Turkey is facing the consequences of another currency collapse

Today we have an example of an exception proving the rule. Indeed it is something so rare in these days of negative interest-rates that I hope you are all sitting comfortably.

ISTANBUL (Reuters) – Turkey’s central bank raised the interest rate in its lira swap operation to 11.75% from 10.25% on Friday, continuing additional tightening steps in the face of a weakening lira after unexpectedly hiking its benchmark interest rate last month.

Following the rate hike in its swap transactions, the lira  rebounded to near 7.90 against the U.S. dollar from a record low of 7.9550 earlier in the day. It had eased back to 7.9375 as of 1010 GMT.

Today is full of hints or more interest-rate cuts in China and Europe but Turkey has found itself raising them again, albeit in an official way. But as you can see the initial reaction in terms of the Turkish Lira was along the lines of “meh”.Actually the Turkish Lira did rally later to 7.84, but that was from another perspective only back to where it was on Wednesday and this morning it is back to 7.89.

Turkish Lira Troubles

It has been a hard year as Bloomberg points out.

Turkey’s lira depreciated to a record against U.S. dollar, decoupling from other emerging-currencies amid mounting geopolitical risks in the region.

The lira fell as much as 0.9% to 7.8692 per dollar, extending losses this year to more than 24%, the second-biggest slide in emerging markets after Brazil’s real.

As you can see that level got replaced and in spite of the unofficial interest-rate rise we are below it now. Regular readers may well recall that the Lira was slip-sliding away and hitting new lows back in the summer of 2018 and the move through 6 versus the US Dollar was regarded as significant whereas now we are on the verge of 8 being the big figure.

Because of the economic links the exchange-rate with the Euro is significant. Indeed some Euro area banks must be mulling their lending to Turkish borrowers as well as Euro area exporters struggling with an exchange-rate of 9.32. That is some 43% lower than a year ago.

Whilst we are discussing big figure changes we see that the UK Pound £ now buys more than ten Turkish Lira.

Inflation Surges

This is the obvious initial consequence of an exchange-rate depreciation.

In August, consumer prices rose by 0.86% and annual inflation remained flat at 11.77%. While annual inflation rose in core goods, energy and food groups, it remained unchanged in the services group. Meanwhile, annual inflation in the alcoholic beverages and tobacco group declined significantly due to the high base from tobacco products

That is from the latest Minutes of the Turkish central bank or TCMB and in fact the impact is even larger in essential goods.

Annual inflation in food and non-alcoholic beverages increased by 0.78 points to 13.51% in August. The rise in annual unprocessed food inflation by 1.51 points to 15.36% was the main driver of this increase.

As important is what happens next and here is the TCMB view.

In September, inflation expectations continued to increase. The year-end inflation expectation rose by 64 basis points to 11.46%, and the 12-month-ahead inflation expectation increased by 45 basis points to 10.15%.

With the ongoing fall in the Lira that looks too low to me. On the other hand I think that Ptofessor Steve Hanke is too high.

Today, I measure #Inflation in #Turkey at 35.67%/yr.

I can see how goods inflation might have such influences but other prices will not respond so mechanically.

Trade Problems

You might think that an ever more competitive economy in terms of the exchange-rate would lead to a balance of payments triumph. However this morning’s figures tell a different story.

The current account posted USD 4,631 million deficit compared to USD 3,314 million surplus observed in the same month of 2019, bringing the 12-month rolling deficit to USD 23,203 million. ( August data).

There are two highlights here. It is significant that the release is in US Dollars and not Turkish Lira. But we also note that Turkey has gone from surplus to deficit about which we get more detail here.

This development is mainly driven by the net outflow of USD 5,347 million in the good deficit increasing by USD 3,948 million, as well as the net inflow of USD 1,179 million in services item decreasing by USD 4,602 million compared to the same month of the previous year.

One factor at play in the services sector weakness is tourism. If we look at the year so far we see this is confirmed by a surplus of US $4.15 billion as opposed to one of US $19.17 billion in the same period in 2019. Another way of looking at this is that 3,225,033 visitors are recorded as opposed to 13,349,256 last year.

The problem here is also what is called the reverse J Curve effect where imports have become more expensive but it takes time for volumes to shift as well as it taking time for more orders to come in for the relatively cheaper exports. At the moment that is exacerbated by the pandemic as for example if we stay with tourism international travel has fallen and with further restrictions possible it may not matter how cheap you are.

