The economic problems of Greece are multiplying

Today is a case of hello darkness my old friend, I have come to talk to you again, as we look at Greece. Yet again we find a case of promised economic recovery turning into another decline although on this occasion it is at least nit the fault of the “rescue” party. The promised recovery was described by the Governor of the Bank of Greece back in February.

According to the Bank of Greece estimates, the Greek economy grew at a rate of 2.2% in 2019 while projections point to growth accelerating to 2.5% in 2020 and 2021, as the catching-up effect, after a long period of recession, through rises in investment and disposable income is projected to counterbalance the effect of the global and euro area slowdown.

Apart from the differences in the years used that could have been written back in 2010 and pretty much was. Maybe no-one should ever forecast 2% or so economic growth for Greece as each time the economy then collapses!

Also Governor Stournaras told us this.

The main causes of the crisis, namely the very large “twin” deficits (i.e. the general government and current account deficits) have been eliminated,

So let us take a look.

Balance of Payments

This morning’s release tells us this.

In June 2020, the current account balance showed a deficit of €1.4 billion, against a surplus of €805 million in June 2019.

So the Governor as grand statements like that tend to do found a turning point except the wrong way. Anyone with any knowledge of 2020 will not be surprised at the cause of this.

This development is mainly attributable to a deterioration in the travel balance and, therefore, the services balance, which was partly offset by an improvement in the balance of goods, as imports of goods decreased more than the respective exports. The primary and the secondary income accounts did not show any significant change.

Let us get straight to the tourism numbers.

The travel surplus narrowed, as non-residents’ arrivals and the corresponding receipts decreased by 93.8% and 97.5%, respectively. Moreover, travel payments dropped by 81.3%. The transport balance also declined, by 39.7%, due to a deterioration in the sea and air transport balances.

Nobody will be especially surprised about this falling off a cliff although maybe with restrictions being eased from mid June the numbers may not have been quite so bad. Also there is the kicker of the impact on Greece’s shipping companies.

Switching to the half-year we see this.

In the first half of 2020, the current account deficit came to €7.0 billion, up by €2.9 billion year-on-year, as the deteriorating services balance and secondary income account more than offset an improvement in the balance of goods and the primary income account.

That is awkward for out good Governor as we note a deficit last year but for our purposes there is something ominous in the goods balance improvement.

The deficit of the balance of goods fell, as imports decreased at a faster pace than exports.

Whilst some of that was the oil trade which was affected by the price fall there was also this.

Non-oil exports of goods declined by 3.9% at current prices (-3.4% at constant prices), while the corresponding imports fell by 10.1% (‑9.5% at constant prices).

Which suggests via the relative import slow down that we have a possible echo of what happened in 2010.

Government Deficit

This was the benchmark set by the Euro area authorities and the IMF. Back in the day they were called the Troika and then the Institutions which provides its own script for events. After all successes do not change their names do they? As for now we see this.

In January-July 2020, the central government cash balance recorded a deficit of €12,767 million, compared to a deficit of €2,432 million in the same period of 2019.

Unsurprisingly revenues are down and expenditure up.

During this period, ordinary budget revenue amounted to €22,283 million, compared to €25,871 million in the corresponding period of last year. Ordinary budget expenditure amounted to €32,423 million, from €29,870 million in January-July 2019.

That does not add up as we note the weasel word “ordinary” which apparently excludes public investment which is over 2.5 billion higher so far this year. Also debt costs are about 700 million higher mostly to “The Institutions”. That looks a little awkward but it seems they have decided to give it back.

(Luxembourg) – The Board of Directors of the European Financial Stability Facility (EFSF) decided today to reduce to zero the step-up margin accrued by Greece for the period between 1 January 2020 and 17 June 2020, as part of the medium-term debt relief measures agreed for the country in 2018. The value of the reduction amounts to €103.64 million.

Additionally, as part of the debt relief measures, the European Stability Mechanism (ESM), acting as an agent for the euro area member states and after their approval, will make a transfer to Greece amounting to €644.42 million, equivalent to the income earned on SMP/ANFA holdings.

The air of unreality about this was added to by ESM and EFSF head Klaus Regling who seems to think the Greek economy is recovering.

This is necessary to further support the economic recovery, improve the resilience of the economy and improve the country’s long-term economic potential.

What is he smoking?

ECB

It has stepped in to help with the Greek finances as these days Greece is issuing its own debt again. The ECB is running two QE programmes and the “emergency” PEPP one ( as opposed to the now apparently ordinary PSPP) had at the end of July bought some 10 billion Euros of Greek government bonds,

There was always an implicit gain from ECB QE for Greece in that its bonds would be made to look relatively attractive now it is explicit with the ECB purchases. Indeed it has so far bought more than Greece issued last year.

During 2019, the Hellenic Republic has successfully tapped the international debt capital markets through 4 market
transactions: 3 new bond series (5Y, 7Y, 10Y new issue + tap) for a total amount of € 9bn have been issued, ( Greece PDMA)

Greece was also grateful for the lower borrowing costs.

The average cost of funding for 10-year bonds has decreased from c. 4.4% to c.1.5%, while yields on 3m and 6m T-bills
have recently reached negative values

But I have never heard the ECB being called an insurance and pension fiund before, although it is in line with my “To Infinity! And Beyond! ” theme maybe the longest of long-term investors..

The investor base for Greece Government Bonds (GGBs) has significantly strengthened and broadened with an
increased share of long-term investors, notably insurance and pensions funds.

Just for clarity the PEPP purchases had not begun but the PSPP had.

Debt

The numbers here apparently have changed little but that is because Greece borrowed extra to give itself a cash buffer. So if we allow for that another 7.4 billion Euros were added to the debt pile in the second quarter of this year.

Comment

The saddest part of this is that the present pandemic has added to what was already a Great Depression in Greece. At current prices a GDP of 242 billion Euros in 2008 was replaced by one of 187.5 billion last year. At this point the casual observer might be wondering how a central bank Governor could be talking about a recovery?

But there is more as Greece arrived at the pandemic under another depressionary influence as it planned to run a fiscal surplus and I recall 3.5% of GDP being a target. Now you may notice that the same group of Euro area authorities seem rather keen on fiscal deficits as they have been taking advice from Kylie it would appear.

I’m spinning around
Move outta my way

To my mind the issue revolves around out other main indicator which is the balance of payments. This used to be the role of the IMF before it had French leaders. At the moment the Greek numbers have been hit hard by something it can do nothing about via the impact of lockdown on tourism. Sadly with the rise in cases of Covid-19 elements of that may return, although one of my friends is out there right now doing her best to keep the economy going. We will never know how much better that trajectory of the Greek economy would have been if the focus had been on reform and trade rather than debt and punishment, but we do know it would have been better and maybe a lot better.

 

UK inflation measurement is a case of lies damned lies and statistics

This morning has brought us up to date with the latest UK inflation data and we ae permitted a wry smile. That is because we have been expecting a rise whereas there was a load of rhetoric and panic elsewhere about deflation ( usually they mean disinflation). The “deflation nutters” keep being wrong but they never seem to be called out on it. The BBC report put it like this.

