Today’s surveys show that any economic recovery in France remains distant

Today out focus shifts to the second largest economy in the Euro area as La Belle France takes centre stage. Let us open with the thoughts of the finance minister on the economic state of play.

PARIS (Reuters) – Recent economic indicators for France are satisfactory but too fragile to change the forecast for an 11% economic contraction this year, Bruno Le Maire said Thursday.

The Minister of the Economy, speaking to the National Assembly for the debate on the orientation of public finances for 2021, said he expected economic growth of 8% for France next year and expressed the will that the in 2022, activity returns to its levels preceding the crisis linked to the new coronavirus.

Only a politician could use the words “satisfactory” and “too fragile” in the same sentence and it is a grim one of a 11% decline in GDP ( Gross Domestic Product) for this year. This means that the expectations for France are worse than those for the Euro area as a whole.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively. ( ECB 16th July)

So around 3% worse which is interesting and I note that there is a similar pattern of predicting most but far from all of it returning in 2021. That is what you call making a forecast that is like an each-way bet where if you do recover no-one will care and if you do worse than that you highlight you did not expect a full recovery. The truth is that none of us know how 2020 will finish let alone what will happen next year. Maybe the quote below suffers from translation from French but “expressed the will?”

expressed the will that the in 2022, activity returns to its levels preceding the crisis

What does that mean? So let us move on knowing 2020 will be bad with a likely double-digit fall in economic output.

Right Here, Right Now

This morning has brought the latest in the long-running official survey on the economy.

In July 2020, the business climate has continued its recovery started in May. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 7 points. At 85, the business climate is however still significantly below its long-term average (100), and a fortiori below its relatively high pre-lockdown level (105).

The ending of the lockdown has seen a welcome rally of 7 points but sadly only to 85% of the long-term average. If we look back though I note it was recording a relatively high 105 which makes me mull this.

In Q1 2020, real gross domestic product (GDP)* fell sharply: -5.3% after -0.1% in Q4 2019, thus a revision of +0.5% compared with the first estimate published in April.

I think the relevant number is the contraction in the last quarter of 2019 and how does that relate to a relatively high reading. As the fall is only 0.1% we could argue the economy was flat lining but we still have a measure recording growth when there wasn’t any.

Going back to the survey we see a similar pattern but weaker number for employment.

In July 2020, the employment climate has continued to recover sharply from the April low. At 77, it has gained 10 points compared to June, but it still remains far below its pre-lockdown level.

Manufacturing

The position here is particularly bad.

According to the business managers surveyed in July 2020, the business climate in industry has continued to improve. The composite indicator has gained 4 points compared to June, after losing 30 points in April due to the health crisis. However, at 82, it remains far below its long term average (100).

Looking ahead the order book does not look exactly auspicious either.

In July 2020, slightly fewer industrialists than in June have declared their order books to be below normal. The balances of opinion on total and foreign order books have very slightly recovered. Both stand at very low levels although slightly higher than in 2009.

If we look back this measure had a recent peak around 112 as 2018 began. This represented quite a rally compared to the dips below 90 seen at times in 2012 and 13. But after that peak it began slip-sliding away to around 100 and now well you can see above.

Saving

Whilst debt hits the headlines the breakdown of the GDP data shows that it is not the only thing going on.

At the same time, household consumption fell (-5.6% after +0.3%), resulting in a sharp rise of the saving rate to 19.6% after 15.1% in Q4 2019.

The pandemic has seen higher levels of saving which has two drivers I think. Firstly many simply could not spend their money as so many outlets closed. Next those who can look like they have been indulging in some precautionary saving which is something of a disaster for supporters of negative interest-rates.

National Debt

Having just looked at ying here is part of the yang.

In Q1 2020 the public deficit increased by 1.1 points: 4.8% of GDP after 3.7% in Q4 2019.

So we see that pandemic France was borrowing more and regular readers will have noted this from past articles. For the year as a whole France had its nose pressed against the Growth and Stability Pact threshold of 3% of GDP. I know some of you measure an economy by tax receipts so they were 1.275 trillion in 2019.

