Is Hong Kong in a recession or a depression now?

Some days an item of news just reaches out and grabs you and this morning it has come from the increasingly troubled Hong Kong. We knew that there would be economic consequences from the political protests there but maybe not this much.

The Census and Statistics Department (C&SD) released today (October 31) the advance estimates on Gross Domestic Product (GDP) for the third quarter of 2019.     According to the advance estimates, GDP decreased by 2.9% in real terms in the third quarter of 2019 from a year earlier, compared with the increase of 0.4% in the second quarter of 2019.

The commentary from a government spokesman confirmed various details.

marking the first year-on-year contraction for an individual quarter since the Great Recession of 2009, and also much weaker than the mild growth of 0.6% and 0.4% in the first and second quarters respectively. For the first three quarters as a whole, the economy contracted by 0.7% over a year earlier. On a seasonally adjusted quarter-to-quarter comparison, the fall in real GDP widened to 3.2% in the third quarter from 0.5% in the preceding quarter, indicating that the Hong Kong economy has entered a technical recession.

The concept of recession first switched to technical recession meaning a minor one ( say -0.1% or -0.2% GDP growth) but now seems to encompass what is a large fall. Time for Kylie again I guess.

I’m spinning around
Move outta my way

A clue to the change is the way that the year so far has fallen by 0.7% in GDP terms. If we look back we see that annual GDP growth of 3.8% slowed a little to 3% from 2017 to 18. But the quarterly numbers have been falling for a while. In annual terms GDP growth was 2.8% in the third quarter of 2018 but then only 1.2% in the last quarter and then going 0.6%, 0.4% and now -2.9% this year.

The Details

If we take the advice of Kylie and start breaking it down we see this.

Gross domestic fixed capital formation decreased significantly by 16.3% in real terms in the third quarter of 2019 from a year earlier, compared with the decrease of 10.8% in the second quarter.

Investment has taken quite a dive as this time last year it was increasing at an annual rate of 8.6%. Indeed the private-sector full stop took a fair hammering.

private consumption expenditure decreased by 3.5% in real terms in the third quarter of 2019 from a year earlier, as against the 1.3% growth in the second quarter.

The one bright spot was government expenditure.

     Government consumption expenditure measured in national accounts terms grew by 5.3% in real terms in the third quarter of 2019 over a year earlier, after the increase of 4.0% in the second quarter.

Is it too cheeky to suggest that at least some of this will be police overtime? So far it is not increased unemployment payouts

     The number of unemployed persons (not seasonally adjusted) in July – September 2019 was 120 300, about the same as that in June – August 2019 (120 600). The number of underemployed persons in July – September 2019 was 41 500, also about the same as that in June – August 2019 (41 000).

The flickers of acknowledgement of the present troubles were in the employment not the unemployment numbers.

 Total employment decreased by around 8 200 from 3 863 600 in June – August 2019 to 3 855 400 in July – September 2019. Over the same period, the labour force also decreased by around 8 500 from 3 984 200 to 3 975 700.

Also does the labour force fall suggest some emigration?

However you spin it the commentary is grim.

As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years. The fall in overall investment expenditure steepened amid sagging economic confidence.

Trade

This added to the woes as you can see below.

Over the same period, total exports of goods measured in national accounts terms recorded a decrease of 7.0% in real terms from a year earlier, compared with the decrease of 5.4% in the second quarter. Imports of goods measured in national accounts terms fell by 11.1% in real terms in the third quarter of 2019, compared with the decline of 6.7% in the second quarter.

Ironically this looks like a boost to GDP from a tale of woe. This is because the fall in imports ( a boost to GDP) is larger than the fall in exports. This situation reverses somewhat in the services sector presumably mostly due to lower tourism revenue.

Exports of services dropped by 13.7% in real terms in the third quarter of 2019 from a year earlier, following the decline of 1.1% in the second quarter. Imports of services decreased by 3.8% in real terms in the third quarter of 2019, as against the increase of 1.3% in the second quarter.