Staying with theoretical economics we should be seeing the J Curve effect from the 2018 devaluation but right now as we have noted with tourism practicalities are trumping theory.

Foreign Debt

We get some context here if we note this from Bloomberg.

Meanwhile, Turkey paid a premium as it sold $2.5 billion of debt to international investors on Tuesday, it’s first foray into global markets since February. The bonds priced at 6.4%, compared with 4.25% for similar-maturity notes issued in February.

We note the fact that we have another trend reversal here as most countries have seen lower debt costs whereas Turkey is paying more. The theme of borrowing in US Dollars is a Turkish theme though and in terms of the money raised each one has so far been a success as in it would have been more expensive later. The catch is when we get to interest payments and repayments which have got ever more expensive in Turkish Lira. So if your income is in US Dollars or other overseas currencies you are okay but if it is in Lira you are in trouble.

According to the TCMB here is what is coming up from its July data.

Short-term external debt stock on a remaining maturity basis, calculated based on the external debt maturing within 1 year or less regarding of the original maturity, recorded USD 176.5 billion, of which USD 15.9 billion belongs to the resident banks and private sectors to the banks’ branches and affiliates abroad. From the borrowers side, public sector accounted for 23.9 percent, Central Bank accounted for 11.4 percent and private sector accounted 64.7 percent in total stock.

August saw an outflow from the TCMB as well.

Official reserves recorded net outflow of USD 7,602 million.

They started the year at US $81.2 billion and are now US $41.4 billion.

Comment

So far we have noted a financial sector which is in distress with rising interest-rates a falling currency and overseas borrowing in a toxic mix. Let us now switch to the real economy where these will impact via general inflation highlighted by foreign goods and services being much more expensive. So living-standards will be lower. The normal mechanisms where a currency depreciation can help an economy are in many cases being blocked by the Covid-19 pandemic. Only on Friday we observed that the UK has been importing less which is pretty much a 2020 generic. This is added to be the fact that a Turkish economic strength ( tourism) has had an especially rough 2020.

There are other issues here as the continual foreign currency depreciation has led to a surge in demand for safe assets.

A significant part of the deterioration in the current account balance is due to gold imports. This year, gold imports will exceed $ 20 billion. ( Hakan Kara)

Gold of course exacerbates the US Dollar issue as it becomes increasingly important in Turkey. Actually the central bank has joined the game as its Gold reserves have risen by some US $17 billion so far this year and whilst some of that is a higher price it must also have bought some more.

Will more interest-rate increases help? I am not so sure as they are usually much smaller than the expected fall in the currency and they will crunch the economy even further. It would help of course if Turkey was not either actually in a war or acting belligerently on pretty much every border it has. Putting it another way government’s in economic trouble often look for foreign scapegoats.

Podcast

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 GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.

 

 

The UK see higher real and nominal GDP growth as house price growth slows

Today has already brought some good economic news for the UK so let us get straight to it. From the chief economist of the Nationwide Building Society.

“UK house price growth remained subdued in March, with
prices just 0.7% higher than the same month last year”

As you can see he is not keen, but I am pleased that if we look at the trend for wage growth we are now seeing annual wage growth of over 2% with respect to house prices. So there will be some welcome relief for those wishing to trade up and especially for first-time buyers. Of course it will take a long time to offset the long hard haul that led to this being reported by out official statisticians only yesterday.

On average, full-time workers could expect to pay an estimated 7.8 times their annual workplace-based earnings on purchasing a home in England and Wales in 2018. Housing affordability in England and Wales stayed at similar levels in 2018, following five years of decreasing affordability.

If you want the equivalent of earnings ratio porn then there was this from an area I will be cycling through later.

Kensington and Chelsea remained the least affordable local authority in 2018, with average house prices being 44.5 times workplace-based average annual earnings.

However returning to the Nationwide there are ch-ch-changes going on.

London was the weakest performing region in Q1, with
prices 3.8% lower than the same period of 2018 – the fastest
pace of decline since 2009 and the seventh consecutive
quarter in which prices have declined in the capital.

Indeed as there have been discussions about the Midlands in the comments section I took a look at the quarterly data which showed them growing at 2.6% in the West and 2.5% in the East. So as ever the picture is complex although even there we are seeing real wage gains albeit only small ones.

