Japan gets paid to issue debt and yet it has just tightened its fiscal policy!

Today I am looking east to the country which is hosting the rugby world cup and let me congratulate them on their victory over Ireland. But there is another area where Japan is currently standing out and that is the arena of fiscal policy. The current establishment view is that it is time that fiscal policy took up the slack after years and indeed in Japan’s case decades of easy monetary policy. One feature of that type of thought is seen by the cheapness of public borrowing in Japan where the ten-year yield is -0.22% and the thirty-year is a mere 0.35%. So Japan is either paying very little or being paid to borrow right now.

Consumption Tax

Last week it did this.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

Things get complex as we note that there are offsetting measures.

The 2 percentage point boost is estimated to inflict about a ¥5.7 trillion burden on households. However, making preschool education free of charge, keeping the 8 percent rate for food and nonalcoholic beverages and beefing up social welfare are expected to lessen that burden to around ¥2 trillion — about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan. ( The Japan Times )

As you can see this takes away a lot of the point of making the change in the first place! According to the government the net effect will be a bit more than a third of the gross. Also it means the government interfering in more areas leafing to transfers of cash from one group to another. Now whilst free preschool education is welcome we have seen extraordinary transfers in the credit crunch era via policies such as negative interest-rates and QE bond buying.

As ever the numbers seem in doubt as NHK News thinks the impact will be larger.

Half the revenue will be spent on making preschool education and childcare free of charge, easing the financial burden of higher education, among other things. The rest will go to restoring the country’s fiscal health.

The economic impact

The very next day Japan’s Cabinet Office released this bombshell.

The Consumer Confidence Index (seasonally adjusted series) in September 2019 was 35.6, down 1.5 points from the previous month.

The Japan Times covered it like this.

A Cabinet Office survey showed earlier this week that consumer sentiment in Japan weakened for the 12th straight month in September, hitting its lowest since the survey started in April 2013……….The index was lower than the 37.1 marked during the first stage of the hike in April 2014.

The last sentence is especially ominous if we consider the impact of the 2014 Consumption Tax rise. If we return to the survey we see from the series that it has been falling since some readings above 44 in late 2017 and the fall has been accelerating. In terms of detail there is this.

Overall livelihood: 33.9 (down 0.9 from the previous month)
Income growth: 38.7 (down 0.8 from the previous month)
Employment: 41.5 (down 0.7 from the previous month)
Willingness to buy durable goods: 28.1 (down 3.6 from the previous month)

So all elements fell and the employment one is particularly significant when we note this.

 The number of unemployed persons in August 2019 was 1.57 million, a decrease of 130 thousand or 7.6% from the previous year…..  The unemployment rate, seasonally adjusted, was 2.2%. ( Japan Statistics Bureau )

As an aside this makes the various natural and equilibrium levels of unemployment look laughable. For newer readers that is demonstrated by the Bank of England thinking it is 4.25% when Japan has an unemployment rate around half that.

This morning has brought news that things have gone from bad to worse.

TOKYO (Reuters) – A key Japanese economic index fell in August and the government on Monday downgraded its view to “worsening”, indicating the export-reliant economy might face slipping into recession.

The outlook was mostly driven by this.

The separate index for leading economic indicators, a gauge of the economy a few months ahead that’s compiled using data such as job offers and consumer sentiment, dropped 2.0 points from July, the Cabinet Office said.

Fiscal Policy

The other side of this particular coin was illustrated by the response of Fitch Ratings to the Consumption Tax hike.

Japan’s consumption tax hike supports medium-term fiscal consolidation efforts, and the country’s sovereign credit profile, Fitch Ratings says. We estimate it will lower Japan’s debt ratio by about 8pp of GDP by 2028; however, very high public debt will remain a key credit weakness.

They further crunched the fiscal numbers here.

Total annual revenue from the tax hike is estimated by the government at about 1% of GDP, half of which is earmarked to reduce debt (the remainder will be used to permanently increase spending for education and long-term care). This would result in Japan’s gross general government debt-to-GDP ratio falling to just over 220% by 2028, from 232% at present.

It hardly seems worth it when it is put like that. Also perhaps unwittingly they let the cat out of the bag as to why Abenomics is so keen on raising the level of inflation.

We estimate that Japan’s public debt dynamics have stabilised due to the resumption of nominal GDP growth in recent years.