The rise was a surprise to economists, said Neil Birrell, chief investment officer at money manager Premier Miton. “It’s a bit early to call the return of inflation, but it does show that there is activity in the economy,” he said.

Perhaps they should find some better economists. Also only last night they were reporting on inflation were they not?

Manctopia: Billion Pound Property Boom……..Meet the people living and working in the eye of Manchester’s remarkable housing boom. ( BBC 2 )

Indeed it has been right in front of them as they now operate from Salford so at least they did not have to travel to do their research. Indeed this is how the BBC 5 live business presenter Sean Farrington tweeted the data.

Happy inflation day, by the way. Prices up 1% in 1yr FYI Inflation that everyone talks about came in at 1% (CPI) Inflation the @ONS prefers came in at 1.1% (CPIH) Inflation used for capping rail fares came in at 1.6% (RPI)

Down pointing backhand index

Here’s @ONS‘s view on RPI (tl;dr – it’s rubbish)

At least he bothered to say what the numbers for the Retail Price Index or RPI were and he gets credit for reporting numbers which the economics editor Faisal Islam has ignored but it touched a raw nerve with me and let me explain why below.

You might think with the BBC launching a flagship programme on property that you might mention that the RPI looks to measure housing inflation whereas CPI completely ignores it and CPIH uses fantasy imputed rents that are never paid. For those unaware the RPI includes owner-occupied housing ( it uses house prices via a depreciation component and mortgage costs). Whereas CPI has intended to include them for around 20 years now and been in a perpetual situation of the dog eating its homework. CPIH is based on the view that the truth ( rises in house prices) is inconvenient as they tend to rise too fast so they invented a fantasy where home owners charge themselves rent and use that to get a lower reading. Oh and the rents themselves are not July’s rent they are based on rents over the past 16 months or so because the series needs to be “smoothed” as it is so unreliable. I would say you really could not make it up but of course they have!

Where I agree is on the bits he goes onto which is the way that RPI is used for rail fares ( and student loans) which is a case of cherry-picking as we find ourselves paying the higher RPI but only receiving the lower CPI.

Today’s Numbers

The rises noted above were driven by several factors but one will be no surprise.

prices at the pump have started to increase as movement restrictions eased. Between June and July 2020,
petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre, to stand at 116.7 pence per litre. In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre.

I doubt anyone except the economists referred to above will have been surprised by that as negative oil price futures have been replaced by ones above US $40. Also there was this.

As government travel restrictions were eased, there were upward contributions from coach and sea fares, where prices rose between June and July 2020 by more than a year ago.

I have pulled those numbers out because this is going to be a complex and difficult area going forwards. Why? Well I was passed by several London buses yesterday and the all had “only 30 passengers” on the side so in future there is going to be a lot less output and higher inflation in that sector. Not easy to measure as the inflation will likely be in higher subsidies rather than bus,coach or rail fares. I am reminded at this point that the GDP data showed National Rail use at a mere 6%. That will have improved in July but even if we get to 50% we have a lot of inflation hidden there.

Another reason for the fall was that the summer clothing sales have been less evident so far.

Clothing and footwear, where prices overall fell by 0.7% between June and July 2020, compared with a fall of 2.9% between the same months in 2019.

Actually clothes for kids saw a price rise, do parents have any thoughts on what is going on?

prices for children’s clothes rose by 0.1% between June and July 2020 but fell by 2.6% between June and July 2019, with the stand out movements coming from clothes for children aged under four years old and from T-shirts for older boys.

There was bad news for smokers and drinkers too.

Alcoholic beverages and tobacco, where overall prices across a range of spirits increased by 0.6% between June and July 2020, but fell by 1.4% in 2019.

On the other side there was some good news.

Food and non-alcoholic beverages, with food prices falling by 0.3% this year, compared
with a rise of 0.1% a year ago

What is coming next?

Perhaps rather similar numbers.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to July 2020, unchanged from June 2020.

There is ongoing upwards pressure but it is also true that the stronger UK Pound £ ( US $1.32 as I type this ) is offsetting it.

Comment

Let me explain how we should measure inflation and the problems in the current approach. The text books say it is a continuous rise in prices which does not help much as even the actively traded oil price struggles to do that. So we measure price changes and we should do this.

  1. Measure as many as we can to represent as best we can the impact of price rises on the ordinary consumer. The use of consumer is important as it prevents a swerve I shall explain in a moment.
  2. Use mathematical formula(e) that works as best as possible and head towards using direct weights as much as we can.
  3. Do not make numbers up that do not exist ( Yes the made up fantasy rents in the officially approved CPIH I am looking at you).

The use of consumer matters because if we stay with housing costs we see Phillip Lane of the ECB recently estimate them as a third of consumer spending which is similar to the US CPI shelter measure. Yet if we use the officially approved word consumption then house price changes are an asset and go in it 0%. Do you see the problem? It is one that fantasy rents that are never paid make worse and not better and is why I spend so much time on this issue.Just for clarity rents for those who pay rent are the right measure although the UK effort at this has so much trouble they smooth it over 16 months to avoid embarrassing themselves too obviously.

Next comes the issue of the maths formula used which are Carli,Jevons and Dutot. Each have strengths and weaknesses and regular readers will have seen Andrew Baldwin and I debate them on here. In a nutshell he prefers Jevons and I Carli although you would also have seen us note that we could sort that sharpish as opposed to the 8 years going nowhere that the official UK bodies have done. The RPI now gets 43% of its data via direct weights and more of this would help to make things better. This was represented at the recent discussion at the Royal Statistical Society.

I believe, and I’m fairly similar to Tony here, that the RPI only has one real flaw. That
is the combination of the Carli index with the way that clothing prices are collected. And that could
be mended………………………Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot
more opportunity to use weighted indices and that should come on-stream in the next few years.  ( Jill Leyland)

I will simply point out that there has been a decade now to sort this out.

I hope that that gives you a picture of a debate that has gone on for a decade and have been dreadfully handled by our official bodies. I will not bore you with the details just simply point out they have lost every consultation so the latest one only involves the timing of changes which have kept being rejected ( by 10 to 1 back in 2012). It is very 1984.

Inflation measurement is not easy and let me give you an example of a problematic area from today’s numbers.

The effect came almost entirely from private dental examinations and non-NHS physiotherapy sessions, where price collectors reported that prices had risen, in part, as companies make their workplace COVID-secure;

Regular readers will know I have a big interest in athletics and sport and as part of that I have been noting reports of physiotherapy being ineffective due to Covid-19 changes. So the service is inferior. That is not easy to measure but we should measure steps backwards as well as forwards. As my dentist is able to inflict pain on me, may I point out that I am sure that is not true of her and the service will be superb…….

Meanwhile the inflation measure in the GDP numbers ( deflator) picked up inflation of 6.2% in the quarter and 7.9% for the year. Now the gap between that and the official consumer inflation measure is something for the UK Statistics Authority to investigate.

