic conditions.

From this there was a very welcome side-effect.

Responding to higher workloads, service providers increased their staffing levels solidly in September

If we move to the economy overall then we see this.

Taken alongside faster growth in the manufacturing sector, these figures point to a positive end to the third quarter of the year. Over the quarter as a whole, we look to have seen only a slight slowdown from Q2, suggesting a further robust GDP reading is likely. IHS Markit currently forecasts growth of 0.7% for Q3.”

Today’s Euro area survey on retail sales does not reach Spain but yesterday’s retail sales release shows they are struggling relatively with annual growth in August at 1.7% but retail sales are erratic.

Population and Demographics

There has also been some better news on this front as highlighted by this below.

The resident population in Spain grew in 2016 for the first time since 2011. It stood at 46,528,966 inhabitants on January 1, 2017, with an increase of 88,867 people.

This matters because the decline in population exacerbated a problem highlighted by Edward Hugh back in 2015. One of his worries was the ratio of births to deaths which had been shifting unfavourably and was -259 last year. This led to this and the emphasis is mine.

Furthermore, INE projections suggest the over-65s will make up more than 30% of the population by 2050 (almost 13 million people) and the number of over-eighties will exceed 4 million, thus representing more than 30% of the total 65+ population.
International studies have produced even more pessimistic estimates and the United Nations projects that Spain will be the world’s oldest country in 2050, with 40% of its population aged over 60. At the present time the oldest countries in Europe are Germany and Italy, but Spain is catching up fast.

Comment

Spain is an example of what is called a V shaped economic recovery as it has bounced strongly as opposed to the much sadder state of play in Greece which has seen an L shaped or if you prefer little bounce-back at all. If you were using economics to predict secessionist trouble you would be wrong about 100 times out of 100 using it. However if we move to what caused trouble in Greece when it had its recent political crisis we see that the driving force was the monetary system of which a signal is that the ECB is still providing over 32 billion Euros of Emergency Liquidity Assistance to it.

So as we stand the impact on the Spanish economy is small as businesses may be affected but moves if they physically happen will boost GDP and shift mostly from one region to another. However if there is any large movement of funds then all this changes as eyes will turn to the banking system at a point when people are wondering if and not when the Bank of Spain will step in? After all would it help a bank that is no longer in Spain? There are rumours that UK banks could have gone to the ECB if they had back in the day thought ahead about their locations. But imagine the scenario if a bank in Catalonia tries to go to the ECB when there is doubt over whether it was in the European Union?

Personally I would expect, after a suitable delay, the ECB would step in but the price would be high as Greece has found out from the years of the Troika which have been so bad they change their name to the institutions.

Tomorrow

I have a morning appointment with my knee specialist so I intend to post an article but it could easily be somewhat later than usual.

 

 

 

 

The stability of the UK economy is quite remarkable

Today gives us another opportunity to take a look under the engine cover of the UK economy and to do so considering the stated position of the Bank of England.

If the economy continues on the track that it’s been on… we can expect interest rates would increase somewhat.

Those were the words of Bank of England Governor Mark Carney on the BBC’s Today programme on Radio Four last week. Listeners will have been wondering if it will be third time lucky for his “Forward Guidance” as he has tried this tack before? More tucked away at the end of last week was a consequence of the actions of Governor Carney and his colleagues in August 2016 when they cut Bank Rate to 0.25% added a “Sledgehammer” to the QE ( Quantitative Easing ) programme and added a soupcon of credit easing with the Term Funding Scheme. Please remember the implications of giving banks cheap funding as you read this from the BBC about the interview with Governor Carney.

“What we’re worried about is a pocket of risk – a risk in consumer debt, credit card debt, debt for cars, personal loans,” he told BBC Radio 4’s Today Programme.
He said banks had “not been as disciplined as they should be” in their underwriting standards and pricing of this debt.

How is that going?

This is the data up to the end of August from the Bank of England.

The annual growth rate of consumer credit remained at 9.8%, with a flow of £1.6 billion in August.

As you can see this is a triumph for the “Sledgehammer QE” of Chief Economist Andy Haldane who wanted precisely this. Oh hang on sorry, it is now the result of unexpected behaviour by the banking system and is a worry for the Bank of England.

Also we see that monetary growth has picked up more generally.

Broad money increased by £16.6 billion in August (Table A), the highest flow since September 2016. Within this, flows for all sectors were positive (Tables B-D) with the largest contribution from non-intermediate other financial corporations (NIOFCs) (Table D).

The monthly numbers are very erratic but this was a surge but the overall picture remains one of strong unsecured credit growth and growth in the wider aggregates that may be picking up again. What is in doubt is the mix that this monetary growth will provide between economic growth and inflation but it suggests that if inflation is 3% economic growth will be 2%.

Remember when we were told that all of this was for smaller businesses or SMEs? Well lending to smaller businesses fell by £200 million in July and £100 million in August.

