The Greek crisis continues on its road to nowhere

Yesterday on my way to looking at the UK Public Finances I pointed out that Greece had a national debt to GDP ratio of 179% at the end of 2016. This came with some cheerleading from the Institutions ( they used to be called the Troika until the name became so damaged) and some of the media about a budget primary surplus of 4.2% of GDP although if we put debt costs back in the surplus shrinks to 0.7%. You may recall that the PSI or Private-Sector Involvement of 2012 was supposed to bring the debt position under control but the ongoing economic depression blew that out of the water as the economy tanked and debt rose.

A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make. Actually repayments is too strong a word as the debt will in fact be rolled from one Euro area institution to another. Bloomberg updates us on the issue.

The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months

It always turns out like this as this is a road we have been down more than once.

The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden.

This is all so familiar as we are always told there has been great success on reform yet somehow more is always needed! Also the debt burden needs easing yet again.

Debt relief

The problem here comes from the number below.

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros….. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

At the beginning of the saga Greece faced high interest costs as the theme was as US Treasury Secretary Timmy Geithner pointed out was one of punishment. This only made things worse as the economy shrunk further so the PSI was enacted. The flaw was that the ever-growing amount of debt held by the Euro area and IMF was excluded from any write-down as we muse the first rule of ECB club which is that it must always be repaid. As this ballooned an alternative more implicit rather than explicit debt relief programme was put in place . From the ESM ( European Stability Mechanism).

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

It calculates the savings for Greece as follows.

Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.

You may note that Greece is always “saving” money and yet the debt burden gets worse. A clue to that is the section on economic progress which trumpets the current account, fiscal deficit and something which apparently the IMF needs to be told.

Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.

Somehow it misses out what now must be called the Great Economic Depression which has ravaged the Greek economy. Also is this one of the reforms?

The government is preparing to honor a pledge to offer permanent status to civil servants in key posts of the public sector, Kathimerini understands, with legislation boosting their rights expected to head to Parliament soon.

 

Also a board member showed the confusion with this sentence in a speech on the 6th of March.

As the Eurogroup chairman Jeroen Dijsselbloem said, there is no immediate liquidity squeeze over the next months, but that does not mean that Greece does not need money.

Er?

The medicine

In spite of where we stand this remains the same as the FT points out.

Greece agreed this month to adopt measures that would improve its primary budget surplus – before paying debt servicing costs – by 2 per cent of gross domestic product.

It is a bit like the old-fashioned treatment of bleeding the patient where it was reported a success but sadly the patient died isn’t it? As usual the rhetoric is being revved up and last night Prime Minister Tsipras was doing exactly that although I note he has passed the responsibility for the changes to the next government.

The measures would be divided roughly equally between cuts in pensions due to be made in 2019 followed by a sharp reduction of the income tax threshold in 2020. But they could be implemented earlier if the budget surplus target veers off-track.

What is the economic outlook for Greece?

The background is favourable as the overall picture for the Euro area is good. However the business surveys do not seem to have picked this up. From the Markit PMI.

At 46.7 in March, down from 47.7 in February, the latest figure signalled a seventh successive deterioration in Greek manufacturing sector conditions. The rate of decline accelerated from the previous month, and was marked overall. Underlying the latest contraction was a sharp fall in new order intakes

There is a clear difference here with the official data which tells us this for January and February combined.

3.7% (rise) in the Manufacturing Production Index.

The official view is pretty much what it has been for the last five years.

Looking forward, the Bank of Greece expects GDP to grow by around 2.5% in 2017, although a downward revision of the December 2016 forecasts is likely due to the negative carry-over effect of the sharp decline in output in Q4 2016 (attributed mainly to the decline in gross fixed capital formation and government consumption). Downside risks to the economic outlook exist related to delays in the conclusion of the second review of the Programme, the impact of increased taxation on economic activity and reform implementation.

The situation regarding bank deposits in Greece is complex because the definition has changed however I note that the ECB gave Greece an extra 400 million Euros of Emergency Liquidity Assistance last month. So the money which left in 2015 has remained abroad. The latest bank lending survey of the Bank of Greece tells us this.

The demand for total loans remained also unchanged during the first quarter of 2017

Comment

This saga has been an economics version of Waiting for Godot. The price of Godot never arriving has been this.

The seasonally adjusted unemployment rate in January 2017 was 23.5% compared to 24.3% in January 2016 and the upward revised 23.5% in December 2016…….

