What is the outlook for the US economy?

We see plenty of rhetoric about challenges and changes but the two biggest players in the world economy are the United States and the US Dollar. So it is time for us to peer under the bonnet again and let me open with the result from the third quarter.

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the third quarter of 2019 , according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( BEA )

There are several implications here of which the first is simply that this is better than we are seeing in most places with Germany and Japan reporting growth rates much lower in the last 24 hours. In general this is , however, weaker than last year although the last quarter of 2018 was particularly weak.

A supporting element for the US has been a strong labour market.

 Real disposable personal income increased 2.9 percent, compared with an increase of 2.4 percent.

Has the easier fiscal policy of President Trump been a factor? Yes but we simply get told this.

federal government spending,

If we shift to a potential consequence which is rising debt well actually the ability of the US to repay it looks strong too.

Current dollar GDP increased 3.5 percent, or $185.6 billion, in the third quarter to a level of $21.53 trillion. In the second quarter, GDP increased 4.7 percent, or $241.4 billion.

As you can see there has been an element of inflating away the debt in there.

What happens next?

The now cast system uses the latest official data to look ahead and just like last year it looks like being a weak end to the year.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases decreased the nowcast for 2019:Q4 by 0.1 percentage point.

Negative surprises from lower than expected exports and imports data accounted for most of the decrease.

Another factor in play is that the labour market is not providing the push it was.

Earnings growth is still below late 2018 levels……Payroll growth was moderate in October, but remained solid year-to-date.

Money Supply

Back on the 22nd February I posted my concerns about the prospects for 2019.

So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme…….So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Of course that was then and this is now as the reference to the now ended QT programme. For example this happened at the end of last month.

the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Yesterday saw Repo operations from the New York Fed which provided some US $73.6 billion of overnight liquidity and US $30.7 billion of 13 day liquidity. Thus the cash is flowing rather than being reduced and like so many things what was presented as temporary seems to keep going.

In accordance with the most recent FOMC directive, the Desk will continue to offer at least $35 billion in two-week term repo operations twice per week and at least $120 billion in daily overnight repo operations.

The Desk will also offer three additional term repo operations during this calendar period with longer maturities that extend past the end of 2019.  ( NY Fed )

That is for the next month and there will be more to come as they catch up with something we have been looking at for a couple of years now which is the year end demand for US Dollars.

These additional operations are intended to help offset the reserve effects of sharp increases in non-reserve liabilities later this year and ensure that the supply of reserves remains ample during the period through year end.

Returning to the money supply data you will not be surprised to read that the numbers have improved considerably. The outright fall of US $42 billion in the narrow money measure in March has been replaced by growth and indeed strong growth as both the last 3 months and 6 months have seen growth at an annual rate of the order of 8%. Back in February I noted that cash growth was strong and it was demand deposits which were weak and it is really the latter which have turned around. Demand deposits totalled US $1.45 trillion in March but had risen to US $1.57 trillion at the end of October.

Talk of the demise of what Stevie V called

Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

continues which is rather the opposite of official rhetoric.

Thus a monetary stimulus has been applied and for those of you who like to look at this in real terms might now that the inflation measures in GDP have faded making the impetus stronger for say the opening and spring of 2020.

Have the Repo operations influenced this? If you look at the September data I think that they have. But this comes with a cautionary note as QE operations do not flow into the monetary data as obviously as you might think and at times in the Euro area for example have perhaps taken quite a while.

Credit

By contrast a bit of a brake was applied in September.

Consumer credit increased at a seasonally adjusted annual rate of 5 percent during the third quarter. Revolving credit increased at an annual rate of 2-1/4 percent, while nonrevolving credit increased at an annual rate of 6 percent. In September, consumer credit increased at an annual rate of 2-3/4 percent.

Those sort of levels would have the Bank of England at panic stations. It makes me wonder if fears over the financial intermediation of the banks was a factor in the starting of Repo operations?

If you are wondering if car loans are a factor here we only get quarterly data and as of the end of the third quarter the annual rate of growth was 4.3% so definitely, maybe.

The US Dollar

The official view is expressed like this.

NEW YORK (Reuters) – President Donald Trump on Tuesday renewed his criticism of the Federal Reserve’s raising and then cutting of interest rates, saying the central bank had put the United States at a competitive disadvantage with other countries and calling for negative interest rates.

He wants lower interest-rates and a lower US Dollar. What we have seen is a trade-weighted index which has risen from 116 in February of last year to above 129 as I type this. So not much luck for the Donald

Comment

As you can see things are better than some doom mongers would have us believe. The monetary situation has picked up albeit with weaker consumer credit and there is the fiscal stimulus. But that is too late for this quarter and there are ongoing issues highlighted by the weak data we have seen out of China this week which the New York Fed summarises like this.

China’s monthly economic activity data is steady at a lower level.

Then there is the ongoing sequence of interest-rate cuts around the world which rose by 2 yesterday as Mexico and Egypt got on the bandwagon. That makes 770 for the credit crunch era now.

Meanwhile for those who have equities the Donald thinks that life is good.

Hit New Stock Market record again yesterday, the 20th time this year, with GREAT potential for the future. USA is where the action is. Companies and jobs are coming back like never before!