Looking Ahead

That was then and this is now so what can we expect?

Looking ahead, with global economic growth expected to remain soft in the near term, Hong Kong’s exports are unlikely to show any visible improvement. Moreover, as the adverse impacts of the local social incidents have yet to show signs of abating, private consumption and investment sentiment will continue to be affected. The Hong Kong economy will still face notable downward pressures in the rest of the year.

If we look at the results from the latest official quarterly business survey and note what happened in the third quarter then we get a proper Halloween style chill down the spine.

 For all surveyed sectors taken together, the proportion of respondents expecting their business situation to be worse (32%) in Q4 2019 over Q3 2019 is significantly higher than that expecting it to be better (7%).  When compared with the results of the Q3 2019 survey round, the proportion of respondents expecting a worse business situation in Q4 2019 as compared with the preceding quarter has increased to 32%, against the corresponding proportion of 17% in Q3 2019.

According to the South China Morning Post then prospects for China continue to weaken.

The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Thursday, stood at 49.3 in October, down from 49.8  in September.  The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – came in at 52.8 in October, below analysts’ expectations for a 53.6 reading. The figure was also down from September’s 53.7, dropping to its lowest level since February 2016.

As to Japan there seems to be little hope as the Bank of Japan just seems lost at sea now.

As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

Comment

As you can see the situation in Hing Kong is clearly recessionary and the size of it combined with the fact that it looks set to continue means it is looks depressionary as well. There has been a monetary respone but this of course only represents maintenance of the US Dollar peg.

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the Base Rate was adjusted downward by 25 basis points to 2% with immediate effect according to a pre-set formula.  The decrease in the Base Rate follows the 25-basis point downward shift in the target range for the US federal funds rate on 30 October (US time).

As to the guide provided by the narrow money supply there is this.

The seasonally-adjusted Hong Kong dollar M1 decreased by 0.5% in September and by 3.4% from a year earlier, reflecting in part investment-related activities.

However you spin it people are switching from Hong Kong Dollars to other currencies.

The Investing Channel

 

Is this the manufacturing recession of 2019?

The year so far has seen increasing focus on a sector of the economy that has been shrinking in relative terms for quite some time. Actually in the credit crunch era it has in some places shrunk in absolute terms as this from my home country illustrates.

Production and manufacturing output have risen since then but remain 7.1% and 3.1% lower, respectively, for July 2019 than the pre-downturn peak in February 2008.

This means that it is now a little over 10% of total UK GDP and so it is completely dwarfed by the services sector which is marching on its way to 80%.Thus we have a context that the current concern about a recession is odd in the sense that we have in fact been in a depression as output more than a decade later is below the previous peak.Yet there is much less concern over that.

We learn more from the detail of the breakdown from the official analysis of the period 2008-18.

The recovery of the manufacturing sector from the 2008 recession has been heavily dependent upon four out of the 24 industries; manufacture of food, motor vehicles, other transport equipment and repair of machinery………..Without the positive impact of these four industries, the Index of Manufacturing in Quarter 4 (Oct to Dec) 2018 would still be below its lowest value during the 2008 recession.

There is always a danger in any analysis that excludes the things that went up but we do learn that there has been quite a shift. Also a lot of the sector has been in an even worse depression than the average. Then we have the situation where two of the fantastic four currently have problems to say the least.

However caution is required as I so often observe and today it is highlighted by this.

The pharmaceutical industry was a strong performer during the recession; at the industry’s highest point in April 2009 the industry had grown by 22% since Quarter 1 (Jan to Mar) 2008. However, the industry would steadily decline from this point over the decade and would finish in Quarter 4 (Oct to Dec) 2018 23% below its Quarter 1 2008 value, though some of this decline is due to business restructuring.

