The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,
Satisfied.

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.

Comment

It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.

 

 

There are major problems brewing in the Pacific for the world economy

It has been something of an economic tenet for a while now that the most dynamic part of the world economy is to be found in the Pacific region. However the credit crunch era has thrown up all sorts of challenges to what were established ideas and it is doing so again right now. The particular issue is what was supposed to be a strength which is trade and we saw another worrying sign on Wednesday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

That is South Korea as we continue our journey past 750 interest-rate cuts in the credit crunch era. Here is their answer to Carly Simon’s famous question, why?

Economic growth in Korea has continued to slow. Private consumption has slowed somewhat, while investment has remained weak. Exports have sustained their sluggish trend as the export prices of semiconductors, petroleum products and chemicals have continued to fall amid the weakening of global trade.

So we see that the economy has been hit by trade issues and that unsurprisingly this has hit investment but also that it has fed through into domestic consumption. Next we got further confirmation that they are blaming trade as we wonder what is Korean for Johnny Foreigner?

Affected mainly by worsening global economic conditions, the growth of the Korean economy is expected to fall back below the July projection…….. The downside risks include a spread of  global trade disputes, a heightening of geopolitical risks and a deepening global
economic slowdown.

We also see that the Korean government has already acted.

Among the upside risks to the growth outlook are an improvement in domestic demand thanks to a strengthening of government policies to shore up the economy and progress in US-China trade negotiations.

 

Quarterly economic growth has been erratic so far this year but Xinhuanet gives us an idea of the trend.

From a year earlier, the real GDP grew 2 percent in the second quarter. It was lower than an increase of 2.8 percent for the same quarter of 2017 and a growth of 2.9 percent for the same quarter of 2018.

Singapore

On the one hand the outlook is supposed to be bright.

Singapore has knocked the United States out of the top spot in the World Economic Forum’s annual competitiveness report. The index, published on Wednesday, takes stock of an economy’s competitive landscape, measuring factors such as macroeconomic stability, infrastructure, the labor market and innovation capability. ( CNN )

The good cheer was not repeated in this from the Monetary Authority of Singapore on Monday.

According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 0.1% year-on-year in Q3 2019, similar to the preceding quarter. In the last six months, the drag on GDP growth exerted by the manufacturing sector has intensified, reflecting the ongoing downturn in the global electronics cycle as well as the pullback in investment spending, caused in part by the uncertainty in US-China relations.

They are very sharp with the GDP number perhaps helped by being a City state. The future does not look too bright either if we look through the rhetoric.

On the whole, Singapore’s GDP growth is projected to come in at around the mid-point of the 0–1% forecast range in 2019 and improve modestly in 2020.

The Straits Times has fone a heroic job trying to make the data below look positive.

Non-oil domestic exports (Nodx) fell by 8.1 per cent in September, a somewhat better showing than the 9 percent fall in August, according to data released by Enterprise Singapore on Thursday (Oct 17).

This was the third month in a row where shipments improved, and the August figure – revised downwards from the 8.9 per cent fall previously reported – also marked a return to single-digit territory after five consecutive months of double-digit declines.

But many eyes will have turned to this bit.

Electronics products weighed down Nodx, shrinking 24.8 per cent year-on-year in September, following a 25.9 per cent contraction in August.

China

This morning has brought the news we were pretty much expecting.

China’s economic growth slowed in the third quarter amid weak demand at home and as the trade war with the U.S. drags on exports.

Gross domestic product rose 6% in the July-September period from a year ago, the slowest pace since the early 1990s and weaker than the consensus forecast of 6.1%. Factory output rose 5.8% in September, retail sales expanded 7.8%, while investment gained 5.4% in the first nine months of the year. ( Bloomberg ).

Back on the 21st of January I pointed out this.

The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

The numbers have been slipping away ever since although Bloomberg tries to put a brave face on it. After all you fo not want to upset the Chinese as you might find yourself like the NBA.

Even with the slowdown, year to date growth of 6.2% suggests the government can hit its 6% and 6.5% for 2019.

Actually M1 money supply growth picked up after January to as high as 4.4% but has now fallen back to 3.4%. So the easing has helped and we are not looking at an “end of the world as we know it” scenario in domestic terms but rather caution.

Before I move on let me point out the consequences of the African swine fever outbreak in the pig industry.