Business Surveys

Today saw the last of the PMI business surveys for the UK and it was a case of steady as she goes.

The headline seasonally adjusted IHS Markit/CIPS Services PMI® Business Activity Index posted 53.6 in September, up from an 11-month low of 53.2 in August. Looking at Q3 as a whole, growth has eased slightly since the previous quarter (the index averaged 54.3 in Q2, compared to 53.5 in Q3).

So the changes are much less that the likely error term. This was reflected in the overall picture described.

The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth.

Markit have a default setting of downbeat on the UK economy which is a switch of sorts as they used to treat France like that. But there is an interesting perspective in the detail of their report.

The rise in price pressures will pour further fuel on expectations that the Bank of England will soon follow-up on its increasingly hawkish rhetoric and hike interest rates. However, the decision is likely to be a difficult one, as the waning of the all-sector PMI in September pushes the surveys slightly further into territory that would normally be associated with the central bank loosening rather than tightening policy.

The inflation picture

We learnt more about this at midnight from the British Retail Consortium or BRC.

In September, Shop Prices reached the shallowest deflation level in the last four years of 0.1%, with prices falling just 0.1% compared to a 0.3% year-on-year decline in August. Non-Food price deflation accelerated to 1.5% in September, from 1.3% in August, although Non-Food prices are less deflationary than in September 2016, when they had fallen 2.1% year on year. Food prices increased in September to 2.2%, up from 1.3% in August.

So food prices are rising but other prices are falling as we seem set to shift from disinflation to inflation in the retail sector although the BRC gets itself into quite a mess on this subject.

Overall shop price deflation reached an all-time low in September with prices now teetering on the edge of inflation.

The food inflation is being driven by butter prices ( a worldwide issue presumably leading to happy days in New Zealand) and on a personal level I note that the rises in the price of broccoli we looked at a while back don’t seem to have reversed much if at all.

Government policy

We should find out more later about this. We are already expecting a boost to the Help To Buy scheme which has led to this.

3,858 first time buyers earning over £100k appear to have had Help2Buy…  ( @HenryPryor )

Also the mind boggles as to what the with a household income below £20,000 per annum were able to buy! Maybe it’s because I am a Londoner………

Also the new £10 billion will be an expansion on what has gone so far ( figures to June 2017).

The total value of these equity loans was £6.72 billion, with the value of the properties sold under the scheme totalling £32.37 billion.

Perhaps we will see more emphasis on social housing later as well.

Comment

Imagine you are an “unreliable boyfriend” what is the worst scenario? It is of course the sort of stability that the UK economy seems to be providing as it seems fairly likely that the first three-quarters will each provide GDP ( Gross Domestic Product) growth of 0.3%. Of course the unreliable boyfriend in question will be hoping we forget his Forward Guidance for what 2017 would be like and instead focusing on his heroic efforts which prevented that. The same heroic efforts he now hints he will reverse. As he spins like a top we are reminded that in monetary policy of a version of  the Bananarama critique.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

Putting UK interest-rates back where they were clearly suggests that they should never have been cut in the first place. Even worse an unsecured credit boom has been fed. Oh and even the ratings agencies are raising the issue of credibility.

S&P troll BOE

S&P: WE BELIEVE RECENT STATEMENTS BY BOE AND CARNEY ARE PRIMARILY AIMED AT PROPPING UP GBP TO REDUCE IMPORTED INF PRESSURES ( @stewhampton )

Who owns the Swiss National Bank?

A feature of pretty much any discussion about a central bank is that someone invariably pops up and claims that it is privately owned. This comes with the implication that dark forces are at work. Mostly it is simply not true but there are some cases which give food for thought and one of those is the case of the Swiss National Bank. You see it is possible to purchase a share in its equity capital and so far this morning some 14 shares have traded with the current price being 3965 Swiss Francs. If dark forces are at play this morning they have a lot of work to do as we look at the equity capital according to the

The share capital of the National Bank amounts to 25 million Swiss francs. It is divided into 100,000 registered shares with a nominal value of 250 Swiss francs each. The shares are fully paid up.

Also to have any real power you would either need to mislead the regulations or be part of a group as there is a limit to how many voting shares an individual can hold.

A shareholder’s registration is limited to a maximum of 100 shares. This limitation shall not apply to Swiss public-law corporations and institutions or to cantonal banks pursuant to Article 3a of the Federal Act of 8 November 19341 on Banks and Savings Banks.

Mind you as Swissinfo.ch pointed out a year ago not everyone is bothered by this.

The prime suspect is Theo Siegert, a German professor and business expert who sits on the boards of numerous companies. Siegert owned 6.6% of the share capital of the SNB at the end of last year, making him the second-largest shareholder behind the canton of Bern.