Something looks wrong with that and if I was in charge I would be looking further as to whether this is/was really like for like. For newer readers I looked because in recent times the pharmaceutical sector has been a strength in the data albeit with erratic swings.

The United States

If we now switch from an underlying issue of depression in some countries to the more recent one of recession well this from the Institute of Supply Management or ISM yesterday upped the ante.

Manufacturing contracted in September, as the PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. This is the lowest reading since June 2009, the last month of the Great Recession, when the index registered 46.3 percent.

This seemed to catch out quite a few people and led to some extraordinary responses like this on CNBC.

“There is no end in sight to this slowdown, the recession risk is real,” Torsten Slok, chief economist at Deutsche Bank said in a note Tuesday after the report.

I agree on the recession risk but “no end in sight”? That applies more to the problems Deutsche Bank itself faces. If we switch to the detail there are some clear things to note which is that is showed a more severe contraction and that the “Great Recession” klaxon was triggered. Furthermore the trade war influence was impossible to avoid.

ISM®’s New Export Orders Index registered 41 percent in September, 2.3 percentage points lower compared to the August reading of 43.3 percent, indicating that new export orders contracted for the third month in a row. “The index had its lowest reading since March 2009 (39.4 percent).

The news reached the Donald and his response was to sing along with “It wasn’t me ” by Shaggy.

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

So far this has not reached the official output numbers. Here is the August announcement from the Federal Reserve.

Manufacturing production increased 0.5 percent, more than reversing its decrease in July. Factory output has increased 0.2 percent per month over the past four months after having decreased 0.5 percent per month during the first four months of the year.

Putting it another way the output level in August was 105.2 which was the same as March. So according to the official data the only impact it has picked up is an end to growth if we try to look through the monthly ebbs and flows.

The World

There is a survey conducted on behalf of JP Morgan which yesterday told us this.

National PMI data signalled deteriorations in overall business conditions in 15 of the countries covered. Among the larger industrial regions, growth was registered in both the US and China. In contrast, Japan saw further contraction while the downturn in the euro area deepened. The rate of decline in the eurozone was the fastest in almost seven years, mainly due to a sharp deterioration in the performance of Germany.

They showed a slight improvement to 49.7 but there is the issue of the US where JP Morgan thinks there has been growth whereas the ISM as we have just observed does not. Here is the Markit PMI view on a possible reason.

Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is representative mix of small, medium and large (and asks only about US operations, so excludes overseas facilities)

Financial markets hit the ISM road and were probably also influenced by this from Bloomberg.

Results were disastrous for leading Asian automakers such as Toyota Motor Corp. and Honda Motor Co., which each suffered double-digit declines that were worse than analysts expected. While a fuller picture will emerge Wednesday when General Motors Co (NYSE: GM). and Ford Motor (NYSE:F) Co. are due to report, the poor performance suggests that overall deliveries of cars and light trucks could come in worse than the 12% drop anticipated by analysts, based on six estimates.

Comment

There are various strands to this of which the first is the motor industry. In the credit crunch era it has seen a lot of support ranging from “cash for clunkers” style operations to much cheaper credit. In the UK it is often cheaper to buy via credit that to pay up front which is part of the theme that has seen this according to the Finance and Leasing Association.

 Over 91% of all private new car registrations in the UK were financed by FLA members.

That seems to be wearing off so we were due something of a dip and that has been exacerbated by the diesel crisis where buyers have understandably lost faith after the dieselgate scandal and the ongoing emissions issue.

Politicans are regularly on the case which was highlighted in the UK by the “march of the makers” claim of former Chancellor George Osbourne. Whilst there was some growth it was hardly a march and now we have President Trump pushing manufacturing as part of MAGA but more latterly giving it a downwards tug with his trade war.

Then there is the issue of green policies which have to lead to less manufacturing but get deflected onto talk of more solar panels and windmills and the like. On that road the depression theme returns.

 

Do not forget Greece is still in an economic depression

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

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

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

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

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

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

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

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

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

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

Greek Consumer Confidence

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

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

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

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

Economic growth

There is a reference to it.