Of which, livestock meat price up by 46.9 percent, affecting nearly 2.03 percentage points increase in the CPI (price of pork was up by 69.3 percent, affecting nearly 1.65 percentage points increase in the CPI), poultry meat up by 14.7 percent, affecting nearly 0.18 percentage point increase in the CPI. ( China Bureau of Statistics )

Japan

Overnight the Cabinet Office has informed us that the Bank of Japan is getting ever further away from its inflation target.

  The consumer price index for Japan in September 2019 was 101.9 (2015=100), up 0.2% over the year before seasonal adjustment, and the same level as  the previous month on a seasonally adjusted basis.

They will of course torture the numbers to find any flicker so if you here about furniture and household utensils ( up 2.7%) that will be why.

Next month the issue will be solved by the Consumption Tax rise but of course that takes money out of workers and consumers pockets at a time of economic trouble. What could go wrong?

Comment

As you can see there are plenty of signs of economic trouble in the Pacific region. Many of these countries are used to much higher rates of economic growth than us in the west. According to Bloomberg Indonesia is worried too.

Indonesia‘s central bank has room to cut interest rates further, perhaps as soon as next week, says its deputy governor

Then of course there is the Reserve Bank of Australia which is cutting interest-rates at a rapid rate. In fact Deputy Governor Debelle gave a speech in Sydney updating us on his priority.

The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the housing market is the Australian economy.[1] That clearly is not the case. But at the same time, developments in the housing market, both the established market and housing construction, have a broader impact than the simple numbers would suggest.

 

 

Australia cuts interest-rates for the third time in five months

This morning has brought news that we were expecting so let me hand you over to the Reserve Bank of Australia or RBA.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.

This means that the RBA has cut three times since the fifth of June. Thus those who travel in a land down under are seeing a central bank in panic mode as it has halved the official interest-rate in this period. It means that they have joined the central bankers headbangers club who rush to slash interest-rates blindly ignoring the fact that those who have already done so are singing along with Coldplay.

Oh no I see
A spider web it’s tangled up with me
And I lost my head
And thought of all the stupid things I said
Oh no what’s this
A spider web and I’m caught in the middle
So I turned to run
The thought of all the stupid things I’ve done.

If we look at the statement we get a reminder of our South China Territories theme.

The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

We can cut to the nub of this by looking at what the RBA also released this morning.

Preliminary estimates for September indicate that the index decreased by 2.7 per cent (on a monthly average basis) in SDR terms, after decreasing by 4.6 per cent in August (revised). The non-rural and rural subindices decreased in the month, while the base metals subindex increased. In Australian dollar terms, the index decreased by 3.5 per cent in September.

So the benefit from Australia’s enormous commodity resources has faded although it is still just above the level last year.

Over the past year, the index has increased by 1.8 per cent in SDR terms, led by higher iron ore, gold and beef & veal prices. The index has increased by 5.2 per cent in Australian dollar terms.

Aussie Dollar

The index above makes me think of this and here is a view from DailyFX.

Australian Dollar price action has remained subdued throughout most of 2019 with spot AUDUSD trading slightly above multi-year lows.

As I type this an Aussie Dollar buys 0.67 of a US Dollar which is down by 6.6% over the past year. The trade-weighted index has been in decline also having been 65.1 at the opening of 2018 as opposed to the 58.9 of this morning’s calculation.

So along with the interest-rate cuts we have seen a mild currency depreciation or devaluation. But so far President Trump has not turned his attention to Australia.

Also if we stay with DailyFX I find the statement below simply extraordinary.

 if the central bank continues to favor a firm monetary policy stance since announcing back-to-back rate cuts.

A firm monetary stance?

Back to the RBA Statement

Apparently in case you have not spotted it everybody else is doing it.

Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation.

As central bankers are pack animals ( the idea of going solo wakes them up in a cold sweat) this is very important to them.

Then we got a bit of a “hang on a bit moment” with this.

The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018.

Now if you believe that things are turning for the better an obvious problem is created. Having cut interest-rates twice in short order why not wait for more of the effect before acting again as the full impact is not reached for 18/24 months and we have barely made four?

Mind you if you look at the opening of the statement and the index of commodity prices you may well be wondering how that fits with this?

a brighter outlook for the resources sector should all support growth.

