Germany escapes recession for now but what happens next?

This morning has brought the economics equivalent of a cliffhanger as we waiting to see if Germany was now in recession or had dodged it. The numbers were always going to be tight. so without further ado let me hand you over to Destatis.

WIESBADEN – In the third quarter of 2019, the price-adjusted gross domestic product in Germany increased by 0.1% on the second quarter of 2019, after adjustment for seasonal and calendar variations.

So Germany has avoided what has become called the technical definition of recession which is two quarters of contraction in a row. However there was a catch.

According to the most recent calculations, taking into account newly available statistical information, the GDP was down 0.2% in the second quarter of 2019, which is 0.1 percentage points more than first published.

So like the UK the German economy shrank by 0.2% in the second quarter which means that over the half-year the economy was 0.1% smaller. Putting it another way the economy was at 107.20 at the end of the first quarter and at 107.03 at the end of the third quarter.

Just to add to the statistical party the first quarter saw growth revised higher to 0.5% so we have a pattern similar to the UK just weaker. As to the detail for the latest quarter we are told this.

positive contributions in the third quarter of 2019 mainly came from consumption, according to provisional calculations. Compared with the second quarter of 2019, household final consumption expenditure increased, and so did government final consumption expenditure. Exports rose, while imports remained roughly at the level of the previous quarter. Also, gross fixed capital formation in construction was up on the previous quarter. Gross fixed capital formation in machinery and equipment, however, was lower than in the previous quarter.

As you can see it was consumption which did the job which was presumably driven by the employment figures which remain strong.

Compared with September 2018, the number of persons in employment increased by 0.7% (+327,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 0.8% in August 2019.

So rising employment albeit at a slowing rate and with it looks as though there has been solid real wage growth too.

 In calendar adjusted terms, the costs of gross earnings in the second quarter of 2019 rose by 3.2% year on year,

At that point inflation had slowed to 1.5% so as far as we know there has been both employment and real wage growth. So we might have expected consumption growth to be higher than it has been.

We are in awkward territory with the mention of exports because they do not count in the output version of GDP as they are sales hence they go in the expenditure version. So we look at production for overseas sales which is problematic as shown below.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 4.6% and imports by 2.3% in September 2019 year on year. After calendar and seasonal adjustment, exports were up 1.5% and imports 1.3% compared with August 2019.

But whilst that is good GDP counts this.

In September 2019, production in industry was down by 0.6% on the previous month and -4.3% on the same month a year earlier (price and calendar adjusted)

Now production is not the only source for exports as services are not in it but services will have had to had been booming so we need more information I think.

Statistical Humility

The analysis of GDP numbers to 0.1% is something I have warned about before. Let me illustrate with this from Sweden Statistics earlier.

Statistics Sweden is publishing revised statistics on the Labour Force Surveys (LFS) for the period July 2018 to September 2019, in which only half of the sample is used, due to an earlier identification of quality deficiencies……..this increases the uncertainty, particularly at a more disaggregated level.

You can say that again! Or to put it another way the unemployment rate of 7.4% in September is now reported as 6.6%. Now we all make mistakes and honesty is the best policy but an error of this size begs so many questions. It reminds me of the mistake made in Japan over the measurement of real wages which was in the same direction although of course had the opposite implication for the economy.

Whilst neither example was about GDP the same principles hold and in the case of Sweden I think the mistake is worse because unemployment is a much simpler concept.

Looking Ahead

This could not have been much more negative.

Business confidence across the German private sector
has slipped to the lowest since the global financial crisis,
according to the latest IHS Markit Global Business
Outlook survey. Output of goods and services is on
average expected to fall slightly over the next 12 months,
while firms have signalled their intention to cut
workforce numbers for the first time in ten years.
Concerns about future profits are meanwhile reflected
in a negative outlook for capital spending (capex).

Now Markit have not had a good run on Germany as they have signalled growth when there has not been any so I am not sure where this takes us? Where there might be some traction is in this bit as we have noted already that employment growth is slowing.

now these latest figures point to private sector workforce numbers actually falling over the coming year.

As to other areas the example is mixed. For now the news seems bad and you will have probably guessed the area.

“By the end of 2022, Mercedes-Benz Cars plans to save more than 1 billion euros in personnel costs. To this end, jobs are to be reduced,” the company said in a statement.