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

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

Comment

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

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

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

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

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

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

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

 

Recession forecasts for the UK collide with stronger wage growth

As we arrive at UK labour market day the mood music around the UK economy has shifted downwards. For example the Resolution Foundation has chosen this week to publish this.

Technical recessions (where economic output contracts for two consecutive quarters) have come along roughly once a decade in the UK. With the current period of economic
expansion now into its tenth year, there is therefore concern that we are nearer to the next recession than we are to the last.

At this point we do not learn a great deal as since policy has been to avoid a recession at almost nay cost for the last decade then the surprise would be if we were not nearer to the next recession.Also they seem to be clouding the view of what a technical recession ( where the economy contracts only marginally) is with a recession where it contracts by more. But then we get the main point.

Indeed, a simple model based on financial-market data
suggests that the risk of a recession is currently close to levels only seen around the time of past recessions and sharp slowdowns in GDP growth, and is at its highest level since 2007.

Okay so what is it?

One indicator that is often cited as a predictor of future recessions is the difference between longer-term and shorter-term yields on government bonds, often referred to as the ‘slope’ of the yield curve……..If shorter-term rates are above longer-term ones (negative slope), it suggests markets are expecting looser monetary policy in future than today, implying expectations of a deterioration in the outlook for the economy.

Okay and then we get the punchline.

It shows that this indicator has increased significantly in the run up to the previous three recessions. And it has risen from close to zero in 2014 to levels only seen around recessions and sharp slowdowns in GDP growth by 2019 Q2, reflecting the flattening of the yield curve……..

Thoughts

The problem with this type of analysis is that it ignores all the ch-ch-changes that have taken place in the credit crunch era. For example because of all the extraordinary monetary policy including £435 billion of purchases of UK government bonds by the Bank of England there is very little yield anywhere thus the yield curve will be flatter. That is a very different situation to market participants buying and selling and making the yield curve flatter. The danger here is that we record a false signal or more formally this is a version of Goodhart’s Law.

Also frankly saying this is not much use.

Our simple model suggests, therefore, that there is an elevated chance of the UK facing a recession at some point in the next three years.

 

UK Labour Market

The figures themselves provoked a wry smile because the downbeat background in terms of analysis collided with this.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.4% for total pay (including bonuses) and 3.6% for regular pay (excluding bonuses)……..Annual growth in both total pay (including bonuses) and regular pay (excluding bonuses) accelerated by 0.2% in March to May when compared with February to April.

The rise for the latter was the best in the credit crunch era and provoked some humour from Reuters. At least I think it was humour.

The pick-up in pay has been noted by the Bank of England which says it might need to raise interest rates in response, assuming Britain can avoid a no-deal Brexit.

The good news section of the report continued with these.

The UK unemployment rate was estimated at 3.8%; it has not been lower since October to December 1974. The UK economic inactivity rate was estimated at 20.9%, lower than a year earlier (21.0%).

So higher wage growth and low unemployment.

Nuance

Actually as the two factors above are lagging indicators you could use them as a recession signal. But moving to nuance we found that in the employment data. This has just powered away over the past 7 years but found a bit of a hiccup today.

The UK employment rate was estimated at 76.0%, higher than a year earlier (75.6%); on the quarter, the rate was 0.1 percentage points lower, the first quarterly decrease since June to August 2018.

At this stage in the cycle with the employment rate so high it is hard to read especially when we notice these other measures.

Between March to May 2018 and March to May 2019: hours worked in the UK increased by 1.9% (to reach 1.05 billion hours)…….the number of people in employment in the UK increased by 1.1% (to reach 32.75 million)

We gain a little more insight from looking at just the month of May which was strong in this area.