 

 

 

 

 

 

The success story of Spain faces new as well as old challenges

Back in the Euro area crisis the Spanish economy looked in serious trouble. The housing boom and bust had fit the banking sector mostly via the cajas and the combination saw both unemployment and bond yields soar. It seems hard to believe now that the benchmark bond yield was of the order of 7% but it posed a risk of the bond vigilantes making Spain look insolvent. That was added to by an unemployment rate that peaked at just under 27%. The response was threefold as the ECB bought Spanish bonds under the Securities Markets Programme to reduce the cost of debt. There was also this.

In June 2012, the Spanish government made an official request for financial assistance for its banking system to the Eurogroup for a loan of up to €100 billion. It was designed to cover a capital shortfall identified in a number of Spanish banks, with an additional safety margin.

In December 2012 and January 2013, the ESM disbursed a total of €41.3 billion, in the form of ESM notes, to the Fondo de Restructuración Ordenada Bancaria (FROB), the bank recapitalisation fund of the Spanish government. ( ESM)

Finally there was the implementation of the “internal competitiveness” model and austerity.

What about now?

Things are very different as Spain has been in a good run. From last week.

Spanish GDP registers a growth of 0.4% in the third quarter of 2019 compared to to the previous quarter in terms of volume. This rate is similar to that recorded in the
second trimester.The interannual growth of GDP stands at 2.0%, similar to the previous quarter.

There are two ways of looking at this in the round. The first is that for an advanced economy that is a good growth rate for these times, and the second is that it will be especially welcome on the Euro area. Combining Spain with its neighbour France means that any minor contraction in Germany does not pull the whole area in negative economic growth.

However there is a catch for the ECB as Spain has slowed to this rate of economic growth and had thus exceeded the “speed limit” of 1.5% per annum for quite a while now. That will keep its Ivory Tower busy manipulating, excuse me analysing output gaps and the like. In fact once the dog days of the Euro area crisis were over Spain’s economy surged forwards with annual economic growth peaking at 4.2% in the latter part of 2015 and then in general terms slowing to where we are now. As to why the ESM explanation is below.

 Strong job creation followed the economic expansion, and employment has recovered by more than 2.5 million. Structural reforms have been paying off: competitiveness gains have supported economic rebalancing towards tradable sectors, and exports of goods and services have stabilised at historical highs (above 30% of GDP). The large and persistent current account deficit, which had reached 9.6% of GDP in 2007, has turned into a surplus averaging 1.5% of GDP in 2014-18.

Actually the IMF must be disappointed it did not join the party as turning around trade problems used to be its job before it came under French management. But Spain certainly rebounded in economic terms.and has been a strength of the Euro area.

Looking at the broader economy, Spain returned to economic growth in 2014 and continues to perform above the euro area average in that category

Over the past six months external trade has continued to boost the economy in spite of conditions being difficult.

On the other hand, the demand external presents a contribution of 0.2 points, eight tenths lower than the quarter past.

The impact of all this has improved the employment situation considerably.

In interannual terms, employment increases at a rate of 1.8%, rate seven tenths
lower than the second quarter, which represents an increase of 332 thousand jobs
( full time equivalents) in one year.

In terms of a broad picture GDP in Spain peaked at 104.4 in the latter part of 2007 then had a double-dip to 94.3 in the autumn of 2013 and now is at 110.9. So it has recovered and moved ahead albeit over the 12 years not made much net progress.

Problems?

According to the ESM the banks remain a major issue.

Several legacy problems also remain in the banking sector. These include larger and more persistent-than-expected losses of SAREB, which pose a contingent liability to the state. Banks have adequate capital buffers, but should further strengthen them towards the euro area average to withstand any future risks. In addition, the privatisation of Bankia and the reform of cajas need to be completed.

Of course banking reform has been just around the corner on a Roman road in so many places. Also the balance sheet of the Spanish banks has received what Arthur Daley of the TV series Minder would call a “nice little earner”.

Housing prices rise 1.2% compared to the previous quarter.The annual variation rate of the Housing Price Index has decreased 1.5 points to 5.3%,

Annual house price growth returned in the spring of 2014 which the banks will welcome. The index based in 2015 is now at 124.2.

However not all ECB policies are welcomed by the banks.

Finally, banks still face pressure on profitability due to the low interest rate environment, and potentially from a price correction in financial assets if the macro environment deteriorates. ( ESM )

An official deposit rate of -0.5% does that to banking profitability. I do not recall seeing signs of the Spanish banks passing this on in the way that Deutsche Bank announced yesterday but the heat is on. I see that the ESM is covering its bases should house prices fall again.

If we look at mortgage-rates then they are falling again as the Bank of Spain records them as 1.83% in September which looks as though it may be an all time low but we do not have the full data set.

Comment

The new phase of economic growth has brought better news on another problem area as the Bank of Spain reports.

Indeed, the non-financial private sector debt ratio
relative to GDP stood at 132%, 5 pp down on a year earlier and 4 pp below the euro area average.

The ratio of the national debt to GDP has fallen to this.

Also, in June 2019 the public debt/GDP ratio stood at 98.9%, a level still 13 pp higher than the euro area average.

 

and these days it is much cheaper to finance as the 7% yields of the Euro area crisis have been replaced by some negative yields and even the benchmark ten-year being a mere 0.31%.