 

The fraudsters want to raise the US inflation target

Today brings us a new variation on an old theme. This is the issue of what is the right level for an inflation target and sometimes we go as far as to whether there should be one at all? This begins with something of a fluke or happenstance. This is the reality that inflation targets are usually set at 2% per annum following the lead set by New Zealand back in the day. This has become something of a Holy Grail for central banksters in spite of the fact that it had no theoretical backing as this from the Riksbank of Sweden explains.

There was no relevant academic research from which to draw support; instead, the New Zealand authorities had to launch the new regime more or less as an “experiment” and quite simply see how well it worked in practice.

In fact it was as we see so often a case of trying to fit later theory to earlier practice.

This shows that it does not seem to be until the mid-1990s, i.e. about five years after its introduction in practice, that inflation targeting began to attract any significant interest in the academic research.

Basocally it was from a different world where inflation was higher and they wanted something of an anchor and an achievable objective.

Also there is another swerve as other time the central bankster preference for theory over reality has led to claims that it provides price stability when it does not. Let me illustrate from the European Central Bank or ECB.

 The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

The truth is in some ways in the “as defined” bit because if we return to the real world it simply isn’t. Also the inflation measure ignores owner-occupied housing an area where we often find inflation. It was relative price stability when inflation was higher but was never updated with the times leaving central bankers aping first world war generals and fighting the previous war.

What about now?

Here is CNBC from earlier this month.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

Actually then CNBC became refreshingly honest.

To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets.

Not fully honest though because we only need to look back to yesterday and the Japanese experience which has gone on for (lost) decades. This theme was added to last week by an Economic Letter from the San Francisco Fed.

Average-inflation targeting is one approach policymakers could use to help address these challenges. Taking into account previous periods of below-target inflation, average-inflation targeting overshoots to bring the average rate back to target over time. If the public perceives it to be credible, average-inflation targeting can help solidify inflation expectations at the 2% inflation target by providing a better inflation anchor and thus maintain space for potential interest rate cuts. It importantly can help lessen the constraint from the effective lower bound in recessions by inducing policymakers to overshoot the inflation target and provide more accommodation in the future.

I have helped out by highlighting the bits which exhibit extreme Ivory Tower style thinking. In general people think inflation is under recorded and would be more sure of this id they knew that housing inflation is either ignored or in the case of the US fantasy rents which are never paid are used to estimate it. It turns into something the Arctic Monkeys dang about.

Fake tales of San Francisco
Echo through the room

Yesterday Bloomberg suggested such a policy was on its way but got itself in something of a mess.

But the Fed’s preferred measure of inflation has consistently fallen short, averaging just 1.4% since the target’s introduction.

The preferred measure PCE ( Personal Consumption Expenditure) was chosen because it gives a lower reading than the more commonly known CPI in the US. This is a familiar tactic by central banksters and if we add in the gap which is often around 0.4% we see things change. Next apparently things move in response to what the Fed is thinking as opposed to the interest-rate cuts, bond buying and credit easing.

“Rising inflation expectations are, in part, indicative of the market beginning to price in the Fed’s shift,” said Bill Merz, senior portfolio strategist and head of fixed-income research at U.S. Bank Wealth Management in Minneapolis.

Rising inflation expectations are presented as a good thing whereas back in the real world the old concept of “sticky wages” is back and in more than a few cases involves wage cuts.

Comment

There is an air of unreality about this which is extreme even for the Ivory Towers of economic theory. After all the last decade has given them everything they could dream of in terms of zero and sometimes negative interest-rates and bond buying on a scale they could not have even dreamt of. If we go back a decade they believed it would work and by that I mean hit the 2% inflation target and rescue the economy. But they have turned out to be the equivalent of snake-oil sales(wo)man where the next bottle will always cure you and even has “Drink Me” written on it in big friendly letters.

But it did not work and even worse like a poor general they left a flank open which is that by having no exit strategy they were exposed to any future downturn. So the Covid pandemic was unlucky in severity but not the event itself as something was always going to come along. To my mind the policy failure has been that central banksters got caught up in the here and now and forgot they had defined a fair bit of inflation away. So they did not realise the  real choice was to lower the target to 1.5% or 1% or to put in a measure of housing inflation that represents inflation reality rather than a non-existent fantasy.

Take a ride in the sky, on our ship fantasii
All your dreams will come true, right away ( Earth Wind & Fire)

Thus they have ended up on a road to nowhere where in their land of confusion they have ended up financing government deficits. This rather than inflation targeting is the new role. Next up they look to support the economy but the truth is that we see another area where they have seen failure. Keynes explained that well I think in that you can shift expectations or trick people for a while but in the end Kelis was right.

Seen it in your one to many times
Said you might trick me once
I won’t let you trick me twice.

So whether they end up targeting average inflation or simply raise the target does not matter in the way it once did. The real issue now is getting politicians weaned off central banks financing their deficits for them. Good luck with that…….

The Investing Channel

GDP in Japan goes back to 2010 in another lost decade

Today we get to look East to the land of the rising sun or Nihon as we note its latest economic output figures. According to the Japanese owned Financial Times we should look at them like this.

Japan’s GDP decline less severe than US and Europe

Of course as we are looking at a country where the concept of the “Lost Decade” began in 1990 and is now heading into number 4 of them we need to be careful about which period we are looking at.

Japan’s economy shrank by a record 7.8 per cent in the second quarter of 2020 as it outperformed the US and Europe but lagged behind neighbouring South Korea and Taiwan in its response to coronavirus.

Okay so better than us in the West but not as good as its eastern competitors. Also I note that it relies quite a bit on seasonal adjustment when we have just had an economic season unlike any other as without it GDP fell by 9.9%.

Returning to the seasonally adjusted data we see a consequence of being an exporter at a time like this.

A fall in private consumption accounted for 4.8 percentage points of the decline in Japan’s GDP as the state of emergency reduced spending in shops and restaurants, while a large drop in exports accounted for the remaining 3 percentage points.

This is because exports fell by 18.5% with imports barely affected ( -0.5%) so there was a plunge in exports on a scale large enough to reduce GDP by 3%. Actually let me correct the FT here as it was domestic demand which fell by 4.8% with private consumption accounting for 4.5% and investment for 0.2% and the government sector not doing much at all. You may be pleased to read that Imputed Rent had only a minor impact on the quarterly change.

A cautionary note is that Japanese GDP data is particularly prone to revision or as the FT puts it.

Business investment was surprisingly strong, however, and contributed just 0.2 percentage points to the overall decline in output. That figure is often revised in updates to the data, but if confirmed, it would suggest resilience in the underlying economy and potential for a strong rebound.

International Comparison

Regular readers will know that due to the extraordinary move in the UK GDP Deflator ( the inflation measure for this area) of 6.2% in a single quarter our GDP fall may well have been more like 15%. Somehow the FT which is often very enthusiatic about combing through UK data has missed this.

The second-quarter decline in Japan’s GDP was comparable to a 9.5 per cent fall in the US during the same period, or a 10.1 per cent drop in Germany. It was less severe than the drop of more than 20 per cent in the UK, which was late to act but then imposed a severe lockdown. However, Japan did worse than neighbouring South Korea, where output fell 3.3 per cent in the second quarter, or Taiwan, where GDP was down just 0.7 per cent. Both countries managed to control the virus without extensive lockdowns, allowing their economies to function more normally.