Indeed the next bit questions why you need three interest-rate cuts in short order as well.

Employment has continued to grow strongly and labour force participation is at a record high.

With that situation this is hardly a surprise as it is only to be expected.

Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate.

The higher participation rate makes this hard to read and analyse.

Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Moving to inflation the RBA seems quite happy.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

It does not seem to bother them much that if wage growth remains weak trying to boost inflation is a bad idea. Also if they look at China there is an issue brewing especially as the Swine Fever outbreak seems to be continuing to spread.

Pork prices have surged more than 70% this year in China due to swine fever, and “people are panicking.”

( Bloomberg)

House Prices

These are always in there and we start with an upbeat message.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.

Yet the foundations quickly crumble.

In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.

Comment

A complete capitulation by the RBA is in progress.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

They like their other central banking colleagues around the word fear for the consequences so they are getting their retaliation in early.

The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.

This is referring to the use of what is called r* or the “natural” rate of interest which of course is anything but. You see in this Ivory Tower fantasy it is r* which is cutting interest-rates and not their votes for cuts. In fact it is nothing at all to do with them really unless by some fluke it works in which case the credit is 100% theirs.

Sweet fantasy (sweet sweet)
In my fantasy
Sweet fantasy
Sweet, sweet fantasy ( Mariah Carey )

 

 

What is the economic impact of an oil price shock?

The economic news event of the weekend was the attack on the Saudi oil production facilities. It looks as though Houthi rebels and Iran were involved but forgive me if I am careful about such things along the lines of this from the Who.

Then I’ll get on my knees and pray
We don’t get fooled again

As you can imagine there was a lot of attention on the London oil price opening last night and no doubt fear amongst those who were short the oil price. Their fears were confirmed as we saw an initial flurry of stop loss trading which can the price of a barrel of Brent Crude Oil go above US $71 which was some US $11 higher. It then fell back to more like US $68 quite quickly. For those unaware this is a familiar pattern in such circumstances as some will have lost so much money they have to close their position and everybody knows that. It is a cruel and harsh world although of course you need to know the nature of the beast before you play.

Thus the first impact was some severe punishment for sections of the oil trading market. The rumour was that a lot of quant funds were short of oil and we will have to wait and see if there is a blow-up here. If we move on we see that the oil price has been falling this morning leaving the price of a barrel of Brent Crude at US $65.50 or up over 8%.So let us start by looking at the winners from a higher oil price.

Winners

A clear group of winners and presumably the group who have taken the edge off the higher oil price are the shale oil wildcatters in the United States and elsewhere.

“Since the last in-depth review five years ago, the United States has reshaped energy markets both domestically and around the world,” the IEA’s Executive Director, Fatih Birol, said at the presentation of the report on Friday, accompanied by U.S. Secretary of Energy Rick Perry. ( oilprice.com )

If we continue with this analysis here is some more detail.

U.S. crude oil exports have soared since the ban was lifted at the end of 2015, to reach 3.159 million bpd on average in June 2019, according to the latest available EIA crude export detail.

As you can see the impact of the shale oil era had one underlying effect last night and this morning via the way that Saudi production is not as important as it was. But also there is the economic model of the shale oil industry which I have pointed out before is more of a cash flow model than a profit one. So I would have expected them to rush to hedge their production last night and this morning. As it happens these levels are ones which would be profitable for them as their costs are often around US $50 per barrel. However they will not be making as much as you might think as they would have impacted more on the WTI ( West Texas Intermediate ) benchmark which is about US $5 lower than the Brent benchmark.

Other companies in the production business will also be winners and we see an example of that as the British Petroleum share price is up 4% at 523 pence today.

Next comes the countries who are net oil producers. We have looked at the US already and the position for Saudi Arabia is mixed as it is getting a higher price but has lower production. Russia is a clear winner as its economy depends so much on its oil production.

Exports of mineral products (consisting mainly of oil and natural gas) accounted for 59.2% of total Russian exports in 2016 (Rosstat, 2017).

There is quite a list of winners in the Middle East including ironically Iran assuming it will be allowed to sell its oil. Then places like Kazahkstan as well as Canada and to some extent Australia. There is also Norway where according to Norskpetroleum it represents some 16% of GDP and 40% of exports as well as this.