The single month estimate of the employment rate, for people aged 16 to 64 years in the UK, for May 2019 was 76.2%

But not as strong as April which was at 76.4%! Oh and in case you are wondering how the three-month average got to 76% it was because March was 75.5%. You could press the Brexit Klaxon there but no-one seems to be doing so, perhaps they have not spotted it yet. Anyway barring a plunge in June the employment rate should be back.

Wages

We can fig deeper into these as well as we note something we have been waiting for.

the introduction of the new National Living Wage rate (4.9% higher than the 2018 rate) and National Minimum Wage rates which will impact the lowest-paid workers in sectors such as wholesaling, retailing, hotels and restaurants.

When we note who that went to we should particularly welcome it although it is different to wages being higher due to a strong economy as it was imposed on the market. There was also this.

pay increases for some NHS staff which will impact public sector pay growth

That provokes a few thoughts so let me give you some number crunching. Public-sector pay is at £542 per week higher than private-sector pay ( £534) and is growing slightly more quickly at 3.6% versus 3.4%. However if we look back to the year 2000 we see that pay growth has been remarkably similar at around 72%. Actually in the categories measured the variation is very small with manufacturing slowest at 69.3% and construction fastest at 74.8%.

If we look at the case of real wages we get a different picture.

In real terms (after adjusting for inflation), total pay is estimated to have increased by 1.4% compared with a year earlier, and regular pay is estimated to have increased by 1.7%.

It starts well although even here it is time for my regular reminder that the numbers rely on the official inflation series and are weaker if we use the Retail Price Index or RPI. But even so the credit crunch era background remains grim.

For May 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at:

£503 per week in nominal terms

£468 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£460 per week), but £5 (1.0%) lower than the pre-recession peak of £473 per week for April 2008

 

The equivalent figures for total pay are £498 per week in May 2019 and £525 in February 2008, a 5.0% difference.

Again that relies on a flattering inflation measure. But the grim truth is that real wages are in a depression and have been so for a bit more than a decade.

Comment

So there you have it in spite of the fears around this sector of the UK economy continues to perform strongly and give quite a different measure to say economic output or GDP. Also as we note the increase in hours worked and that GDP growth is fading we are seeing a wage growth pick-up with weak and probably negative productivity growth. We will have to see how that plays out but let me show you something else tucked away in the detail and let us go back to the Resolution Foundation.

Real pay growth grew by more than 3.5% for the real estate sector but fell by more than 1.0% in the arts and entertainment sector.

A bit harsh on luvvies who have been one of the strongest sectors in the economy. But I have spotted something else which may be a factor in why estate agents and the like are doing so well.

The proportion of UK mortgage lending at (LTV) ratios of 90% or higher was 18.7% of all mortgage lending in 2019 Q1. ( @NobleFrancis )

Odd that as I recall out political class singing along with Depeche Mode.

Never again
Is what you swore
The time before
Never again
Is what you swore
The time before

 

 

 

 

 

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

 

 

Argentina looks trapped in a now familiar downwards spiral

Just over a year ago on the 3rd of May 2018 I gave some advice on here to Argentina about its ongoing economic and currency crisis.

The problem is twofold. Firstly you can end up chasing your own tail like a dog. What I mean by this is that markets can expect more interest-rate rises each time the currency falls and usually that is exactly what it does next. Why is this? Well if anticipating a 27,25%% return on your money is not doing the job is 30.25% going to do it? Unlikely in my view as we note that the currency has fallen 5% this week.

Events accelerated later that day as the Argentine central bank the BCRA did this.

This article came to late for the BCRA it would appear as just before 5 pm UK time they raised interest-rates to 33.25%. I would place a link bit nobody seems to have told the English version of their website yet.

That backed up my point and that theme just carried on as this from Reuters on April Fools Day highlights.

Argentina has established an interest rate floor of 62.5 percent, the central bank said in a statement on Monday, as the country looks to rein in stubborn inflation and ease concerns about a run on the local peso currency.