On the other side of the coin first-time buyers will not welcome the new higher house prices and there are areas of trouble.

In this respect, consumer credit grew in June 2019 at a year-on-year rate of around 12%, and non-performing consumer loans at 26%, raising the NPL ratio slightly to 5.6% ( Bank of Spain)

What could go wrong?

Another signal is the way that the growth in employment has improved things considerably but Spain still has an unemployment rate that has only just nudged under 14%.So there is still much to do just as we fear the next downturn may be in play.

A fifth successive monthly deterioration in Spanish
manufacturing operating conditions was signalled in October as a challenging business climate negatively impacted on sales and output……At 46.8, down from 47.7 in September, the index also posted its lowest level for six-and-half years.   ( Markiteconomics )

 

What economic situation faces the new Greek government?

There was a link between the two main news stories on Sunday. Those who feel the main aim of the original Greek bailout was to allow European banks to exit the country will have had a wry smile at the ongoing travails of Deutsche Bank. Also the consequences of that bailout are still being felt in Greece which may vote for political change but finds itself continuing to be in troubled economic times. From Kathimerini.

Crucially, asked to what extent the creditors would be open to a reduction to fiscal targets, Regling said the 3.5 percent of GDP target Greece has committed to is a “cornerstone of the program,” adding that it’s “very hard to see how debt sustainability can be achieved without that.”

This was a reminder that via the fiscal target some 3.5% of economic activity each year will be taken out of the economy to help reduce the size of the national debt. A bit like driving a car with the handbrake on. It also gives us a reminder of the early days of the Greek crisis where a vicious circle was set up as austerity shrank the economy which meant that more austerity was required and repeat. Accordingly Greece was plunged into what can only be described as a great depression. Putting it another way the Greek economy is now 18.8% smaller than it was as 2010 opened.

Another disturbing feature is the weakness of the current recovery. I have written throughout this saga about my fear that what should be a “V-Shaped” recovery has been an “L-Shaped” one. So after a better 2017 ( which was essentially the second quarter) we find ourselves reviewing not much growth.

The available seasonally adjusted data indicate that in the 1st quarter of 2019 the Gross Domestic Product (GDP) in volume terms increased by 0.2% in comparison with the 4th quarter of 2018, while in comparison with the 1st quarter of 2018, it increased by 1.3%

So if there is a recovery impetus it is finding that its energy is being diverted away by the primary surplus target.

Trade Problems

Yesterday we got the latest trade data for Greece and this matters because it is a test of what has become called the internal competitiveness model. This was produced for the Euro area crisis because there was no devaluation option as the official view is that the Euro is irreversible. Thus the wages of the ordinary Greek had to take the whole strain of whipping the economy back into shape. How has that gone?

The total value of imports-arrivals, in May 2019 amounted to 5,230.9 million euros (5,832.8 million dollars) in
comparison with 4,356.6 million euros (5,130.8 million dollars) in May 2018, recording an increase, in euros, of
20.1%…….The total value of exports-dispatches, in May 2019 amounted to 3,044.6 million euros (3,415.5 million dollars) in comparison with 2,955.0 million euros (3,501.2 million dollars) in May 2018, recording an increase, in euros, of 3.0%.

In itself a rise in the import bill may not be bad as it can indicate an economic recovery on its way. Also in these times of trade wars then an increase in exports is welcome. But we need to look further as to the overall position.

The deficit of the Trade Balance, for the 5-month period from January to May 2019 amounted to 9,421.0 million
euros (10,515.9 million dollars) in comparison with 8,086.2 million euros (9,738.3 million dollars) for the
corresponding period of the year 2018, recording an increase, in euros, of 16.5%.

These numbers do not allow for two of the main strengths of the Greek economy so let is put them in.

The rise in the services surplus is attributable to an improvement, primarily in the transport balance and, secondarily, in the travel and other services balances. Transport receipts (mainly sea transports) rose by 9.8%. At the same time, non-residents’ arrivals and the relevant receipts rose by 0.5% and 22.8%, respectively. ( Bank of Greece)

Those numbers are only up to April but we see that even without the grim trade data for May the overall current account was not going well.

In the January-April 2019 period, the current account showed a deficit of €5.1 billion, up by €335 million year-on-year.

Of course the flip side of Euro membership is that the value of the currency is unlikely to take much notice of this as due to Germany’s presence the overall position is of a consistent surplus. But whilst tourism in particular has done well the idea of a net exports surge is just not happening.

Looking Ahead

The Bank of Greece told us this at the beginning of this month.

economic activity is expected to increase by 1.9% in 2019, by 2.1% in 2020 and by 2.2% in 2021, mainly driven by private consumption, business investment and exports.

Those numbers send a chill down my spine because throughout the crisis we have been told that Greece will grow by around 2% per annum. This was supposed to start in 2012 whereas in fact the economy shrank at annual rates of between 4.1% and 8.7%. For now growth via exports seems unlikely to say the least.

The private-sector Markit PMI survey told us this.

Operating conditions in the Greek manufacturing sector
improved moderately in June, with the headline PMI
dipping to its lowest since November 2017. Weighing on
overall growth were slower increases in production and new business.

The reading was 52.4 ( 50 = unchanged)  so slow growth was the order of the day as we note Greece is being affected by a sector that in the Euro area overall is contracting.

