The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

The Retail Prices Index or RPI has come in for quite a bit of official criticism over the past decade sometimes around the issue of what is called the Formula Effect and more rarely about the way it deals with the housing sector. The latter is more rare because many of the critics are not well informed enough to realise that house prices are in it as they are implicit via the use of depreciation. However to my mind this has been something of a sham and the real reason was highlighted in yesterday’s post.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%.

As you can see the RPI consistently gives a higher inflation reading hence using it real wages are lower. That is why official bodies such as the UK Statistics Authority with the dead hand of HM Treasury behind them keep trying to eliminate it. Let me illustrate by using the measures they have recommended RPI, then CPI and then CPIH as you can see from the quote above they keep recommending lower numbers. What a coincidence! This flatters real wages and GDP as consumer inflation is around 24% of the inflation measure used there so yes UK GDP has been inflated too. In fact by up to 0.5% a year,by the changes according to the calculations of  Dr.Mark Courtney.

They are back as this from the Chair of the UK Statistics Authority Sir (hoping to be Lord) David Norgrove shows.

We have been clear for a long time that RPI is not a good measure of inflation and its use should be discouraged. The proposals we put to the Chancellor are consistent with this longheld view.

That is very revealing as we have had several consultations and they have lost each one. In fact my view has gained more support over time because if you look at the facts putting a fantasy number as 17% of your inflation index as is done by putting Imputed Rents in CPIH is laughable when you can use an actual number like house prices. This is how they explain they lost. It does allow me to update my financial lexicon for these times where “wide range of views” equals “we keep losing”

There has since then been extensive consultation
and discussion about inflation measurement. All the statistical issues have been well aired. A
notable feature of these discussions was the wide range of opinions

They have lost so badly that this time around they have taken the possibility of losing out of the new plan.

The Authority’s consultation, which will
be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

As you can see it is about how and when it will be done rather than what should be done. The plan is to put Imputed Rents in the RPI so it also records lower numbers. Regular readers may have noted Andrew Baldwin asking me to support his effort to stop a change to the inflation numbers calculated, which I did. You see that change will stop people like him and me being able to calculate what the impact of changing the RPI will be. You see at this point how the deep state operates. Along the way it exterminates an inflation measure which Andrew has supported after I may note the UK statistics establishment presented it ( RPIJ) as the next best thing to sliced bread. Before behaving like a spoilt child and taking their football home with them so no-one else can play.

Let me also address the Formula Effect issue. I have just explained above how suddenly they do not want people to be able to calculate it. Suspicious eh? But it is worse than that because all of the official propaganda ignores the fact that a lot of it is due to clothing prices and fashion clothing. We could find out as the statistician Simon Briscoe has suggested by suspending some of the clothing section for a while or producing numbers with and without it. After all CPI was the official measure for over a decade and it ignored owner occupied housing which is 17% of the index when included. But apparently you cannot exclude less than 1% which leads me to believe they already know the answer which presumably would be found in the 2012 pilot scheme which has been kept a secret.

Today’s Data

There was a quirk in the series meaning a rise was likely but not this much.

The all items CPI annual rate is 1.8%, up from 1.3% in December.

The factor which was mostly expected was this.

In January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services……….However, in January 2020, its contribution increased to 0.55 percentage points (an increase of 0.19 percentage points from December 2019), as the gas and electricity price reductions from January 2019 unwound.

I was a bit slack yesterday in saying that inflation will fall to help real wage growth when I should have put it is heading lower but the impact of regulatory moves will cause bumps in the road. Apologies.

Changes to Ofgem’s energy price cap introduce some volatility — with CPI inflation expected to pick up to 1.8% in 2020 Q1, before falling back to around 1¼% in the middle of the year. The expected reduction in water bills as a result of action by the regulator Ofwat is also expected to contribute to the fall in inflation in 2020 Q2.  ( Bank of England)

As it does not happen often let us congratulate the Bank of England on being on the money so far. Returning to UK inflation it was also pushed higher by this.