“The expanded range of plug-in hybrids and all-electric vehicles is leading to cost increases that will have a negative impact on Mercedes-Benz Cars’ return on sales,” it added. ( )

Looking further ahead there is potentially some better news on the horizon.

Tesla’s chief executive, Elon Musk, has said Berlin will be the site of its first major European factory as the carmaker’s expansion plans power ahead.

“Berlin rocks,” Mr Musk said, adding Tesla would build an engineering and design centre in the German capital.

Tesla previously said it aimed to start production in Europe in 2021.

The moves come as the firm, which has also invested heavily in a Chinese factory, faces intensifying competition in the electric vehicle industry.


Let me start with this just released by the Financial Times.

Learning to love negative interest rates……..As evidence accumulates the naysayers case becomes less convincing.

So Germany should be booming right? After all it not only has an official deposit rate of -0.5% but it also has a benchmark bond yield of -0.3%. Yet the economy had a burst of growth and has now pretty much stagnated for a year. So actually it is the case for negative interest-rates which has got weaker. No doubt more of the same “medicine” will be prescribed.

We find ourselves observing what has become a two-speed economy where the services sector is struggling to make up for the declines in the manufacturing sector or if you like they are turning British. There are deeper questions here as for example how much manufacturing will remain in the West?

Also the money supply situation which has been helpful so far in 2019 may be turning lower for the Euro area as a whole.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

So for now there is not much sign of a turn for the better and if we stick to annual GDP growth as our measure that will be focused on the first quarter next year as there is a 0.5% reading to be replaced.  Germany must have its fingers crossed for the end of the trade war.

The Investing Channel



What just happened to the GDP and economy of France?

Sometimes reality catches up with you quite quickly so this morning Mario Draghi may not want a copy of any French newspapers on holiday. This is because on the way to one of the shorter and maybe shortest policy meeting press conferences we were told this.

The latest economic indicators and survey results have stabilised and continue to point to ongoing solid and broad-based economic growth, in line with the June 2018 Eurosystem staff macroeconomic projections for the euro area.

As you can see below Mario did drift away from this at one point but then returned to it in the next sentence.

Some sluggishness in the first quarter is continuing in the second quarter. But I would say almost all indicators have now stabilised at levels that are above historical averages.

Then we got what in these times was perhaps the most bullish perspective of all.

Now, one positive development is the nominal wage performance where, you remember, we’ve seen a pickup in nominal wage growth across the eurozone. Until recently this pickup was mostly produced by wage drift, while now we are seeing that there is a component, which is the negotiated wage component, which is now – right now the main driver of the growth in nominal wages.

Most countries have a sustained pick up in wage growth as a sort of economic Holy Grail right now. So we were presented with a bright picture overall and as I pointed out yesterday Mario is the master of these events as he was even able to make a mistake about economic reforms by saying there had been some, realise he had just contradicted what is his core message and engage reverse  gear apparently unnoticed by the press corps.


This morning brought us to the economic growth news from France which we might have been expecting to be solid and broad-based and this is what we got.

In Q2 2018, GDP in volume terms* rose at the same pace as in Q1: +0.2%

Now that is not really solid especially if we recall it is supposed to be above historical averages so let us also investigate if it is broad-based?

Household consumption expenditure faltered slightly in Q1 2018 (−0.1% after +0.2%): consumption of goods declined again (−0.3% after −0.1%) and that of services slowed down sharply (+0.1% after +0.4%).

The latter slowdown is concerning as we note that estimates put the services sector at just under 79% of the French economy. We also might expect better consumption data as whilst it may be a bit early for Mario’s wages growth claims to be at play household disposable income rose by 2.7% in 2017. However such metrics seem to have dropped a fair bit so far this year as household purchasing power was estimated to have fallen by 0.6% in the opening quarter of this year. So if anything is broad-based here it is the warning about a slowdown we got a few months ago and not the newer more upbeat version.


This was a drag on growth but not in the way you might expect. The easy view would be that French car exports would have been affected by the trade wars developments. But whilst there nay be elements of that it was not exports which were the problem.

Imports recovered sharply in Q2 2018 (+1.7% after −0.3%) after the decrease observed in Q1. Exports also bounced back but to a lesser extent (+0.6% after −0.4%). All in all, foreign trade balance contributed negatively to GDP growth: −0.3 points after a neutral contribution in the previous quarter.

That is a bit like the UK in the first quarter and we await developments as even quarterly trade figures can be unreliable.