Bond Market

There has been a spate of articles pointing out that Greece now has a ten-year yield which is very similar to that of the United States. Actually that is not going quite so well this morning as at 2.17% Greece is 0.1% higher. But it is being used as a way of bathing the situation in a favourable light which has quite a few problems.

  1. Rather than a sign of economic recovery it is a sign of a policy ( primary surplus target) which is sucking growth out of the economy.
  2. Pretty much any yield is being bought these days!
  3. Greece does not have that many government bonds in issue as so much of the debt is now owned by the two Euro area bailout vehicles the ESM and EFSF. They disbursed some 204 billion Euros to Greece and now hold more than half its national debt. It is also why if you look back at the first quote in this piece it is Klaus Regling of the ESM who is quoted.

So rather than success what the bond yield now tells us is that Greece is in a program that the so-called bond vigilantes would love, otherwise known as the primary surplus target. It also has seen the ESM debt kicked like a can to the late 2050s. That is really rather different.

Why would you pay investors 2% or so rather than 1% to the ESM? A blind eye keeps being turned to that question.

It is also why I find it frankly somewhat frustrating when people like Yanis Varoufakis call for QE for Greece as via the ESM It got its own form of it on a much larger scale. Their real problem is that it came with conditions.

Comment

This has been a long sad story perhaps best expressed by Elton John.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad (so sad)
Why can’t we talk it over?
Oh it seems to me
That sorry seems to be the hardest word

There have been some improvements but the numbers below also highlight the scale of the problem to be faced.

The seasonally adjusted unemployment rate in March 2019 was 18.1% compared to 20.2% in March 2018 and the downward revised 18.4% in February 2019.

If we look back to the pre credit crunch era then the employment rate was around 10% lower than that. Also a youth unemployment rate of 40.4% is considerably improved but if we look at the past numbers we see that not only must so many young Greek’s not have a job but they must have no hope of one. Also it has gone on so long that some will now be in the next category of 25-34.

So the new Greek government has plenty of challenges so let me finish with the main two as seen by the Bank of Greece.

 This is so because, with a public debt-to-GDP ratio of 180%

and

Banks have made progress in reducing non-performing loans (NPLs). More specifically, at end-March 2019, NPLs amounted to €80 billion, down by about €1.8 billion from end-December 2018 and by around €27.2 billion from their March 2016 peak

 

 

Mark Carney claims “this is not a debt fuelled expansion” and interest-rates will rise “sooner than markets expect” yet again!

One of the features of the credit crunch era is the way that those in authority so often get given pretty much a free pass from the media, This is illustrated starkly by the BBC’s senior economics correspondent Dharshini David.

Today the Bank of England’s Governor admitted to me that rates are likely to rise faster than the markets expect. So when can we expect the first move? My analysis for

Perhaps Dharshini was giddy after being given the first question at the press conference. Sadly she asked a question which might have been written by Governor Carney himself and accordingly he seemed like Roger Federer as he volleyed it nonchalantly at the net.

Missing is any questioning of the assertion such as pointing out Governor Carney told us that interest-rates would rise “sooner than markets expect” in his Mansion House speech in June 2014. When this did not happen he acquired this moniker.

The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden. ( BBC)

The reality was that his next move was to cut interest-rates In August 2016 followed by promises of another cut that November before yet another U-Turn. Then there was another U-Turn just over a year ago which if you recall was followed by a sharp drop in the value of the Pound £.

So you can see that it is really rather extraordinary that Dharshini either ignored or is unaware of this. I am not sure what to make of the sentence below.

But that doesn’t mean that Mark Carney or his colleagues are asleep at the wheel.

She was nearer the mark with this.

Report press conference was perhaps unprecedented number of female hacks… taken a while but face of financial journalism is changing, all the better to reflect our audiences

However there was no mention of the “woman  overboard” problem at the Bank of England which was illustrated by the 100% middle-aged male make up of its panel. The press conference highlighted this as in response to a question about diversity at the Bank of England Governor Carney responded with a barrage of “ums” and “ers”.

Still we can have a wry smile at this.

Growth actually isn’t that different to what was expected a year ago……..UK growth in the first quarter is likely to have been 0.5%, double what the Bank expected just three months ago.

Governor Carney kept pointing to the former forecast as he had a rare opportunity to bathe in a correct forecast, although he was not challenged on why they then cut the growth forecast to 0.2% so recently?

Pinocchio

In response to a rather good question about the growth of fixed-rate mortgages and its effect on the responsiveness of the economy to Bank Rate changes the Governor claimed this was nothing to do with him.  Nobody pointed out that in his first phase of Forward Guidance promising interest-rate increases there were people who were listening to him as there was a shift towards foxed-rate mortgages. Sadly, they were then shafted when Governor Carney cut interest-rates.

The point above was in a way the media catching up with one of my earliest themes from 2010 as I pointed out how market interest-rates were following official ones much less closely than before. However there was an even bigger humdinger out of Governor Carney’s mouth.

This is not a debt fuelled expansion

He has said this before and there are two main issues with this. The first is that the main policy over his tenure has been the funding for lending scheme which turned net mortgage lending positive. So more debt as shown by Wednesday’s figures.