The government’s total net cash flow from the petroleum industry is estimated to NOK 251 billion in 2018 and NOK 263 billion in 2019

Thus I am a little unclear how Oxford Economics are reporting that Norway would lose from a higher oil price.

There are quite a few African countries which produce oil and Libya comes to mind as do Ghana and Nigeria ( assuming the output of the latter can avoid the problems there).

Another group of winners would be world central banks especially the ECB after its moves on Thursday. The reason for this is that they have been trying to raise the inflation rate for some time now and either mostly or entirely failing as Mario Draghi pointed out on Friday..

The reference to levels sufficiently close to but below 2% signals that we want to see projected inflation to significantly increase from the current realised and projected inflation figures which are well below the levels that we consider to be in line with our aim.

Should this transpire then we will no doubt see a shift away from core and the new “super core” measures of inflation which for newer readers basically ignore what are really important.

Losers

These are the net oil importers which are most of us. In terms of economic effect the standard view has been this from FXCM.

Data analysed by the Federal Reserve shows that a 10 percent increase in the price of oil is associated with about a 1.4 percent drop in the level of U.S. real GDP.

The 10% depends on the actual price but that has been a standard with the Euro area thinking there would be the same effect on it from a US $5 move. Of course these days the US would see more offset from the shale industry and I think worldwide the advance of renewable energy would help at the margins. But a higher oil price leads to a net loss overall as the importers are assumed to fall by more than the exporters rise. Geographically one thinks of China, Japan and India.

The effect on inflation is unambiguously bad and let me offer a critique of the central banking view above. The impact of inflation on real wages will make workers and consumers worse and not better off reminding us that central bankers have long since decoupled from reality.

Comment

There are a couple of perspectives here. The first is that in any warlike situation the truth is the first casualty. This leads to a situation where we do not know how long Saudi oil output will be reduced for, which means that we do not know how long there will be an upwards push on the oil price. Next comes a situation where looking ahead there will be fears that attacks like this could happen again. That is in some way illogical as defences will no doubt be improved but is part of human nature especially as we now know how concentrated the production facilities are in Saudi Arabia.

Another perspective is provided by the fact that the oil price is back to where it was in May and some of July.

Oh and central bankers used to respond to this sort of thing with interest-rate increases whereas later this week we are expecting an interest-rate cut from the US Federal Reserve. How times change…..

Podcast

Thank you to those of you who have supported this as the listener numbers on Soundcloud on Saturday alone exceeded any previous week..

 

Australia faces both falling house prices and a falling money supply

This morning has brought us up to date with news from what the Men at Work described as.

Living in a land down under
Where women glow and men plunder
Can’t you hear, can’t you hear the thunder?

That is of course what was called Australis and then Australia and these days in economic terms can be considered to be the South China Territories. The monetary policy statement from the Reserve Bank of Australia (RBA)  reinforces the latter point as you can see.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.

One needs to read between the lines of such rhetoric as for a central banker “remains reasonable” is a little downbeat in reality as we note the following use of “declined” “softened” and “slower”.But he was providing a background to this.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

In essence the heat is on for another interest-rate cut and if you are wondering why? There is this.

GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.

I will come to the central bankers fear of negative wealth effects from what they call an “adjustment in housing markets” in a moment as we note they cannot bring themselves to mention lower house prices. The pattern of GDP growth looks really rather poor as we see that the trend goes 1.1%,0.8% and then 0.3% and now 0.2%. So we see a familiar pattern of much weaker growth in the second half in 2018 which if we see again in the first half of this year will see the annual rate of growth halve. Actually it may be worse than that as the only factor driving growth according to Australia Statistics was this.

Government final consumption expenditure increased 1.8% during the quarter contributing 0.3 percentage points to GDP growth.

So without it the economy would have shrunk and Australia might be on course for something it has escaped for quite a while which is a recession. Also according to the Australia Treasury Budget from earlier it is planning a dose of austerity.

The total turnaround in the budget balance between 2013-14 and 2019-20 is projected to be $55.5 billion, or 3.4 per cent of GDP.

The Government’s plan for a stronger economy ensures it can guarantee essential services while returning the budget to surplus.

This budget year will see a surplus of $7.1 billion, equal to 0.4 per cent of GDP.