Also we need to remind ourselves that this covers Nationwide customers only although the numbers do fit the patterns we have been observing through other sources. Also whilst I welcome the change it seems clear that The Guardian does not.

Slide driven by London and south-east slowdown as Brexit chaos seems to put off buyers.

The economy

This mornings economic growth or Gross Domestic Product release brought some further good news. Not from the last quarter of 2018 which remained at 0.2% but from this.

There has been an upward revision of 0.1 percentage points to GDP growth in Quarter 3 (July to Sept) 2018 to 0.7%, due to revisions to estimates of government services;  In comparison with the same quarter a year ago, UK GDP increased by a revised 1.4%.

So we did a little better on 2018 and in particular had a really spectacular third quarter. It does look out of kilter with the rest of the year but let me point out that something which regularly gets the blame for once gets a little credit.

 where some of this activity is likely to have reflected one-off effects of the warm weather and the World Cup.

There are two catches in the series however. The first is the issue of investment which has been having a troubled period.

There have been some upward revisions to business investment in Quarter 3 and Quarter 4 2018 because of later survey returns, but business investment still fell in every quarter of 2018.

So not as bad as previously reported but even so there has been an issue here.

Business investment has now fallen for four consecutive quarters – the first such instance since 2009 –driven mainly by declines in transport equipment as well as IT equipment and other machinery. The latest estimates show that there have been some upward revisions in the second half of 2018, with business investment now estimated to have fallen by 0.9% in Quarter 4.

These revisions to the quarterly path have resulted in an upward revision to the annual figure with business investment falling 0.4% in 2018.

This is a bit of a ying and yang factor as the issue over future trade relationships and a possible Brexit are factors here. The optimistic view is that once there is more certainty it will not only pick up it will regain much of the lost ground. Maybe we will find out more later although of course today was supposed to be the day we got certainty!

Also there is this hardy perennial.

The UK current account deficit widened by £0.7 billion to £23.7 billion in Quarter 4 (Oct to Dec) 2018, or 4.4% of gross domestic product (GDP), the largest deficit recorded since Quarter 3 (July to Sept) 2016 in both value and percentage of GDP terms….Annually, the UK current account deficit widened to 3.9% of GDP in 2018, compared with 3.3% in 2017.

Regular readers will be aware I have major doubts about the accuracy of these numbers, specifically about the lack of detail we get about the important services sector. However the trend was worse last year probably driven by the weakening trade outlook generally. Here is how we paid for it.

The UK mainly financed its current account deficit through portfolio investment, where UK investors disinvested in foreign equity and debt securities, while overseas investors increased their holdings of UK debt securities.

Even more care is needed with those numbers as when you start looking into them they are built on what are often in my opinion dubious assumptions.

Unsecured Credit

With house price growth slowing Bank of England Governor Mark Carney will have a an even deeper frown today as he reads this.

The annual growth rate of consumer credit has continued to slow, though more gradually than during the second half of 2018. At 6.3% in February , it was well below its peak of 10.9% in November 2016. Within this, the growth rate of both credit card lending and other loans and advances fell slightly.

The rest of us will have another sigh of relief although there are two problems. The first is that an annual rate of growth of 6.3% is far higher than anything else in the economy. It is around double the rate of wage growth and more than quadruple the annual economic growth we have seen. The other is that the latest two monthly numbers at £1.2 and now £1.1 billion show signs of a rebound so it is a case of “watch this space” for subsequent months.

Money Supply

We saw some broad money growth in February.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £3.6 billion in February.

The waters were muddied by a large Gilt maturity in February and the Operation Twist QE bond buying we have seen in March so far. Meaning we may see a pick up in the March data although it is unclear how much will be recorded as being the financial sector and hence ignored. The annual rate of growth at 2% in February is little to write home about but was a rise.

Comment

The UK data releases have been pretty solid today. Economic growth has been revised higher and there is a hint of better money supply growth. This comes with the usual caveats of high unsecured credit growth and a balance of payments deficit. Let me move onto the numbers which illustrate my point via something which gets widely ignored in the UK data which is inventories or stocks. I was struggling to get my head around this.

There was a £4.2 billion increase in inventories in Quarter 4 2018, including alignment adjustments and balancing adjustments. However, excluding these adjustments the estimates show a slight decrease of £1.2 billion in stocks being held by UK companies.

