France decides to Spend! Spend! Spend!

Yesterday brought something that was both new and familiar from France. The new part is a substantial extra fiscal stimulus. The familiar is that France as regular readers will be aware had been pushing the boundaries of the Euro area fiscal rules anyway, This is something which has led to friction with Italy which has come under fire for its fiscal position. Whereas France pretty much escaped it in spite of having its nose pressed against the Growth and Stability Pact limit of 3% of Gross Domestic Product for the fiscal deficit. Actually that Pact already feels as if it is from a lifetime ago although those who have argued that it gets abandoned when it suits France and Germany are no doubt having a wry smile.

The Details

Here is a translation of President Macron’s words.

We are now entering a new phase: that of recovery and reconstruction. To overcome the most important in our modern history, to prevent the cancer of mass unemployment from setting in, which unfortunately our country has suffered too long, today we decide to invest massively. 100 billion, of which 40 billion comes from financing obtained hard from the European Union, will thus be injected into the economy in the coming months. It is an unprecedented amount which, in relation to our national wealth, makes the French plan one of the most ambitious.

So the headline is 100 billion Euros which is a tidy sum even in these inflated times for such matters. Also you will no doubt have spotted that he is trying to present something of a windfall from the European Union which is nothing of the sort. The money will simply be borrowed collectively rather than individually. So it is something of a sleight of hand. One thing we can agree on is the French enthusiasm for fiscal policy, although of course they have been rather less enthusiatic in the past about such policies from some of their Euro area partners.

There are three components to this.

Out of 100 billion euros, 30 billion are intended to finance the ecological transition.

As well as a green agenda there is a plan to boost business which involves 35 billion Euros of which the main component is below.

As part of the recovery plan, production taxes will be reduced by € 10bn from January 1, 2021, and by sustainable way. It is therefore € 20bn in tax cuts of production over 2021–2022.

That is an interesting strategy at a time of a soaring fiscal deficit to day the least. So far we have ecology and competitiveness which seems to favour big business. Those who have followed French history may enjoy this reference from Le Monde.

With an approach that smacks of industrial Colbertism

The remaining 35 billion Euros is to go into what is described as public cohesion which is supporting jobs and health. In fact the jobs target is ambitious.

According to the French government, the plan will help the economy make up for the coronavirus-related loss of GDP by the end of 2022, and help create 160,000 new jobs next year.  ( MarketWatch)

Is it necessary?

PARIS (Reuters) – French Finance Minister Bruno Le Maire believes that the French economy could perform better than currently forecast this year, he said on Friday.

“I think we will do better in 2020 than the 11% recession forecast at the moment,” Le Maire told BFM TV.

I suspect Monsieur Le Maire is a Beatles fan and of this in particular.

It’s getting better
Since you’ve been mine
Getting so much better all the time!

Of course things have got worse as he has told us they have got better. Something he may have repeated this morning.

August PMI® data pointed to the sharpest contraction in French construction activity for three months……….At the sub-sector level, the decrease in activity was broad based. Work undertaken on commercial projects fell at the
quickest pace since May, and there was a fresh decline in civil engineering activity after signs of recovery in June and July. Home building activity contracted for the sixth month running, although the rate of decrease was softer than in July. ( Markit)

We have lost a lot of faith in PMi numbers but even so there is an issue as I do not know if there is a French equivalent of “shovel ready”? But construction is a tap that fiscal policy can influence relatively quickly and there seems to be no sign of that at all.

Indeed the total PMI picture was disappointing.

“The latest PMI data came as a disappointment
following the sharp rise in private sector activity seen
during July, which had spurred hopes that the French
economy could undergo a swift recovery towards precoronavirus levels of output. However, with activity
growth easing considerably in the latest survey period,
those hopes have been dashed…”

So the data seems to be more in line with the view expressed below.

It is designed to try to “avoid an economic collapse,” French Prime Minister Jean Castex said on Thursday. ( MarketWatch)

Where are the Public Finances?

According to the Trading Economics this is this mornings update.

France’s government budget deficit widened to EUR 151 billion in the first seven months of 2020 from EUR 109.7 billion a year earlier, amid efforts to support the economy hit by the coronavirus crisis. Government spending jumped 10.4 percent from a year earlier to EUR 269.3 billion, while revenues went down 6.3 percent to EUR 142.25 billion

I think their definition of spending has missed out debt costs.

As of the end of June the public debt was 1.992 trillion Euros.

Comment

I have avoided being to specific about the size of the contraction of the economy and hence numbers like debt to GDP. There are several reasons for this. One is simply that we do not know them and also we do not know how much of the contraction will be temporary and how much permanent? We return to part of yesterday’s post and France will be saying Merci Madame Lagarde with passion. The various QE bond purchase programmes mean that France has a benchmark ten-year yield of -0.18% and even long-term borrowing is cheap as it estimates it will pay 0.57% for some 40 year debt on Monday. That’s what you get when you buy 473 billion Euros of something and that is just the original emergency programme or PSPP and not the new emergency programme or PEPP. On that road the European Union fund is pure PR as it ends up at the ECB anyway.

The Bank of France has looked at the chances of a rebound and if we look at unemployment and it looks rather ominous.

However, the speed of the recovery in the coming months and years is more uncertain, as is the peak in the unemployment rate, which the Banque de France forecasts at 11.8% in mid-2021 for France……….Chart 1 shows that in France, Germany, Italy, and the United States, once the unemployment rate peaked, it fell at a rate that was fairly similar from one crisis to the next: on average 0.55 percentage point (pp) per year in France and Italy, 0.7 pp in Germany, and 0.63 pp in the United States.

There is not much cheer there and they seem to have overlooked that unemployment rates have been much higher in the Euro area than the US. But we can see how this might have triggered the French fiscal response especially at these bond yields.

But Giulia Sestieri is likely to find that her conclusion about fiscal policy is likely to see the Bank of France croissant and espresso trolley also contain the finest brandy as it arrives at her desk.

Ceteris paribus, the lessons of economic literature suggest potentially large fiscal multipliers during the post-Covid19 recovery phase

Mind you that is a lot of caveats for one solitary sentence.