Yes it has fallen a bit but if we compare to the pre credit crunch low of 7.9% you get an idea of the scale of the issue. Also this now defines long-term unemployment especially for the young ( 15-24 ) where nearly half ( 48%) are unemployed.

As the band strikes up a familiar tune and we see claims of reform and progress I think this from Elvis is appropriate for Greece.

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

Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds

 

 

What are the economic prospects for France?

This weekend sees the first stage of the French Presidential elections which seem to be uncertain even for these times. A big issue will be economic prospects which will be my subject of today. But before I do let me send my best wishes to the victims of the terrorist attack which took place in Paris last night. If we move back to the economic situation we can say that the background in terms of the Euro area looks the best it has been for a while. From French Statistics.

In Q1 2017 the Eurozone economy is expected to grow at a similar pace as registered at the end of 2016 (+0.4%), then slightly faster in Q2 (+0.5%) before returning to +0.4% in Q3 2017. The main force behind the expansion in aggregate activity should be private consumption which benefits from the increase in disposable income and favourable labour market conditions and despite the upturn in inflation which is eroding household purchasing power. Moreover investment is forecast to strengthen, driven by improved expectations about near term outlook. Also investment in construction should accelerate. Finally, the positive international environment will likely reinforce external demand growth and exports.

As you can see according to them Goldilocks porridge seems pretty much exactly the right temperature as everything is expected to rise.

What about France itself?

 Some perspective

If we look back 2016 was an erratic year where quarterly economic growth was 0.6%,-0.1%,0.2% and then 0.4%. So whilst it began and ended well there was a near recession in the middle. Overall the growth at 1.1% was in fact less than the 1.2% of 2015 and it does pose a question as that is the level of economic growth which has caused such problems in both Italy and Portugal. Indeed if we look back we see that as 2011 opened quarterly economic output was 509 billion Euros whereas in the last quarter of 2016 it had only risen by 4,4% to 531.6 billion Euros ( 2010 prices).

This lack of economic growth has contributed to what is the major economic problem in France right now.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016……Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The fact so long after the credit crunch hit the unemployment rate is still in double-digits albeit only just echoes here. Also there is the issue of underemployment.

In Q4 2016, 6.2% of the employed persons were underemployed, a ratio decreasing by 0.1 percentage points quarter on quarter, and by 0.4 percentage points over a year. Underemployment mainly concerns people who have a part-time job and wish to work more.

Oh and if we return to the unemployment rate actually 10% is only a reduction because the previous quarter was revised higher. We could improve like that forever and remain at the same level!

The next consequence of slow/low economic growth can be found in the public finances.

At the end of 2016, the Maastricht debt accounted for €2,147.2 billion. It rose by €49.2 billion in 2016 after € +60.2 billion in 2015. It reached 96.0% of GDP at the end of 2016, after 95.6% at the end of 2015.

In essence this has risen from 65% pre credit crunch and the combination of an annual fiscal deficit and slow growth has seen it rise. France seems to have settled on an annual fiscal deficit of around the Maastricht criteria of 3% of GDP so to get the relative debt level down you can see how quickly it would need to grow.

What about prospects?

This morning’s business survey from Markit has been very positive.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 57.4, compared to March’s reading of 56.8. The latest figure was indicative of the sharpest rate of growth in almost six years.

The idea that elections and indeed referenda weaken economies via uncertainty may need to be contained in Ivory Towers going forwards.

The numbers provide further evidence that the French private sector remains resilient to political uncertainty around the upcoming presidential election. Indeed, business optimism hit a multi-year high in April, with a number of respondents anticipating favourable business conditions following its conclusion.

Even better there was hope of improvement for the labour market.

Moreover, the rate of job creation quickened to a 68-month peak. Both manufacturers and service providers continued to take on additional staff, with the pace of growth sharper at the former.

However a little caution is required as we were told by this survey that there was manufacturing growth in February as the index was 52.2 but the official data told us this.

In February 2017, output diminished for the third month in a row in the manufacturing industry (−0.6% after −0.9% in January). It decreased sharply in the whole industry (−1.6% after −0.2%). Manufacturing output decreased slightly over the past three months (−0.3%)…..Over a year, manufacturing output also edged down (−0.5%)

Bank of France

In a reversal of the usual relationship the French central bank is more downbeat than the private business surveys as you can see below.

In March, industrial production rose at a less sustained pace than in February.

Whilst it describes the services sector as dynamic I note that its index for manufacturing fell from 104 in February to 103 in March leading to the overall picture described below.