Net lending for mortgages increased to £4.1 billion in March.

In the month before Governor Carney’s arrival the net increase was £785 million and whilst the rise has not been smooth ( early 2016 saw an incredible surge due to the buy to let changes) I think the numbers speak for themselves

Also the past three years or so has seen quite an extraordinary surge in unsecured credit something which I have been regularly documenting. It was £156.4 billion and is now around 38% higher at £216.7 billion. Can anybody think of anything else that has risen that fast as wage growth and GDP have been left far behind?

A factor in this has been something we have followed closely and was highlighted by the Office of Budget Responsibility.

 Data from the Finance & Leasing Association suggest that, between 2012 and 2016, dealership car finance contributed around three-fifths of the growth in total net consumer credit flows. Within that, around four-fifths reflected strong growth in car sales, with the remainder accounted for by a higher proportion of cars bought using dealership car finance.

So “this is not a debt fuelled recovery” means we have pumped up mortgage lending and seen quite a surge in car finance.

Inflation

Sadly for those who parroted the Bank of England line there was this. From @NicTrades

Bank of England Carney signals more than 1 hike may be needed to keep inflation in Check, while at the same time he cuts inflation forecasts.

Thus according to its inflation targeting regime an interest-rate increase is less and not more likely. Even worse the absent-minded professor Ben Broadbent gave us quite a spiel on oil markets as he tried to look on the ball, but to anyone market savvy that will have backfired too as they will have been thinking that the oil price has been falling recently. The price of a barrel of Brent Crude Oil is as I type this nearly US $5 lower since President Trump indulged in his own open mouth operation on Twitter last Friday.

Comment

The era of Forward Guidance has turned out to be anything but for the Bank of England. Governor Carney seems to have set the boy who cried wolf as his role model and the fact that he has actively misled people gets mostly overlooked. Still let us hope he is right that UK GDP grew by 0.5% in the first quarter of this year. If true that will also pose a question for the Markit series of business surveys.

At 50.9 in April, up from 50.0 in March, the seasonally
adjusted All Sector Output Index revealed a return to growth for private sector business activity.

Meanwhile our supposed football fan missed an opportunity that was taken by the ECB.

Best of luck to our local team for tonight’s semi-final!

Perhaps I am more sensitive on that front as I am a Chelsea fan, but Arsenal fans may wonder too.

 

 

The Italian crisis continues to deepen

Sometimes financial life comes at your quickly and at others it feels like it takes an age. The current Italian crisis has managed in typically Italian style to have covered nearly all bases as we note the main driver simply being lack of economic growth meaning on a per head basis economic output is lower than when the Euro began, But if we move to the current there was a development yesterday, and context can be provided by statements from the new government that economic growth of 3% per annum is possible. From Italian statistics.

In 2018, GDP is expected to increase by 1.1 percent in real terms.The domestic demand will provide a contribution of 1.3 percentage points while foreign demand will account for a negative 0.2 percentage point and inventories will provide a null contribution. In 2019, GDP is estimated to increase by 1.3 percent in real terms driven by the contribution of domestic demand (1.3 percentage points)
associated to a null contribution of the foreign demand and inventories.

The initial response was surprise that Istat had held the previous forecast at 1.4% for so long. After all the Italian economy had been slowing for a while in quarterly terms from the peak of 0.5% and as it had been following a Noah’s Ark two-by-two style policy might have been expected to be 0.2% this time around, Except of course it was 0% reducing the annual rate to 0.8% which is below the current forecast.

If we look at the detail we see that such as it is there seems to be a reliance on consumption.

In 2018, exports will increase by 1.6 percent and imports will grow by 2.6 percent, both are expected
to accelerate in 2019 (3.2% and 3.5% respectively). Residential households consumption expenditure
is expected to grow by 0.9 percent in 2018 accelerating in 2019 (1.2%). The stabilisation in employment and the wages increase will support households purchasing power. Investment are expected to progressively decelerate both in 2018 (+3.9) and in 2019 (+3.2%).

In itself the trade decline is not a big deal as Italy has a strong trade position but it does subtract from GDP. It also poses a question for the Euro area “internal devaluation” model. Also it is hard not to question where that investment is going? After all in collective terms the economy is not growing. So we are left with domestic consumption relying on this.

Labour market conditions will improve over the forecasting period. Employment growth is expected to stabilise at 0,9 percent in 2018 and in 2019. At the same time, the rate of unemployment will decrease at 10.5 percent in the current year and at 10.2 percent in 2019.

Will the labour market continue to improve with economic growth slowing and maybe stopping completely? Frankly the only reason to forecast a better 2019 is the planned fiscal stimulus which of course is where the whole issue comes in.

Along the way we can get a new perspective from the fact that if we put 2010 at 100 the Italian economy peaked above 102 in early 2008 and has now recovered to just above 97.

Excessive Deficit Procedure

In essence the Euro area is stalling on the application of the EDP as it is hoping there might be a change of tack. Also I would imagine that it does not want to prod the Italian crisis with Brexit also up in the air. But there is something quite revealing in yesterday’s documentation from the European Commission.

Italy made a sizeable fiscal effort between 2010 and 2013, raising the primary surplus to over 2% of GDP and exiting the excessive deficit procedure in 2013 by keeping its headline deficit at a level not above 3% of GDP as of 2012 (down from more than 5% in 2009).

