The first business surveys about this economic depression appear

This morning has seen the first actual signals of the scale of the economic slow down going on. One of the problems with official economic data is the  time lag before we get it and this has been exacerbated by the fact that this has been an economic contraction on speed ( LSD). By the time they tell us how bad it has been we may be in quite a different world! It is always a battle between accuracy and timeliness for economic data. Thus eyes will have turned to the business surveys released this morning.

Do ya do ya do ya do ya
Ooh I’m looking for clues
Ooh I’m looking for clues
Ooh I’m looking for clues ( Robert Palmer)


The main series began in Japan earlier and brace yourselves.

#Japan‘s economic downturn deepens drastically in March, dragged down by a sharp contraction in the service sector, according to #PMI data as #coronavirus outbreak led to plummeting tourism, event cancellations and supply chain disruptions. ( IHS Markit )

The composite output index was at 35.8 which indicates an annualised fall in GDP ( Gross Domestic Product) approaching 8% should it continue. There was a split between manufacturing ( 44.8) and services ( 32.7) but not the way we have got used to. The manufacturing number was the worst since April 2009 and the services one was the worst since the series began in 2007.


Next in the series came La Belle France and we needed to brace ourselves even more.

March Flash France PMI suggest GDP is collapsing at an annualised rate approaching double digits, with the Composite Output PMI at an all-time low of 30.2 (51.9 – Feb). Both services and manufacturers recorded extreme drops in output on the month.

There was more to come.

French private sector activity contracted at the
sharpest rate in nearly 22 years of data collection
during March, amid widespread business closures
due to the coronavirus outbreak.

There are obvious fears about employment and hence unemployment.

Amid falling new orders, private sector firms cut
their staff numbers for the first time in nearly threeand-a-half years during March. Moreover, the rate
of reduction was the quickest since April 2013.

I also noted this as I have my concerns about inflation as the Ivory Towers work themselves into deflation mode one more time.

Despite weaker demand conditions, supply
shortages drove input prices higher in March…….with
manufacturers raising output prices for the first time
in three months

We could see disinflation in some areas with sharp inflation in others.


Next up was Germany and by now investors were in the brace position.

The headline Flash Germany
Composite PMI Output Index plunged from 50.7 in
February to 37.2, its lowest since February 2009.
The preliminary data were based on responses
collected between March 12-23.

This led to this analysis.

“The unprecedented collapse in the PMI
underscores how Germany is headed for recession,
and a steep one at that. The March data are
indicative of GDP falling at a quarterly rate of
around 2%, and the escalation of measures to
contain the virus outbreak mean we should be
braced for the downturn to further intensify in the
second quarter.”

You may be thinking that this is better than the ones above but there is a catch. Regular readers will recall that due to a problem in the way it looks at supply this series has inflated the German manufacturing data. This has happened again.

The headline Flash Germany
Manufacturing PMI sank to 45.7, though it was
supported somewhat by a further increase in
supplier delivery times – the most marked since
July 2018 – and a noticeably slower fall in stocks of
purchases, both linked to supply-side disruption

So the truth is that the German numbers are closer to France once we allow for this. We also see the first signals of trouble in the labour markets.

After increasing – albeit marginally – in each of the
previous four months, employment across
Germany’s private sector returned to contraction in
March. The decline was the steepest since May
2009 and was underpinned by similarly sharp drops
in workforce numbers across both manufacturing
and services.

Also we note a continuing pattern where services are being hit much harder than manufacturing, Of course manufacturing had seen a rough 2019 but services have essentially plunged at a rapid rate.

The Euro Area

We do not get much individual detail but you can see that the other Euro area nations are doing even worse.

The rest of the euro area reported an even
steeper decline than seen in both France and
Germany, led by comfortably the sharpest fall in
service sector activity ever recorded, though
manufacturing output also shrank at the steepest
rate for almost 11 years.

I am trying hard to think of PMI numbers in the 20s I have seen before.

Flash Eurozone Services PMI Activity Index(2)
at 28.4 (52.6 in February). Record low (since
July 1998)

Putting it all together we get this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

The UK

Our numbers turned up to a similar drum beat and bass line.

At 37.1 in March, down from 53.0 in February, the seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – signalled the fastest downturn in private sector business activity since the series began in January 1998. The prior low of 38.1 was seen in November 2008.

This was supported by the manufacturing PMI being at 48 but it looks as though we have at least some of the issues at play in the German number too.