According to the monthly index of business activity (MIBA), GDP is expected to increase by 0,3% in the first quarter of 2017. The slight revision (-0,1 point) of last month estimate does not change the overall perspective for the year.

The cost of housing

This is very different to the situation across La Manche ( the Channel) and a world apart from the Canadian position I looked at yesterday.

In Q4 2016, house prices slightly decreased compared to the previous quarter (−0.3%, not seasonally adjusted data) after two quarters of increase. This slight downturn was due to secondhand dwellings (−0.4%). However, the prices of new dwellings grew again (+0.7%).

Indeed some more perspective is provided by the fact that an annual rate of growth of 1.9% is presented as a rise!

Year on year, house prices accelerated further in Q4 2016 (+1.9% after +1.4% in Q3 and +0.7% in Q2). New dwelling prices grew faster (+2.9% y-o-y) than second-hand dwelling prices (+1.8%).

Not much seems to be happening to rents either.

In Q1 2017, the Housing Rent Reference Index stood at 125.90. Year on year, it increased by 0.51%, its strongest growth since Q2 2014.

Just for perspective the index was 124.25 when 2013 began so there is little inflation here.

Comment

There is much that is favourable for the French economy right now. For example the European Central Bank continues with very expansionary monetary policy with an official interest-rate of -0.4% and 60 billion Euros a month of QE bond purchases. The Euro as an exchange-rate is below the level at which it started although only by 6%. So France finds that it gets a boost from very low debt costs as the recent rise in them only leaves the ten-year yield at 0.83%.

So 2017 should be a good one although there is the issue of why other countries have out-performed France. We only have to look south to see a Spain where economic growth has been strong. A couple of years of that would help considerably. But as I type that I am reminded of some of the comments to yesterday’s article especially the one saying house prices in Barcelona are on the march again. To get economic growth these days do we need booming house prices? This leads into my argument that we are calling what is really partly inflation as growth. The catch is that the numbers tell people they are better off but then they find housing ever more expensive and increasingly frequently unaffordable. As we stand France does better here but is that at the cost of higher unemployment?

 

 

 

 

Is this the end of the beginning for Quantitative Easing?

Today sees the Bank of England reach a threshold and but not yet a rubicon. This is because of this which it announced on last month.

As set out in the MPC’s statement of 2 February, the MPC has agreed to make £11.6bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 22 January 2017 of a gilt owned by the Asset Purchase Facility (APF).

This is an Operation Twist style manoeuvre where a Gilt matures and the Bank of England chooses to roll it forwards. Sometimes it does this a long way forwards as you see once a week a share of the funds have been put in what are called ultra-long Gilts which go out as far as 2068 ( of which it holds £1.54 billion). Creating an issue for our grandchildren and maybe great-grandchildren.  The details are shown below.

The Bank will continue, normally, to conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; of over 15 years on Tuesdays; and of 7-15 years on Wednesdays. The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £775mn for each maturity sector.

There was a time when £775 million seemed a lot of money but in central banking terms these days that is plainly no longer so. This should have finished last Wednesday but the Bank of England chose not to act on that day, maybe it did not want to let go! But more seriously it avoids days of known political importance as a rule.

So a threshold has been reached but the Bank of England will be able to announce something on Thursday as last week another Gilt matured and some £6.1 billion of that will be able to be rolled forwards. So no doubt it will be time for Operation Twist to wake itself after only a few days of being asleep to start again!

Charlotte Hogg

Charlotte should logically be voting against any further Operation Twist style move if this exchange with the Treasury Select Committee was any guide.

Andrew Tyrie ” On balance do you think we would be better off unwinding it or letting it run off?”

Charlotte Hogg ” I don’t see the distinction between the two to be honest”

So it does not do any good either? I pointed this out on the first of this month.

If Charlotte actually believes what she says then I look forwards to her voting against any more QE which must be pointless as apparently Gilt prices and yields would be unaffected if it stopped.

As to her own position people are more worried about her dissembling that her apparent lack of competence if this from Deborah Orr in the Guardian is any guide.

The trouble is that few people are likely to believe that not mentioning her brother’s job was an oversight. Even if they do, her judgment is still in question.

This bit does however mine a theme we have discussed on here many times.

Clearly, people run the risk of feeling over-entitled. They believe strongly in rules, but develop a belief that they are the people who make the rules, not the people who follow them……..Privileged people also run the risk of mistakenly believing that what’s good for them is good for everybody…….Finally, of course, privileged people assume, often rightly, that no one is going to hold them to account.