Nominal GDP growth includes inflation.

Comment

This is a story with several facets so let us open with the driving force of this which was the IMF or International Monetary Fund and the case it made in the earlier part of this decade for Japan to improve its national debt to GDP ratio. Here is the IMF Blog after the 2014 Consumption Tax rise.

Japan’s GDP declined by almost 7 percent in the second quarter, more than many had forecast including us here at the IMF.  Many cite the increase in the sales tax this April for this decline.  But that is not the full story.

That opening suggests there were other reasons for the fall but fails to state them as it then discusses general rather than specific issues. Oh and it does not day but it means annualised fall in GDP. The impact was so great that the 2015 rise was delayed to now rather ironically because of the recession risk. What it means is that Japan ends up doing this at a very risky time if we look at the world economic outlook.

We now find also that IMF fiscal conservatism is being applied just as it has switched to expansionism. That is quite a mess! No wonder Christine Lagarde shot out of the door. After all Japan can borrow quite cheaply mostly due to the fact that The Tokyo Whale ( Bank of Japan for newer readers ) owns so much of it. The IMF has just published a Working Paper on this so let me give you some numbers from 2017.

As shown in the Fiscal Monitor, Japan’s PSBS stands out as one of the largest PSBS in the world, with assets and liabilities of 533 percent of GDP in 2017. Japan’s
PSBS also includes cross-holdings of assets and liabilities within the public sector, exceeding 210 percent of GDP in 2017—the largest in the IMF’s PSBS database. Much of these come from public corporations’ financing of central government liabilities. ( PSBS = Public Sector Balance Sheet)

Next let me help the author out as the situation below is explained by world wide trends accompanied thsi decade by the enormous purchases of The Tokyo Whale.

Several previous studies considered it puzzling that the stock of Japanese Government Bonds (JGBs) has been increasing but their yields have been declining
for the last three decades.

Next we get a higher estimate for the national debt.

However, these may not fully explain why Japan has been able to build up 288 percent of GDP in public sector borrowing.

Also it is not only The Tokyo Whale that has bought this.

In 2017, the public sector finances 150 percent of GDP of public sector borrowing,

In some ways it has been buying off other parts of the public-sector.

For example, the Post Bank
reduced allocations to public sector financing from 95 percent of its total assets at its peak in
1998 to 33 percent in 2017. The social security funds also reduced asset allocations to public
sector financing from 77 percent at its peak in 1998 to 34 percent in 2017.

Oh what a tangled web we weave……

Meanwhile it would appear that even extraordinary fiscal expansionism has not done much good.

Borrowing of general government ballooned in the 1990s and 2000s. It was 60 percent of GDP in 1990 and
increased to 226 percent of GDP in 2017.

The ordinary Japanese may have a job but real wages are falling again and fell at an annual rate of 1.7% in August.

Podcast

 

 

Do not forget Greece is still in an economic depression

Today I intend to look at something which I and I know from your replies many of you have long feared. This is that the merest flicker of better news from Greece will be used as a way of obscuring the fact that it is still in an economic crisis. At least I think that is what we should be calling an economic depression. So let me take you straight to the Financial Times.

Today, on the face of things, the emergency is over and the outlook is bright. The authorities have lifted capital controls, imposed four years ago. Greece’s 10-year bond yield touched an all-time low in July. Consumer confidence is at its highest level since 2000. Elections in July produced a comfortable parliamentary majority for New Democracy, a conservative party committed under prime minister Kyriakos Mitsotakis to a well-designed programme of economic reform, fiscal responsibility and administrative modernisation.

Firstly let me give the FT some credit for lowering its paywall for a bit. However the latter sentence is playing politics which is an area they have got into trouble with this year on the subject of Greece but I will leave that there as I keep out of politics.

As to the economics you may note that the first 2 points cover financial markets rather than the real economy and even the first point is a sentiment measure rather than a real development. If we work our way through them it is of course welcome that capital controls have now ended although it is also true that it is troubling that they lasted for more than four years.

Switching to Greek bonds we see that they did indeed join the worldwide bond party. I am not quite sure though about the all-time July low as you see it is 1.31% as I type this compared to being around 1% higher than that in July! Perhaps he has not checked since it dipped below 2% at the end of July which is hardly reassuring. As to why this has happened other than the worldwide trend there are 2 other factors. Firstly there is the way that the European Stability Mechanism has changed the debt envelope as the quote from Karl Regling below shows.