Longer suppliers’ delivery times are typically seen as an
advance indicator of rising demand for raw materials and
therefore have a positive influence on the Manufacturing PMI index.

The numbers added to the household finances one from IHS Markit yesterday.

UK consumers are already feeling the financial pinch of
coronavirus, according to the IHS Markit UK Household Finance Index. With the country on the brink of lockdown during the survey collection dates (12-17 March), surveyed households reported the largest degree of pessimism towards job security in over eight years,
with those employed in entertainment and manufacturing sectors deeming their jobs to be at the most risk.


So we have the first inklings of what is taking place in the world economy and we can add it to the 40.7 released by Australia yesterday. However we need a note of caution as these numbers have had troubles before and the issue over the treatment of suppliers delivery times is an issue right now. Also it does not appear to matter if your PMI is 30 or 37 we seem to get told this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

Now I am slightly exaggerating because they have said 1.5% to 2% for the UK but if we are there then France and the Euro area must be more like 3% and maybe worse if the series is to be consistent.

Next I thought I would give you some number-crunching from Japan.

TOKYO (Reuters) – The Bank of Japan on Tuesday acknowledged unrealized losses of 2-3 trillion yen ($18-$27 billion) on its holdings of exchange-traded funds (ETFs) after a rout in Japanese stock prices, raising the prospect it could post an annual loss this year.

Our To Infinity! And Beyond! Theme has been in play for The Tokyo Whale and the emphasis is mine.

Its stock purchase started at a pace of one trillion yen per year in 2013 when the Nikkei was around 12,000. The buying expanded to 3 trillion yen in 2014 and to 6 trillion yen in 2016, ostensibly to boost economic growth and lift inflation, but many investors view the policy as direct intervention to prop up share prices.

Surely not! But the taxpayer may be about to get a warning of sorts.

The unrealized loss of 2-3 trillion yen would wipe out about 1.7 trillion yen of recurring profits the BOJ is estimated to make this year from interest payments on its massive bond holdings, said Hiroshi Ugai, senior economist at J.P. Morgan.

For today that will be on the back burner as the Nikkei 225 equity index rose 7% to just above 18,000 which means that its purchases of over 200 billion Yen yesterday will be onside at least as we note the “clip size” has nearly trebled for The Tokyo Whale.



The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.


This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)


The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.


If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).



That does not fit with this at all.


Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow


This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it

The road to a Bank of England Bank Rate cut

Today sees the production of the UK service-sector Purchasing Manager’s Index for February and this is eagerly awaited. The main reason for this is that the recent data on the UK economy has shown signs of a further slowing in the rate of economic growth. Yesterday’s Economic Review reminded us that whilst 2015 was a relatively good year it was not as good as 2014.

GDP growth for the final quarter of 2015 was unrevised at 0.5%, resulting in a level of GDP 1.9% higher than in the same period in 2014. While growth has continued for the sixth successive year, it moderated somewhat between 2014 and 2015, dropping from 2.9% to 2.2%.

So we were slip-sliding away to quote Paul Simon although the UK ONS did present anew perspective on the credit crunch era.

GDP growth has averaged 2.0% per year since 2009, making growth in 2015 slightly above the recent average.

It hasn’t always felt like that as I recall the fears back in the day that there might be a triple-dip! As time passes revisions tend to mark the numbers higher and such a concept has disappeared. According to the ONS now we have had this.

this continues a six-year period of continuous expansion,

Some care is needed here as there were two quarterly falls in 2012 either side of the Olympics boost.

Also I am reminded of the view that 2% economic growth per year may well represent standing still in the modern era. The GDP per head figures largely support such a view.

A little help from my friends

Regular readers will be aware that I have long criticised the change referred to below which according to analysis presented at the Royal Statistical Society has improved our annual growth rate by something of the order of 0.5% per year. The ONS puts it like this.

The UK shows larger revisions to GDP growth estimates than many other countries over this longer period, but this is mainly due to the switch from RPI- to CPI-based deflation in 2011, a methodological improvement that was not implemented in other countries at the time.

It seems to have slipped their mind to tell us which why it impacted on economic growth! Something to hide?

Something familiar?

This welcome period of UK economic expansion has had two familiar features which have ended up causing trouble in the past.

Much of the growth in the expenditure measure of GDP in recent years has been driven by household consumption and investment

Is investment a euphemism for buying houses? Anyway this tends to be followed by a persistent bugbear.