If you are going Eh? “You are not alone” as Olive sang but let me help out by pointing out there was a £3 billion balancing adjustment in the numbers which is quite a bit more than the economic growth reported so let us hope they were right.

Let me end on some better news as there was this also.

Nominal gross domestic product (GDP) grew by 0.7% in Quarter 4 (Oct to Dec) 2018, revised up from 0.6% in the first quarterly estimate.

 

 

 

 

 

Has the UK just lost £490 billion as claimed in the Daily Telegraph?

As someone who pours over the UK’s economic statistics this from Ambrose Evans-Pritchard in the Telegraph yesterday was always going to attract my attention.

Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.

It is presented as the sort of thing we in the UK should be in a panic about like being nuked by North Korea or back in the day Iraq. Although the global strategists cannot have been much good if they missed £490 billion can they? Anyway there is more.

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

Okay so we have a transformed outlook for the Pound £ and Gilt market so let us take a look.

GBP/USD +0.10% @ 1.33010 as UK’s May and Davis meet EU’s Juncker and Barnier in Brussels. . ( DailyFX)

I am not sure that this is what Ambrose meant! It gets even worse if we look at the exchange rate against the Euro which has risen to 1.128 or up 0.4%. I will let you decide whether it is worse for a journalist not to be read or to be read and ignored! The UK 10 year Gilt yield has risen from 1.37% to 1.38% but that is hardly being transformed and in fact simply follows the US Treasury Note of the same maturity as it so often does.

Before we move on there is more.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Okay so we have moved onto to comparing a stock (wealth) with an annual flow ( GDP) . I kind of like the idea of “gone missing” though should we start a search on the moors or perhaps take a look behind our sofas? If nothing else we might find some round £1 coins to take to the bank as they are no longer legal tender.

What has happened here?

If we move on from the click bait and scaremongering the end of September saw not only the usual annual revision of the UK national accounts but also the result of some “improvements”. The latter do not happen every year but they are becoming more frequent as it becomes apparent that much of our economic data is simply not fit for purpose. Part of the issue is simply that the credit crunch has put more demands on the data with which it cannot cope and part of it is that the data was never really good enough.

The data

Here is what was announced.

From 2009 onwards, the total revisions to the international investment position (IIP) are negative with the largest revision occurring in 2016.

So let us look at what it means.

In contrast, the IIP is the counterpart stock position of these financial flows. The IIP is a statement of:

  • the holdings of (gross) foreign assets by UK residents (UK assets)
  • the holdings of (gross) UK assets by foreign residents (UK liabilities)

The difference between the assets and liabilities shows the net position of the IIP and represents the level of UK claims on the rest of the world over the rest of the world’s claims on the UK. The IIP therefore provides us with the UK’s external financial balance sheet at a specific point in time. The net IIP is an important barometer of the financial condition and creditworthiness of a country.

Well it would be an important barometer if we could measure it! Some investments are clear such as Nissan in Sunderland but others will be much more secretive. This leads to problems as I recall back in the past the data for the open interest in the UK Gilt futures contract being completely wrong allowing the Prudential which was on the ball to clean up. Such things do not get much publicity as frankly who wants to admit they have been a “muppet”? There was an international example of this around 3 years ago when Belgian holdings of US Treasury Bonds apparently surged to US $381 billion before it was later realised that it was much more likely to be a Chinese change. If we look at the City of London such things can happen on an even larger scale in the way that overseas businesses in Ireland may be little more than a name plate. What does that tell us? That the scope for error is enormous.

Specific ch-ch-changes

Corporate bonds are one area.

improvements made to the corporate bonds interest, which has led to an increase in the amount of income earned on foreign investment in the UK (liabilities).

Which leads to this.

The largest negative revision occurs in 2016 (£27.3 billion) and includes improvements to corporate bond interest and late and revised survey data.

So as yields have collapsed all over the world as ELO might point out foreign investors have earned more in the UK from them? Also what about those who sold post August 2016 to the Bank of England? But that is a flow with only an implied stock impact so let us look at the main player on the pitch.

caused mainly by the share ownership benchmarking that has led to a greater allocation of investment in UK equities to the rest of the world. The largest downward revision is in 2016 (negative £489.8 billion) and includes these improvements, as well as the inclusion of revised data.

Share ownership benchmarking

Regular readers of my work in this area will be familiar with the concept that big changes sometimes come from a weak base and here it is.