Sadly however the article seems completely unaware of the performance of Charlotte when questioned about monetary policy.

Hogg is clearly regarded as tremendously bright and capable.

More problems for the UK establishment

If you are intervening in so many areas then the need for honesty confidence and trust rises and yet we are also in an era where more issues are emerging. From the Wall Street Journal.

On average, between April 2011 and December 2016, U.K. government-bond futures correctly anticipated the rise or fall that ultimately happened when economic data were published, according to an analysis prepared for The Wall Street Journal by Alexander Kurov, associate professor of finance at West Virginia University.

Of course bond markets move on other days but there is a particular concern on these days because of this.

“The more prerelease access you have, the more likely it is that these things are going to be leaked,” said Hetan Shah, executive director of the Royal Statistical Society, the U.K.’s professional body for statisticians that has campaigned for several years to end such access.

At 9:30 am the day before release quite a large number of people ( 118 on the labour  market report)  get the numbers according to the WSJ.

Corporate Bond QE

This will continue but is of a much smaller size as there is only £2 billion left out of a total of £10 billion.. Regular readers will recall that I pointed out when it began that the Bank of England would struggle to mount any operation on a large scale because UK corporates issue a substantial proportion of their debt in Euros and US Dollars because they are often international businesses.  This has led the Bank of England on this road as I pointed out in early November.

The Bank of England is boosting the UK economy by buying the corporate bonds of Total and Maersk Oh hang on….

I was told they were back buying Maersk bonds last week. Also there is the issue of subsidising larger businesses who can issue corporate bonds versus ones which are too small to be able to afford the costs. That is awkward when you are claiming you are boosting the economy.

The ECB

It too is in a zone where ch-ch-changes are ahead. I have written several times already explaining that with inflation pretty much on target and economic growth having improved its rate of expansion of its balance sheet looks far to high even at the 60 billion Euros a month due in April. But the issue was highlighted by this which was on the newswires last week. From the Financial Times.

He warns investors not to rule out that the ECB could raise rates while it is still in the process of tapering its stimulus spending.

Well of course it could! Indeed the Bank of England has suggested it would raise interest-rates towards 2% before it started to reverse its own QE purchases. But the confusion around is highlighted by this seemingly being an issue.

Comment

There is a fair bit to consider at this time when the central bankers face the issue of stopping their stimulus policies. The Federal Reserve of the United States has signalled it will raise interest-rates for a third time in this phase later this week. But the Bank of England and ECB have not even entered the foothills and are still easing. If we move on from policy plainly being inappropriate we face the issue of what will bond markets do when the largest buyers disappear? Well we are getting hints as this from the twitter feed of Bond Vigilantes suggests.

10 year Swiss Government bonds offer a positive yield again, having traded in negative territory for almost 18 months.

Something of a shift has already taken place in the US with its ten-year Treasury Note yield being at 2.56% but with the ten-year Gilt at a mere 1.21% there is quite gap these days. Real yields are getting ever more negative as inflation moves ahead. From the BBC.

SSE has become the latest “big six” energy supplier to raise its prices.

It said average electricity prices would rise by 14.9% from 28 April for 2.8 million customers. However, it will keep its gas prices unchanged.

 

 

 

The relationship between ECB policy and the economic performance of France

Today the Governing Council of the ECB (European Central Bank) meets to announce its monetary policy decisions. It does so in a very different environment to its more recent meetings because of the way that the economic winds of change have blown. What I mean by this is that the economic outlook is the brightest it has seemed for a while now. Also consumer inflation has risen to pretty much on target which poses a question for ECB policy going forwards as I have been pointing out for a while now, most recently last Friday. There is a clear contrast with the United States where expectations of an interest-rate rise this month are pretty much 100% now. Yet there is a problem as we note this from @fwred on the Atlanta Fed forecast for US economic growth.

Potentially HALF the growth rate of the euroarea in Q1.

This has led to hints of a change today this morning.

doesn’t plan to announce a new round of TLTROs, according to people familiar with the matter” ( @bondzilla )

So if true it will scrap a bank subsidy.