Budget surpluses will build in size in the medium term and are expected to exceed 1 per cent of GDP from 2026-27.

So as you can see it seems unlikely that government spending will continue to boost the economy. Also as they are assume growth of 2.25% then those numbers as so often seem rooted in fantasy rather than reality. Next if we switch back to the RBA the austerity plan comes at this time.

 In Australia, long-term bond yields have fallen to historically low levels.

In fact they fell to an all time low for the benchmark ten-year at 1.72% recently and is spite of a bounce back are still at a very low 1.82%. So yet again we are observing a situation where countries borrow heavily when it is expensive and try in this instance not to borrow at all when it is cheap. I know it is more complicated than that but we also have this into an economic slow down.

The Government is focused on reducing net debt as a share of the economy, which is expected to peak in 2018-19 at 19.2 per cent of GDP.

The Government is on track to eliminate net debt by 2029-30.

So it may look to be Keynesian but reality seems set to intervene especially on the economic growth forecasts.

House Prices

Again we see that the Governor of the RBA cannot bring himself to say, falling house prices. It is apparently just too painful.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low.

Even worse it has implications for “the precious”.

 At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased.

Indeed a central banker would have his/her head in their hands as they see the negative wealth effects in the latest quarterly national accounts.

Real holding losses on land and dwellings were $170.8b. This marks a fourth consecutive quarter of losses and reflects the falling residential property prices over the past year. ……The real holding losses have translated into the first fall in household assets (-1.5%) since the September quarter 2011. Household liabilities increased 1.0%.

Some of the latter was falling equity prices which have since recovered but house prices have not. Here is ABC News on the first quarter of 2019.

On a national basis, the average house price fell 2.4 per cent to $540,676, and apartment prices dropped 2.2 per cent to $484,552 during that period.

CoreLogic observed that markets which experienced their peaks earlier had experienced sharper downturns.

Darwin and Perth property prices skyrocketed during the mining boom, but peaked in 2014. Since then dwelling values in both capitals have fallen by 27.5 per cent and 18.1 per cent respectively.

So it seems likely that the value of the housing stock fell again. If we move to the official series we see that in the rather unlikely instance you could sell all of Australia’s houses and flats in on e go then from the end of 2015 to early 2018 the value rose by one trillion Aussie Dollars from a bit below 6 trillion to a bit below 7. Now in a development to pack ice round a central bankers heart it has fallen to 6.7 trillion officially and if we factor in other measures is now 6.6 trillion Aussie Dollars and to quote Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fallin’

Comment

Australia escaped the worst of the credit crunch via its enormous natural resource base. According to the RBA index of commodity prices that has not ended.

Preliminary estimates for March indicate that the index decreased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 5.3 per cent in February (revised)…….Over the past year, the index has increased by 11.0 per cent in SDR terms, led by higher iron ore, LNG and alumina prices. The index has increased by 16.6 per cent in Australian dollar terms.

But now we see that the domestic economy has weakened whilst the boost from above has faded. If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms. Thus the outlook for the domestic economy remains weak and could get weaker.

 

 

The banks continue to be trouble,trouble,trouble

The weekend just past has been full of banking news which has not been good. That is quite an anti achievement when we note that a decade or so ago when the banking crisis hit we were assured by politicians and central bankers that it would never be allowed to happen again and they would fix the problems. Whereas the reality has been represented by this from the Guardian this morning.

Under the new Lloyds Bank “Lend A Hand” deal, a first-time buyer will be able to borrow up to £500,000 for a new home, without putting down a penny of deposit.

Why is this necessary? It is because the establishment have played the same old song of higher house prices and telling people they are better off via wealth effects. Meanwhile the claims of no inflation are contradicted by the increasing inability of first-time buyers to afford housing even with ultra-low mortgage rates to help.

In this instance the mortgage is 100% of the loan for the people taking it out but payments are backed for 3 years by a family member or members.

The Lloyds deal requires that a member of the family – such as parent, grandparent or close relative – helps out. The bank will only grant the 100% mortgage if the family member puts a sum equal to 10% of the value of the property into a Lloyds savings account.

I have looked it up and their liability is limited to the first 3 years.

At the end of the 3 years, you will be able to take out your savings plus interest. That’s as long as the buyer hasn’t missed any payments or their home hasn’t been repossessed.