 In total, Greece received almost €290 billion in financial support, of which €205 billion came from the EFSF and the ESM.

So the Greek bond yield is approaching what the ESM charges. Another factor is they way that it has confirmed my “To Infinity! And Beyond!” theme as the average maturity was kicked like a can to 42.5 years. Next is a factor that I looked at on the 9th of July and Klaus also notes.

The general government primary balance in programme terms last year registered a surplus of 4.3% of GDP, strongly over-performing the fiscal target of 3.5% of GDP.

This is awkward for the political theme of the article as it was achieved by the previous government. Also let me be clear that whilst this is good for bond markets there is a big issue for the actual economy as 4.3% of demand was sucked out of it which is a lot is any circumstance but more so when you are still in an economic depression.

So it is a complex issue which to my mind has seen Greek bond yields move towards what the ESM is charging which is ~1%. Maybe the ECB will add it to its QE programme as well as whilst it does not qualify in terms of investment rating it could offer a waiver.

Greek Consumer Confidence

I have to confess referring to a confidence signal does set off a warning klaxon. But let us add in this from the Greek statistics office.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2019, increased by
2.3%, compared with the corresponding index of June 2018……..The seasonally adjusted overall volume index in June 2019, compared with the corresponding index of May 2019, increased by 2.5%.

So there has been some growth. However there is a but and it is a BUT. You might like to sit down before you read the next bit. The volume index in June was 103.5 which compares to 177.7 in March 2008 and yes you did read that right. I regularly point out that monthly retail sales numbers are erratic so let me also point out that late 2007 and early 2008 had a sequence of numbers in the 170s. Even worse this century started with a reading of 115.4 in January 2000.

So we have seen a little growth but not much since the index was set at 100 in 2015 and you can either have a depression lasting this century or quite a severe depression since 2008 take your pick. Against that some optimism now is welcome but does not really cut it in my opinion.

Economic growth

There is a reference to it.

Even before these clouds appeared on the horizon, however, Greece was not rebounding from the debt crisis with the vigour of other stricken eurozone economies such as Ireland, Portugal and Spain.

That is one way of putting a level of GDP that has fallen 18% this decade. In 2010 prices it opened this decade with a quarterly performance of just over 59 billion Euros whereas in the second quarter of this year it was 48.3 billion. I am nit sure that “clouds on the horizon” really cover an annual growth rate struggling to each 2% after such a drop. Greece should be rebounding but of course as I have already pointed out the dent means that 4.3% of economic activity was sucked out of it last year. So no wonder it is an L-shaped and not a V-shaped recovery. At the current pace Greece may not get back to its previous peak in the next decade either.

Comment

There are some references to ongoing problems in Greece as for example the banks.

A second factor is the fragility of Greece’s banks. By the middle of this year, they were burdened with about €85bn in non-performing loans. To some extent, however, liquidity conditions are now improving.

Not mentioned is the fact that according to the Bank of Greece more than another 40 billion Euros needs writing off. From January 19th.

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

That brings us to another problem which is that the debt was supposed to fall from 2012 onwards whereas even now there are plans for it to grow. So whilst the annual cost has been cut to low levels the burden just gets larger.

Also there has been a heavy human cost in terms of suicides, hospitals not being able to afford drugs and the like. It has been a grim run to say the least. The ordinary Greek did not deserve anything like that as they were guilty of very little. The Greek political class and banks were by contrast guilty of rather a lot. The cost is an ongoing depression which looks like it will continue for quite some time yet. After all I welcome the lower unemployment rate of 17% but also recall that such a rate was considered quite a disaster on the way up.

Is this the real life? Is this just fantasy?
Caught in a landslide, no escape from reality
Open your eyes, look up to the skies and see ( Queen)

 

The struggles of the French economy are continuing

This morning has brought more disappointing news both for and from the French economy. The statistics institute has released this.

In September 2018, households’ confidence in the economic situation has declined: the synthetic index has lost 2 points and reached its lowest level since April 2016. It remains below its long-term average (100).