How do the negative interest-rates of the ECB fit with a surging money supply?

Today brings an opportunity for us to combine the latest analysis from the European Central Bank with this morning’s money supply and credit data. The speech is from Executive Board member Isabel Schnabel who is apparently not much of a fan of Denmark or Sweden.

In June 2014, the ECB was the first major central bank to lower one of its key interest rates into negative territory.

Of course the effect of the Euro was a major factor in those countries feeling the need for negativity but our Isabel is not someone who would admit something like that. We do however get a confession that the ECB did not know what the consequences would be.

As experience with negative interest rates was scant, the ECB proceeded cautiously over time, lowering the deposit facility rate (DFR) in small increments of 10 basis points, until it reached -0.5% in September 2019. While negative interest rates have, over time, become a standard instrument in the ECB’s toolkit, they remain controversial, both in central banking circles and academia.

Unfortuately for Isabel she has been much more revealing here than she intended. In addition to admitting it was new territory there is a confession the Euro area economy has been weak as otherwise why did they feel the need to keep cutting the official interest-rate? Then the “standard instrument” bit is a confession that they are here to stay.

In spite of the problems she has just confessed to Isabel thinks she can get away with this.

In my remarks today, I will review the ECB’s experience with its negative interest rate policy (NIRP). I will argue that the transmission of negative rates has worked smoothly and that, in combination with other policy measures, they have been effective in stimulating the economy and raising inflation.

Even before the Covid-19 pandemic that was simply untrue. You do not have to take me word for it because below is the policy announcement from the ECB on the 12th of September last year. They did not so that because things were going well did they?

The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%…….Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November.

The accompanying statement included a complete contradiction of what Isabel is trying to claim now.

Today’s decisions were taken in response to the continued shortfall of inflation with respect to our aim. In fact, incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures.

I wonder if anyone challenged Isabel on this?

Fantasy Time

Some would argue that this represents a policy failure but not our Isabel.

In other words, the ECB had succeeded in shifting the perceived lower bound on interest rates firmly into negative territory, supported by forward guidance that left the door open for the possibility of further rate cuts.

It is no great surprise that for Isabel it is all about “The Precious! The Precious!”

The ECB, for its part, tailored its non-standard measures to the structure of the euro area economy, where banks play a significant role in credit intermediation. In essence, this meant providing ample liquidity for a much longer period than under the ECB’s standard operations.

Yet even this has turned out to be something of a fantasy.

In spite of these positive effects on the effectiveness of monetary policy, the NIRP has often been criticised for its potential side effects, particularly on the banking sector……..In the extreme, the effect could be such that banks charge higher interest rates on their lending activities, thereby reversing the intended accommodative effect of monetary policy.

The text books which Professor Schabel has read and written contained nothing like this. We all know that if something is not in an Ivory Tower text book it cannot happen right?

Money Supply

This morning’s data showed a consequence of the Philosophy described above.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 13.5% in July from 12.6% in June.

This is the fastest rate of monetary expansion the Euro area has seen in absolute terms. There was a faster rate of expansion in percentage terms in its first month ( January 1999) of 14.7% but the numbers are so much larger now. Also contrary to so much official and media rhetoric cash is in demand as in July it totalled some 1.31 trillion Euros as opposed to 1.19 trillion a year before. This is out of the 9.78 trillion Euros.

As we try to analyse this there is the issue that it is simple with cash as 0% is attractive compared to -0.5% but then deposits should be fading due to the charge on them. Except we know that the major part of deposits do not have negative interest-rates because the banks are terrified of the potential consequences.

We can now switch to broad money and we are already expecting a rise due to the narrow money data.

The annual growth rate of the broad monetary aggregate M3 increased to 10.2% in July 2020 from 9.2% in June, averaging 9.5% in the three months up to July.

Below is the break down.

 

The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 13.5% in July from 12.6% in June. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 1.4% in July from 0.8% in June. The annual growth rate of marketable instruments (M3-M2) increased to 12.8% in July from 9.2% in June.

Putting it that way is somewhat misleading because the M1 change of 158 billion dwarfs the 33 billion of marketable instruments although the growth rates are not far apart.

 

Comment

Let me now put this into context in ordinary times we would expect the narrow money or M1 surge to start impacting about six months ahead. So it should begin towards the end of this year. Although it will be especially hard to interpret as some of the slow down was voluntary as in we chose to shut parts of the economy down. Has monetary policy ever responded to a voluntary slow down in this way before?

Also if we switch to broad money we see that the push has seen M3 pass the 14 trillion Euros barrier. Again in ordinary times we should see nominal GDP surge in response to that in around 2 years with the debate being the split between inflation and real growth. Except of course we do not know where either are right now! We have some clues via the surges in bond and equity markets seen but of course the Ivory Tpwers that Professor Schabel represents come equipped with blacked out windows for those areas.

Actually the good Professor and I can at least partly agree on something as I spotted this in her speech.

With the start of negative rates, we have observed a steady increase in the growth rate of loans extended by euro area monetary financial institutions.

They did although that does not mean the policies she supported caused this and in fact the growth rate of loans to the private-sector is now falling.

She somehow seems to have missed the numbers which further support my theme that her role is to make sure government borrowing is cheap ( in fact sometimes free or even for a profit) is in play.

The annual growth rate of credit to general government increased to 15.5% in July from 13.6% in June,

We now wait to see if the famous quote from Milton Friedman which is doing the rounds will be right one more time.

Inflation is just like alcoholism, in both cases when you start drinking or when you start printing to much money, the good effects come first the bad effects come later.

Or Neil Diamond.

Money talks
But it can’t sing and dance and it can’t walk

 

 

How much do the rising national debts matter?

Quote

A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

Join us on 30 June for an interactive webinar with restaurateur, chef and The Great British Bake Off judge, @PrueLeith . Find out more and register for your place here: b-o-e.uk/2CsGokX

Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.

Comment

So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.