Rising pump prices and upward contributions from transport services (in particular, airfares) meant transport’s contribution rose to 0.22 percentage points in January 2020.

There was also a nudge higher ( 0.07% in total) from a more surprising area as we are know the retail sector is in trouble but clothing and footwear prices saw a slightly lower sales impact. There was a similar impact on restaurants and hotels where prices fell less than last year.Meanwhile.

The all items RPI annual rate is 2.7%, up from 2.2% last month.

House Prices

Sadly there are ongoing signs of a market turn.

The latest house price data published on GOV.UK by HM Land Registry for December 2019 show that average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019 (Figure 1). Over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.

I was contacted on social media yesterday to be told that the market has really turned in Wales. The official numbers seem to have turned the other way though…

House price growth in Wales increased by 2.2% over the year to December 2019, down from 5.5% in November 2019, with the average house price in Wales at £166,000.

Maybe they will turn back in January.

Comment

A lot of today’s article has been comment via fact based opinions. Let me add two more factors. Firstly the UK establishment just as the Euro area has released it cannot get away any longer with ignoring the owner-occupied housing sector in its official inflation measure. Meaning the screams of those unable to afford housing have even penetrated the clouds around the skyscraper Ivory Towers of the ECB. Next whilst this may seem like a fait accompli it has seemed like this as every consultation has begun but each time so far I have ended up winning. If you think about it they are admitting they cannot win on the arguments by trying to eliminate them from the consultation.

As to this month’s data it is a shame to see a rise but with the UK Pound £ and the oil price where they are the trend should remain downwards. But there will be swings and roundabouts as the impact of utility price regulation comes into play.

UK Real Wages have not regained their previous peak

As we switch out focus to the UK labour market we see two contrasting forces being applied to it. The first comes from the better news being reported for the UK economy recently.

Financial wellbeing expectations hit survey-record high in
February ( IHS Markit )

That came only yesterday and according to it the outlook is brightening.

Looking ahead, UK households signalled positive expectations towards their financial health. The Future Household Finance Index – which measures expected change in financial health over the next 12 months – rose to 52.7 in February, from 49.6 in January. The level of optimism was at its highest since the data were first collected in February 2009, exceeding the previous
peak seen in January 2015.

This led according to the survey to a better labour market situation.

UK households recorded a lessened degree of pessimism
towards their job security during February, with the respective index rising (but remaining below 50.0) to a seven-month high. Meanwhile, the rate of growth in both workplace activity and income from employment accelerated from January.

This survey is a curious beast because the headline index which went from 44.6 to 47.6 in this report has never been in positive territory. Whilst in some ways that does cover out experience ( real wages for example) it does not cover the employment situation which has been pretty good.

This backed up the survey of the wider UK economy conducted by IHS Markit earlier this month.

At 53.3 in January, up from 49.3 in December, the seasonally adjusted IHS Markit/CIPS UK Composite Output Index posted above the neutral 50.0 mark for the first time since last August. The latest reading signalled a faster pace of growth than the earlier ‘flash’ estimate (52.4 in January) and was the highest for 16 months.

This too came with positive news for the labour market.

This uplift in success also created some business pressures
as the rush to increase staffing levels resulted in demands
for higher salaries.

Apple and HSBC

Last night, however, brought a reminder that on a world wide scale there is an ongoing economic impact from the Corona Virus.

Apple Inc become the latest company to flag lower revenue as a result of the epidemic, saying it would not meet its revenue guidance for the March quarter because of slower iPhone production and weaker demand in China. ( Reuters)

The main Apple market is not yet open due to yesterday being Presidents Day but more minor markets have suggested it will open more than 4% lower. I note that Reuters is also reporting this for the Chinese economy.

Analysts at Nomura again downgraded their China first-quarter economic growth forecast, to 3%, half the pace in the fourth quarter, and said there was a risk it could be even weaker.

This morning we have seen another consequence of the era of treating banks as The Precious.