This index has been in use for 31 years now so the fact that it is below its long-term average does give us some perspective. Also reaching a level not seen since April 2016 takes us back to around when what we might call the Euroboom began (in the second quarter of 2016 the French economy shrank by 0.2%) which will provide some food for thought for the European Central Bank or ECB. It has been on the wires leaking hints about how it will continue to withdraw its monetary stimulus just as its second largest economy has shown more hints of weakness. If we stay with the Euro theme this measure welcomed it by going above 120 but such heady days were capped by 9/11 and now we have seen 97,97,96 and then 94 in September. So there has been a long-running decline overall which did see a rally in the period 2013 to 17 but perhaps ominously turned down at a similar level to 2007/08. Also the outlook is not bright according to French households.

Future standard of living in France: strong
degradation……… The share of households
considering that the future standard of living in France
will improve in the next twelve months has sharply
declined: the corresponding balance has lost 7 points
and stands below its long-term average.

Markit PMI

This hammered out a similar beat last week.

Output growth across the French private sector
slipped to its lowest since December 2016 during the
latest survey period, with data indicating a broadbased
slowdown across both the manufacturing and
service sectors.

This slowdown had as part of it something you might expect with the ongoing diesel debacle and the trade wars.

Manufacturing businesses frequently reported a deterioration in the automotive sector.

This poses a question if we move to what the French economy did in the first half of 2018. Just as a reminder quarterly economic growth went 0.2% in something of a surprise but then backed it up with another 0.2% reading. I contacted Markit’s chief economist pointing out that a reduction on 0.2% as implied by their survey looked grim. But they are sticking to the view that France did better in the first half of the year and in spite of the recorded slowdown is doing this.

Across the region, growth slowed in Germany and
France but both continued to outperform the rest of
the eurozone as a whole, where the pace of
expansion held close to two-year lows.

I have no idea how France is outperforming by doing worse but there you have it. There were times when Markit was accused by the French government of being too pessimistic about France whereas now it must be delighted with its work.

The official surveys for businesses are also above their long-term averages but the situation here is awkward especially if we look at services. Here the confidence indicator has been stable around 105 for a few months or so suggesting growth and yet if we move to the actual data we know that the French economy has struggled.

Bank of France

In the circumstances the projections released earlier this month look rather optimistic.

In a less dynamic, more uncertain international
environment, French GDP is expected to expand
by 1.6% in 2018, 2019 and 2020. GDP growth
should remain above potential, helping to drive
further reductions in France’s unemployment rate.

They are plainly suggesting that the first half of 2018 will be followed by a vastly more dynamic second half involving growth of 1.2% as opposed to 0.4%. But once you look past that I note that 1.6% economic growth is described as “above potential” which to me seems somewhat depressing. Central bankers have a habit of thinking the same thing at the same time and this reads rather like the 1.5% speed limit that the Bank of England Ivory Tower has suggested for the UK economy.

In essence it is downbeat for domestic demand but hopes that export growth and some investment growth will take up the slack. Let us hope that it is right about the area below as unemployment in France remains elevated compared to its peers.

The ILO unemployment rate should fall gradually
to 8.3% at the end of 2020 (France and overseas
departments)

Although that is still high meaning that for some in France unemployment will be all that they have known.

Public Finances

Perhaps we are seeing an official response to the growth malaise. From Reuters.

France will reduce the tax burden on households and companies by nearly 25 billion euros ($29.4 billion) next year, the government said in its 2019 budget bill, pushing the deficit up towards an EU cap as the economy fails to gain pace.

This represents a change of direction although we do see something very familiar these days in the split between businesses and individuals.

Households will see their tax bill reduced by a total 6 billion euros while business taxes will fall by 18.8 billion euros, resulting in the overall tax burden decreasing to 44.2 percent of national income, the lowest for France since 2012.

There is also some pump priming on the expenditure side of the accounts although it is a reduction on the previous 1.4%.

While the government has kept overall public spending stable this year after inflation, the 2019 budget foresees an increase of 0.6 percent after inflation.

If we move to the debt situation we see what is a factor in President Macron’s enthusiasm for a shared budget in the Euro area.

At the end of Q1 2018, the Maastricht debt reached
€2,255.3 billion, a €36.9 billion increase in comparison
to Q4 2017. It accounted for 97.6% of gross domestic
product (GDP), 0.8 points higher than last quarter’s
level.