 

The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

UK tax receipts hint that economic growth is better than GDP tells us

Today the UK Public Finances are in the news and that is before we even get to the data release. This is because there has been a flurry of announcements on transport policy and the railways in particular. According to LBC we should soon get some clarity on out subject from a couple of days ago.

The Transport Secretary said he was making the biggest infrastructure decision taken in the UK in peacetime and promised it in “weeks rather than months”.

Mr Shapps told LBC: “We are nearing the conclusion. I am now in the final stages of gathering all the data together for HS2, so it’s a mega decision for this country.

“It’s maybe the biggest infrastructure project, certainly in Europe, and the biggest this country’s ever taken, certainly in peacetime. So we’ve got to get that right.

Bigger than when the Victorians built the railways? As opposed to one line! Also there were some announcements to help deal with what has been the headliner of the problems with UK railways.

Network Rail is being investigated over its poor service on routes used by troubled train operators Northern and TransPennine Express.

The government-owned firm has been put “on a warning” for routes in the North West and central region of England, the Office of Rail and Road (ORR) said.

The regulator said it was “not good enough” in those areas and was probing Network Rail’s contribution to delays.

Network Rail apologised for “very poor service” in the Midlands and the North. (BBC )

The solution to that problem according to the Transport Minister is to build a new railway for somewhere above £10 billion and in the meantime spend some £2.9 billion on improving the existing line. That is rather vague as it lacks timescales and will we be making improvements just in time to close them? But the issue here for the public finances is that the UK government is more willing to spend than it was. There is also an issue as to why if traffic on these railways has expanded so much why money has not been spent along the way to help it cope? That of course goes much wider as we note energy infrastructure where yet again we see an enormously expensive project after years and indeed decades of little action.

Today’s Data

We open with something against the recent trend.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in December 2019 was £4.8 billion, £0.2 billion less than in December 2018.

Maybe it is just a quirk that we borrowed less as the monthly numbers are volatile. But we do perhaps get a little more from this.

Central government receipts in December 2019 increased by £2.2 billion (or 3.7%) to £62.2 billion, compared with December 2018, while total central government expenditure increased by £1.7 billion (or 2.7%) to £63.9 billion.

As you can see the rise in receipts even if we use the highest inflation measure ( RPI) hints at a better growth rate than we are expecting from the GDP data. This does tie in with the employment and wages numbers we looked at yesterday. But only in a broad sweep because of this.

Central government receipts were boosted by increases in National Insurance contributions (NICs) of £0.5 billion, interest and dividends receipts of £0.3 billion, and across many of the taxes on production (such as Value Added Tax (VAT), tobacco duty and stamp duty) totalling £1.1 billion.

Taxes on income and wealth saw a small reduction (less than £0.0 billion), with an increase in petroleum revenue tax of £0.3 billion being offset by decreases in both Corporation Tax and Income Tax receipts of £0.3 billion and £0.1 billion respectively.

The highlighted part is because after yesterday’s data you might reasonably expect higher income tax payments and I was asked this question yesterday. Yet as you can see we got 0! It may be that due to the changes in the Personal Allowance that the National Insurance numbers are a better measure. So my answer goes from a no, to definitely,maybe.

There is also some awkwardness with the production receipts when we are being told production is struggling and in the latter part of 2019 retail moved from growth to decline. So let us note that these numbers hint at a stronger economy than we otherwise would have thought.

So far you might reasonably be wondering where the fiscal stimulus has gone? Well if you add the number below back in you can see that the deficit number was in fact driven by lower inflation rather than lower general government spending.

Interest payments on the government’s outstanding debt decreased by £1.1 billion, compared with December 2018.

Perspective

If we look back we see stronger signs of a fiscal boost than seen in December alone.

Borrowing in the current financial year-to-date (April 2019 to December 2019) was £54.6 billion, £4.0 billion more than in the same period last year.

Although care is needed as the numbers well they keep seeing ch-ch-changes.

ONS revisions again significantly lowered estimated borrowing in the earlier months of the
financial year. Last month, borrowing was revised down by £5.2 billion for earlier months while
this month’s release reduced borrowing by a further £1 billion.  The ONS has also revised down 2018-19 borrowing by £3.3 billion in this month’s release. ( OBR last month)

Assuming the numbers are accurate we see that the rise in borrowing so far this year has not only been caused by more spending but also by weakish receipts.

In the current financial year-to-date, central government receipts grew by 2.3% on the same period last year to £548.2 billion, including £402.7 billion in tax revenue.

On that road we see again a hint of a pick-up in the economy in December.

The National Debt

This turns out to be a complex issue and the simple version is this.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of December 2019 was £1,819.0 billion (or 80.8% of gross domestic product, GDP); this is an increase of £35.5 billion (or a decrease of 0.9 percentage points) on December 2018.

Actually the Bank of England managed to make things even more complex as one of its bank subsidies ended up boosting the national debt.

Debt at the end of December 2019 excluding the Bank of England (BoE) (mainly quantitative easing) was £1,644.2 billion (or 73.0% of GDP); this is an increase of £48.0 billion (or a decrease of 0.1 percentage points) on December 2018.

Actually it was the Term Funding Scheme which was badly designed rather than QE as the release seems to realise later.

The introduction of the Term Funding Scheme (TFS) in September 2016 led to an increase in public sector net debt (PSND), as the loans provided under the scheme were not liquid assets and therefore did not net off in PSND (against the liabilities incurred in providing the loans). The TFS closed for drawdowns of further loans on 28 February 2018 with a loan liability of £127.0 billion.

Unfortunately I seem to be the only person who ever calls out the Bank of England about this.

Comment

There are three lessons from today’s numbers. The first is that there is an ongoing fiscal boost especially if we allow for the impact of lower debt costs via lower inflation ( RPI). Next we again see a hint of the UK economy being stronger than indicated by economic output or GDP if December’s receipts data are to be relied upon. However and thank you to Fraser Munro of the Office for National Statistics for replying there is always doubt as the December income tax receipts are a forecast rather than a known number.

PAYE in December is based on HMRC’s cash forecast for January so we could see a revision next month.