It is typical of a Japanese owned publication to trumpet a form of national superiority though.

Japan’s performance relative to other advanced countries highlights how the effectiveness of a country’s coronavirus response affects the economy, with Japan forced to close schools but able to avoid the strict lockdowns used in Europe.

However, only time will tell whether that was more of a tactical than a strategic success.

Japan is suffering an increase in infections, with new cases running at more than 1,000 a day, but it has not imposed a fresh state of emergency.

Let me wish anyone who is ill a speedy recovery.

Context

The initial one is the economic output has now fallen in the last 3 quarters. Following the rise in Consumption Tax from 8% to 10% a decline was expected but now.of course, it looks really badly timed. Although in the period of the Lost Decade there is a bit of a shortage of good times to do such a thing.

Japan has if we look at the seasonally adjusted series gone back the beginning of 2010 and the middle of 2011 which was the same level.It has never achieved the “escape velocity” talked about by former Bank of England Governor Mark Carney.

Bank of Japan

The problem for it is that it was already doing so much or as the Red Queen put it.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

I noted Bloomberg reporting that it owns so 44% of the Japanese Government Bond market these days. Although there is an element of Alice In Wonderland here as via its stimulus programmes the Japanese government will be issuing ever more of them.

In May, the Japanese government approved a second large-scale ¥117tn ($1.1n or 21% of Japan’s GDP) economic rescue package, matching the size of the first stimulus introduced in April. ( OMFIF).

So there will be plenty more to buy so we can expect full employment to be maintained for the bond buyers at the Bank of Japan.

On a gross basis, the government plans to issue close to ¥253tn ($2.3tn) in government bonds and treasury bills in fiscal year 2020 (ending March 2021). This amount combines issues under all three budgetary plans. Excluding refinancing bonds, the net issuance of government bonds is reduced to almost ¥145tn (about 27% of GDP). This includes close to 4% of front-loaded bond issues from future fiscal years and is the largest net issuance in the post-world war II era.

Next there is its role as The Tokyo Whale to consider.

This phase saw the Bank of Japan buy on up as well as down days and the index it looks to match is the Nikkei 400.

There is also the negative interest-rate of -0.1% which I do not think the Bank of Japan has ever been especially keen on which is why it is only -0.1%. After all the years of propping up the banks we can’t have them failing again can we.

The latest move as is so often the case has echoes of the past so let me hand you over to Governor Kuroda.

The first is the Special Program to support corporate financing. The total size of this program is about 120 trillion yen. It consists of purchases of CP and corporate bonds with the upper limit of about 20 trillion yen and the Special Funds-Supplying Operations, which can amount to 100 trillion yen. Through this operation, the Bank provides funds on favorable terms to financial institutions that make loans in response to COVID-19. This operation also includes a scheme in which the government takes the credit risk while the Bank provides liquidity, thereby supporting financing together.

Comment

Japan is a mass of contradictions as we note that annual GDP was higher in the mid 1990s than it is now. The first switch is that the position per head is much better although that is partly because the population is in decline. Of course in terms of demand for resources that is a good thing for a country which has so few of them. That is not so hot when you have an enormous national debt which will be getting a lot larger via the stimulus effort. There are roads where it will reach 300% of GDP quite soon.

So why have things not collapsed under the weight of debt? One reason is the size of the Bank of Japan purchases in what is mostly (90% or so) a domestic market. Then we also need to note that in spite of it being official policy to weaken the Yen ( one of the arrows of Abenomics) it is at 106.4 versus the US Dollar looking strong in spite of all of the above. This is because even if the foreign investors started to leave the Japanese have large savings abroad and large reserves. As we stand they have had little success in pushing the Yen lower even with all the efforts of the Bank of Japan.

What is needed is some sustained economic growth but if Japan could do that the concept of the Lost Decade would have been consigned to the history books and it hasn’t. So we left with this thought by Graham Parker.

And there’s nothing to hold on to when gravity betrays you ( Discovering Japan)

Podcast on GDP measures

What else could go wrong for the Banks of Italy?

We are overdue a look at the state of play for an old and familiar friend. Except it is the sort of friend written about by Paul Simon.

Hello darkness, my old friend
I’ve come to talk with you again

It has been like a game of snakes and ladders except without the ladders. Ironically the Deputy Governor of the Bank of Italy chose March 18th as the day to rebut this. Yes the day central bankers around the world were crossing their fingers that the US Federal Reserve was going to step in and rescue the world financial system. That was in line with the time when Prime Minister Renzi told investors that shares in Monte Paschi would be a good investment. Anyway let me hand you over to Deputy Governor Luigi Federico Signorini who wrote to the New York Times to say.

Plenty of evidence points to a substantial strengthening of Italian banks in the recent years.

The collapses? The bailouts? The share price falls?

I must credit him in one regard as it takes a lot of chutzpah to mention “Asset Quality” when discussing the Italian banks. Also the sharper-eyed maybe be wondering where the problem was moved too?

The share of NPLs in banks’ total loans continues to fall, also thanks to large-scale disposals made by a large number of banks.

That game of pass the parcel must have seen the music stop.

Also the ECB had to buy off someone and it is still a lot.

Sovereign exposures. At the end of January banks’ holdings of sovereign bonds amounted to €316 billion, or 9.8 per cent of total assets; in early 2015 they peaked at €403 billion.

Is it rude to point out that with the surge in the Italian bond market ( the ten-year is 1.1%) that the banks have been partially deprived of the one area where they could have made some money?

Profitability. In 2019 the profitability of Italian banks was broadly in line with that of European peers

That bad eh?

The next bit has been highlighted by me in parts.

While the annualized ROE, at 5.0 per cent net of extraordinary components, is still below the estimated cost of equity, benefits are expected from ongoing restructuring and consolidation. The process is especially string among small cooperative banks, and the new framework is expected to strengthen their capacity to attract investors.

As the whole sector is extraordinary I am not sure what excluding it leaves you. Also we have been expecting benefits from “restructuring and consolidation” for a decade now. Finally their ability to attract investors could hardly get much worse…..

Bringing it up to date

On Tuesday the ratings agency DBRS Morningstar took a look. How are the profits our Deputy Governor was so keen on doing?

In H1 2020, Italian banks (UniCredit, Intesa Sanpaolo, Banco BPM, Banca MPS, UBI Banca, Credito
Valtellinese, and BP Sondrio) reported an aggregate net loss of EUR 464 million compared to a net profit
of EUR 6.2 billion in the same period of 2019.

Next we find something really rather familiar from the overall banking saga.

For the time being, the bulk of LLPs ( Loan Loss Provisions ) is still related to Stage 1 and Stage 2 loans, as the relief measures currently in place have been preventing the build-up of new NPLs. However, when these support
measures began to ease, we would expect a more significant migration of Stage 1 loans into Stage 2
(i.e. credit risk has increased significantly since initial recognition) and Stage 3 loans.