Moving to the national debt we see this.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Looking ahead this is the view of the Bank of France.

As a result of the wider deficit and the fall in GDP, government debt should rise substantially to 119% of GDP in 2020, from 98.1% in 2019, and should scarcely decline over the rest of the projection horizon. The average debt-to-GDP ratio for the euro area should also increase in parallel, but to a more limited extent (to 101% of GDP in 2022, easing to 100% by end-2022).

Comment

There are some familiar patterns of a sharp drop in economic output followed by plenty of rhetoric about a sharp recovery next year. However the surveys we have looked at show a very partial recovery so far so that the “V-shaped” hopium users find themselves singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning

Switching to the mounting debt burden it is a clear issue in terms of capital and if you like the weight of the debt. Also estimates of economies at around 120% of GDP went spectacularly wrong in the Euro area crisis. But in terms of debt costs then with a ten-year yield of -0.19% France is often being paid to issue debt. Although care is needed because the ECB does not buy ultra long bonds ( 30 years is its limit) meaning that France has a fifty-year bond yield of 0,58%. We should not forget that even the latter is very cheap, especially in these circumstances.

Also there is this from the head of the ECB Christine Lagarde.

In my interview with @IgnatiusPost

, I explained that price stability and climate change are closely related. Consequently, we must take climate-related risks into account in our central banking activities.

 

 

 

UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,

Comment

As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

Me on The Investing Channel

The UK Public Finances conform to the first rule of OBR club yet again

Not so long ago the UK Public Finances were headline news as we faced the consequences of the recession caused by the credit crunch and the cost of the various banking bailouts. We were promised that by now the situation would be fixed as we would have a surplus it terms of our annual deficit before it transpired that our previous Chancellor George Osborne was of the “jam tomorrow” variety and specifically always promised that success was 3/4 years away from whatever point in time you were at! This meant that what we might call the ordinary national debt has steady risen as whilst much of the bank debt is off our books we have borrowed overall. If we go back to the 2010 Budget forecast we were told this by the Office of Budget Responsibility ( OBR).

public sector net debt (PSND) to increase from 53.5 per cent of GDP in • 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

So we might expect the national debt to be 63.4% of GDP now. How is that going?

In November we expected public sector net debt (PSND) to peak at 90.2 per cent of GDP in 2017-18, with the August 2016 monetary policy package raising debt significantly in 201617 and 2017-18. We continue to expect debt to peak as a share of GDP in 2017-18, but at a slightly lower 88.8 per cent. As in November, we expect it to fall each year thereafter.

This is one of the factors in my first rule of OBR club ( it is always wrong…) and in a way it is quite touching that they always think that the national debt is about to shrink relative to the size of our economy.

Current issues

The first is that economic growth in the UK has continued but has slowed so that revenue growth may be under pressure. This was highlighted to some extent by yesterday’s retail sales data.

The underlying pattern in the retail industry is one of growth; for the three-months on three-months measure, the quantity bought increased by 0.6%…….Year on year, the quantity bought in the retail sector increased by 1.2%, with non-food (household goods, clothing stores) and non-store retailing all providing growth.

That suggests there is a fading of the consumer sector with implications for revenue although of course Value Added Tax is on value and not volume so will get a boost from this.

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3% (non-seasonally adjusted).

The general picture was summed up in yesterday’s monthly economic review.

GDP growth has slowed in the first two quarters of 2017, while the economy has grown 1.5% compared with the same quarter a year ago – the slowest rate since Quarter 1 2013.

Also in a week where there has been a lot of news on problems with economic statistics there was this.

we will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

I admire the ambition here but not the brains. I particularly wait to see how the quarterly services surveys will give monthly results! Ironically the same monthly review suggested grounds for caution.

The latest figures include significant revisions due to improvements in the measurement of dividend income, which have led to an upwards revision of the households and NPISH saving ratio by an average of 0.9 percentage points from 1997 to 2016, with a revised 2016 estimate of 7.1% (revised up from 5.2%).

So places like the OBR can produce reports sometimes  hundreds of pages long on the wrong numbers?