The benchmarks were last updated in 2012, when the 2010 Share Ownership Survey was available. Since that time, we have run the 2012 and 2014 Share Ownership Surveys and reprocessed the 2010 survey.

So the numbers being used in 2016 are from 2014 at best and the quality and reliability of the numbers is such that the 2010 ones are still be reprocessed in 2017. On that basis the 2014 survey will still be open for change until at least 2021. Or to put it another way they simply do not know.

Comment

So in essence the main changes in the recent UK numbers for the stock and flow of our international position depend on assumptions about foreign holding of equities and corporate bonds respectively. There are a range of issues but let us start with the word assumption which means they do not know and could be very wrong. This is an area where a UK strength which is the City of London is an issue as the international flows in and out will be enormous and let us face the fact that a fair bit of it will be flows which are the equivalent of the “dark web”. So we have a specific problem in terms of scale compared to the size of our economy.

Before we even get to these sort of numbers we have a lot of issues with our trade data. You do not have to take my word for it as here is the official view from the UK Statistics Authority.

For earlier monthly releases of UK Trade Statistics that have also been affected by this error, the versions on the website should be amended to make clear to users that the errors led the Authority to suspend the National Statistics designation on 14 November 2014.

So this is balanced let me give you an example in the other direction from the same late September barrage of data.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

Or the way our savings data surged!

I do not mean to be critical of individual statisticians many of whom no doubt do their best and work hard. But sadly much of the output simply cannot be taken at face value.

 

 

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.

 

Is the football transfer market rational?

As we approach what in the UK is a Bank Holiday weekend many thoughts turn to the weekend’s sport and football in particular. News is increasingly dominated by the UK Premier League but of course there are strong European influences highlighted by yesterday’s Champions League draw and today’s Europa League one. The latter indicates a change as it replaced the UEFA Cup which had a fair bit of prestige back in the day as opposed to a league that many teams were not keen to be in although in recent times that appears to have switched again, That may of course simply be because Chelsea and Manchester United have won it as opposed to much poorer recent UK efforts in the Champions League.

If we move to the economics then the ever larger sums are having an impact and regular readers will be aware that I mull from time to time how much of this is inflation and how much genuine growth? From Deloittes.

In 2015/16 Premier League revenues rose to a record £3.6 billion. Each club generated more on average than the whole top division of 22 clubs did in total in 1991/92 and commercial revenues exceeded £1 billion for the first time in the league’s history.

It has been a heady mix of higher ticket prices and subscription TV fees which have been mostly inflationary and higher commercial revenues which I would suggest are growth. Oh and for those unaware the UK has split its subscription TV coverage so you need to pay 2 subscriptions now to get everything. Sneaky inflation I think especially as at least some of the European competitions was free to air albeit you might have to watch some advertisements.

The balance of payments issue is even more complex as we have the tap running into the sink via ever larger fees from overseas viewers of the Premiership but also a plug hole as we buy ever more foreign players. As to the wages we pay foreign players it is almost impossible to figure out how much will be spent here.  I also note with a wry smile that the Premier League all time 11 just voted for on the BBC website had 8 British players. So we continually buy foreign players when the best ones were British all along? What of course we are seeing here is the influence of emotion and irrationality which strongly influences these matters. Also if 25 years the new all-time?

Is it Rational?

The Financial Times has published some research suggesting that the various transfer fees are rational.

Data analysis suggests sums spent on players are in proportion to resources available

Care is needed with something like that as if we look at other news the woman who has won that enormous sum on the US Lottery could easily massively overpay for things and say she has plenty left. In fact it is exactly the sort of argument used to justify any raging bubble and at that specific moment in time it is usually true, the catch is of course that time only seems to be suspended and moves on. First let us update the numbers which have soared again.

 

According to Deloitte, more than £1.17bn has been splashed out this summer by clubs in the Premier League, Europe’s wealthiest division, where they have combined revenues of roughly £4.5bn. Overall spending in this summer’s window has already breached the £1.16bn spent by English sides during the same period in 2016.

Okay but let me point out the missing number here which is the wages commitment which over time might not be far off as much again. As transfer fees rise clubs are keen to sign these players up for long contracts at high wages which is an ongoing annual burden. Also it is hard to know where to start with this below.

 

Neymar’s transfer is an outlier, with the Brazilian forward’s fee representing more than 40 per cent of PSG’s revenues of €521m. However, the French club believes the global superstar will enable it to secure higher income from future commercial and merchandising deals, as well as achieve better performances in European competition.