So bad loans become sour loans, NPLs and now LLPs. That is revealing in itself. The process leaves the ratings agency worried about next year.

When comparing with some European peers with higher provisioning levels, we consider it
possible that larger provisions may be required for Italian banks, should default rates from performing
loans increase more than expected.

So that’s a yes then.

The situation is complicated as we wait for the government Covid response plays to wind down.

Based on the latest data released by the Bank of Italy, as of July 24, the applications for a debt
moratorium from households and companies reached 2.7 million, up from around 660,000 requests
reported in early April, but not significantly changed compared to end-May and mid-June . The outstanding loans under moratoria amounted to EUR 297 billion, equivalent to around 15% of the total
performing loans at end-2019.

Plus this.

In contrast, we have observed the requests for loans backed by a State guarantee surging remarkably in
the same period. As of August 4, the requests for State-guaranteed loans amounted to over 944,000,
corresponding to a total consideration of around EUR 77 billion, or approximately 4% of the total net
customer loans at end-2019.

I know there are elements of stereotyping here so apologies for that, but can anyone genuinely say that they are not wondering how many of these loans are fraudulent? Like the way the Mafia took control of the extra virgin olive oil market, basically if you bought some from Italy your chances of actually getting it were 50/50.

Here is the explicit view on what is expected to happen next.

Whilst the combination of moratoria and State guaranteed loans represent strong relief measures in the
near term, we still believe that the currently challenging scenario will result in a rise in NPLs starting
from 2021, once the moratoria have expired. We note that in Q2 2020 some of loans under moratoria
moved to Stage 2 from Stage 1.

The Financial Times

It produced a long read on banking and seemed to try to avoid Italy but from time to time it popped up.

Centuries-old national champions Barclays (€17.4bn), Deutsche Bank (€15.6bn) and Italy’s UniCredit (€17.2bn) are collectively worth less than Zoom, the $72bn (€61bn) videoconferencing company founded in 2011.

Unicredit had been presented as a type of national champion and there was also a rather familiar development.

 In July, Italy’s largest retail lender Intesa Sanpaolo succeeded in a €4.2bn hostile takeover of local rival UBI Banca, marking the largest European banking deal since the financial crisis.

Which financial crisis please?

Comment

Let us take a look at what Queen might describe as “you’re my best friend” in this saga which is Monte Paschi. According to Johannes Borgen it plans this.

1) Sell defaulted loans to AMCO (with the EC’s blessing, hum.)

2) Take a capital hit and risk being below cap requirement. 3) But that’s ok, because there will be less loan losses because of the sale of defaulted loans to AMCO

Please hold fire on the issue of there being yet another rescue vehicle for the Italian banks for now and stay with Monte Paschi.

Sounds good? Well, there’s a slight problem here. In H1 2020, Monte took a total 520m€ of loan losses. Of the 520m, only 95m were from defaulted loans. Can anyone explain how the sale to AMCO will significantly reduce provisions? Because I’m missing something here.

In a nurshell that is the Monte Paschi saga because if you go through the numbers you are always missing something and sometimes quite a lot.

Now let me return to the subject of rescue vehicles. Here is a @gianluca1 describing one effort.

In 2016 Ita banks created a fund (Atlante) to help few bad banks clean their loan book from NPLs It was funded by all banks pro rata

Result: catastrophic risk of 2/3 banks was extended to all good banks due to perceived unlimited underwriting of risk of bad banks.

Then there was Atlante2 as well. More recently as he points out there has been Amco.

few years ago…it is the former SGA used to liquidate Banco di Napoli NPL

Fitch Ratings looked at Amco at the end of May and I think we have found someone with a sense of humour.

AMCO is a debt purchaser and servicer with nearly EUR25 billion of assets under management and a leading position in the unlikely-to-pay (UTP) loans sector.

Also.

Support Incentives: Government incentives supporting AMCO are underpinned by the fact that AMCO’s viability is central to its “patient approach” to the management of non-performing loans.

Patient approach sums up the whole episode really……Or to put it another way the can they kicked landed in the middle of the next crisis. I guess it would be like some sort of time warp meaning Apollo 13 landed in the middle of the Covid-19 pandemic.

 

The UK finds itself with a trade surplus

In many ways that is quite a chocking headline. It has been quite some time since the UK has been in a surplus situation as regarding trade. On a personal level I have got used to pointing out that not only has it been years since we sustained one it has in fact been decades. It was around 1997/98 that we did so as the effect of what turned out to be White Wednesday or the UK’s exit from the ERM ( Exchange-Rate Mechanism). I suppose that raises an initial point as it seems we need quite a economic shock to ever be in surplus. Also as people dip into my blogs over years I would point out that the 1997/98 has been revised in and out over time, less likely now for obvious reasons but you never know. In a way that provides its own critique of trade statistics.

You may be wondering why this was not on the news yesterday? I suppose like the extraordinary inflation numbers it was either not read or dismissed. One area where I do have sympathy though is that the concept of “theme days” that the Office for National Statistics does flood the system with too much data at once. Fans of Yes Prime Minister will know that this is a deliberate tactic to hide bad news, so somewhere Sir Humphrey Appleby and Jim Hacker are having a quiet chuckle.

The UK Surplus

The headline is this.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £8.6 billion to £8.6 billion in Quarter 2 (Apr to June) 2020, as imports fell by £35.2 billion and exports fell by a lesser £26.7 billion; the largest underlying total trade surplus on a three-month basis since records began in 1998.

As Shalamar are wont to put it.

There it is, there it is
What took us so long, ooh, to find each other, baby?
There it is, there it is
This time I’m not wrong

Actually the last line is more than risky as trade numbers at a time like this will see revisions.

Returning to the numbers it is immediately clear that we have not come to the surplus in the best of ways. This is because unless we have suddenly kicked out addiction to imports the fall in imports represents a consequence of the depressionary level fall in economic output we looked at yesterday. Also exports fell as well meaning out own domestic output was lower. One request I would make to the ONS is that they stop implying that ( in this instance) records began in 1998. After all if there were no records in the mid-1960s we would not have devalued in 1967 would we?! Ironically the records were wrong but the ONS statement should add recorded in this manner or something similar.

It is no great surprise to learn that the falls were everywhere.

Falling imports and exports in Quarter 2 2020 were largely seen in trade in goods, excluding non-monetary gold and other precious metals, where imports and exports fell by £21.4 billion and £14.0 billion respectively, while for trade in services they fell by £13.9 billion and £12.7 billion respectively.

A Goods Deficit

One familiar feature persisted in spite of the changes elsewhere.

The trade in goods deficit, excluding precious metals, narrowed by £7.4 billion to £20.7 billion in Quarter 2 2020 (Figure 2). Goods imports fell by £21.4 billion to £87.0 billion, while goods exports fell by £14.0 billion to £66.4 billion. Falling imports and exports were largely seen in machinery and transport equipment, and fuels, with larger falls of each in imports than exports.