HSBC posted plummeting profits for 2019 today as it outlined plans to get rid of $100bn (£77bn) of assets and dramatically downsize its investment banking arm in a restructure that will cost 35,000 jobs over the next three years. ( City-AM )

We know that the situation is really poor because the chief executive has deployed the word “resilient” which we have learnt means anything but.

Today’s Data

Employment

The long sequence of good news in this area continues.

The UK employment rate was estimated at a record high of 76.5%, 0.6 percentage points higher than a year earlier and 0.4 percentage points up on the previous quarter.

If we look further we see that such numbers are based on this.

There was a 180,000 increase in employment on the quarter. This was, again, mainly driven by quarterly increases for full-time workers (up 203,000 – the largest increase since March to May 2014), and for women (up 150,000 – the largest increase since February to April 2014). The quarterly increase for women working full-time (also up 150,000) was the largest since November 2012 to January 2013.

Actually this continues to be a remarkable performance and is a clear gain in the credit crunch era. However we do need context because there is for example an element of subjectivity in the definition of full-time work. Those completing the survey are guided towards 16 hours per week which is a bit low in itself but they can also ignore that. Also the rise in female employment is no doubt influenced by the rise in the retirement age for them.

The overall position is that on this measure things turned for the UK economy in 2012 a year earlier that GDP picked up. Regular readers will recall that back then we were worried about it being part-time but that has changed. Overall though there has been a pick-up in self-employment with ebbs and flows which is currently flowing.

Whilst there is an implicit rather than explicit link to unemployment ( as there is also the inactivity category) the good employment news has driven this.

the estimated UK unemployment rate for all people was 3.8%; this is 0.2 percentage points lower than a year earlier and 0.1 percentage points lower than the previous quarter…..For October to December 2019, an estimated 1.29 million people were unemployed. This is 73,000 fewer than a year earlier and 580,000 fewer than five years earlier.

Wages

Here the news has been less good. Let me explain using today’s release.

Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 2.9% from 3.2% last month for total pay (including bonuses), and to 3.2% from 3.4% for regular pay (excluding bonuses).

This gives us two contexts. We have been in a better phase for wages growth but it has been slowing recently and that has continued. Things get more complex as we look at real wages as there are serious problems with the official representation of them.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.4%, and annual growth in regular pay is estimated to be 1.8%.

The problem is that a simply woeful inflation measure is being used, via the use of fantasy imputed rents in the official CPIH inflation measure. This ensures that housing inflation is under-recorded and thus real wages are over recorded. A much better context is provided by this from Rupert Seggins.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%. If the household deflator’s your thing, then it happened in 2016 Q1.

Can anybody think why Her Majesty’s Treasury is trying to replace house prices in the RPI with Imputed Rents?! Actually trying to measure housing inflation stops the establishment claiming house prices are a Wealth Effect rather than the more accurate gains for existing owners but inflation for present and future buyers. Returning to real wages as you can see it makes a very large difference.

Having established that I have been disappointed to see so many news sources copy and paste this part of the release.

In real terms, regular pay is now at its highest level since the series began in 2000, whereas total pay is still 3.7% below its peak in February 2008.

As The Zombies pointed out.

And if she should tell you “come closer”
And if she tempts you with her charms
Tell her no no no no no-no-no-no
No no no no no-no-no-no
No no no no no

If we look into the monthly data we see that the UK chemicals sector is doing well and wage growth has picked up to 8.9%. Care is needed with such detail but it has been around 7% for over 6 months. However other areas of manufacturing are more troubled with the clothing and textiles sector seeing no increase at all. Whilst I am all for higher wages I have to confess that fact that the real estate sector is seeing consistent rises above 6% has a worrying kicker.

Comment

We find ourselves in broadly familiar territory where the quantity news for the UK economy is again very good but the quality news is not as good. At least these days the real wages position is improving a little. But to claim we are back to the previous peak is frankly a case of people embarrassing themselves.

The numbers themselves always need a splash of salt. For example I have pointed out already the growth of the self-employed, so their omission from the wages data is increasingly significant. Also whilst we are employing more people this time around hours worked was not as strong.