We may be about to get a lesson in how quickly an outlier becomes the norm! Maybe not too long if this from L’Equipe is any guide.

Barcelona have agreed a deal worth up to 150m euros (£138m) to sign Borussia Dortmund’s 20-year-old France forward Ousmane Dembele.

They are also offering what only a few months ago would have been an extraordinary sum for Phillipe Coutinho at Liverpool. We get a hint here at the inflation around because he was bought by Liverpool for £8.5 million according to the BBC and he has played really well so shall we say his price should be now treble or quadruple? I would be interested in reader’s thoughts as trying that sort of analysis has a lot of growth but also lashings of inflation. We also need the caveat that the media is not entirely reliable with its price estimates as rumour is dressed up as fact.

Bubbilicious

Apparently the numbers do work.

 

21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings……….21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings.

So current prices tell us that prices are statistically current? It is hard not to think of someone proclaiming Dutch Tulip prices were statistically based back in the day. Even if we suspend such thoughts the model as presented gives some rather odd results. For example Arsenal would presumably not have bought Lacazette if they had known he was about as likely to lose as win them points. Chelsea are certainly not users of the system as for Rudiger and Bakayoko it is apparently only a question of how many points they will cost them. Let’s face it any football fan would be able to figure out that Bonucci would improve pretty much any team he joined. Those who watched the woeful keepy-uppy skills of Paulinho at his Barcelona presentation may be scratching their heads at any scenario where he will improve them.

Oh and correct me if I am wrong but is this not simply another form of extend and pretend?

 

Tim Bridge, a senior manager at Deloitte’s sports business group, says: “Clubs do not account for a transfer all upfront, instead spreading the fee across the life of the contract, so a £30m to £40m revenue uplift in one year translates to £200m in transfer spend across a five-year period.”

They do of course have some income sources which may be fixed for this period but not all of them.

Comment

Can something which depends so much on emotion ever be fully rational? I doubt it. This does not mean that there have not been pockets of rationality such as past purchases of loss making UK Premiership clubs who later turned into money machines. In some cases this involved luck as the debt that the Glazers loaded on Manchester United should have both imploded and exploded after the credit crunch but of course the central banks stepped in. So they should perhaps raise a glass to Janet Yellen and Mario Draghi as they speak later at Jackson Hole. Actually in more ways than one because if I recall correctly the loans that were used by Real Madrid to buy Cristiano Ronaldo were used as collateral at the ECB.

Over my career I have seen so many statistical models suddenly collapse as the assumptions behind them disappear into a mathematical quicksand. So in essence here apparent rationality becomes something else or the modellers can sing along with both football fans and The Monkees.

Then I saw her face, now I’m a believer
Not a trace of doubt in my mind.
I’m in love, I’m a believer!
I couldn’t leave her if I tried.

Me on Core Finance TV

http://www.corelondon.tv/consequences-parallel-currency-italy-not-yes-man-economics/

 

 

UK economic growth is showing some signs of slowing

We advance on quite a bit of UK economic data today and in a link to yesterday’s article there is news to make  Gertjan Vlieghe of the Bank of England even more gloomy. It comes from the housing market.

House prices in the three months to March were 0.1% higher than in the previous quarter; the lowest quarterly rate of change since October 2016. The annual rate of growth fell further; to 3.8% from February’s 5.1%, the lowest rate since May 2013. ( Halifax).

The date given is significant as it is just before the Bank of England launched its initiative to ramp house prices called the Funding for Lending Scheme. Officially this was supposed to boost business lending whereas the reality was that mortgage rates fell quite quickly by over 1% and the total drop was around 2% according to the Bank of England. The UK house market responded in it usual manner to such stimulus. If we stay with the Bank of England it will no doubt be disappointed that its latest banking and house price subsidy scheme called the Term Funding Scheme has not worked in spite of the £55 billion provided.

By contrast I welcome this news which is being reported by more than one source and regular readers will be aware I was expecting it. Even the Halifax itself briefly joins in.

A lengthy period of rapid house price growth has made it increasingly difficult for many to purchase a home as income growth has failed to keep up, which appears to have curbed housing demand.

An extraordinary example of this is given from the London borough of Haringey when houses have “earnt” much faster than their owners salaries/wages.