So the truth is that the numbers are a rather broad brush and on that theme let me end with some national debt numbers which are internationally comparable.

General government gross debt was £1,821.9 billion at the end of the financial year ending March 2019, equivalent to 84.0% of gross domestic product (GDP) and 24.0 percentage points above the reference value of 60.0% set out in the protocol on the excessive deficit procedure.

Me on The Investing Channel

 

The struggles of the French economy are continuing

This morning has brought more disappointing news both for and from the French economy. The statistics institute has released this.

In September 2018, households’ confidence in the economic situation has declined: the synthetic index has lost 2 points and reached its lowest level since April 2016. It remains below its long-term average (100).

This index has been in use for 31 years now so the fact that it is below its long-term average does give us some perspective. Also reaching a level not seen since April 2016 takes us back to around when what we might call the Euroboom began (in the second quarter of 2016 the French economy shrank by 0.2%) which will provide some food for thought for the European Central Bank or ECB. It has been on the wires leaking hints about how it will continue to withdraw its monetary stimulus just as its second largest economy has shown more hints of weakness. If we stay with the Euro theme this measure welcomed it by going above 120 but such heady days were capped by 9/11 and now we have seen 97,97,96 and then 94 in September. So there has been a long-running decline overall which did see a rally in the period 2013 to 17 but perhaps ominously turned down at a similar level to 2007/08. Also the outlook is not bright according to French households.

Future standard of living in France: strong
degradation……… The share of households
considering that the future standard of living in France
will improve in the next twelve months has sharply
declined: the corresponding balance has lost 7 points
and stands below its long-term average.

Markit PMI

This hammered out a similar beat last week.

Output growth across the French private sector
slipped to its lowest since December 2016 during the
latest survey period, with data indicating a broadbased
slowdown across both the manufacturing and
service sectors.

This slowdown had as part of it something you might expect with the ongoing diesel debacle and the trade wars.

Manufacturing businesses frequently reported a deterioration in the automotive sector.

This poses a question if we move to what the French economy did in the first half of 2018. Just as a reminder quarterly economic growth went 0.2% in something of a surprise but then backed it up with another 0.2% reading. I contacted Markit’s chief economist pointing out that a reduction on 0.2% as implied by their survey looked grim. But they are sticking to the view that France did better in the first half of the year and in spite of the recorded slowdown is doing this.

Across the region, growth slowed in Germany and
France but both continued to outperform the rest of
the eurozone as a whole, where the pace of
expansion held close to two-year lows.

I have no idea how France is outperforming by doing worse but there you have it. There were times when Markit was accused by the French government of being too pessimistic about France whereas now it must be delighted with its work.

The official surveys for businesses are also above their long-term averages but the situation here is awkward especially if we look at services. Here the confidence indicator has been stable around 105 for a few months or so suggesting growth and yet if we move to the actual data we know that the French economy has struggled.

Bank of France

In the circumstances the projections released earlier this month look rather optimistic.

In a less dynamic, more uncertain international
environment, French GDP is expected to expand
by 1.6% in 2018, 2019 and 2020. GDP growth
should remain above potential, helping to drive
further reductions in France’s unemployment rate.

They are plainly suggesting that the first half of 2018 will be followed by a vastly more dynamic second half involving growth of 1.2% as opposed to 0.4%. But once you look past that I note that 1.6% economic growth is described as “above potential” which to me seems somewhat depressing. Central bankers have a habit of thinking the same thing at the same time and this reads rather like the 1.5% speed limit that the Bank of England Ivory Tower has suggested for the UK economy.

In essence it is downbeat for domestic demand but hopes that export growth and some investment growth will take up the slack. Let us hope that it is right about the area below as unemployment in France remains elevated compared to its peers.

The ILO unemployment rate should fall gradually
to 8.3% at the end of 2020 (France and overseas
departments)

Although that is still high meaning that for some in France unemployment will be all that they have known.

Public Finances

Perhaps we are seeing an official response to the growth malaise. From Reuters.

France will reduce the tax burden on households and companies by nearly 25 billion euros ($29.4 billion) next year, the government said in its 2019 budget bill, pushing the deficit up towards an EU cap as the economy fails to gain pace.

This represents a change of direction although we do see something very familiar these days in the split between businesses and individuals.

Households will see their tax bill reduced by a total 6 billion euros while business taxes will fall by 18.8 billion euros, resulting in the overall tax burden decreasing to 44.2 percent of national income, the lowest for France since 2012.

There is also some pump priming on the expenditure side of the accounts although it is a reduction on the previous 1.4%.

While the government has kept overall public spending stable this year after inflation, the 2019 budget foresees an increase of 0.6 percent after inflation.

If we move to the debt situation we see what is a factor in President Macron’s enthusiasm for a shared budget in the Euro area.

At the end of Q1 2018, the Maastricht debt reached
€2,255.3 billion, a €36.9 billion increase in comparison
to Q4 2017. It accounted for 97.6% of gross domestic
product (GDP), 0.8 points higher than last quarter’s
level.

This looked like it was going through 100% but was rescued by the growth spurt. Now we wait to see what happens next should the French economy continue the struggles of the first half of 2018.Also there are risks on the debt costs side as we see two factors at play.The first is the tend towards higher bond yields we have sen recently and the second is the ongoing reduction in ECB purchases of French government bonds which had reached 410 billion Euros at the end of August.

Comment

If you want some good news then the sporting front has provided it for France in 2018 with its football world cup victory and it is just about to host golf’s Ryder Cup. But the economic news has disappointed pretty much across the board in an irony considering it is supposed to now have a business friendly government. It is true that the tax cuts are weighted towards the private-sector but so far the economy has slowed down rather than speeding up.

Unless the French statistics office has been missing things the ECB will also be noting that its second largest economy has turned weaker. That will provoke thoughts suggesting it can only boom in response to pretty much flat out monetary stimulus. Also there will be worries about what might happen if the ECB tightens policy as opposed to reducing stimulus. There is a case for that from the inflation data as the annual rate has risen to 2.6% on the equivalent measure to UK CPI which may be why French consumers feel so negative about the economy.