The reality if we look at the pattern of GDP was that returning to 2010 as our benchmark Italian GDP which was recovering from the initial credit crunch shock and rallying from ~94 to ~97 turned south from early 2011 and fell to below 93. Back then the EC and its acolytes were claiming that this was an expansionary fiscal contraction whereas if we allow for the lags it hit the Italian economy hard. There have been various mea culpas ( IMF mostly) and redactions of history since. But not only did Italy struggle to recover as even now we are only back to the 97 level where in GDP terms it started from of course it was then benefiting from both fiscal and monetary policy. Or as Mario Draghi likes to put it.

an ongoing broad-based economic expansion

If we look back to my article from the 26th of October Italy is now being told that fiscal policy cannot help and may make things worse too. So Italians may reasonably be annoyed and sing along with All Time Low.

‘Cause I’m damned if I do ya, damned if I don’t

Things that will not improve their humour is that it is the same Olivier Blanchard pushing this who was in the van of arguing that a fiscal contraction would boost the economy. Also that Euro area rhetoric is making the situation of their bond market worse.

Bond Market

Back on the 2nd of October I noted that the benchmark ten-year yield for Italy had risen to 3.4% but that such things took time to have an impact on the real as opposed to financial economy. Well it is 3.47% as I type this and I note that @liukzilla calculated that this phase of higher yields will cost Italy around 6.6 billion Euros in higher debt costs. Care is needed as it is not something to pay now but say over the next ten years as interest is paid. But a rising problem.

The new government suggested that retail investors might surge into the market but they have bought less than one billion Euro’s of this week’s offer which is at best a damp squib. Of course there are the banks…

Italian banks

Did somebody mention the banks? They are of course stuffed full of Italian government bonds and you can see the state of play courtesy of @LiveSquawk.

Italy’s 5 Star Movement Has Proposed Measures To Allow Unlisted Banks And Insurers Not To Mark To Market Gvt Bonds – RTRS Sources.

Yes that bad. But the circus for banks carries on regardless it would appear as we move to Reuters.

Carige said Italian banks had guaranteed they would buy bonds worth 320 million euros, with a further 80 million euros earmarked for private investors, possibly including existing shareholders.

So the tin can gets another kick as we note that this weakens the other banks which participate.

Comment

Let me add another dimension provided courtesy of the Financial Times Magazine and let us first set the scene.

Mafia syndicates in Italy have an estimated annual turnover of €150bn, according to a report by the anti-Mafia parliamentary committee in 2017.

They have moved into agriculture as it seems like easy money and the economic crisis gave them an opportunity as whilst conventional business struggled they had cash.

With margins as high as 700 per cent, profits from olive oil, for example, can be higher than those from cocaine — and with far less risk.

Also it gives you clean money to which Michael Corleone would nod approvingly. Here is one route.

A Mafia family could claim about €1m a year in EU subsidies on 1,000 hectares, while leasing it for as little as €37,000. “With profit margins as high as 2,000 per cent, with no risk, why sell drugs or carry out robberies when you can just wait for the cheque to arrive in the post?” he says by telephone from his home.

Here is an even more unpleasant one.

In February last year, 42 members of the Piromalli clan in Calabria were arrested and 40 farms seized in connection with the export of counterfeit oil to the US, sold as extra virgin, which retails for at least €7 a litre. A number of those arrested are now in prison awaiting trial. According to police, about 50 per cent of all extra-virgin olive oil sold in Italy is adulterated with cheap, poor-quality oil. Globally the proportion is even higher.

Makes me wonder about the bottle of olive oil in my kitchen and the “made in Italy” spaghetti. It is all nearly as bad as the video of Patrice Evra and the chicken or perhaps we should say salmonella.

 

 

 

 

Are we living beyond our means in the UK?

This morning has seen the UK Office for National Statistics enter the fray around whilst is something of a hardy perennial amongst economic questions.

UK households have seen their outgoings surpass their income for the first time in nearly 30 years, our data have shown.

I have to confess my first thought was are you sure about the 30 years? But let us suspend that particular critical facility for a moment and continue.

On average, each UK household spent or invested around £900 more than they received in income in 2017; amounting to almost £25 billion (or about one-fifth of the annual NHS budget in England).

Households’ outgoings last outstripped their income for a whole year in 1988, although the shortfall was much smaller at just £0.3 billion.

Even in the run-up to the financial crisis of 2008 and 2009 – when 100% (and more) mortgages were offered to home buyers without a deposit – the country did not reach a point where the average household was a net borrower1.

Significant factors here will be regular topics such as the higher inflation of 2017 raising expenditure and the continuing struggles of wages growth. Although the next point raised may result in a strongly worded letter from an angry Canadian in the heart of the City of London.

To fund this shortfall, households either have to borrow – at which point they could be living beyond their means – or dip into their savings.

And our data show they are borrowing more and saving less.

Households took out nearly £80 billion in loans last year, the most in a decade; but they deposited just £37 billion with UK banks, the least since 2011.

Why might borrowing be attractive? Oh yes.

We’re borrowing more and saving less partly because the interest rate – which dictates returns on money saved and the size of loan repayments – has been at or near a record low for the past decade.