So whilst it shrank we still had one and I doubt anyone fell off their chairs whilst noting the areas which were affected the most. Interestingly one major part of this saw a switch in which side of the ledger was worst affected.

The falls in exports and imports of machinery and transport equipment in Quarter 2 2020 were largely seen in road vehicles, where exports and imports fell by £7.8 billion and £4.2 billion respectively.

Switching to fuel and oil I am not sure I have seen numbers like this before.

Demand down by a record 31 per cent as a result of the COVID-19 lockdown. Demand in the three months to May 2020 was just 11.3 million tonnes, a record low in the series and 2.7 million tonnes under the previous low seen in the three months to April 2020.

Aviation fuel demand fell by 75% in the three months to May.

Services

Here is all we get.

The trade in services surplus widened by £1.2 billion to £29.3 billion in Quarter 2 2020. Services imports fell by £13.9 billion to £35.3 billion, while services exports fell by £12.7 billion to £64.6 billion.

Good job it is not around 80% of our economy…..Oh wait.

Allowing for Inflation

After the extraordinary GDP Deflator number of yesterday it is perhaps for best that in fact this does not seem that large a player here.

In volume terms, the total trade surplus (goods and services), excluding unspecified goods (which includes non-monetary gold), widened £7.2 billion to £7.8 billion in Quarter 2 (Apr to June) 2020, as imports fell by £31.1 billion and exports fell by £23.8 billion.

Although this deserves an investigation as which prices rose?

Total trade import prices fell 0.8% in Quarter 2 2020, while export prices fell 0.4%. Fuels were the largest drivers of the fall in both import and export prices, by 35.7% and 36.7% respectively.

We should at least be told.

An Annual Surplus

The party continues here.

The total trade balance (goods and services), excluding non-monetary gold and other precious metals, increased by £37.6 billion to a surplus of £3.7 billion in the 12 months to June 2020, as imports fell by £67.6 billion and exports fell by a lesser £29.9 billion.

The detailed breakdown is below.

The increase of the underlying total trade balance in the 12 months to June 2020 was largely because of a £39.5 billion narrowing of the trade in goods deficit to £104.6 billion. Imports decreased by £61.7 billion, while exports decreased by £22.1 billion. The fall in both imports and exports of goods was largely seen with machinery and transport equipment, and fuels.

As usual we get no detail on the services position.

The trade in services surplus narrowed by £1.9 billion to £108.3 billion in the 12 months to June 2020, as exports fell by £7.8 billion and imports fell by a lesser £5.9 billion.

Comment

The warm glow provided by a UK trade surplus soon starts to fade. Whilst there may well have been a shift towards producing more domestically it will hardly have been at play on this scale. In reality it is the fall in demand affecting the demand for imports which has somewhat artificially created a trade surplus. One area where this is clearly in play is fuel and energy as production of oil and gas in the North Sea only fell by 2.6% in the three months to June as opposed to the much larger demand falls noted earlier.

What we are also reminded of is how little detail is provided on the sector which provides around four-fifths of out economy. Even the annual figures which allow for some actual surveys to be done – for newer readers the main services trade survey is quarterly leading to the reverse of Meatloaf’s two out of three aint bad – tell us nothing more than the bare numbers which hardly inspires confidence. I have long suspected the numbers for services are better than those recorded but doubt they fully offset the trade deficit. Of course trying to track this down is a complex business, but then it is also true that the gains in information technology have been exytaordinary.

 

Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP

UK wages are falling in both real and nominal terms

It is the UK that is in the economic spotlight this morning as we look to dig some insight out of the labour market figures. Many of the usual metrics are failing us as we have looked at originally with reference to Italy, but some are working. The best guide we get to the fall in employment comes from this.

Between January to March 2020 and April to June 2020, total actual weekly hours worked in the UK decreased by a record 191.3 million, or 18.4%, to 849.3 million hours.

This compares to 16.7% or 877.1 million hours last month. So as you might expect the rate of change has slowed quite a bit as lockdown began to be eased but we are still falling.In terms of context there is this.

This was the largest quarterly decrease since estimates began in 1971, with total hours dropping to its lowest level since September to November 1994. Average actual weekly hours fell by a record 5.6 hours on the quarter to a record low of 25.8 hours.

The weekly numbers have dipped further too as they were 26.6 hours last month.

If we look at the annual picture for more perspective we see that whilst the vast majority of the change is “right here, right now” as Fatboy Slim put it we can see that the economy was hardly flying before the Covid-19 pandemic. Although in something of an irony I suppose there were phases where productivity was better.

As to the sector worst hit there is no great surprise.

The accommodation and food service activities industrial sector saw the biggest annual fall in average actual weekly hours, down 15.4 hours to a record low of 13.0 hours per week.

The Office for National Statistics has been trying to do a weekly breakdown which tells us this.

During May we saw average actual hours start to increase slowly for the self-employed, however this increase has slowed down and hours remained relatively flat throughout June.

Here it is in graphical format.

So we learn a little but this only takes us to the end of June.

Falling Wages

The opening salvo warns us that there is trouble ahead.

Employee pay growth declined further in June following falls in April and May; growth has been affected by lower pay for furloughed employees since March, and reduced bonuses; nominal regular pay growth for April to June 2020 is negative for the first time since records began in 2001.

Firstly records did not begin in 2001 as it is rather disappointing to see an official body like the ONS reporting that. As I shall explain later their certainly were records as how could we have seen the wages and prices spiral of the late 1970s? What they mean is that they changed the way they record the numbers.

Returning to now the main impact is below.

Growth in average total pay (including bonuses) among employees declined in April to June to negative 1.2%, with annual growth in bonus payments at negative 19.4%; regular pay (excluding bonuses) slowed to negative 0.2%.

So wages are falling and we can add to that a worse picture for June itself.

Single-month growth in average weekly earnings for June 2020 was negative 1.5% for total pay and negative 0.3% for regular pay.

In terms of sectors we are told this.

For the sectors of wholesaling, retailing, hotels and restaurants, and construction, where the highest percentage of employees returned to work from furlough, there is a slight improvement in pay growth for June 2020 compared with April and May; weaker pay growth in some higher-paying sectors negates this at whole economy level.

If we stay with the June figures then as you might well have suspected it is a much better time to be in the public-sector with wages growth of 4.2% than in the private-sector where it was -2.9% on a year before. The worst sector is construction where wages in June were 9% worse than a year ago. It is also true that there are some hints of improvement as the hospitality sector mentioned above went from -7% in May to -4% in June and construction had been -11%.

Real Wages

My usual caveat is that the official inflation measure is woeful due to its use of Imputed Rents and to that we need to add that somewhere around 20% of the inflation data has not been collected due to the pandemic. Indeed the official house price data series was suspended as after all who is interested in that? But what we have is this.

In real terms, pay is now growing at a slower rate than inflation, at negative 2.0% for total pay, the lowest rate since January to March 2012. Regular pay growth in real terms is also negative, at negative 1.0%. The difference between the two measures is because of subdued bonuses, which fell by an average negative 19.4% (in nominal terms) in the three months April to June 2020.

Or if you prefer it in monetary terms.