The current issues with the sale of Rafale fighter jets to India seems symbolic too. Corruption in such sales is of course far from unique to France but I also note that the way President Macron is distancing himself from it ( It was not on my watch….) bodes badly for what may happen next.

 

 

 

 

 

Euro area money supply data looks worrying again

One of the features of the credit crunch era is that conventional economics not only clings at times desperately to theories that do not work but also looks the other way from ones which do. I have been reminded of that this morning as I look at the money supply data for the Euro area and note that there is not many of us who publicise it on social media. That is a shame as it has been working pretty well as a signal for economic trends in recent times. The experiments of the 1980s especially in the UK where money supply data was taken very literally taught us to use it for broad trends rather than exact specifics. But the broad trends have sent accurate signals which brings us to this mornings clues as to what will happen next in the Euro area?

Broad Money

From the European Central Bank or ECB.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.0% in July 2018 from 4.5% in
June, averaging 4.1% in the three months up to July.

So the opening salvo returns us to thoughts of an economic slow down. If we look back for a general trend we see that the monetary stimulus lifted M3 growth to around 5% and it rumbled on around that sort of growth in 2016 and 17 with several peaks at 5.2% the most recent being last September. But December 2017 gave a warning as growth fell to 4.6% and this year has seen a clear dip especially when growth fell below 4% in March and April. June gave a hint of a recovery and ironically has been revised up to 4.5% but July has sunk back to 4%.

The rule of thumb is that looking ahead this is the trend for nominal GDP growth which provokes an awkward thought. If 4% is the new trend and the ECB hits its 2% inflation target as it is roughly doing now then annual GDP growth should also be 2%. So the “Euroboom” will continue to fade. Also of note is the fact that in 2016/17 the ECB achieved a level of broad money growth which would be consistent with nominal GDP growth of 5% which we have seen several Ivory Towers make a case for. That may well have been the signal used for deciding the amount of QE bond purchases and other credit easing.

The overall growth can be broken down as follows.

 the annual growth rate of M3 in July 2018 can be broken down as follows: credit to the private sector contributed 3.3 percentage points (up from 3.2 percentage points in
June), credit to general government contributed 1.4 percentage points (down from 1.5 percentage points),
longer-term financial liabilities contributed 0.7 percentage point (down from 0.8 percentage point), net
external assets contributed -0.7 percentage point (down from -0.4 percentage point), and the remaining
counterparts of M3 contributed -0.8 percentage point (down from -0.6 percentage point).

I would counsel taking care with such numbers as this sort of mathematical economics is always advanced confidently by its proponents who in my experience become somewhat elusive when as happens so often it ends in tears.

Narrow Money

This is usually a much more direct line of impact on the economy of say a few months ahead as opposed to the a year plus of broad money. Accordingly this month’s release is not optimistic.

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 6.9% in July from 7.5% in June.

This is the lowest number for the series so far in this phase eclipsing the 7% of April. Overall the annual rate of growth has been falling for a while now. The double-digit growth of late 2015 and early 2016 drifted into single digits but it has been this year where a clear move lower has been seen. The 8.8% of January was followed by 8.4% and 7.5% and now we seem to be circa 7%.

The difference?

People ask for breakdowns and definitions of the above so here we go.

  • M1 is the sum of currency in circulation and overnight deposits;
  • M2 is the sum of M1, deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months; and
  • M3 is the sum of M2, repurchase agreements, money market fund shares/units and debt securities with a maturity of up to two years. (ECB)

Putting that into numbers at the end of July M1 was 8050 billion Euros of which 1136 billion was cash/currency and the rest was overnight deposits. Moving to M2 brings us up to 11,486 billion Euros as we add in time deposits and more technical additions brings us to 12,130 billion Euros.

Negative Interest-Rates

The financial media often points us to the 0% current account rate of the ECB and looks away from the -0.4% deposit rate but some find it applying to them. From Handelsblatt.

Frankfurt Starting in September, Hamburger Sparkasse (Haspa) intends to charge private customers a fine of 0.4 percent for deposits of more than € 500,000. This applies to checking and overnight money accounts. The second largest German savings bank after Berlin reacts to the European Central Bank (ECB) , which in turn charges the banks negative interest-rates , which park money at short notice.

Handelsblatt goes on to tell us that around a dozen savings institutions are now applying negative interest-rates. There has been a slow spread of this since the first one to break ranks did so in the summer of 2016. This reinforces our theme that banks are in fact very nervous about what would happen to deposits if they fully applied negative interest-rates which has mean that relatively few have applied them. Also the way that they are usually applied to larger deposits means they are particularly afraid of applying them to the European equivalent of Joe Sixpack. In addition a lesson from the mortgage rates we looked at on Friday is that banks soon adjust margins to keep them out and usually well out of the negative zone as well.

Thus the fears about the profitability of “the precious” have proved mostly unfounded and in my opinion negative interest-rates would need to go deeper to change this. Past say -1% towards -2%.

Comment

The monetary data suggests not only that the “Euroboom” is over but that the trajectory looks downwards. As it happens that seems to coincide with monetary data for elsewhere in the world for July so a general trend may be in play as we wait a day or two for the UK data. For the ECB and its President Mario Draghi this has a couple of elements. The elephant in the room today has been the reduction in the QE ( Quantitative Easing) bond purchases which have fallen to 15 billion Euros a month from a peak of 60 billion. That has been a factor in the monetary slowing although how much puts us in a chicken and egg situation as it should be crystal clear but rarely is.

In a technical sense that may suit the ECB as it can slap itself on the back for its role in the better economic growth phase for the Euro area. But also it revives my argument that there has been an element of junkie culture here because if growth fades away as the sugar supply is reduced then all the talk of reform fades away too. With Germany running a fiscal surplus it will be less easy to fire up the QE engine looking forwards as there will be fewer bunds to buy and many are have remained at negative yields. There may well of course be plenty of Italian bonds to buy but that is a potential road to nowhere for the ECB.