As of yesterday the interest-rate was 71.44% which must feel somewhat bizarre to ordinary Argentine’s in a world of low and indeed negative interest-rates. Another sign of trouble is the gap to deposit rates which were 51.94% yesterday.

The Argentine Peso

Let me hand you over to the Buenos Aires Times.

Argentina’s peso, the worst-performing emerging-market currency this year, could see more volatility as investors learn how to connect the latest pieces of the country’s complex political puzzle……..So far this year, the peso has slumped by about 16 percent against the US dollar and equity assets have been shaky.

As you can see the situation has continued to deteriorate. In fact there has been something of a double-whammy as interest-rates have soared above 70% and the Peso has gone from 21.52 versus the US Dollar when I wrote my post to 45.2 as I type this. Indeed things are so bad that even Bitcoin supporters are trolling the situation.

If an Argentinian had bought Bitcoin at the highest point of the “biggest bubble in history”, in 2017, he would have been better off than leaving his money in his Argentinian bank account. So tell me again how Bitcoin is a horrible store of value. ( @josusanmartin )

Of course you can look at that the other way which is that he has gone to the outer limits of cherry-picking by choosing the Argentine Peso.

Inflation, Inflation,Inflation

The currency fall was always going to led to inflation and the situation is such that as the Buenos Aires Times reports the government has resorted to direct controls.

The government agreed with leading supermarkets that the price of 60 essential products of the food basket will be frozen for at least six months.

The list includes 16 manufacturing companies of rice, sugar, milk, yoghurt, flour, tea and coffee, among others, whose products will be available at 2,500 outlets as from April 22.

At the same time, the Macri administration agreed with slaughterhouses to offer beef cuts at 149 pesos per kilo (120,000 kilos weekly), which will be available at the Central Market and at other retail outlets.

I am pleased that they are focusing on such an important area that is regarded by central bankers as non-core.  I fear however that this is a sign that some people are in real trouble.

However the statement below is something of a hostage to fortune.

“We are entering into a new phase. Currency instability is now something of the past, which guarantees a lower inflation rate,” Economy Minister Nicolás Dujovne said at a press conference

Moving to the present situation there is this.

The government plan was announced in the same week as March’s inflation data of 4.7 percent was revealed, sending alarm-bells ringing among Macri administration officials. Prices have now increased 11.8 percent increase in the first quarter of the year and 54.7 percent in the last 12 months.

As you can see we now have a triple-play of economic woe with high interest-rates, a devalued currency and high inflation

Fourmidable

Let us advance on the economic situation with trepidation and an apology to Manchester City for appropriating their current punchline. A chill is in the air from this.

Consumption in supermarkets also dropped 8.7 percent in March compared to the same period last year, accumulating a 7.3 percent decline so far this year, according to a report by the consultancy Scentia. ( Buenos Aires Times)

The OECD has updated its economic forecasts this morning and in spite of its efforts to cheer lead for the present IMF programme it has downgraded economic growth from the -1.5% of March to -1.8% now. This is something we have become familiar with in IMF programmes as we note that last summer the government was forecasting 1.5% growth for this year. This comes on top of the 2.5% contraction in 2018. So recession and depression.

Consequently the OECD finds itself reporting that the unemployment rate has risen by 2% since 2017 to 9.1%.

100 Year Bond

Here is Bloomberg from yesterday.

Argentine bond spreads against US Treasuries rose 19 basis points to 962, double the average for Latin America……..The country’s five-year credit default swaps also rose 1.3 percent to 1,274 basis points.

There was a bit of a rally today but in general the bonds of Argentina trade about 9.3% over their US equivalents. However bonds in Peso’s yield more highly with the 9-year being at 23%.

The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.

Comment

Those who have followed the recent history of the International Monetary Fund will find the statement below awfully familiar.