This looked like it was going through 100% but was rescued by the growth spurt. Now we wait to see what happens next should the French economy continue the struggles of the first half of 2018.Also there are risks on the debt costs side as we see two factors at play.The first is the tend towards higher bond yields we have sen recently and the second is the ongoing reduction in ECB purchases of French government bonds which had reached 410 billion Euros at the end of August.

Comment

If you want some good news then the sporting front has provided it for France in 2018 with its football world cup victory and it is just about to host golf’s Ryder Cup. But the economic news has disappointed pretty much across the board in an irony considering it is supposed to now have a business friendly government. It is true that the tax cuts are weighted towards the private-sector but so far the economy has slowed down rather than speeding up.

Unless the French statistics office has been missing things the ECB will also be noting that its second largest economy has turned weaker. That will provoke thoughts suggesting it can only boom in response to pretty much flat out monetary stimulus. Also there will be worries about what might happen if the ECB tightens policy as opposed to reducing stimulus. There is a case for that from the inflation data as the annual rate has risen to 2.6% on the equivalent measure to UK CPI which may be why French consumers feel so negative about the economy.

The current issues with the sale of Rafale fighter jets to India seems symbolic too. Corruption in such sales is of course far from unique to France but I also note that the way President Macron is distancing himself from it ( It was not on my watch….) bodes badly for what may happen next.

 

 

 

 

 

Is the US economy at a turning point?

Yesterday brought us some significant news from the US economy. One segment of this was the testimony given by the new Chair of the US Federal Reserve Jerome Powell as everyone combs his words looking for any signs of a change in policy. The sentence from the written testimony that has drawn most attention is below.

In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. ( PCE is Personal Consumption Expenditure )

The reason for that is the use of the word “overheated” which brings with it all sorts of value judgements and implications. This was added to by the phrase he added to this.

My personal outlook for the economy has strengthened since December.

We also got an explanation of what was driving such thoughts.

 In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative.

The nod to fiscal policy was a change of emphasis from his predecessor Janet Yellen as I am reminded of the analysis of the US Congress on the subject we looked at on February the 8th.

The Joint Committee staff estimates that this proposal would increase the average level of output (as measured by Gross Domestic Product (“GDP”) by about 0.7 percent relative to average level of output in the present law baseline over the 10-year budget window.

The underlying position

The thoughts above added to the existing situation which Chair Powell described thus.

Turning from the labor market to production, inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of the year.

So the fiscal policy will add to an already strengthening situation and the emphasis is mine.

Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth, and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time.

The reason I have highlighted that bit is because Chair Powell had explicitly linked it to wage growth.

Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been damped in part by the weak pace of productivity growth in recent years.

If we switch to the section on employment we see a continuing theme.

Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about 3/4 percentage point lower than a year earlier and the lowest level since December 2000.

Are we seeing a hint of Phillips Curve style analysis which would predict wage growth acceleration? We did get told he likes policy rules.

Personally, I find these rule prescriptions helpful

Also you may note that he hinted at a pick-up in jobs growth in January which comes when the unemployment rate tells us that according to old policy rules we have what would have been considered to be full employment. It was also interesting that he skirted what we might call the missing eleven million or so via the drop in the participation rate.

the labor force participation rate remained roughly unchanged, on net, as it has for the past several years

I am not sure that it all be blamed on retiring “baby boomers” as we were told.

So we are told that the economy is strong and got a pretty strong hint that higher wage growth is expected and of course that follows the 2.9% growth seen in January in average hourly earnings.

Wages should increase at a faster pace as well.

What about inflation?

That is supposed to pick-up as well as we continue our journey on a type of virtual Phillips Curve.

 we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term.

These days it is something of a residual item in speeches by central bankers. This is for two main reasons. The first is that they have really been targeting output and the labour market. The second is that even after an extraordinary amount of QE they failed to generate the ( consumer) inflation they promised and so they are de-emphasising it.

Overheating?

This subject flickered onto some radar screens yesterday as they observed this from the Census Bureau.

The international trade deficit was $74.4 billion in January, up $2.1 billion from $72.3 billion in December.
Exports of goods for January were $133.9 billion, $3.1 billion less than December exports. Imports of goods
for January were $208.3 billion, $0.9 billion less than December imports.

This is something which has been rising as we note this from the Bureau of Economic Analysis or BEA earlier this month.