Production in goods and services barely accelerated in Q2 2018 (+0.2% after +0.1%)………….Output in manufactured goods fell back again (−0.2% after −1.0%). Production in refinery stepped back (−9.9% after −1.6%) due to technical maintenance; production in electricity and gas dropped too (−1.7% after +1.9%). However, construction bounced back (+0.6% after −0.3%).

As you can see there is not a lot to cheer here as construction may just be correcting the weather effect in the first quarter. There was better news from investment though.

In Q2 2018, total GFCF recovered sharply (+0.7% after +0.1% in Q1 2018), especially because of the upsurge in corporate investment (+1.1% after +0.1%). It was mainly due to the upswing in manufactured goods (+1.2% after −1.1%)

As there was not much of a sign of a manufacturing upswing lets us hope that the optimism ends up being fulfilled as other wise we seem set to see more of this.

Conversely, changes in inventories drove GDP on (+0.3 points after 0.0 points).

The Outlook

We of course are now keen to know how the third quarter has started and what we can expect next? From the official survey published on Tuesday.

The balances of industrialists’ opinion on overall and
foreign demand in the last three months have dropped
again sharply in July – they had reached at the beginning of the year their highest level in seven years, before dropping back in the April survey. Business managers are also less optimistic about overall and foreign demand over the next three months;

If we look at the survey index level the number remains positive overall but the direction of travel is south, not as bad as the credit crunch impact but more like how the Euro area crisis impacted which is odd. Let us now switch to the services sector.

According to business managers surveyed in July
2018, the business climate remains stable in services.
The composite indicator which measures it has stood at
104 since May 2018, above its long-term average

Is stable the new contraction? Perhaps if we allow for the rail strikes in the second quarter but the direction of travel has again been south. If we step back and look at the overall survey which has a long record we see that it recorded a pick up early in 2013 which had some ebbs and flows but the trend was higher and now we are seeing the first turn and indeed sustained fall.

I cannot find anything from the Markit PMI business surveys on this today as presumably they are mulling how they seem now to be a lagging indicator as opposed to a leading one.


The rhetoric of only yesterday has faded quite a bit as we mull these numbers from France. It is the second biggest economy in the Euro area and the story that if we use a rowing metaphor it caught a crab at the beginning of the year now seems untrue. It may even have under performed the UK which is supposed to be on a troubled trajectory of its own. Under the new structure we do not have the official numbers for June in the UK. The surveys quoted above do not seem especially optimistic apart from the Markit ones which of course have been through this phase.

A more optimistic view comes from the monetary data which as I analysed on Wednesday has stopped getting worse and strengthened in terms of broad money and credit. Let me give a nod to the masterful way Mario Draghi presented the narrow money numbers.

The narrow monetary aggregate M1 remained the main contributor to broad money growth. ( It fell…)

So the outlook should be a little better and the year on course for the 1.3% suggested by the average number calculated today. But 0.7%,0.7% to 0.2%,0.2% is quite a lurch.

In other news let me congratulate France on being the football World Cup winners. Frankly they have quite a team there. But in the language world cup there is only one winner as Mario Draghi went to some pains to point out yesterday.

Let me clear: the only version that conveys the policy message is the English version. We conduct our Governing Council in English and agree on an English text, so that’s what we have to look at.

Or as someone amusingly replied to me Irish……

However much the Tokyo Whale buys wages and consumption seem to struggle

On Wednesday evening the US Federal Reserve will announce its latest policy decision and it will be a surprise if it does not give US interest-rates another 0.25% nudge higher. Yet we see in an example of clear policy divergence other countries ploughing on with monetary easing. For example the European Central Bank continues with monthly QE of 30 billion Euros a month and still has a deposit rate of -0.4%. However the leader of this particular pack is the Bank of Japan especially if we look at other signals of what are known as side-effects. From Bloomberg last week.

That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading C0. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: “the JGB market was generally thin.”

The latter part is simply part of the Japanese concept of face. One reason for this is the size of the holdings of the Bank of Japan.

The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies.

The latter sentence there is weak as pension funds and life insurers enact such strategies all over the world and have done so for decades so it is hardly their fault. Indeed quite the reverse s many national bond markets have relied on such purchases.

Whilst we keep being told the Bank of Japan is cutting back the amount of buying remains enormous.

Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.

The next bit contradicts itself as it seems to be claiming that if you buy everything you do not need to intervene. Oops!