Looking ahead the battle has begun to be the next ECB President but as the Bank of England may be about to show the earth can move in mysterious ways.

Carney reportedly asked to remain governor of BOE until 2020 ( @RANsquawk )

Although the ECB itself seems keen to emphasise other matters.

Is the football transfer market rational?

As we approach what in the UK is a Bank Holiday weekend many thoughts turn to the weekend’s sport and football in particular. News is increasingly dominated by the UK Premier League but of course there are strong European influences highlighted by yesterday’s Champions League draw and today’s Europa League one. The latter indicates a change as it replaced the UEFA Cup which had a fair bit of prestige back in the day as opposed to a league that many teams were not keen to be in although in recent times that appears to have switched again, That may of course simply be because Chelsea and Manchester United have won it as opposed to much poorer recent UK efforts in the Champions League.

If we move to the economics then the ever larger sums are having an impact and regular readers will be aware that I mull from time to time how much of this is inflation and how much genuine growth? From Deloittes.

In 2015/16 Premier League revenues rose to a record £3.6 billion. Each club generated more on average than the whole top division of 22 clubs did in total in 1991/92 and commercial revenues exceeded £1 billion for the first time in the league’s history.

It has been a heady mix of higher ticket prices and subscription TV fees which have been mostly inflationary and higher commercial revenues which I would suggest are growth. Oh and for those unaware the UK has split its subscription TV coverage so you need to pay 2 subscriptions now to get everything. Sneaky inflation I think especially as at least some of the European competitions was free to air albeit you might have to watch some advertisements.

The balance of payments issue is even more complex as we have the tap running into the sink via ever larger fees from overseas viewers of the Premiership but also a plug hole as we buy ever more foreign players. As to the wages we pay foreign players it is almost impossible to figure out how much will be spent here.  I also note with a wry smile that the Premier League all time 11 just voted for on the BBC website had 8 British players. So we continually buy foreign players when the best ones were British all along? What of course we are seeing here is the influence of emotion and irrationality which strongly influences these matters. Also if 25 years the new all-time?

Is it Rational?

The Financial Times has published some research suggesting that the various transfer fees are rational.

Data analysis suggests sums spent on players are in proportion to resources available

Care is needed with something like that as if we look at other news the woman who has won that enormous sum on the US Lottery could easily massively overpay for things and say she has plenty left. In fact it is exactly the sort of argument used to justify any raging bubble and at that specific moment in time it is usually true, the catch is of course that time only seems to be suspended and moves on. First let us update the numbers which have soared again.

 

According to Deloitte, more than £1.17bn has been splashed out this summer by clubs in the Premier League, Europe’s wealthiest division, where they have combined revenues of roughly £4.5bn. Overall spending in this summer’s window has already breached the £1.16bn spent by English sides during the same period in 2016.

Okay but let me point out the missing number here which is the wages commitment which over time might not be far off as much again. As transfer fees rise clubs are keen to sign these players up for long contracts at high wages which is an ongoing annual burden. Also it is hard to know where to start with this below.

 

Neymar’s transfer is an outlier, with the Brazilian forward’s fee representing more than 40 per cent of PSG’s revenues of €521m. However, the French club believes the global superstar will enable it to secure higher income from future commercial and merchandising deals, as well as achieve better performances in European competition.

We may be about to get a lesson in how quickly an outlier becomes the norm! Maybe not too long if this from L’Equipe is any guide.

Barcelona have agreed a deal worth up to 150m euros (£138m) to sign Borussia Dortmund’s 20-year-old France forward Ousmane Dembele.

They are also offering what only a few months ago would have been an extraordinary sum for Phillipe Coutinho at Liverpool. We get a hint here at the inflation around because he was bought by Liverpool for £8.5 million according to the BBC and he has played really well so shall we say his price should be now treble or quadruple? I would be interested in reader’s thoughts as trying that sort of analysis has a lot of growth but also lashings of inflation. We also need the caveat that the media is not entirely reliable with its price estimates as rumour is dressed up as fact.

Bubbilicious

Apparently the numbers do work.

 

21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings……….21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings.

So current prices tell us that prices are statistically current? It is hard not to think of someone proclaiming Dutch Tulip prices were statistically based back in the day. Even if we suspend such thoughts the model as presented gives some rather odd results. For example Arsenal would presumably not have bought Lacazette if they had known he was about as likely to lose as win them points. Chelsea are certainly not users of the system as for Rudiger and Bakayoko it is apparently only a question of how many points they will cost them. Let’s face it any football fan would be able to figure out that Bonucci would improve pretty much any team he joined. Those who watched the woeful keepy-uppy skills of Paulinho at his Barcelona presentation may be scratching their heads at any scenario where he will improve them.

Oh and correct me if I am wrong but is this not simply another form of extend and pretend?

 

Tim Bridge, a senior manager at Deloitte’s sports business group, says: “Clubs do not account for a transfer all upfront, instead spreading the fee across the life of the contract, so a £30m to £40m revenue uplift in one year translates to £200m in transfer spend across a five-year period.”

They do of course have some income sources which may be fixed for this period but not all of them.

Comment

Can something which depends so much on emotion ever be fully rational? I doubt it. This does not mean that there have not been pockets of rationality such as past purchases of loss making UK Premiership clubs who later turned into money machines. In some cases this involved luck as the debt that the Glazers loaded on Manchester United should have both imploded and exploded after the credit crunch but of course the central banks stepped in. So they should perhaps raise a glass to Janet Yellen and Mario Draghi as they speak later at Jackson Hole. Actually in more ways than one because if I recall correctly the loans that were used by Real Madrid to buy Cristiano Ronaldo were used as collateral at the ECB.

Over my career I have seen so many statistical models suddenly collapse as the assumptions behind them disappear into a mathematical quicksand. So in essence here apparent rationality becomes something else or the modellers can sing along with both football fans and The Monkees.

Then I saw her face, now I’m a believer
Not a trace of doubt in my mind.
I’m in love, I’m a believer!
I couldn’t leave her if I tried.