For 2017, the goods and services deficit increased $61.2 billion, or 12.1 percent, from 2016. Exports
increased $121.2 billion or 5.5 percent. Imports increased $182.5 billion or 6.7 percent.

So we may well be seeing economic growth sucking in imports yet again or a different form of overheating. Thus the words of Chairman Powell above on exports were both true ( they are up) and to some extent misleading as imports have risen faster. This is reinforced with my usual caution about monthly trade data by  the size of the January  goods deficit which is the largest for ten years. If we allow for the fact that the shale oil and gas boom flatters the figures the numbers take a further turn for the worse.

Consumer Confidence

We return to the same theme as we note this.

The Conference Board Consumer Confidence Index® increased in February, following a modest increase in January. The Index now stands at 130.8 (1985=100), up from 124.3 in January. The Present Situation Index increased from 154.7 to 162.4, while the Expectations Index improved from 104.0 last month to 109.7 this month.

So another signal looks strong.

Comment

If we start with the analysis of Chair Powell we see that the US Federal Reserve plans to continue interest-rate rises this year and that it means to do so either 3 or more likely 4 times. This is based on the view that otherwise the economy will overheat as discussed above. Let me add a personal view to this which is the current madness of going along at 0.25%, why not raise by 0.5% in March and then sit back for a while and see what develops? Monetary policy has long lags and if you take ages to act you are at an ever greater risk of being proved wrong.

Another factor in this is the data I have looked at above as I have held something back until now which is troubling. Here is the extra bit from the consumer confidence figures.

Consumer confidence improved to its highest level since 2000 (Nov. 2000, 132.6).

Now if we look at the trade in goods figures the deficit was last higher in January 2008 a time when consumer confidence was high in many places too. What happened next in both instances?

If we continue with that line of thought we find that the oil market may be giving a hint as well.

https://twitter.com/a_coops1/status/968783142717919233

Another reason I think to act more decisively now as after all interest-rates will only be 1.75% to 2% after a 0.5% rise a level I have long argued for and then wait and see. After all we could be seeing a flicker of a road to QE4.

Can the economy of Italy throw off its past shackles?

It is time to take another look at how the economy of Italy is performing and first let me point out that the backdrop is good. What I mean by that is that the outlook for the Euro area is currently rather good with this being reported by Markit at the end of last week.

Eurozone economic growth gathered further momentum in March, according to PMI® survey data, reaching a near six-year high…….The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter

That has been followed this morning by better news on the inflation front for March as lower petrol and diesel prices have pulled back both Spanish and some German regional inflation from the February highs this morning. Actually Spanish inflation seems very volatile and therefore difficult to read but this month’s picture seems lower than last even allowing for that. But overall there seem to be some economic silver linings around albeit that there was a cloud or two as the credit data lost some momentum.

What about Italy?

The sentiment numbers here released yesterday were positive as well.

With regard to the consumer survey, the confidence climate index grew in March 2017 from 106.6 to 107.6……With reference to the business surveys, the composite business confidence climate index (IESI, Istat Economic Sentiment Indicator) increased from 104.3 to 105.1.

However there was something rather Italian in all of this good news as I note this.

while the personal and current components worsened from 102.1 to 101.0 and from 104.7 to 104.5

Whilst the outlook is favourable it does not seem to have impacted so far on Italians themselves.

What about industry?

On Tuesday the Italian statistics office served up a swerving serve that Roger Federer would be proud of as its headline showed both industrial turnover (1.9%) and new orders (8.6%) rising. But if we look deeper as there were 21 days this year as opposed to 19 last we see this.

In January 2017 the seasonally adjusted turnover index decreased by -3.5% compared to the previous month (-2.3% in domestic market and -5.4% in non-domestic market)……..In January 2017 the seasonally adjusted industrial new orders index decreased by -2.9% compared with December 2016 (-6.6% in domestic market and +2.6% in non-domestic market).

So it was a bad January meaning that quarterly growth fell to 1.7% for turnover and 0.8% for new orders.

If we look for context of the Italian problem we see some of it in the underlying index which was set at 100 in 2010 and has now risen to 100.3. If we look further we see another sign as the growth has been export-led (121.7) whereas the domestic market has fallen to 91.5. Thus the domestic numbers are more depressionary than recessionary.