Inflation

This is proving expensive because the UK has a large amount of index-linked Gilts which are linked to the Retail Price Index which is currently growing at an annual rate of 3.9%. The effect is described below.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

Today’s data

The deficit numbers were in fact rather good in the circumstances.

Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016…….Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £32.5 billion in the current financial year-to-date (April 2017 to September 2017), compared with the same period in 2016.

The main factor in the improvement is that revenue growth continues to be pretty solid.

In the current financial year-to-date, central government received £334.5 billion in income; including £250.5 billion in taxes. This was around 4% more than in the same period in the previous financial year.

You may have already guessed the best performer which was Stamp Duty on property which has risen from £6 billion in the same period last year to £7 billion this. By contrast Corporation Tax has been a disappointment as it has only risen by £100 million to £29 billion on the same comparison.

The National Debt

Here it is.

The amount of money owed by the public sector to the private sector stood at nearly £1.8 trillion at the end of September 2017, which equates to 87.2% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Oh and thanks Mark Carney and the Bank of England as yet another bank subsidy turns up in the figures.

£100.3 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility; including £84.6 billion from the Term Funding Scheme (TFS).

Comment

We see that for all the many reports of woe the UK economy continues to bumble along albeit more slowly than before. We can bring in that theme and also the first rule of OBR club as I expect another wave in November.

The OBR is likely to revise down potential productivity growth in its November forecast, weakening the outlook for the public finances.

As they have been consistently wrong they are also likely to change course at the wrong point so this may be the best piece of news for UK productivity in a while! Actually I think a lot of the problem is in how you measure it at all in the services sector? In fact any resources the ONS has would be much more usefully spent in this area than producing a monthly GDP figure.

For those of you who measure the economy via the tax take then a 4% increase in the year so far is fairly solid. There will be a boost from inflation on indirect taxes but so far not so bad. Also we can look at revenue versus the National Debt where £726 billion last year compares with our national debt of about 1800 billion or around 40%

Meanwhile there was some good news for the UK economy from Gavin Jackson of the Financial Times.

The UK has 6.5 per cent of the global space economy!

Plenty of room for expansion (sorry). Intriguingly it may be led by Glasgow which would be a return to past triumphs.

 

 

 

 

 

 

Greece reaches a Euro area target or standard

Yesterday saw an announcement by the European Commission back on social media by a video of the Greek flag flying proudly.

The Commission has decided to recommend to the Council to close the Excessive Deficit Procedure (EDP) for Greece. This follows the substantial efforts in recent years made by the country to consolidate its public finances coupled with the progress made in the implementation of the European Stability Mechanism (ESM) support programme for Greece.

It sounds good although of course the detail quickly becomes more problematic.

Greece has been subject to the corrective arm of the Stability and Growth Pact since 2009. The deadline to correct its excessive deficit was extended several times. It was last set in August 2015 to be corrected, at the latest, by 2017.

That reminds us that even before the “Shock and Awe” of spring 2010 Greece had hit economic trouble. It also reminds us that the Euro area has seen this whole issue through the lens of fiscal deficits in spite of calamitous consequences elsewhere in both the economy and the country. I also note that “the corrective arm” is a rather chilling phrase. Here is the size of the change.

The general government balance has improved from a deficit of 15.1% in 2009 to a surplus of 0.7% in 2016

Greeks may have a wry smile at who is left behind in the procedure as one is at the heart of the project, one has been growing strongly and one is looking for the exit door.

If the Council follows the Commission’s recommendation, only three Member States would remain under the corrective arm of the Stability and Growth Pact (France, Spain and the United Kingdom), down from 24 countries during the financial crisis in 2011.

Let us wish Greece better luck than when it left this procedure in 2007. Also let us note some very curious rhetoric from Commissioner Dombrovskis.

Our recommendation to close the Excessive Deficit Procedure for Greece is another positive signal of financial stability and economic recovery in the country. I invite Greece to build on its achievements and continue to strengthen confidence in its economy, which is important for Greece to prepare its return to the financial markets.

Another positive signal?