The upside for the BOJ is that with such little going on in the market, it makes it easier to control the yield curve, with less need for intervention

The Bank of Japan is the yield curve it would seem which is we step back for a moment begs all sorts of questions. For example you might compare currencies as I have certainly done in the past by comparing bond yields yet in such a calculation there is the implicit assumption that you have a “market” rate. But no, we clearly do not in Japan and that is before we get to the moral hazard of it being set by a body trying to depreciate/devalue the Yen. Oh and if you are a Japanese bond trader you might want to send your CV to the Bank of Japan.

Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank.

The Tokyo Whale

This for newer readers refers to the way that the Bank of Japan has piled into the equity market as well. The numbers are opaque as they are in several accounts but Bloomberg has been doing some number-crunching.

The BOJ started buying ETFs in 2010, with Governor Haruhiko Kuroda later accelerating purchases as part of an unprecedented stimulus package aimed at revitalizing the economy. The central bank had spent $150 billion on Japanese ETFs as of Dec. 8. It owned 74 percent of the market at the end of October, up from 65 percent a year earlier, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. ( ETFs are Exchange Traded Funds)

As the Nikkei-225 equity index fell by 195 points today we know that the Tokyo Whale would have been buying again.

The BOJ stepped up purchases in November after equities retreated, buying 598 billion yen of ETFs.

With there being a buy the dip strategy we can be sure that the Bank of Japan has been buying this year as there have been dips. If we were not sure then this morning’s release of “opinions” from the latest policy meeting reinforce the message.

If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets,

Just for clarity the BOJ is breaking new ground here is it really believes that. Not by arguing for “wealth effects” as central bankers the world over are true believers in them. What I mean is the implication that they are larger than other factors at play whereas the evidence I have seen over time is that they are minor and thus often hard to find at all. Looking deeper we see that the BOJ seems to have little intention of changing course although a boundary is on the horizon as some holders must want to keep their ETFs meaning it cannot be long before it has to look for greener pastures.

Perhaps this are suggested last November, from Reuters.

The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank………By selling put options of Japanese stocks, the BOJ should be able to not only help bring down the stock market’s volatility but also to make it easier to wean the markets off its stimulus, said Katsunori Sago, a former Goldman Sachs (GS.N) executive.

Alumni of the Vampire Squid get everywhere don’t they? So the fact that the Bank of Japan’s policies have in effect been a put option for Japanese equities should be added to by writing actual put options. Who would be silly enough to buy these options from the Bank of Japan? It is hard to know where to begin with the moral hazard here.

If the BOJ sells out-of-the-money puts, for example, put option with strike price below the current market levels, it can reduce the market’s volatility, Sago said.

Er simply no. You can reduce perceived or implied volatility but should the market move there is actual volatility. Unless of course Sago san is suggesting that the Bank of Japan should intervene in equity markets on the same scale as it has in bond markets and I think there we have it. Whilst there would presumably be profits for equity holders as much of the Japanese markets are Japanese owned we are in many cases simply shifting from one balance sheet to another.


This is something that fits the famous Churchillian phrase.

 It is a riddlewrapped in a mystery, inside an enigma;

Why? Well it is something which all the buying above should according to economics 101 be on its way down and yet there it is at 106 to the US Dollar. You can argue the US Dollar has been weak but I note that the UK Pound £ has been pushed back to 148 Yen as well. We get a clue from this from the Nikkei Asian Review.

Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country’s gross domestic product.

The market has been responding to fears of a repatriation much more than any new flows. Also as the BOJ has to some extent driven investors overseas it has undermined its own weak Yen policy. We are back to timing effects where something may be true but for a limited time period, Keynes understood it but modern central bankers lack such humility.


We have looked at the financial economy today but lets us via the “opinions” of the Bank of Japan switch to the real economy.

For instance, although the structural unemployment rate was formerly said to be around 3.5 percent, the actual
unemployment rate has continued to decline and registered 2.4 percent recently.

I imagine each Board Member sipping from their celebratory glass of sake as they type that. But there is a problem as we see below.

Although wage increases by firms have been at around 2 percent for the past few years, real wages registered negative growth in 2017 on a year-on-year basis.

That claim about wage rises is news to me and also the ministry of labor but let us pass that as we note the fall in real wages admitted as we reach the nexus of all of this.

The weak recovery in household consumption since last summer is of concern.