Net exports have tended to act as a drag on GDP growth, and this trend continued in 2015, with a downward contribution of 0.5 percentage points (against GDP growth for the year of 2.2%).

I was reading a hopeful analysis yesterday from Nordea bank using our effective exchange rate as a predictor. They forecast a boom in UK exports on that basis. Let us hope so but I also note that their chart missed out the 2007/08 devaluation which of course saw a disappointing export response.

Oh and the definition of austerity in my financial lexicon for these times chalks up another victory.

Government consumption made modest, positive contributions to growth in 2014 and 2015 of 0.5 and 0.3 percentage points, respectively, compared with an average of 0.2 percentage points over the past 6 years.

Up is again the new down.


Only last weekend the man responsible for monetary policies which were supposed to rebalance the UK economy away from services and towards manufacturing returned to the news. Apparently a £8 million pension pot does not buy what it used to even when it is indexed to the Retail Price Index ( the lower CPI being for the likes of us….) and so Baron King of Lothbury has written a book. Having not read it I cannot say if it explains this development.

In Quarter 4 (Oct to Dec) 2015, production and manufacturing were 9.8% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008……….Manufacturing output decreased by 0.2% in December 2015 compared with November 2015.

If we look at Monday’s PMI we see this.

The breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall.

So expansion in January was followed by stagnation in February and it came with an ominous side-effect.

The slowdown was also reflected in the labour market, with job losses registered for the second straight month.

Thus we see that the picture for UK manufacturing remains troubled. There are dangers in relying on such business surveys but the truth is that they are timely and official data is not what it was once perceived to be. As it happens both are playing the same song right now its Dire Straits.

There’s panic on the switchboard tongues are ties in knots
Some come out in sympathy some come out in spots
Some blame the management some the employees
And everybody knows it’s the Industrial Disease

The Service Sector

The pattern here has been of rebalancing towards it as opposed to the away promised by Baron King.

The service industries increased by 0.7% in Quarter 4 2015 (Figure 3), unrevised from the previous estimate, marking the twelfth consecutive quarter of positive growth. This follows a 0.6% increase in Quarter 3 2015.

Putting it another way if we put Q1 of 2008 as 100 it is now at an index level of 111.6 with the 2008/09 dip consigned to history.

Today’s catch is that according to the PMI data even it may be slowing.

The UK’s dominant service sector lost momentum in February…… Growth of both total business activity and new business were the weakest since March 2013, leading firms to raise employment at the slowest pace in two-and-a-half years.

So growth but not as we know it to coin a phrase and it was driven by this.

The weaker increase in services activity mainly reflected a slower expansion in the volume of incoming new business.

In terms of an explanation there are some already blaming Brexit which seems to have replaced the weather these days as the scapegoat. So much so in fact I have been surprised that Arsene Wenger has not brought it into play.

The irony is that even at a PMI of 52.7 we are still rebalancing towards the service sector and if it slows as this survey predicts then there is a kicker to this below.

However, the slowdown in services is arguably the most worrying, as the sector has provided an important support to UK economic growth in recent years, not least due to its sheer size


There is much to consider here but if the UK service sector is slowing and the PMI survey is correct it adds not only to the construction and manufacturing surveys but also to the signs of slowing in the official data as described above. Now let me remind you of the words of the Bank of England’s most recent recruit Gertjan Vlieghe that I reported on the 24th of February.

I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.

How quickly Gertjan? Perhaps a little more quickly if he looks at GDP per head as opposed to aggregate GDP. Oh and those who remortgaged on the back of Forward Guidance on interest-rate rises from Governor Carney may be wondering what this from that day means.

We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,

Down is the new up and I await the 5.45 pm speech from Andy Haldane on this subject although of course he may have written it some days ago. You see I would expect him to vote for a cut first.

Just to be clear as I hinted at yesterday this would be a bad idea in my opinion but it is looming larger on the horizon.

Number Crunching

The Bank of England Funding for Lending Scheme is still ongoing so let is look at this.

Net lending by FLS Extension participants to SMEs was £0.6bn in the fourth quarter of 2015

At least the number was positive albeit weaker by £200 million than in the previous quarter. How much did this cost?

Of these, ten participants made total drawdowns of £6.6bn during the fourth quarter of 2015. Participants also repaid £0.7bn, taking total outstanding drawings to £69.5bn.

Now if I gave you £10 at ultra low interest-rates you would probably be happy to loan £1 to a small business at a much higher interest-rate. I do hope this is not funding the record low mortgage rates that keep being announced.