The authorities’ policies that underly the Fund-supported arrangement are bearing fruit. The high fiscal and current account deficits – two major vulnerabilities that led to the financial crisis last year – are falling. Economic activity contracted in 2018 but there are signs that the recession has bottomed out, and a gradual recovery is expected to take hold in the coming quarters. ( Managing Director Christine Lagarde)

There are similarities with her “shock and awe” description for Greece as I note the OECD 2.1% economic growth forecast for next year is the same number as was forecast for it at this stage. I also note that the “exports fairy” is expected to make an appearance although so far the trade adjustment in the first quarter of 2019 has involved them falling slightly and imports falling by around 27%. Again familiar and as Japan showed us yesterday the import plunge will flatter the next set of GDP numbers. There is a different situation in that the currency has devalued although Argentina rather than defaulting on some of its debt is finding the foreign currency part of it ever more expensive whilst it is in the teeth of a fiscal contraction.

Even the Financial Times is questioning the IMF and Christine Lagarde.

When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.

The IMF has strongly supported the present government.

Even former senior fund officials are concerned by the organisation’s exposure to Argentina, and the potential fallout should its biggest ever programme implode.

Of course we do not know who will win the election in October but we face a situation of economic crisis which follows other crises in Argentina. Also most of us unlike the FT live in a world where Lagarde lost her credibility years ago.

In truth this was always going to be a really difficult gig along the lines of when Neil Young decided to stop playing his hits and just play his new (unpopular) album. As the comment below suggests what is really needed is long-term reform which is exactly what the IMF has not provided in Greece.

“Argentina has signed 22 agreements with the IMF, most of which ended with bitterness on both sides.”

Clearly neither side has heard the phrase ‘once bitten, twice shy’! ( Donald in the FT)

 

 

 

Italy exits recession but sadly continues its economic depression

Today brings Italy into focus as we find out how it did in the first three months of this year. The mood music has been okay ( 0.3% GDP growth in France) and really rather good ( 0.7% GDP growth in Spain) but we are of course looking at the country described in economic terms as a girlfriend in a coma. The situation has recently deteriorated yet again as highlighted below.

As you can see there has been quite a plunge which illustrates part of the girlfriend in a coma issue. This is that in any economic slow down Italy participates but in a period of growth it grows much less than its peers. So it has for the whole of this century been “slip-sliding away” as Paul Simon would say. Putting that into numbers in the better periods it struggles to grow at more than 1% per annum on average. An example of that has been provided by the last six years as if we look at the period from the beginning of 2013 to the end of 2018 we see that GDP growth was less than 5%. This means that the 402.8 billion Euros of quarterly economic output at the end of 2018 was still a long way short of a number that according to the chart nudged over 425 billion early in 2008. Putting it another way it has joined in with the drops including the Euro area crisis of 2010-12 but not shown anything like the same enthusiasm for the rallies.

Fiscal Problems

This was something of a headliner last autumn as the Italian government pressed the Euro area authorities for some more laxity on the annual deficit before mostly being forced back. But this is not really the problem as Italy has not been an over spender and let me highlight with the data.

The government deficit to GDP ratio decreased from 2.5% in 2016 to 2.4% in 2017. In 2018, the Government deficit to Gross Domestic Product ratio was 2.1%

The primary surplus as a percentage of GDP was 1.4% in 2017, unchanged with respect to 2016.

In 2015 the deficit was 2.6% so we can see that Italy had behaved according to Euro area rules by being below 3% on an annual basis and furthermore had been trimming it.

The catch is that with the low level of economic growth even that has led to this as Eurostat lists those who fail the Maastricht criteria.

Greece (181.1%), Italy (132.2%), Portugal (121.5%), Cyprus (102.5%), Belgium (102.0%), France (98.4%) and Spain (97.1%)

The total has risen from 2.173 trillion Euros at the end of 2015 to 2.32 trillion Euros at the end of last year. As it happens that is nearly exactly the same size as France and the catch is that the French national debt has been rising faster which creates its own worries. But the Italian problem is the way that its debt relates to the lack of economic growth which means that relatively it poses a bigger question.