House prices in the borough increased by an average of £139,803 over the last two years, exceeding average take-home earnings in the area of £48,353 over the same period – a difference of £91,450, equivalent to £3,810 per month.

What could go wrong?

February was not a good month for the UK economy

This morning’s data releases show that we were not at our best this February.

In February 2017, total production decreased by 0.7% compared with January 2017 with falls in all four main sectors, with electricity and gas providing the largest downward contribution, decreasing by 3.4%.

It is with a wry smile that I note that like the poor numbers for Spain also released this morning a familiar scapegoat takes the rap.

The monthly decrease in electricity and gas was largely due to falls in both electricity generation and in the supply and distribution of gas and gaseous fuels; this was largely attributable to the temperature in February 2017 being 1.6 degrees Celsius warmer than average.

Manufacturing output also fell by 0.1% as the Pharmaceutical industry continued its erratic pattern and drove the numbers yet again.

The deficit on trade in goods and services widened to £3.7 billion in February 2017 from a revised deficit of £3.0 billion in January 2017, predominantly due to an increase in imports of erratic goods;

This was added to by this.

The largest revision was to exports, with a downward revision of £1.3 billion in January 2017. This was mainly due to a revision to the exports of erratic commodities (down by £1.0 billion).

Some of the problem is the ongoing issue of how the UK’s gold trade is measured. Frankly the efforts are not going so well. Better news came from this revision as we see that we both exported and imported more.

Since the last UK trade release, there have been upward revisions across both exports and imports of trade in services throughout the 4 quarters of 2016.

Whilst I continue to have little confidence in the numbers the official construction series had a weak month as well.

output fell by 1.7% in February 2017 in comparison to January 2017……infrastructure provided one of the main downward pressures on output in February, decreasing by 7.3%.

Taking some perspective

Underneath this some of the recent trends remain good. For example if we look at manufacturing.

In the 3 months to February 2017, manufacturing increased by 2.1% (unchanged from the 3 months to January 2017), continuing its strongest growth since May 2010……. ( and on a year ago) manufacturing providing the largest contribution, increasing by 3.3%.

This has been driven by a combination of the transport industry, textiles, machinery and computer equipment.

Within this sub-sector, the manufacture of motor vehicles, trailers and semi-trailers rose by 14.4% compared with February 2016.

This drove production higher so that it is 2.8% higher than a year ago although North Sea Oil & Gas pulled it lower.

If we move to the trade picture and look for some perspective we see this.

In the 3 months to February 2017, the deficit on trade in goods and services narrowed to £8.5 billion, reflecting a higher increase in exports than imports, mainly due to increases in exports of machinery and transport equipment, oil and chemicals;

So the by now oh so familiar deficit! But a little lower than before. We should remember that we had a relatively good end to 2016.

The current account deficit improved in Quarter 4 2016, mainly due to an improved primary balance and an improved trade in goods position.

However we now wait for the March data as another weak month would be the first turn down in the UK economy for a while. Should we see that then we will be even further away from regaining the pre credit crunch position.

both production and manufacturing output have steadily risen but remain well below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008 by 6.7% and 3.0% respectively in the 3 months to February 2017.

Productivity

This of course is one of the problem areas of the post credit crunch world and whilst we have some the problem is far from solved.

Productivity – as measured by output per hour worked – increased by 0.4% in Quarter 4 (Oct to Dec) 2016, following growth of 0.2%, 0.3% and 0.3% in the 3 preceding quarters. As a result, labour productivity was around 1.2% higher in Quarter 4 2016 than in the same period a year earlier and grew consistently over 2016.

Household Debt

I think the chart not only speaks for itself but is rather eloquent.

 

Comment

We have seen the first series of weak numbers from the UK economy since the EU leave vote. Production fell in January and that has now been repeated in February as even manufacturing saw a dip. If we look back the services sector had a disappointing January so the expectations for the NIESR GDP estimate later are likely to cluster around 0.4%. Of course the Bank of England will be watching all of this and perhaps especially the weaker house price data.

As ever the numbers are erratic and we have only part of the picture. On the optimistic front the business confidence figures for all out main sectors showed growth in March. In fact the services data was strong.

March data pointed to a rebound in UK service sector growth, with business activity and incoming new work both rising at the strongest rates so far in 2017. Survey respondents also remained optimistic about the year-ahead business outlook,

Fingers crossed!