Between October to December 2018 and October to December 2019, total actual weekly hours worked in the UK increased by 0.8% (to 1.05 billion hours), while average actual weekly hours decreased by 0.2% (to 31.9 hours).

I look at such numbers because out official statisticians have yet to cover the concept of underemployment adequately. There is an irony here in that productivity will be boosted by a shorter working week. Maybe even by this.

In October to December 2019, it was estimated that there were a record 974,000 people in employment on a “zero-hour contract” in their main job, representing a record 3.0% of all people in employment. This was 130,000 more than for the same period a year earlier.

Japan sees quite a GDP contraction in spite of the Bank of Japan buying 8% of the equity market

Overnight the agenda for today was set by news out of the land of the rising sun or Nihon. Oh and I do not mean the effort to reproduce the plot line of the film Alien ( Gaijin) for those poor passengers on that quarantined cruise ship. It was this reported by the Asahi Shimbun.

Gross domestic product declined by a seasonally adjusted 1.6 percent in the quarter from the previous three months, or an annualized 6.3 percent, the Cabinet Office figures showed.

The contraction of 6.3 percent was far worse than expectations of many private-sector economists, who predicted a shrinkage of 4 percent or so.

Just to clarify the quarterly fall was 1.6% or using the Japanese style 6.3% in annualised terms. What they do not tell us is that this means that the Japanese economy was 0.4% smaller at the end of 2019 than it was at the end of 2018. So quite a reverse on the previous trend in 2019 which was for the annual rate of growth to pock up.

The Cause

Let me take you back to October 7th last year.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

I pointed out back then that I feared what the impact of this would be.

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

As you can see this was a risky move and it came with something of an official denial of the economic impact.

 about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan.

The 2014 rise in the Consumption Tax ( in rough terms the equivalent of VAT in the UK and Europe) had hit the Japanese economy hard, so the official claim of that the new impact would be a quarter was something I doubted. Now let us return to the Asahi Shimbun this morning.

Japan’s economy shrank in the October-December period for the first time in five quarters, as the sales tax hike and natural disasters pummeled personal consumption, according to preliminary figures released on Feb. 17.

The exact numbers are below.

Personal consumption, which accounts for more than half of Japan’s GDP, grew by 0.5 percent in the July-September period.

But the figure plunged to minus 2.9 percent for the three months from October, when the government raised the consumption tax rate to 10 percent from 8 percent.

We had previously looked at the boost to consumption before the tax rise as electrical appliances in particular were purchased. This will have flattered the economic data for the third quarter of last year and raised the GDP growth rate. But as you can see the party has had quite a hangover. On its own this would have led to a 2.2% decline in quarterly GDP.

The spinning has continued apace.

Yasutoshi Nishimura, minister in charge of economic revitalization, gave a positive outlook for personal consumption in a statement released on Feb. 17.

“The margin of decline in personal consumption is likely to shrink,” he said.

As John Lennon points out in the song Getting Better.

It can’t get no worse

As ever there is a familiar scapegoat which is the weather.

Destructive typhoons that hit eastern Japan and the warmer winter also fueled the slowdown in personal spending, such as purchases of winter clothes.

Although as @Priapus has pointed out there was an impact on the Rugby World Cup and the Japanese Grand Prix.

Investment and Exports

These will be on people’s minds as we try to look forwards. According to the Asahi Shimbun the situation for investment is also poor.

Investment in equipment by businesses, for example, shrank by 3.7 percent, a sharp decline from a rise of 0.5 percent in the preceding quarter, while housing investment tumbled 3.7 percent from an increase of 1.2 percent.

New housing starts have also been waning since the tax hike.

Many companies’ business performances are deteriorating, particularly in the manufacturing sector.

The business investment fall was presumably in response to the trade war and the deteriorating conditions in the Pacific economy we looked at in the latter part of 2019 and of course predates the Corona Virus. By contrast the Bank of Japan like all central banks will be more concerned about the housing market.