For June 2020, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at £504 per week in nominal terms. The figure in real terms (constant 2015 prices) fell to £465 per week in June, after reaching £473 per week in December 2019, with pay in real terms back at the same level as it was in December 2018.

As ever they seem to have had amnesia about the total wage series where at 2015 prices we see a weekly wage of £489 in June which compares to £502 for most of the end of last year and the beginning of this. It was last at that level in May 2018. On the positive side we saw a drop in wages but the last three months have been the same ( within £1 in both series). However the negative view is that total wage growth since 2015 is now 1.3%

Employment and Unemployment

The furlough scheme has made these of little use.

A large number of people are estimated to be temporarily away from work, including furloughed workers; approximately 7.5 million in June 2020 with over 3 million of these being away for three months or more.

Unless of course you actually believe this.

the estimated UK unemployment rate for all people was 3.9%; this is largely unchanged on both the year and the quarter

If so perhaps you will let us know the other five.

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” ( Alice In Wonderland)

Comment

The wages numbers tell a story but is it a truthful one? If we stay with it there is a problem highlighted by this from the LSE blog in 2015.

Figure 1 shows that median real wages grew consistently by around 2 per cent per year from 1980 to the early 2000s. There was then something of a slowdown, after which real wages fell dramatically when the economic downturn started in 2008. Since then, real wages of the median worker have fallen by around 8-10 per cent (depending on which measure of inflation is used as a deflator – the consumer price index, CPI, or the housing cost augmented version CPIH). This corresponds to almost a 20 per cent drop relative to the trend in real wage growth from 1980 to the early 2000s.

I have left the inflation measures in as by now all regular readers will be aware that things will be worse using the RPI which is why they have tried and failed to scrap it and are now trying to neuter it. So now the drop is over 25%.

The cautionary note is that the official wages series can be heavily affected by changes in composition or what we are obviously seeing right now. Rather bizarrely we are officially told this is not happening. Meanwhile the series based on taxes ( PAYE) is more optimistic.

Median monthly pay increased by 1.1% in June 2020, compared with the same period of the previous year.

Maybe there is an influence going from average to median but I suspect that it is those not paying taxes it is badly missing here. Such as it is I think we do get something from the improvement for July.

Early estimates for July 2020 indicate that median monthly pay increased by 2.5%, compared with the same period of the previous year.

So overall in terms of real pay it seems we are going to have to wait some time for Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where started from.

The Investing Channel

 

 

 

China is suffering from food and especially pork inflation

The week has opened with an additional focus on China. We have been reminded of the nature of its style of government by the arrest of the pro democracy business tycoon Jimmy Lai in Hing Kong. This adds to the issue of how the economy its doing post the original Covid-19 outbreak. Typically even the inflation data comes with a fair bit of hype and rhetoric.

In July , under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, all regions and departments coordinated the epidemic prevention and control, emergency rescue and disaster relief, and economic and social development work, actively implemented the policy of ensuring supply and stabilizing prices, and the overall market operation was orderly.

Switching now to the actual numbers we are being told this.

From a month-on-month perspective, the CPI went from a decline of 0.1% last month to an increase of 0.6% ………From a year-on-year perspective, CPI rose by 2.7% , an increase of 0.2 percentage points from the previous month .

So out initial picture is that inflation is picking up a little again and that it is not far below the target which is around 3% ( one report said 3.5%). Yet again we see that those who rush to tell us inflation is over look like being wrong yet again.

Pork Prices

This is an important issue in China due to its importance in the diet and the swine flu problem which preceded the Covid-19 outbreak. According to this it has not gone away.

In food, with the gradual recovery of catering services, the demand for pork consumption continues to increase, and floods in many places have a certain impact on the transportation of pigs. The supply is still tight. The price of pork rose by 10.3% , an increase of 6.7 percentage points over the previous month.

The annual numbers further remind us of the issue.

In food, the price of pork increased by 85.7% , an increase of 4.1 percentage points from the previous month

The pig333 website only takes us to the end of July but reports a price of just under 37 Renminbi compared to a bit under 20 this time last year.

I also noted this on the same website and the emphasis is mine.

Senasa (National Service of Agri-Food Health and Quality) officials certified exports of 18,483 tons of pork products and by-products sent between January and June of 2020, representing an improvement of 49% compared to the 12,336 tons sent in the same period in 2019. The main destinations were: China (9,379 tonnes); Hong Kong (2,599 t), Russia (1,845 t), Chile (1,400 t) and Angola (644 t).

So some extra demand for Argentinian farmers which will no doubt be welcome in its difficulties. But Hub Trade China suggests it may be a while before things get better.

#China‘s #pork prices, which jumped in June and edged up in July, will continue to rise in coming months due to seasonal factors and the influence of #COVID19. But tight supplies will begin to ease in the 4th. quarter thanks to boosting hog production and the expansion of imports.

The official view of the Ministry of Agriculture is this.

In the first half of 2020, live pigs and sows have maintained momentum towards recovery. At the end of June, the national sow population of 36.29 million heads changed from negative to positive for the first time year-on-year, up 5.49 million head from the end of last year. The current sow population has recovered to represent 81.2% of the herd at the end of 2017.

We are left wondering what “largely under control” means in reality.

African swine fever has been largely under control, and no major regional animal epidemics occurred in the first half of the year.

I have tried to look at the underlying indices but the England version has not been updated but up until June we have seen them be 170% to 180% of what they were in the previous year.

Food Overall

In fact the annual rate of inflation is being driven by food prices.

Among them, food prices rose by 13.2% , an increase of 2.1 percentage points, affecting the increase in CPI by about 2.68 percentage points.

A major player in this is of course the pork prices we have just analysed, but it is far from the only player.

the price of fresh vegetables increased by 7.9% , an increase of 3.7 percentage points; the price of aquatic products rose by 4.7% , a decrease of 0.1 percentage point; the price of eggs fell 16.6% , The rate of decline expanded by 0.8 percentage points; the price of fresh fruits fell by 27.7% , and the rate of decline narrowed by 1.3 percentage points.

So if you can get by on eggs and fresh fruit you are okay, otherwise you are not. Although on a monthly basis egg prices rose so that trend mat have turned.

Fuel

I note these because after the excitement around the period when we saw negative prices for some crude oil futures things are rather different now. Brent Crude Oil was essentially above US $40 throughout July. So we see this in the report.

gasoline and diesel prices rose by 2.5% and 2.7% ( monthly)…….

If we switch to the producer prices report we see that the times they are a-changing.

Affected by the continued rebound in international crude oil prices, prices in petroleum-related industries continued to rise. Among them, the prices of petroleum and natural gas extraction industries rose by 12.0% , and the prices of petroleum, coal and other fuel processing industries rose by 3.4% .

So the situation has turned for oil and the overall picture is as follows.