However I wish to take the opportunity of the second anniversary of the major QE program of the ECB to take a look at the impact it has had on France and its economy. It has provided a deposit rate of -0.4% a balance sheet heading towards 4 trillion Euros and thereby a lower level for the Euro although of course we can never judge any policy in isolation. The QE purchases have meant that 269 billion Euros of French government bonds have been bought easing its fiscal policy via the fact that it has some negative bond yields and only has a ten-year bond yield of 1,03%. So whilst that has become increasingly expensive vis a vis Germany it is also as Middle of the Road pointed out some years ago.

Chirpy, Chirpy, Cheep, Cheep, Chirp

The French economy

Lets look at it with a different twist as the particularly francophile Financial Times has looked at the French economic situation. It has done so on a political beat but for me the issue is monetary policy as over the period in question ( since 2012) it has been monetary policy that has been the main economic player in town.

The winner of this year’s election will inherit an economy that has been growing slowly but steadily since the 2008 financial crisis……..However, as the chart below shows, despite modest growth the country has underperformed relative to the likes of Germany, the UK and the US. Nevertheless, towards the end of Mr Hollande’s term things began to pick up. Growth last year reached 1.1 per cent, the fastest pace during his tenure — though it still fell well below the EU average of 1.8 per cent.

Let me just correct a factual error with this from the French statistical office.

On average over the year, GDP rose by 1.1%, practically as much as in 2015 (+1.2%).

So in annual terms not the fastest rate although it is quicker than 2012,13 and 14. In a way cheering an economic growth rate of ~1% poses its own question in an era where we have tentatively described the new normal as 2%. But if we skip the UK and US there is an issue in a currency union where growth is consistently below the average and the country which is considered with France at the heart of the Euro project which is Germany. The solution for that would be regional policy but quite how that would manifest itself I am not sure.

Unemployment

The numbers here continue to be awkward to say the least.

unemployment continued to creep up to a high of more than 10 per cent, prompting the president — late in his tenure — to take more decisive steps to tackle what he labelled an “economic emergency”……..unemployment figures have shown only marginal improvements over the past year,

There are other worrying features of the French labour market as well.

The reforms have so far failed to break France’s two-tier labour market. Last year, 86.4 per cent of total hiring was into temporary jobs — and of those, 80 per cent were for contracts shorter than one month. Meanwhile, long-term unemployment remains stubbornly high: more than 45 per cent of the unemployed in France have been without a job for more than a year, the highest proportion since records began in 2003.

It is not a good time to be young in the French labour market either.

France’s youth unemployment rate is roughly double that of the UK and continues to rise — in contrast with a decline in most advanced economies. The story is similar for foreigners and those with lower levels of education.

Accordingly the quantity number unemployment remains poor in spite of all the monetary easing and a chill wind blows through if we add in the reforms promised because the situation has not changed all that much. Also “emergencies” seem to last these days don’t they as I think also of the UK “emergency” Bank Rate of 0.5% which somehow went even lower to 0.25%!

If you are employed in a permanent job in France you have better conditions and perhaps better pay than in the UK. But for those outside such a position the outlook is worse, although some aspects seem the same as “contracts for less than one month” are not a million miles away from zero hours contracts in principle.

The state

This is larger in France than in many other places.

But France still has one of the highest public spending ratios among advanced countries — at 57 per cent of GDP. Within that, health, social and pensions expenditure as a share of GDP remain comparatively high and have risen since 2012.

Of course there are beneficial consequences of this as many French people are proud of their health system. Whilst the ECB continues with its QE bond purchases the fact that the national debt to GDP ratio is 97.5% matters little but of course unless France finds some economic growth we are left with what happens if the ECB stops buying?

House Prices

Let me throw in something which is not mentioned by the FT. If you look at French houses prices they were in the autumn of 2016 where they were in the last quarter of 2007. I do not know about you but with all that has gone on in the credit crunch era that seems so much healthier than the UK situation. What do readers think?

There is a catch though ( as ever…) as we consider the mortgage books of the French banks.

Regulation and Taxation

The Financial Times struggled here to present an optimistic picture.

Despite attempts at simplification, French companies “are still faced with a high regulatory burden and fast-changing legislation”, according to a recent European Commission report………At 48 per cent, the labour tax wedge was the fifth highest in the OECD in 2015 and French corporation tax remains the highest in Europe.

Comment

There is much to consider here and there are of course problems with using GDP as a yardstick. It is a long way from perfect but in essence monetary policy in the Euro area has been trying to drive it higher using the excuse that it is bringing inflation back on target. But for France there has been an improvement but only to a growth rate of around 1% so far. The opening of 2017 looks better but can that be sustained for the several years required? Along that road the ECB would have all sorts of questions to answer if it maintained its stimulus.