The base rate set by the Bank of England is just 0.5%, compared with almost 15% in 1990, making financial conditions better for borrowers rather than savers.

That of course does not give the Bank of England enough credit as until November the Bank Rate was 0.25% and nearly for the whole year it was supplying liquidity to the banks via the £127 billion Term Funding Scheme. It had also back in August 2016 started other Sledgehammer measures such as £10 bililion of Corporate Bond purchases and £60 billion of UK Gilt ( QE) purchases. These moves led to a succession of record low mortgage rates which perhaps the ONS is not aware of but it has spotted a likely consequence.

Households’ investment reached a record high of £74 billion in 2017, most of which was spending on new homes and major home improvements.

This provokes two lines of thought. Let us start with my subject of Monday where we noted a case of someone buying a new kitchen presumably expecting his house would rise in value by more only to discover that it was not that simple. Next is the issue that something ordinarily regarded as a “good thing” investment seems not to be quite so clearly so here.

The nib on the fountain pen of our angry Canadian may fracture under the pressure as he notes that even being unreliable has contributed.

Recently, the Bank of England has been warning the country to expect interest rate rises. Expectations of an interest rate rise can affect saving and borrowing behaviour. Borrowing could rise in the short-term as households seek to take advantage of smaller repayments, while saving could be put off amid the prospect of higher returns in future.

At this point our angry Canadian will be torn between pointing out he saved 250,000 jobs and venting his spleen by calling in Chief Economist Andy Haldane and asking for a report on developments with his adviser Billy Bragg. Oh and when did over 4 years become “recently” please? As to the pen’s nib I would not be too worried as after all there is no shortage of gold to repair it with at the Bank of England.

There was something rather familiar to readers of my work although of course something confusing for those who believed the past Bank of England claims that there was no unsecured credit boom.

The stock of consumer credit – including credit cards, car finance plans and payday loans – has risen by nearly one-third in the last five years. Car finance is comfortably the fastest growing type of credit, with nearly 90% of new car purchases now funded this way.

I think actually car finance was the fastest growing type of credit is better as the slow down in sales will put a brake on things.

The amount of money owed in short-term loans has surpassed its pre-crisis level. These loans do not require any collateral (such as a house deposit) to be approved, but they’re expensive to pay back because they demand higher interest repayments.

Oh and here is an example from the BBC of an official body getting ready for an interest-rate move.

National Savings and Investments (NS&I) is cutting the interest rate it pays on its Direct Individual Savings Account (ISA), affecting nearly 400,000 savers.

From 24 September, NS&I will reduce the rate on its Direct ISA from 1.00% to 0.75%.

Ch-ch-changes

Can anybody think how our financial behaviour might have been influenced so that we have become more like Canada?

Meanwhile, the average household in Germany and France has always been able to cover their outgoings without turning to debt, partly because they’re historically bigger savers than the UK, Canada and the US.

For a long time, the average UK household was in a similar position to those in France and Germany. However, we’re now much closer to Canada and the US than our European neighbours.

Comment

As I noted this work appearing on social media I started to wonder if it would turn out to be like that Swiss cheese with the holes in it? There are elements of that because if you are looking at borrowing in this way I think you also need an idea of asset backing ( if any) and also a realisation that some of the numbers will not be known. For example I can see how we should know the amount of bank deposits in the UK but share investments especially abroad are far from clear.

If we look at the numbers there is an unsettling tone as I note that the report talks about a financial year and the numbers are for calendar years. But I know people like them so here we go. UK financial assets at the end of 2017 were £6.6 trillion and our angry Canadian might be mollified as he notes that it has grown from £5.2 trillion in the year he took up his post especially as he can then add to it the rise in house prices. By far the largest player is pension schemes at £3.8 billion with bank deposits next at £1.57 billion.Against that total debt is £1.8 trillion so looked at like that we are (trillions of) quids in.

Except of course the £3.8 billion is against a future liability which is missed out and we are often somewhere between poor and hopeless in measuring them. From Josephine Cumbo of the Financial Times.

The adoption of a higher discount rate by USS is in keeping with other private sector schemes. This year, Tesco sliced its DB deficit largely by increasing its discount rate from 2.5% to 2.9%.

In addition there is the issue of maybe people have borrowed because they think ( perhaps are) wealthier. Or at least some are as we are reminded that in the era of the 0.01% there is a clear case of what Pink Floyd described as “Us and Them”

Meanwhile as a cricket fan let me note that there seams to have been a late swing to Imran Khan in Pakistan.

 

 

The IMF debt arrow warning misses the real target

Yesterday brought the latest forecasts from the IMF ( International Monetary Fund). Don’t worry I am not concerned with them as after all Greece would be now have recovered if they were right. But there is a link to the Greece issue and the way that it has found itself trying to push an enormous deadweight of debt which meant that Euro area policy had to change to make the interest-rates on it much cheaper. Here is the ESM or European Stability Mechanism on that subject.

1% Average interest rate on ESM loans to Greece (as of 28/04/2017)

That is a far cry from the “punishment” 4.5% that regular readers will recall that Germany was calling for in the early days and the implementation of which added to the trouble. Also if we continue with the debt theme there is another familiar consequence.