PPI rose by 0.4% , the same rate as last month…….From a year-on-year perspective, PPI fell by 2.4% , and the rate of decline narrowed by 0.6 percentage points from the previous month

Comment

The rise in inflation in China is being reported as good news or rather a reason for a rally in equity markets. But in fact a look at the consumer inflation data shows that food prices have been rising in many areas with the price of pork continuing to surge. So the Chinese consumer and worker will be worse off. Of course central bankers love to ignore this sort of thing as for newer readers basically they define everything that is vital as non-core for inflation purposes. Also inflation calculations assume you substitute products when the price rises to keep the numbers lower, although here they may be correct because poorer Chinese may not be able to afford pork at all now.

On the other side of the coin should China find a way out of the pork problem then inflation would be very low. Well for consumers and workers that would be a good thing because as we stand the chances for wage rises seem slim and I fear the reverse.

Looking at the exchange rate we get regular reports of a collapse on the way but whilst it has joined the rise against the US Dollar it has not done much. At just below 7 versus the US Dollar it is down 1% on the year. Are they running a pegged currency?

Podcast on GDP

 

Another survey says UK House Prices are rising

This morning there will have been scenes at the Bank of England. Indeed there will have been jostling amongst the staff as they rush to be the one who presents the morning meeting. Whoever grabbed the gig will be facing a Governor who has a wide beaming smile as his mind anticipates raiding the well-stocked wine cellar later. Perhaps the cake trolley will be filled with everyone’s favourites as well. What will cause such happiness?

Sharp increase in July pushes house prices to
highest ever levels ( Halifax )

Unwitting passers-by may hear a murmur which sounds like “The Wealth Effects! The Wealth Effects!” because that is exactly what it is. This mentality has seeped its way through the UK establishment now as the Deputy National Statistician Jonathan Athow parroted such a line during a recent online conference on how he plans to neuter the Retail Price Index.

What are the numbers?

The Halifax reported quite a surge last month.

Following four months of decline, average house prices in July experienced their greatest month on month
increase this year, up 1.6% from June and comfortably offsetting losses in 2020. The average house price
in July is the highest it has ever been since the Halifax House Price Index began, 3.8% higher than a year
ago.

If we look at levels we get a context to the house price boom the UK has seen in recent decades as we note that an index set at 100 in 1992 was at 416.6 in July. Putting that another way the average price is now £241,604. Care is needed with such averages because they vary between different organisations quite a but partly because as you can see the numbers come in for some torture.

The standardised average price is calculated using the HPI’s mix adjusted methodology………The standardised index is seasonally adjusted using the U.S. Bureau of the Census X-11 moving-average method based on a rolling 84-month series. Each month, the seasonally adjusted figure for the same month a year ago and last month’s figure are subject to revision.

84 months!

Why?

As we switch to the question posed by Carly Simon we are told this.

The latest data adds to the emerging view that the market is experiencing a surprising spike post lockdown. As pent-up demand from the period of lockdown is released into a largely open housing market, a low supply of available homes is helping to exert upwards pressure on house prices. Supported by the government’s initiative of a significant cut in stamp duty, and evidence from households and agents
suggesting that confidence is currently growing, the immediate future for the housing market looks brighter
than many might have expected three months ago.

So we see that the Stamp Duty cut is in play so once the Chancellor has completed this morning’s round of media interviews he will receive a call from Governor Andrew Bailey to say “Well played sir!”. I have to confess that this bit has me a little bemused.

that confidence is currently growing

That is hard to square with the wave of job and pay cuts we are seeing.

Mortgages

We looked at the approvals data last week but there is also the data from the tax register.

Monthly property transactions data shows a rise in UK home sales in June. UK seasonally
adjusted residential transactions in June 2020 were 63,250 – up by 31.7% from May following the lifting
of COVID-19 lockdown measures. Quarter-on-quarter transactions were approximately 47% lower than
quarter one 2020. (Source: HMRC, seasonally-adjusted figures)

I find it odd that so many organisations continue with seasonal adjustment at a time when we are not acting as usual. But we have to suspect higher numbers again in July if we also note the trends below.

Results from the latest (June 2020) RICS Residential Market Survey point to a recovery emerging
across the market, with indicators on buyer demand, sales and new listings rallying following the
lockdown related falls. New buyer demand has moved to a net balance of +61% (compared to -7% and
-94% in April and May respectively). New instructions also rose firmly to a net balance of +42%
(compared with -22% in May). Newly agreed sales net balance has moved into positive territory for the
first time since February, with a net balance of +43% (from -34% in May)

Care is needed as that is a sentiment index with spin in play and maybe as much as the Pakistan cricket team which has picked two spinners.

If we switch to mortgage rates then the Bank of England tells us this.

The effective rates on new and outstanding mortgages were little changed in June. New mortgage rates were 1.77%, an increase of 3 basis points on the month, while the interest rate on the stock of mortgage loans was 2.16%, unchanged from May and 0.2 percentage points lower than in February.

As you can see the rate for new mortgages is quite a bit below that on the existing stock meaning that a combination of new draw downs and remortgaging is pulling the overall position lower.

Bringing this up to date we have a story of two halves where remortgages remain at extraordinary low levels but the first time buyer has to pay quite a bit more.

This week has seen several rate increases for mortgages, particularly at higher loan-to-values (LTV). Halifax, TSB, Skipton Building Society, Virgin Money and Nationwide Building Society all increased their rates during the week on 85% LTV mortgages. HSBC increased its rates on 90% LTV mortgages, but they remain among the top rates for those with a smaller mortgage deposit. ( Moneyfacts )

The organisations above may well be getting a phone call from Governor Bailey along these lines.

Whose side are you on, son?

Don’t you love your country?

Then how about getting with the program? Why don’t you jump on the team and come on in for the big win?

( Full Metal Jacket)

Indeed the whole Monetary Policy Committee seems to have mortgage rate news on speed dial.

The Committee discussed the various factors affecting the price of new mortgage lending.

They also took some time to applaud themselves.

But other factors had been pushing in the opposite direction, such that it was possible that, in the absence of the MPC’s policy action, mortgage rates would have risen somewhat at all LTV ratios.

Comment

So we see a rather surprising development which backs up what we looked at on the 29th of July from Zoopla. I think we are seeing a bit of delayed action or if you prefer something which is in fact in the ( often derided) rational expectations models where prices can rise to prepare for a larger fall.

Why? Well in the short term the efforts of the government looked at above and the Bank of England via its new Term Funding Scheme ( over £21 billion now) can work. So we have lower costs and continued pressure on mortgage rates, But as time passes the higher levels of unemployment and wages cuts have to come into play in my opinion.

Meanwhile at the upper end of New York.

Two years after selling a three-storey penthouse for $59 million, one of the most expensive sales in Manhattan at the time, the developer of a luxury building on the High Line in Manhattan has steeply discounted the remaining four apartments, with the price of one full-floor unit overlooking the elevated park dropping by more than 50%.

The units at The Getty Residences in Chelsea, designed by architect Peter Marino, had been on the market for the last three years.

The units range from a 3,312-square-foot, three-bedroom, 3 1/2-bathroom that had its price cut about 42% to $9.4 million to a 3,816-square-foot, three-bedroom, 3 1/2-bathroom apartment with a balcony dropping 43% to $13.8 million.  ( Forbes )