Something that should particularly benefit French business is the corporate bond buying program but as it has bought more than 10% of Euro area corporate bonds already how long can it go on? For a start it is anti-competitive especially if you do not qualify.

 

The ECB faces a growing policy dilemma

Today I want to look at what was one of the earliest themes of this blog which is that central banks will dither and delay before they reduce their policy easing and accommodation. Or to put it another way they will be too late because they are afraid of moving too soon and being given the blame should the economy hic-cup or turn downwards. Back in the day I did not realise how far central banks would go with the Bank of Japan seemingly only limited by how many assets there are in existence in Japan as it chomps on government bonds and acts as a Tokyo whale in equity markets. Actually it has made yet more announcements today including this from Governor Kuroda according to Marketwatch.

“There is not much likelihood that we will further lower the negative rate” from the current minus 0.1%, Kuroda said in parliament, citing Japan’s accelerating growth.

Last time he said something like that he cut them 8 days later if I recall correctly!

However the focus right now is on Europe and in particular on the ECB ( European Central Bank). as it faces the policy exit question I posed on the 19th of January.

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise?

What has changed?

Yesterday brought news on economic prospects which will have simultaneously cheered and worried Mario Draghi and the ECB. It started with France.

The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 56.2, compared to January’s reading of 54.1. The latest figure pointed to the sharpest rate of growth since May 2011.

Welcome news indeed and considering the ongoing unemployment issue that I looked it only a few days ago this was a welcome feature of the service sector boom.

Staffing numbers rose for the fourth consecutive month during February. The increase was underpinned by a solid rate of growth in the service sector,

Unusually for Markit it did not provide any forecast for expected GDP (Gross Domestic Product) growth from this which is likely to have been caused by its clashes with the French establishment in the past. It has regularly reported private-sector growth slower than the official numbers so this is quite a change.

Next up was Germany and the good news theme continued.

The Markit Flash Germany Composite Output Index rose from January’s fourmonth low of 54.8 to 56.1, the highest since April 2014 and signalling strong growth in the eurozone’s largest economy. Output has risen continuously since May 2013.

The situation is different here because of course Germany has performed better than France in recent times illustrated by its very different unemployment rate. I note that manufacturing is doing well as it benefits from the much lower exchange rate the Euro provides compared to where any prospective German mark would be priced. Markit is much more willing to project forwards from this.

The latest PMI adds to our expectations that economic growth will strengthen in the first quarter to around 0.6% q-o-q, marking a strong start to 2017.

Whilst these are the two largest Eurozone economies there are others so let us add them into the mix.

“The eurozone economy moved up a gear in February. The rise in the flash PMI to its highest since April 2011 means that GDP growth of 0.6% could be seen in the first quarter if this pace of expansion is sustained into March.

There are actually two cautionary notes here. The first is that these indices rely on sentiment as well as numbers and as they point out March is yet to come. But the surveys indicate potential for a very good start to 2017 for the Eurozone.

As the objectives of central banks have moved towards economic growth there is an obvious issue when they look good and it is to coin a phrase “pumping up the volume”.

Also there was a hopeful sign for a chronic Euro area problem which is persistent unemployment in many countries.

February saw the largest monthly rise in employment since August 2007. Service sector jobs were created at a rate not seen for nine years and factory headcounts showed the second-largest rise in almost six years.

What about inflation?

Just like it fell more quickly and further than the ECB expected it has rather caught it on the hop with its rise. The move from 1.1% in December to 1.8% in January means it is just below 2% or where the “rules based” ECB wants it. There is an update later but even if it nudges the number slightly the song has the same drum and bass lines. Indeed yesterday’s surveys pointed to concerns that more inflation is coming over the horizon.

Inflationary pressures meanwhile continued to intensify. Firms’ average input costs rose at the steepest rate since May 2011, with rates accelerating in both services and manufacturing. The latter once again recorded the steeper rise, linked to higher global commodity prices, the weak euro and suppliers regaining some pricing power amid stronger demand.

In the past such news would have the ECB rushing to raise interest-rates which leaves it in an awkward position. The only leg it has left to stand on in this area is weak wage growth.

Asset prices

Mario Draghi’s espresso will taste better this morning as he notes this.

GERMANY’S DAX RISES ABOVE 12,000 FIRST TIME SINCE APRIL 2015 ( h/t Darlington_Dick)

Although even the espresso may provide food for thought.