Frankly if payments are in danger of being missed it may suit the family member to fund them. But unless things go dreadfully wrong after 3 years we have what it a mortgage with only a little equity as not much is repaid in the first 3 years.

But as ever we see something of a round-tripping cycle between the central bank which pushes cheap liquidity to the banks who then pump up the housing market.

Vim Maru, group director of Lloyds Banking Group, which also controls Halifax, said: “We are committed to lending £30bn to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and ‘Lend a Hand’ is one of the ways we will do this.

Mark Carney’s morning espresso will be tasting especially good today.

China

Let me hand you over to the People’s Bank of China which has issued a Q&A about its new (easing) policy and it starts with something very familiar.

Banks need to have adequate capital to guarantee sustainable financial support for the real economy.

When central banks state that what they in fact mean is the housing sector. For example the Bank of England claimed its Funding for Lending Scheme was for smaller businesses when in fact lending to them fell but mortgage lending picked up as mortgage rates plunged. So let us dig deeper.

The Central Bank Bills Swap (CBS) allows financial institutions holding banks’ perpetual bonds to have more collateral of high quality, improves market liquidity of such bonds, and increases market desire to buy them, thereby encouraging banks to replenish capital via perpetual bond issuance and creating favourable conditions for stepping up financial support for the real economy.

As we do so we see that what are finite organisations (banks) have debt forever which is troubling for starters. We also note that this is a type of debt for equity operation as we mull that there are some quite good reasons for not being keen on bank equity. So debt in this form ( perpetual) qualifies as capital and I believe Tier 1 capital in this case. The next move is that the perpetual bonds can be swapped for central bank bills meaning that the central bank now has the risk and the investor has none in return for a haircut depending on how much collateral is required. Thus we get.

increases market desire to buy them

because if you have worries you just accept the haircut and pass the rest of the risk to the PBOC.  As to improving market liquidity then the Bank of China was quick to back up that point.

Bank of China issued 40 billion yuan perpetual on Friday at a coupon rate of 4.5%, the first bank issuer of perpetualbond in . ( Yuan Talks)

The catch is that these sort of moves create liquidity for a time but later can drain it. That is because if things go wrong you end up with two very different markets which is the real one and the central bank supported one.

So the banks will get more capital and they will use it to raise lending and if history is any guide the “real economy” will be the housing market. This will then be presented as a surprise and we will learn what the Chinese word for counterfactual is.

Deutsche Bank

It is always there isn’t it? Let us start with what looked like some better news which was a 4% rally in the share price to 8.13 Euros on Friday. This looks like an early wire on this from @DeltaOne yesterday.

DEUTSCHE BANK GETS ADDITIONAL INVESTMENT FROM QATAR…….DISCUSSIONS ON QATAR INVESTMENT ARE ADVANCED BUT NO FINAL AGREEMENT TIMING AND SIZE OF INVESTMENT UNCLEAR

As they are already shareholders then this would be a case of doubling up or rather if we look at the price history doubling down. Of course this is not the only plan doing the rounds about DB.

Shareholders in Deutsche Bank have voiced deep concerns about the German lender’s mooted tie-up with domestic rival Commerzbank, saying the move would “paralyse” the country’s largest lender and destroy value for investors. ( Financial News)

Mind you it has been doing a pretty good job of destroying shareholder value all on its own.

Greece

Here we have seen massive sums used to pump up the banks at the cost of the national debt of Greece itself. But according to the IMF at the end of last week more is needed.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets. Coordinated steps by key stakeholders are needed to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).

So all the bailouts have been to the tune of “Tantalize Me” by Jimmy the Hoover from back in the day.

Comment

The sad part of all of this is that we are observing yet another lost decade. As so often the hype and indeed hyperbole has not been matched by action. Central banks like to trumpet the improvement in bank capital ratios but if you look at bank share prices then there has been a shortage of investors willing to put their money where the central banks open mouth operations are.

In the case of Deutsche Bank as well as the Chinese and Greek banking systems we see that we are entering yet another phase of the crisis. With the problems recently at Metro Bank in the UK that had its risk model wrong in another “mistake” then the central banks will be on the case this time or maybe not.

This means we have not been processing most model change requests from internal model banks. ( Reserve Bank of New Zealand)

 

Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.