You see one way of looking at the Japanese economy is of deficient domestic demand. So when we are in an official world of wealth effects, plunging unemployment and surging wages ( 2% is a surge in Japanese terms or at least it would be) it should be on the up whereas with a little poetic licence it seems still to be rather Japanese.

The problems with raising the inflation target to 4%

One of the features of the economic environment is how monetary policy easing options are like weeds in a garden. As soon as you chop them down it feels like a new batch appears. This is particularly true of my subject of today which is that there has been a recent flurry of articles and suggestions that the inflation target should be raised usually to 4% per annum. This would replace the current level of 2% used by most of the world’s central banks. This is a situation which was aptly described by The Average White Band.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time

Before we move onto the details of this I would like readers to stop and think exactly how an increase in inflation would help them? A faster rise in prices just on its own would make consumers and workers worse off. After all if inflation was an economic cure why did countries in the 1970s and 80s go to so much trouble to push it lower?

The theory

A paper has been published on the Voxeu website by Paul De Grauwe and Yuemei Ji and the essentials of the case made are shown below.

An inflation target too close to zero risks pushing the economy into a negative inflation territory when even mild shocks occur. During periods of deflation the nominal interest rate is likely to hit the lower zero bound (ZLB). When this happens, the real interest rate cannot decline further. In such a scenario, the central bank loses its capacity to stimulate the economy in a recession, thereby risking prolonging recessions that do occur.

Okay let me respond sentence by sentence. Firstly we have the implication that negative inflation is bad when we have seen that via a boost to real wages it can expand consumption in an economy. I first discussed this back in January 2015 with respect to the UK, Ireland and Spain. Also there is the issue that for many years high inflation and not low inflation was the problem so the proposed solution may well be dealing with a symptom rather than a cause.

The next sentence was presumably updated with the word “lower” as the authors would have been using 0% as the lower bound until a couple of years ago. With so many countries now having negative interest-rates ch-ch-changes have been required but the concept of a lower bound has seen so much revisionism as it has got well lower and lower. For example the current state of play in the UK allowed Mark Carney to in effect promise Bank Rate below  the 0.5% which he previously called the “lower bound” for it. Mario Draghi has cut the ECB interest-rate to -0.4% below what he called the lower bound. Indeed the Riksbank of Sweden which has the lowest official rate if we look at the deposit rate of -1.25% told us this on Wednesday.

The Executive Board remains highly prepared to make monetary policy even more expansionary, if necessary, even between the ordinary monetary policy meetings. There is still scope to cut the repo rate further.

The repo rate is -0.5% and could be cut without lowering the deposit rate but it’s rhetoric is not one of a central bank which thinks that it is out of ammunition.

The final point of a central bank riding to the rescue in a recession has a problem. It is simply that if it was that simple we would not be where we are. Some 8 years or so into a credit crunch where central banks have fired their phasers repeatedly and run down the supplies of photon torpedoes we apparently still need more! More! More! As Agent Smith put it in the Matrix series of films and of course he lost.

The conclusion of the paper is as follows.

An inflation target in the range of 3% to 4% comes closer to producing a symmetric distribution of the output gap.

Ah the output gap that has been about as much use as a chocolate teapot in the credit crunch era. Also we are told this.

It turns out that an inflation target of 3% or 4% has more credibility than a target of 2%.

How? As central banks currently cannot mostly hit a 2% inflation target surely raising it would be even worse.

Japan as a test case

The Bank of Japan is the central bank which has most set its sights on the policy objective described above. It has just pushed the monetary base to above 400 Trillion Yen ( 403.9 to be precise) which compares to the 358.7 Trillion of January so as you can see it is expanding it very quickly. Yet for some this is still not enough.

With thanks to Mike Bird of the Wall Street Journal here are the thoughts of Credit Suisse.

The case for a 4 per cent inflation target for the BoJ

Okay so how would it be achieved?

We would argue that the central bank has actually  been too disciplined (restrained) in its approach to monetization of government debt. ……… we think it possible for the bank to promise that monetization of government debt will be maintained over a more extended period of time.

I bet some of you thought I was joking with my “To Infinity! And Beyond!” critique provided by Buzz Lightyear. Trapped within this is the fact that we always are told we need more without any objective analysis of why what was previously regarded as “more” is not working. Let me pose some questions for that approach.