That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

So in the words of the payday lenders Greece now has one affordable monthly payment or something like that. As we note the IMF research below I think it is important to keep the consequences in mind.

The IMF Fiscal Monitor

Here is the opening salvo.

Global debt hit a new record high of $164 trillion in 2016, the equivalent of 225 percent of global GDP. Both private and public debt have surged over the past decade.

Later we get a breakdown of this.

Of the $164 trillion, 63 percent is non financial private sector debt, and 37 percent is public sector debt.

That is a fascinating breakdown so the banks have eliminated all their own debt have they? Perhaps it is the new hybrid debt being counted as equity. Also the IMF quickly drops its interest in the 63% which is a shame as there are all sorts of begged questions here. For example who is it borrowed from and is there any asset backing? In the UK for example it would include the fast rising unsecured or consumer credit sector as well as the mortgaged sector but of course even that relies on the house price boom for an asset value. Then we could get onto student debt which whilst I have my doubts about some of the degrees offered in return I have much more confidence in young people as an asset if I may put it like that. So sadly the IMF has missed the really interesting questions and of course is stepping on something of a land mine in discussing government debt after its debacle in Greece.

Government Debt

Here is the IMF hammering out its beat.

Debt in advanced economies is at 105 percent of
GDP on average—levels not seen since World War II.
In emerging market and middle-income economies,
debt is close to 50 percent of GDP on average—levels
last seen during the 1980s debt crisis. For low-income
developing countries, average debt-to-GDP ratios have
been climbing at a rapid pace and exceed 40 percent
as of 2017.

If we invert the order I notice that there are issues with the poorer countries again.

Moreover, nearly half of this debt is on
nonconcessional terms, which has resulted in a doubling
of the interest burden as a share of tax revenues
in the past 10 year.

This gives us food for though as you see one of the charts shows that such countries have received two phases of what is called relief, once in the 90s and once on the noughties. Is it relief or as Elvis Presley put it?

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Next time I see Ann Pettifor who was involved in the Jubilee debt effort I will ask about this. Does such debt relief in a way validate policies which lead such countries straight back into debt trouble?

Advanced Countries

Here the choice of 2016 by the IMF is revealing. I have a little sympathy in that the data is often much slower to arrive than you might think but the government debt world has changed since them. Any example of this came from the UK only this week.

General government deficit (or net borrowing) was £39.4 billion in 2017, a decrease of £19.0 billion compared with 2016; this is equivalent to 1.9% of GDP, 1.1 percentage points below the reference value of 3.0% set out in the Protocol on the Excessive Deficit Procedure.

It is hard not to have a wry smile at the UK passing one of the Maastricht criteria! But the point is that the deficit situation is much better albeit far slower than promised meaning that whilst the debt soared back then now prospects are different.

In truth I fear that the IMF has taken a trip to what we might call Trumpton.

In the United States—where
a fiscal stimulus is happening when the economy is
close to full employment, keeping overall deficits above
$1 trillion (5 percent of GDP) over the next three
years—fiscal policy should be recalibrated to ensure
that the government debt-to-GDP ratio declines over
the medium term.

I have quite a bit of sympathy with questioning why the US has added a fiscal stimulus to all the monetary stimulus? I know it has been raising interest-rates but the truth is that it has less monetary stimulus now rather than a contraction. Those of us who fear that modern economies can only claim growth if they continue to be stimulated or a type of economic junkie culture will think along these lines. But also they lose ground with waffle like “full employment” in a world where the Japanese unemployment rate is 2.5% as to the 4.1% in the US. Oh and whilst we are at it there is of course the fact that Japan has been running such fiscal deficits for years now.

What about interest-rates and yields?

There was this from Lisa Abramowicz of Bloomberg yesterday.

While U.S. yields may still be rising, the world is still awash in central-bank stimulus. The amount of negative-yielding debt has actually grown by nearly $1.4 trillion since February, to about $8.3 trillion: Bloomberg Barclays Global Aggregate Negative Yielding Debt index

My point is that for all the talk and analysis of higher interest-rates and yields we get this.

Comment

There is a fair bit to consider here and let me open with a bit of tidying up. Comparing a debt stock to an income/output flow ( GDP) requires also some idea of the cost of the debt. Moving on an opportunity has been missed to look at private-debt as we note that US consumer credit has passed the pre credit crunch peak. Of course the economy is larger but there are areas of troubled water such as car loans. This matters because the last surge in government debt was driven by the socialisation of private debt previously owned by the banks.

If we note the debt we have generically then there are real questions now as to high interest-rates can go? Some of you have suggested around 3% but in the end that also depends on economic growth which is apposite because the slowing of some monetary indicators suggests we may be about to get less of it. Should that turn further south then more than a few places will see an economic slow down that starts with both negative interest-rates and yields. These are the real issues as opposed to old era thinking.

• First, high government debt can make countries
vulnerable to rollover risk because of large gross
financing needs, particularly when maturities are
short

In reality that will be QE’d away if I may put it like that and the real question is where will the side-effects and consequences of the QE response appear? For example the distributional effects in favour of those with assets. Perhaps the real issue is the continuing prevalence of negative yields in a (claimed) recovery………From the Fab Four.

You never give me your money
You only give me your funny paper
And in the middle of negotiations
You break down

Me on Core Finance TV