If we move to policy we see that we have a curious situation as of course investors are buying shares in what these days is a hedge fund which holds a lot of equities. This particular hedge fund has some 747 billion Swiss Francs in foreign currency investments of which around 20% is in equities.

Swissinfo.ch updated us a year ago on who owned the shares back then.

Cantons own 45% of stock, cantonal banks 15% and private investors (individuals or institutions) the remaining 40%.

What has happened?

The share price has given the impression that as Todd Terry would put it there is “something going on”. Here is the Wall Street Journal from the 21st of September.

Less than a month after its stock smashed through the 3,000-franc-a-share barrier, SNB shares hit an intraday high of 4,324 on Wednesday and were trading as high as 4,600 on Thursday. The stock has tripled in value from a year ago, repeatedly confounding market watchers by regularly hitting records.

So far this year, SNB shares are up about 160%, compared with an 11% gain for the SMI stock-market index of Swiss blue-chip companies. The broader Stoxx Europe 600 is up only 5.7% on the year.

If we look back the share price was in recent years mostly between 1000 and 1100 Swiss Francs so something has changed. The first wave was in August and September last year when the price rose to 1750 Swiss Francs and the next began towards the end of July when the 2000 Swiss Franc barrier was broken. As you can see progress was swift after that. Rather an irony to see a central bank share price surge like well “a boy in a bubble” isn’t it?

Backing

There is a dividend payment as shown below.

 

Subject to the Annual General Meeting’s approval of the proposed profit appropriation, a dividend not exceeding 6% of the share capital is to be paid from net profit (art. 31 para. 1 NBA). The dividend is CHF 15 (gross) and CHF 9.75 (net) per share, after deduction of withholding tax.

Interestingly the SNB itself feels that its shares should be traded like a bond.

Due to the legally stipulated maximum dividend of 6%, the price of the SNB share usually develops along similar lines to a long-term Confederation bond with a 6% coupon.

That gives us grounds for a surge in the price but leaves us with an awkward timing problem. The Swiss ten-year government bond yield went negative at the beginning of 2015 and it is currently 0%. So everybody was asleep at the wheel for quite some time.

The SNB as an equity investor

Here is @stocknewstimes and these tweets are from this morning.

Swiss National Bank boosted its stake in Bright Horizons Family Solutions Inc. (NYSE:BFAM) by 7.8% during the 2nd quarter………..SwissNationalBank Boosts Stake in Bright Horizons Family Solutions Inc. …….SwissNationalBank Boosts Holdings in The Madison Square Garden Company

You get the picture but how is this going? Well here is the Financial Times today.

Japan’s stock market hit a two-year high on Tuesday following fresh records set overnight in New York.

So equity investors are singing along with the band Chic.

Good times, these are the good times
Leave your cares behind, these are the good times
Good times, these are the good times
Our new state of mind, these are the good times

As a very large equity investor the SNB must be cheering from the sidelines and a weaker phase for the Swiss Franc only adds to the party. We do not know how holdings have performed but we are looking at a company with around 150 billion Swiss Francs of overseas equities at a time of all time highs for stock markets. Suddenly we have a potential rationale for buying shares in the Swiss National Bank.

Comment

Let us now move to the public side of the SNB where it sets interest-rates ( currently -0.75%) and monetary policy for Switzerland. This sits rather oddly with the private shareholders. They might be looking for a bond coupon as they are in short supply to say the least in modern-day Switzerland. Much more likely is that eyes are on the profits from the equity investments in particular. It is hard not to think of the phrase “socialisation of losses and privatisation of profits” at this point.

As to getting their hands on it the issue poses formal problems as profit distributions are for the public-sector. From Reuters.

For 2016 it paid 1.7 billion francs to the federal government and cantons. Remaining profit went into SNB reserves.

However according to Reuters some seem to think they have a chance of changing the rules.

A group of private shareholders proposed changing the bank’s rules to allow a higher payment, saying the bank’s foreign currency purchases had diluted the value of the Swiss franc.

“Our proposal aims to demonstrate the dilution of the purchasing power of the Swiss franc following the seven-fold increase in the SNB’s balance sheet since the financial crisis,” said shareholder Blaise Rossellat.

Has nobody told them that rule changes are only for central banks themselves? Or rather the rules get “interpreted” along the lines so memorably described in Yes Prime Minister “they didn’t seem quite appropriate.”

So we have two routes here I think which can be interrelated. Someone may have “high- ticked” the shares to get a reaction. This would most logically be done by an existing investor but may have been someone who was simply bored. The next is that some think they have a solid chance of changing the rules and actually benefitting from the gains of the SNB. Of course they are at this stage almost entirely paper profits but that does not bother people in so many other areas. This simultaneously has everything and nothing to do with monetary policy as we mull yet another series of unintended consequences. The investors must be hoping that the words of Tom Petty do not turn out to be appropriate.

I’m learning to fly, around the clouds
But what goes up must come down.

RIP Tom and thank you for the music.