Me on Core Finance TV

http://www.corelondon.tv/consequences-parallel-currency-italy-not-yes-man-economics/

 

 

What is happening in the US economy?

It has been a while since we have taken a good look at the US economy so it is overdue. This morning it has been analysed by the International Monetary Fund which has grabbed some headlines with this.

U.S. growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated.

As you can see the IMF has had something of a road to Damascus change since the days it argued that Greece could expand its economy in the face of harsh austerity! Also it is hard not to have a wry smile at the thought that anyone can really predict accurately what will emerge from the Trump administration next. Of course it and the IMF are on various collision courses included this one which was mentioned in the IMF’s Friday press conference.

Since the Trump administration has been promoting its “America first” polices, Managing Director Lagarde has talked more about promoting free and fair trade policies

Returning to the forecast here are the specific numbers.

The growth forecast in the United States has been revised down from 2.3 percent to 2.1 percent in 2017 and from 2.5 percent to 2.1 percent in 2018.

In addition to  the view on fiscal policy there were concerns about this.

the markdown in the 2017 forecast reflects in part the weak growth outturn in the first quarter of the year.

That is slightly odd because as regular readers will be aware US economic growth tends to underperform in the first quarter these days. Also it is reassuring to know that the number could be either too high or too low.

Risks to the U.S. forecast are two sided: the implementation of a fiscal stimulus (such as revenue-reducing tax reform) could drive U.S. demand and output growth above the baseline forecast, while implementation of the expenditure-based consolidation proposed in the Administration’s budget would drive them lower.

So let us move on with two thoughts. The first is that if we look at the IMF’s track record it is completely incapable of forecasting economic growth to that level of accuracy. Secondly I note that the forecast for the next two years is the average of the last two.

The Nowcast

Several of the US Federal Reserves do what are called nowcasts of economic forecasts so let us head down to the good old boys and girls in Atlanta.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 2.5 percent on July 19, up from 2.4 percent on July 14. The forecast of second-quarter real residential investment growth increased from -1.6 percent to -0.6 percent after this morning’s new residential construction report from the U.S. Census Bureau.

This represents an overall decline on the initial estimate of 4.3% in early May. There have been notable falls in both export expectations and investment of all types including housing combined with a dip in consumption. Perhaps the fall in exports is a response to the stronger dollar that we saw a year or so ago.

The Labour Market

This remains very strong as the latest report indicates.

Total nonfarm payroll employment increased by 222,000 in June, and the unemployment rate was little changed at 4.4 percent, the U.S. Bureau of Labor Statistics reported today.  Since January, the unemployment rate and the number of unemployed are down by 0.4 percentage point and 658,000, respectively.

As you can see in spite of the fact that we are in fact above what some would call full employment jobs are still being generated. If we move to the measure of underemployment there continue to be improvements in it as well. The U-6 measure of this has seen the rate fall from 9.6% in June 2016 to 8.6% in June ( seasonally adjusted) this although a rise in this June needs to be watched.

However as we observe so often to the sound of Ivory Towers crumbling to the ground this has not generated much wage growth.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.25. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent.

If we move to median wage growth to exclude the impact of very high earners then we see something that is becoming ever more familiar across many different countries.

We see that the good news is that the US has some real wage growth but the bad news is that it is not that great. The numbers if we return to averages are below.

Real average hourly earnings for all private nonfarm employees increased 0.8 percent from June 2016 to June 2017. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 1.1-percent increase in real average weekly earnings over the year.

Not much is it? If we look back on the chart above we see higher levels that it looked briefly we might regain but in spite of further employment improvements we are now left mulling wage growth fading and wondering how much it and inflation will dip. At this point it is hard not to wonder also about the impact of the “lost workers” from the around 4% fall in the labour force participation rate.

Monetary policy

This is of course being “normalised” which at a time when nobody really has any idea of what normal is anymore is therefore easy to claim. An interest rate of between 1% and 1.25% certainly does not feel normal nor does a central bank balance sheet approaching US $4.5 trillion. There are now plans to trim a minor amount off the balance sheet.

Of course this leaves everyone wondering what happened when the next recession strikes? Well everyone apart from those who believe that the central bankers have ended recessions. It looks as though bond markets have switched to wondering about that as the 30 year which had pushed above 3% is now at 2.8%. Also even the IMF has spotted that the US Dollar is in a weaker phase now.

As of end-June, the U.S. dollar has depreciated by around 3½ percent in real effective terms since March.

These moves will take a little off the edge of what tightening we have seen as I note that US consumer credit flows are in the middle of the post credit crunch range,

In May, consumer credit increased at a seasonally adjusted annual rate of 5-3/4 percent. Revolving credit increased at an annual rate of 8-3/4 percent, while nonrevolving credit increased at an annual rate of 4-3/4 percent.

Comment

A couple of years or so we discussed the likelihood that US economic growth would be around 2% going forwards and we now note that such thoughts have come true. Is that as good as it gets? The US has had one of the better recoveries from the impact of the credit crunch in terms of GDP and unemployment. We should be grateful for that. But we are again left wondering what happens should things slow or head towards a recession?

Still some will not be too bothered, from the Financial Times

Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options.

Does the continuing enormous gains of the banksters go into the wages numbers?

How much longer can the ECB keep telling us that QE has worked?

Later this week Mario Draghi and his colleagues at the European Central Bank Governing Council meet up for a policy meeting. As ever there is much for them to discuss and maybe he will raise a glass of Chianti to the passing of a significant threshold. From the ECB.

Public sector assets cumulatively purchased and settled as at 01/09/2016 €1,001,947 (26/08/2016: €990,807) mln

To infinity and beyond indeed as it now strides beyond the 1 trillion Euro barrier in terms of government bonds purchased. There were attempts to put this in perspective.

Completely useless stat of the day: if you made a €1tn pile of €500 banknotes it would be 1189x taller than the ECB HQ. ( @jonathanalgar)

You would have to complete it before they phase out the 500 Euro note though as using 200 Euro notes would be 2.5 times as hard!