Oh I don’t know…Robusta coffee futures creeping back towards 5-1/2 year highs

That pesky inflation again. Oh sorry I mean the temporary or transient phase!

As to house prices there is a wide variation but central bankers always want more don’t they?

House prices, as measured by the House Price Index, rose by 3.4% in the euro area and by 4.3% in the EU in the third quarter of 2016 compared with the same quarter of the previous year.

Of course should any boom turn to bust then the rhetoric switches to it was not possible to forecast this and therefore it was a “surprise” and nobody’s fault. The Bank of England was plugging that particular line for all it’s worth only yesterday.

The Euro

Much is going on here and it has been singing along to “Down, Down” by Status Quo again. For example it has moved very near to crossing 1.05 versus the US Dollar this morning which makes us wonder if economists might be right and it will reach parity. Such forecasts are rarely right so it would be its own type of Black Swan but more seriously we are seeing a weaker phase for the Euro as it has fallen from just over 96 in early November 2016 to 93.4 now. Here economists return to their usual form as this has seen the UK Pound £ nudge 1.19 this morning or further away from the parity so enthusiastically forecast by some.

A factor in this brings us back to QE and ECB action. A problem I have reported on has got worse and as ever it involves Germany. The two-year Schatz yield has fallen as low as -0.87% as investors continue to demand German paper even if they have to pay to get it. This is creating quite a differential ( for these times anyway) with US Dollar rates and thereby pushing the Euro lower.

Comment

There are obvious issues here for the ECB as it faces a period where economic growth could pick-up which is of course good but inflation will be doing the same which is not only far from good it is against its official mandate. It does plan to trim its monthly rate of bond buying to 60 billion Euros a month from 80 billion but of course it still has a deposit rate of -0.4%. Thus the accelerator is still being pressed hard. But as we note that the lags of monetary policy are around 18 months then it may well find itself doing that as both growth and inflation rise. Should that lead to trouble then a so-called stimulus will end up having exactly the reverse effect. Yet the consensus remains along the lines of this from Markit yesterday.

No change in policy
therefore looks likely until at least after the German
elections in September.

 

 

The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.

Productivity

There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.

Production

With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.

Comment

I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

Will rising bond yields mean ECB QE is To Infinity! And Beyond!?

Yesterday the ECB ( European Central Bank ) President Mario Draghi spoke at the European Parliament and in his speech were some curious and intriguing phrases.

Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.

I say that bit was curious because it contrasted with the other rhetoric in the speech as we were told how well things are going.

Over the last two years GDP per capita has increased by 3% in the euro area, which compares well with other major advanced economies. Economic sentiment is at its highest level in five years. Unemployment has fallen to 9.6%, its lowest level since May 2009. And the ratio of public debt to GDP is declining for the second consecutive year.

The talk of what I would call “More,More,More” is also a contrast to the December policy decision which went down the road of less or more specifically slower.

We will continue to purchase assets at a monthly pace of €80 billion until March. Starting from April, our net asset purchases will run at a monthly pace of €60 billion, and we will reinvest the securities purchased earlier under our programme, as they mature. This will add to our monthly net purchases.

There was another swerve from Mario Draghi who had written to a couple of MEPs telling them that a country leaving the Euro would have to settle their Target 2 balances ( I analysed this on the  23rd of January ) whereas now we were told this.

L’euro e’ irrevocabile, the euro is irrevocable

Of course Italian is his natural language bur perhaps also there was a message to his home country which has seen the rise of political parties who are against Euro membership.

Such words do have impacts on bond markets and yields but I was particularly interested in this bit. From @macrocredit.

DRAGHI SAYS ECB POLICY DOESN’T TARGET BOND SPREADS

A rather curious observation from someone who is effectively doing just that and of course for an establishment which trumpeted the convergence of bond yield spreads back before the Euro area crisis. Just to be clear which is meant here is the gap between the bond yield of Germany and other nations such as Spain or Italy. These days Mario Draghi seems to be displaying all the consistency of Arsene Wenger.

Oh and rather like the Bank of England he seems to be preparing himself for a rise in inflation.

As I have argued before, our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation.

Spanish energy consumers may not be so sanguine!

Growing divergence in bond yields

The reality has been that recently we have seen a growing divergence in Euro area bond yields. This has happened in spite of the fact that the ECB QE ( Quantitative Easing) bond buying program has continued. As of the latest update it has purchased some 1.34 trillion Euros of sovereign bonds as well as of course other types of bonds. Perhaps markets are already adjusting to the reduction in the rate of purchases planned to begin on April 1st.