If we move to production we see that it fell by 0.5% in January leaving it at 93.8% of the level seen in 2010.

Retail Sales

If we look at the latest data we see that the better sentiment has yet to impact here.

In January 2017 the seasonally adjusted retail trade index increased by 1.4% with respect to December 2016 (+2.3% for food goods and +0.8% for non-food goods). The average of the last three months compared to the previous three months was unvaried. The unadjusted index decreased by 0.1% with respect to January 2016.

The underlying index returns us to thoughts of an economic depression as this time an index set at 100 in 2010 compares to 95.7 in January.

Employment and Unemployment

This continues a rather troubled pattern so let us start with the good bit.

The labour input used in the economic system (expressed by the hours worked in the national accounts) increased by 0.4% quarter-on-quarter and by 1.6% year-over-year.

So there is more work around but because of the past pattern it is hard to look past this.

The unemployment rate confirmed at 11.9%, up by 0.2 percentage points after the substantial stability over the four previous quarters.

Some of that is technical as the particpation rate rose reversing for example some of the arguments over the US labour market but it is also true that the previous year saw unemployment rise by 108,000. So we see that this problem is persisting when if we look at other metrics it should not be.

Also we get a clue perhaps as to the current issues with retail sales as we note that real wages are under pressure.

as a result of a 0.2% increase in wages ( in 2016).

 

Population

The numbers for 2016 are out and they tell us this.

The population at 1st January 2017 was estimated to be 60,579,000; the decrease on the previous year was 86,000 units (-1.4 per thousand).

This happened in spite of the growth from migration.

The net international migration in 2016 amounted to +135 thousand, a similar level to that seen in 2015. Compared to the latter it was determined by a higher number of inflows, 293 thousand, and a new record of outflows, for the recent time, equal to 157 thousand.

As we see people are leaving but are being replaced and some presumably mostly by those crossing the Mediterranean.

Also the demographics clock continued to tick. However let me also welcome this as people are living longer.

The mean age of the population at 1st January 2017 was 44.9 years, two tenths more than in 2016.

The banks

This has become a little like the never-ending story. After all what news is there some 3 months down the road after the announcement of a bailout for Monte Paschi. Well according to Bloomberg there are ongoing arguments.

In the view of some ECB Supervisory Board members, while Monte Paschi cleared the hurdles for aid, its viability was bolstered by unrealistic valuations of its bad loan portfolio, the people said. The board gave the all-clear even though the possibility that Monte Paschi sold junior bonds inappropriately to retail investors wasn’t fully reflected in the solvency assessment, they said.

There is also the issue of what will happen to Banca Popolare di Vicenza and Veneto Banca. The official view is that this will be solved “soon” which is a line they also use for Greece.

Also remember the Atlante bailout fund which was supposed to rescue things which rather embarrassingly was followed by Atlante 11 as it needed more funds, how is it going? From Teleborsa.

Intesa Sanpaolo is not prepared to add other loans in the Fund Atlas. It does not leave space for imagination Carlo Messina, CEO of the banking group……..”There is no doubt that today the one to which we must aim is to safeguard the investment made in Atlas “

Perhaps he is worried by this in 24 ORE.

Altogether, as reconstructed by Radiocor Plus, the adjustments made by the top 12 Italian banks that have joined Atlas amounted to 1.01 billion, compared with 1.98 billion actually paid into the fund on December 31 last year (about l ‘ 80% of the 2.45 billion total commitment declared by the main institutions). Less than a year after the birth of the fund, the average write-down was then 51.2% of actual amounts paid.

Comment

As ever there is much to consider and if we look at the forecast of the Bank of Italy against what is for once a favourable backdrop I am reminded of the “Girlfriend in a Coma” theme of Bill Emmott.

We expect GDP to expand, on an annual basis, by 0.9 per cent this year and the next and by 1.1 per cent in 2018 and 2019.

This reinforces my theme that even in the good years Italy manages around 1% economic growth which means that by the time we allow for downturns it is on a road to nowhere. Actually that explains its experience in the Euro area and as the population has grown it has seen GDP per capita fall by around 6%.

If we move to the banking sector we see something very sclerotic which is plainly holding the economy back as we not even the official data shows Non-Performing Loans at 16.24% of the total. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is. Yet real reform never seems to actually turn up as we mull another apparently never-ending story.