Actually if we put all the QE programs into the pot including continuing ownership of Greek government bonds we come 1.37 trillion Euros. Let us look at what it has achieved as we are now at what we were told back in January 2015 was going to be the planned completion date..

Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016.

Of course the rate of monthly purchases has risen since then ( 80 billion Euros) and the program got extended until March 2017 as the to infinity and beyond theme continues.

Economic growth

Let me use the words of Mario Draghi from the last ECB meeting.

Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace.

If we also factor in the oil price fall that is not a lot of bank for the Euro area taxpayers buck or Euro. As the program started the Euro area was in the process of seeing economic growth of 0.4% in the last quarter of 2014 and 0.6% in the first quarter of 2016. Of course some in the media were arguing yesterday that such policies work instantly! In reality whilst financial markets can move extremely fast real economies cannot. What we observe in terms of economic growth since has been 0.3%, 0.4%,0.3%,0.6% and then 0.3%. The latter number came with both France and Italy flatlining.

But in a word if you factor in the negative interest-rate of 0.4% and the lower oil price you might say “M’eh”. Or as has already been used in reply to me the word “counterfactual” which of course is the last resort of an economic scoundrel.

Looking Forwards

We got an implied view from the Mario Draghi quote above and he was unlikely to be cheered by the business survey from Markit yesterday.

The eurozone economy continued to expand at a broadly steady pace in August. The rate of increase edged down to a 19-month low, however, mainly due to a weaker rate of expansion in Germany.

Even less so by this bit.

There were, however, signs that the longest period of sustained job creation in the region over the past eight years may be cooling.

Rather than a glass of Chianti he may now want the whole bottle.

While the overall picture is one of steady but sluggish 0.3% growth in the third quarter, the revised figures indicate that the economy is losing rather than gaining momentum.

Inflation

This is what the ECB is officially aiming at and is the stated reason for the increase in both the term of the QE program and the faster rate of purchases.

until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

There was little sign of this in the Markit survey and in fact there were signs of the opposite.

Inflationary pressures are also cooling amid intense competition,

As the current official consumer inflation rate (CPI) is estimated to be 0.2% this poses a problem for achieving a 2% annual inflation target. In fact even the services sector which in both the UK and US is above the inflation target is not in the Euro area. Via its 1.1% annual rate and 44.2% weighting it is pulling the number higher but even if it was the whole index we would be below target still. Ignoring energy only takes us to 0.9%.

The ECB does not seem to have had much success in creating asset price inflation which of course is the central bankers dream. Yes prices of government bonds have surged and more recently corporate bonds have followed. But equities have dropped back since the initial knee-jerk response to QE which saw the Eurofirst 300 push strongly above 1600. As of this morning it is 1379 and virtually unchanged on a year ago. We do not have a reliable house price indicator for the area as a whole but only Austria and Estonia seem of the individual countries to have lit the blue touch-paper.

What is inflation?

Regular readers will be aware that I like to look into the details and I have found this report from Eurostat. Some of the data is for countries outside the Euro area but look at this.

The price of a cup of coffee was surveyed in 15 countries (Figure 4). 8 countries had prices below 1.15 €/cup (7 Eastern European countries and Italy). Norway had the highest average price, where a serving of a cup of coffee costs 3.08 €/cup on average. 3 other countries had prices above 2€/cup (The Netherlands, Finland and Germany).

Prices so different poses challenges for inflation measurement. Oh and if you are looking for the most expensive prices in Europe you seem unlikely to go broke by just answering Norway!

Government assistance

Usually this is presented for Greece and the ESM loves to tell us how much it has saved Greece. Seldom can a country which has apparently saved so much been in such shocking shape! But let us move to its opposite in Euro area terms.

Between 2008 and 2015, German government interest payments were a whopping €122 billion less than originally planned for. The figure comes from a ministerial response to a question submitted by the opposition Green Party, which Handelsblatt has seen.

They are over playing their hand as other influences ( safe haven status for example) have been at play here but for the last 18 months or so the ECB has been explicitly driving German bond yields lower leading to this.

In 2015, the German government paid €21.1 billion in interest, almost half the 2008 level, when it paid €40 billion.

For some bonds it is now paid to issue as the ten-year yield is -0.07%.

Germany does not help back

The ECB has moved from asking to pleading for fiscal help but Germany shows very little sign of doing so. It ran a balanced budget in 2014 and 15 and now looks likely to run a surplus. The one time it showed a sign of some expansionism was when Chancellor Merkel promised to take in one million immigrants.

The ECB would love Germany to spend some of the money it is saving and indeed in terms of imbalances ( Germany’s current account surplus) you can make a good case for it. Although it would have to continue to break the Growth and Stability Pact rules on national debt as the Euro area contradicts itself.

Also there is a clear and present danger that the ECB may run out of German bonds to buy as the FT points out.

bankers at Citigroup estimate that the country’s entire government bond market will become ineligible for the ECB’s bond-buying scheme by November.

Buy equites?

Bloomberg seems not to have figured this out but there is a clear implication in this point made by Citigroup.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity,

Perhaps the ECB should just buy everything along the lines of “It’s the only way to be sure” from the film Aliens. After all what could go wrong?

Comment

As we look back we see a distinctly patchy record. Perhaps the irony is that QE type policies that were for so long criticised for being inflationary have in fact delivered pretty much nothing in that front at least in terms of consumer inflation at least so far. We do see a fair bit of asset price inflation but central bankers call that seed corn for economic growth.

As to economic growth the picture is one of “moderate” growth to use the ECB’s own words. But in the economic world we never get “ceteris paribus” and at the same time there have been other influences which have boosted growth. For example lower oil and commodity prices have boosted real wages and hence consumption and the world economy has grown. Whilst the UK is the current scapegoat of choice via Brexit it is also true that its economic growth since 2013 will have helped the countries that follow its trajectory such as Ireland and Spain.

So a lot of effort for not much and maybe it is an entry in the list of the most expensive PR campaigns in history. Indeed if you allow for the costs of any exit then you may find that the overall impact was in fact negative. On that road to nowhere we will see no exit especially on Mario’s watch.