France

Ch-ch-changes here are right at the core of the Euro project which is the Franco-German axis. If we look back to last autumn we see a ten-year yield which fell below 0.1% and now we see one of 1.12%. This has left it some 0.76% higher than its German equivalent.

Care is needed as these are still low levels but politicians get used to an annual windfall from ,lower bond yields and so any rise will be unwelcome. It is still true that up to the five-year maturity France can borrow at negative bond yields but it is also true that a chill wind of change seems to be blowing at the moment. The next funding auction will be much more painful than its predecessor and the number below suggests we may not have to wait too long for it.

The government borrowing requirement for 2017 is therefore forecast to reach €185.4bn.

Italy

Here in Mario’s home country the situation is more material as the ten-year yield has risen to 2.36% or 2% over that of Germany. This will be expensive for politicians in the same manner as for France except of course the yield is more expensive and as the Italian Treasury confirms below the larger national debt poses its own demands.

The redemptions over the coming year are just under 216 billion euros (excluding BOTs), or some 30 billion euros more than in 2016, including approximately 3.3 billion euros in relation to the international programme. At the same time, the redemptions of currently outstanding BOTs amount to just over 107 billion euros, which is below the comparable amount in 2016 (115 billion euros) as a result of the policy initiated some years ago to reduce the borrowing in this segment.

The Italian Treasury has also noted the trends we are discussing today.

As a result of these developments, the yield differentials between Italian government securities and similar securities from other core European countries (in particular, Germany) started to increase in September 2016……. the final two months of 2016 have been marked by a significant increase in interest rates in the bond market in the United States,

Although we are also told this

In Europe, the picture is very different.

Anyway those who have followed the many debacles in this particular area which have mostly involved Mario Draghi’s past employer Goldman Sachs will note this next bit with concern.

Again in 2017, the transactions in derivatives instruments will support active portfolio management, and they will be aimed at improving the portfolio performance in the current market environment.

Should problems emerge then let me place a marker down which is that the average maturity of 6.76 years is not the longest.

Portugal

Here the numbers are more severe as Portugal has a ten-year yield of 4.24% and of course it has a similar national debt to economic output ratio to Italy so it is an outlier on two fronts. It need to raise this in 2017.

The Republic has a gross issuance target of EUR 14 billion to EUR 16 billion through both auctions and syndications.

To be fair it started last month but do you see the catch?

The size was set at EUR 3 billion and the new OT 10-year benchmark was finally priced at 16:15 CET with a coupon of 4.125% and a re-offer yield of 4.227%.

That is expensive in these times of a bond market super boom. Portugal has now paid off some 44% of its borrowings from the IMF but it is coming with an increasingly expensive kicker. Maybe that is why the European establishment wanted the IMF involved in its next review of Portugal’s circumstances.

Also at just over five years the average maturity is relatively short which would mean any return of the bond vigilantes would soon have Portugal looking for outside help again.

As of December 31, 2016 the Portuguese State direct debt amounted to EUR 236,283 million, decreasing 0.5% vis-à-vis the end of the previous month ( 133.4% of GDP).

Comment

Bond markets will of course ebb and flow but recently we have seen an overall trend and this does pose questions for several countries in the Euro area in particular. The clear examples are Italy and Portugal but there are also concerns elsewhere such as in France. These forces take time but a brake will be applied to national budgets as debt costs rise after several years when politicians will have been quietly cheering ECB policies which have driven falls. Of course higher inflation will raise debt costs for nations such as Italy which have index-linked stocks as well.

If we step back we see how difficult it will be for the ECB to end its QE sovereign bond buying program and even harder to ever reverse the stock or portfolio of bonds it has bought so far. This returns me to the issues I raised on January 19th.

If we look at the overall picture we see that 2017 poses quite a few issues for central banks as they approach the stage which the brightest always feared. If you come off it will the economy go “cold turkey” or merely have some withdrawal systems? What if the future they have borrowed from emerges and is worse than otherwise?

Meanwhile with the ECB being under fire for currency manipulation ( in favour of Germany in particular) it is not clear to me that this from Benoit Coeure will help.

The ECB has no specific exchange rate target, but the single currency has adjusted as a consequence. Since its last peak in 2011, the euro has depreciated by almost 30% against the dollar. The euro is now at a level that is appropriate for the economic situation in Europe.