That rather ignores this situation which I pointed out on the 22nd of May.

The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

Achievements? To achieve the holy grail of a target of a fiscal deficit on 3% of GDP they collapsed the economy. They also claimed that the economy would return to growth in 2012 and in the case of Commissioner Moscovici have claimed it every year since.

A return to financial markets?

Whilst politically this may sound rather grand this has more than a few economic issues with it. Firstly there is the issue of the current stock of debt as highlighted by this from the European Stability Mechanism on Monday.

Holding over 51% of the Greek public
debt, we are by far Greece’s biggest creditor a long-term partner

I note that the only reply points out that a creditor is not a partner.

The ESM already disbursed €39.4 bn to and combining EFSF it adds up to € 181.2 bn.

That is of course a stock measure so let us look at flow.

I am happy to announce the ESM
has today effectively disbursed €7.7 bn to Greece

I am sure he is happy as he has a job for life whether Greek and Euro area taxpayers are happy is an entirely different matter especially as we note this.

Of this disbursement, €6.9 bn will be used for debt servicing and €0.8 bn for arrears clearance

Hardly investment in Greece is it? Also we are reminded of the first rule of ECB ( European Central Bank ) club that it must always be repaid as much of the money will be heading to it. This gives us a return to markets round-tripping saga.

You see the ESM repays the ECB so that Greece can issue bonds which it hopes the ECB will buy as part of its QE programme. Elvis sang about this many years ago.

Return to sender
Return to sender

There is also something worse as we recall this from the ESM.

the EFSF and ESM loans lead to substantially lower financing costs for the country.

Okay why?

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.

Indeed and according to a speech given by ESM President Regling on the 29th of June this saves Greece a lot of money.

We have disbursed €175 billion to Greece already. This saves the Greek budget €10 billion each year because of the low lending costs of the ESM. This amounts to 5.6 percent of GDP, and allows Greece the breathing space to return to fiscal responsibility, healthy economic developments and debt sustainability.

No wonder the most recent plans involved Greece aiming for a fairly permanent budget surplus of 3.5% of GDP. With the higher debt costs would that be enough. If we are generous and say Greece will be treated by the markets like Portugal and it gets admitted to the ECB QE programme then its ten-year yield will be say 3% much more than it pays now. Also debt will have a fixed maturity as opposed to the “extend and pretend” employed so far by the ESM.

What if Greece joining the ECB QE programme coincides with further “tapers” or an end to it?

If you wish to gloss over all that then there is this from the Peterson Institute for International Economics.

http://www.ekathimerini.com/219950/opinion/ekathimerini/comment/time-for-greece-to-rejoin-global-markets

Is austerity really over?

There are issues with imposing austerity again so you can say it is now over. I looked at this on the 22nd of May.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

It was noticeable that one of the tax rises was in the amount allowed to be earned before tax which will hit the poorest hardest. But according to Kathimerini yesterday the process continues.

The government is slashing state expenditure by 500 million euros for next year……..The purge will mainly concern health spending, while credit for salaries and pensions will be increased.

Comment

The background economic environment for Greece is as good as it has been for some time. Its Euro area colleagues are in a good phase for growth which should help exports and trade. According to Markit this is beginning to help its manufacturing sector.

Having endured a miserable start to 2017, the latest survey data is welcome news for Greek manufacturers as the headline PMI pointed to growth for the first time since August last year.

If we look for another hopeful signal it is from this as employment has been a leading indicator elsewhere.

The number of employed persons increased by 79,833 persons compared with April 2016 (a 2.2% rate of increase) and by 23,943 persons compared with March 2017 (a 0.6% rate of increase).

The catch is that in spite of the barrage of official rhetoric about reform that Greek economy has gone -1.1% and +0.4% in the last two quarters with the latter number being revised up from negative territory. But the worrying part is that elsewhere in the Euro area things are much better when Greece should be a coiled spring for economic growth. Let me give you an example from the building industry where it is good that the numbers are finally rising. But you see annual building was 80 million cubic meters in 2007 and 10 million yes 10 million in 2016. That is an economic depression and a half….