The dog that has not barked has been the issue of debt costs which would have made all of this much worse if we lived in a bond vigilantes world. But instead the advent of Euro area QE from the ECB means that debt costs have fallen for Italy. In 2015 they cost 68.1 billion Euros or 4.1% of GDP as opposed to 65 billion Euros or 3.7% of GDP last year. Extraordinary really! How? Here you go.

Italian version. Excluding QE, Italy‘s public debt ratio is 110% of GDP. ( @fwred )

Also via cheaper borrowing costs which have risen over the past year  but were believe it or not negative at the short-end for a while. Back in the Euro area crisis I recall the benchmark ten-year yield reaching 7% which puts the current 2.63% into perspective.

I note that this issue reappears from time to time. From Lorenzo Codogno earlier.

My op-ed written with ⁦⁩ on “Italydebt restructuring would do enormous damage” published today in Italy’s business daily Il Sole 24 Ore.

In some ways Euro area membership might help. What I mean by that is if the Bank of Italy wrote off its holdings of Italian bonds then the Euro as a currency might not be affected all that much as it reflects the overall area and especially a fiscally conservative Germany.

On the other side of the coin there is something which is a hardy perennial.

Euro area banks sold domestic government bonds in March (-€13bn net). The total over the past 12-month is still positive (+€23bn) but that’s all due to Italy where banks have started to increase their sovereign exposure again over the past year or so. ( @fwred )

Perhaps they are hoping there will be another ECB inspired party along the lines of this described in Il Sole 24 Ore. The emphasis is mine.

Although these loans are tied to loans to the real economy, it is expected that there will be some flexibility in its implementation in such a way as to allow banks to use the funds to buy government bonds, earning money on the rate differential (“carry trade” in jargon) ). Only when the ECB publishes the details of the transaction in June will we know how generous the new Tltro will be.

Perhaps it will be a leaving gift from Mario Draghi to the banks he used to supervise meaning Grazie Mario may be a new theme. It makes me wonder if profits from what has been called “gentlemen of the spread” maybe the only profits Italian banks these days? Also let me apologise to female traders on behalf of the author of that phrase.

Labour Market

This has brought some welcome news today.

In March 2019, the number of employed people increased compared with February (+0.3%, +60 thousand); the employment rate rose to 58.9% (+0.2 percentage points)…..The number of unemployed persons fell by 3.5% (-96 thousand); the decline involved men and women and all age classes. The unemployment rate dropped to 10.2% (-0.4 percentage points), the youth rate decreased to 30.2% (-1.6 percentage points).

As a headline the rising employment rate and falling unemployment and especially youth unemployment rates are welcome. But sadly we only have to look back to February and recall the unemployment rate was published at 10.7% to see a sadly familiar issue. It is unreliable as January was revised down by 0.5% as was March last year but February last year was revised up by 0.9%.

There is also this highlighted a year ago by a paper for the Swiss National Bank.

An exception is Italy where productivity growth started to stagnate 25 years ago

Okay why?

We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy’s aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within
sectors than between them, increasing more in sectors where the world technological frontier has
expanded faster.

Comment

There was both good and nor so good news in the mid-morning release.

In the first quarter of 2019 it is estimated that the gross domestic product (GDP), expressed in chained values ​​with reference year 2010, adjusted for calendar effects and seasonally adjusted, increased by 0.2% compared to the previous quarter and by 0, 1% in tendential terms.

The good news is that Italy has recovered the ground lost in the second half of last year but the kicker is that it has grown by only 0.1% in a year, which is well within the margin of error. Or if you prefer it has escaped recession but remains stuck in a depression.

Another perspective is provided by the fact that this is the first time quarterly economic growth has risen since the end of 2016. As to the productivity problem I think that it is linked to the weakness of the banking sector which needs to look beyond punting Italian bonds as a modus operandi if Italy is to improve and escape its ongoing depression.