  1. This was supposed to provide a lower level for the Yen but in spite of an acceleration in the size of the monetary base the Yen has been appreciating. It is at 100.6 versus a US Dollar which itself has been strong.
  2. We were promised by so many places that wages were just about to turn a corner and places like Bloomberg and the Financial Times have told us it has turned a corner. Last night the Ministry of Labour reported that total wages fell by 0.2% in May compared to a year earlier.

Your typical Japanese worker and consumer will rather doubt the promises of those who tell them that higher inflation will be some sort of economic nirvana after the experience of 3 and a bit years of what was supposed to be that nirvana! In the theories and economic models wages will respond to the higher inflation whereas in the real world that would be against wage trends that have been in play for quite some time. Ivory Tower meets reality you might say. Or as Japan Macro Advisers put it.

After taking account of inflation, real wages rose by 0.2% year on year in May. However, when we consider that real wages in Japan has been declining for many years, the pitiful rise of 0.2% rise offers little consolation. In real terms, real wages are still close to the lowest point in 30 years.

Yep the improvement in real wages came as a result of lower and not higher inflation but our Ivory Tower experts would apparently at the stroke of a pen solve a 30 year problem. Does anyone believe that?


There is an elephant in this particular room and I note that it fails to get a mention in the Ivory Tower theories. It is of course the debt burden which will be inflated away more quickly with 4% inflation than 2% inflation. Debtors rule okay or something like that! Except that the price is very likely to be that workers and consumers will be worse off in real terms just after they have taken a hit anyway. After all when the UK had 5% inflation in the autumn of 2011 there was no compensating surge in wages and in fact real wages were hit hard.

Another issue is the claim that higher inflation targets allow prices to adjust relatively. It is not made in the cases above but no doubt it will be along. Let me help out with some UK data.

The CPI all goods index annual rate is -1.8%, down from -1.6% last month……The CPI all services index annual rate is 2.6%, up from 2.4% last month.

It seems able to have relative price changes with near zero inflation does it not?

The Bank of Canada looked into this and I note that on its way to suggesting a revisiting of the inflation target it told us this.

The main conclusion is that, in the absence of the zero lower bound, the optimal rate of inflation is zero or negative.

Well since their paper was published in October 2015 the zero lower bound is not what it was.




Just in time for summer UK consumer confidence booms as GDP is revised higher

Today sees the UK economy at least make an effort to nudge past one or two of the headlines about Greece! One thing London at least has is temperatures which are expected today to be Athens like, or in tabloid terms to be hot,hot,hot with the temperature at the tennis at Wimbledon expected to make 30 degrees Celsius. We do not cope with it particularly well and I think I will give the tube a miss as I am not a great fan of saunas. However already we have received an update on consumer confidence which ties in with the weather. From the Gfk Consumer Confidence Report.

We’re seeing a dramatic uptick in confidence this month, a real post-election bounce that’s put a spring in the step of consumers across the UK. June’s six-point jump takes the Overall Index Score back to levels not seen since the late Nineties or early days of the Noughties.

If you look for some perspective you will see that like so many measures this index picked up after the Bank of England Funding for (Mortgage) Lending Scheme began in the summer of 2012. The chart provided shows that it hit a low of around -30 as summer turned to autumn in 2012 compared to +7 now. So the UK consumer has followed mortgage and housing changes just like one of Pavlov’s Dogs and “same as it ever was” to quote Talking Heads. The catch which will wipe the smile of the face of the more thoughtful Bank of England policy-makers is that back when consumer confidence was last at this level UK Base Rates were more like 5% than 0.5%.

Or as the Chief Economist of the Bank of England Andy Haldane put it in a speech yesterday.

Interest rates appear to be lower than at any time in the past 5000 years.

I will leave the Bank of England to explain how record  low interest-rates go with a consumer boom that may well be as hot as the weather if Gfk are correct.

Perhaps Andy and his colleagues are troubled by this issue.

Over the course of a decade, the risk of experiencing at least one recession rises steadily, reaching between 85-90% after ten years.  Using post-war data, this cumulative probability is just less than 80%.

One is starting to become due is it not? If we look for possible causes there is Greece in all the headlines or deeper in the newspapers but overall more significant the way that China seems to be bubbling over.

Of savings and generational inequality

One (Space) Oddity of the Gfk report is that the savings index has improved too and it is apparently now a good time to save! Rather awkward that as that does not go well either with it being a good time to consume nor following the FLS inspired reductions in savings deposit rates. But this does link in with an interesting set of data on my theme of generational inequality from the Office for National Statistics.

The median disposable income of retired households was 7.3% (£1,400) higher in 2013/14 than in 2007/08, after accounting for inflation and household composition, compared with 5.5% (£1,600) lower for non-retired households.

So retired households who one might think are dependent on savings income and deposit rates both of which have fallen have in fact done relatively well in the credit crunch era. We have considered this many times before but if we add in higher house prices and indeed rents it is not the best of times to be young is it? Or to be more specific for the first time for a while subsequent generations face the probability of being worse-off than their antecedents.

Whilst I expected the changes to the state pension to be an influence here I have to confess some surprise at the other impact below.

In 2013/14, retired households received an average of £9,500 from private pensions/annuities, a real terms increase of 9% from 2012/13 when the average was £8,800 and an increase of 26% since 2007/08 (£7,500).

Going forwards with the legal changes that is going to be difficult to measure to say the least.

What about booming consumption?

Also whilst the data only takes us up to April 2014 there is plenty of food for thought in the numbers below.

In 2013/14, median disposable income was £500 (or 2.0%) lower than in 2007/08, while GDP per person in 2013/14 was 3.1% below its 2007/08 level.

Indeed the OECD (Organisation for Economic Co-operation and Development) weighed in on this subject yesterday evening. It compared hourly wage growth pre credit crunch (2000-07) to after it (2007-14) and had the UK as 5th worst at just under -4%. Until their full report is published the methodology used is unclear but we are not that different to Greece on this measure.

Those numbers do not fit that well with booming consumption but of course we have just had a good year in economic growth terms to add into the pot.

Between Quarter 1 2014 and Quarter 1 2015, GDP in volume terms increased by 2.9%, revised up 0.5 percentage points from the previously published estimate.

GDP was estimated to have increased by 3.0% in 2014, compared with 2013, revised up 0.2 percentage points from the previously published estimate.

But even allowing for that we again find ourselves in the position of looking at things which do not seem to be consistent. Perhaps the unsecured lending boom squares much of this circle.

Consumer credit increased by £1.0 billion in May, in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.5% and 7.2% respectively.

There was a time when this would be considered a risk of “over-heating” and interest-rates would rise in response as opposed to being unchanged for over 6 years at a 5000 year low.

Also we may be feeling better-off due to this.

Real household  disposable income per head increased 3.9% in Q1 2015 compared to the same quarter a year ago

Oh and on the subject of interest-rates Andy Haldane might like to review and perhaps redact this bit.

in my time at the Bank of England I can recall UK interest rates rising by 5 percentage points in a day.

Actually in 1992 the latter 2% never actually happened as it was announced for the next day and was cancelled.

The unreliability of GDP statistics

I often detail the problems of using Gross Domestic Product as a measuring-stick for an economy. Today’s data release highlights that in one simple section and it refers to the construction sector update that I discussed on the 12th of this month.

Construction output rose by 4.5% between Quarter 1 2014 and Quarter 1 2015, revised up 4.8 percentage points from the previously published estimate.

The construction series was a shambles and hopefully has now been improved. If we recall the shambles over recording rents and then the establishment effort to force us to use them as an (owner-occupied) inflation measure you can see that the housing sector is measured dreadfully. It is a good job it is not a significant part of the UK economy…..Oh hang on.


There is much to consider in the latest data. We should be grateful that the UK continues to grow and that the performance over the past year of circa 3% is good in historical terms. However even if we ignore the conceptual issues with GDP we have the problem that if we move from the aggregate to the individual level things are not as good. For example I have already highlighted the lagging of per capita GDP well even now it continues to lag the aggregate number.

GDP per head was estimated to have increased by 0.2% between Quarter 4 2014 and Quarter 1 2015, revised up 0.1 percentage points from the previously published estimate. Between 2013 and 2014, GDP per head increased by 2.3%.

As for generational issues they continue to build as the young face student debt,maybe mortgage debt on large scales whilst wages and incomes stagnate. Perhaps this is why Andy Haldane is so gloomy.

The psychological scars of the Great Recession, as after the Great Depression, have proved lasting and durable.  They help explain the sluggishness of the recovery, and the adhesiveness of interest rates, since the crisis.  And, if the past is any guide, these scars may heal only slowly.

His policy prescription? Well we do get a broad steer.

As then, they suggest the optimal path for interest rates involves an immediate cut in rates for about a year, which pushes inflation back to target and closes the output gap.

Meanwhile enjoy your extra second tonight!