Switching to trade itself the position appears brighter.

In contrast, external demand pushed up GDP by 0.5 percentage point.

But in fact this was due to imports falling by 2.6% so a negative and exports fell too albeit by a mere 0.1%. That pattern was repeated for the annual comparison as exports were 2.2% lower than a year before and imports 4.3% lower. It is one of the quirks of the way GDP is calculated that a fall in imports larger than a fall in exports boosts GDP in this instance by 0.4%. Thus the annual comparison would have been -0.8% without it.

Comment

Sometimes the numbers are eloquent in themselves. If we look at the pattern for private consumption in Japan we see that it fell from 306.2 trillion Yen to 291.6 trillion in the first half of 2014 as the first tax rise hit. Well on the same seasonally adjusted basis and 2011 basis it was 294 trillion Yen in the last quarter of 2019. If we allow for the fact that 2014 saw a tax based boost then decline then consumption in 2019 had barely exceeded what it was before the first tax rise before being knocked on the head again. Or if you prefer it has been groundhog day for consumption in Japan since 2013. That is awkward on two counts. Firstly the Japanese trade surplus was one of the economic world’s imbalances pre credit crunch and expanding consumption so that it imported more was the positive way out of it. Instead we are doing the reverse. Also one of the “lost decade” issues for Japan was weak consumption growth which has just got weaker.

This leaves the Japanese establishment in quite a pickle. The government has already announced one stimulus programme and is suggesting it may begin another. The catch is that you are then throwing away the gains to the fiscal position from the Consumption Tax rise. This poses a challenge to the whole Abenomics programme which intended to improve the fiscal position by fiscal stimulus leading to economic growth. I am sure you have spotted the problem here.

Next comes the Bank of Japan which may want to respond but how? For newer readers it has already introduced negative interest-rates ( -0.1%) and bought Japanese Government Bonds like it is a powered up Pac-Man to quote the Kaiser Chiefs, But the extent of its monetary expansionism is best highlighted by this from Etf Stream earlier.

According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Hence the nickname of The Tokyo Whale.They think the rate of buying has slowed but I think that’s an illusion because it buys on down days and as The Donald so regularly tweets equity markets are rallying. Just this morning the German Dax index has hit another all-time high. But what do they do next? They cannot buy that many more ETFs because they have bought so many already. As you can see they are already a material player in the equity market and they run the Japanese Government Bond market as that is what Yield Curve Control means. Ironically the latter has seen higher yields at times in an example of how water could run uphill rather than down if the Bank of Japan was in charge of it. It will be wondering how the Japanese Yen has pretty much ignored today’s news.

Also as a final point. More and more countries are finding it hard to raise taxes aren’t they?

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Since the first quarter of 2018 the GDP of Germany has grown by a mere 1%

This morning has brought what has become pretty much a set piece event as we finally got the full report on economic growth in Germany in 2019.

WIESBADEN – The gross domestic product (GDP) did not continue to rise in the fourth quarter of 2019 compared with the third quarter of 2019 after adjustment for price, seasonal and calendar variations.

Regular readers of my work will have been expecting that although it did create a small stir in itself. This is because many mainstream economists had forecast 0.1% meaning that they had declare the number was below expectations, when only the highest Ivory Tower could have missed what was happening. After all it was only last Friday we looked at the weak production and manufacturing data for December.

Annual Problems

One quarterly GDP number may not tell us much but the present German problem is highlighted if we look back as well.

In a year-on-year comparison, economic growth decelerated towards the end of the year. In the fourth quarter of 2019, the price adjusted GDP rose by 0.3% on the fourth quarter of 2018 (calendar-adjusted: +0.4%). A higher year-on-year increase of 1.1% had been recorded in the third quarter of 2019 (calendar-adjusted: +0.6%).

As you can see the year on year GDP growth rate has fallen to 0.4%. The preceding number had been flattered by the fall in the same period in 2018. Indeed if we look at the pattern for the year we see that even some good news via an upwards revision left us with a weak number.

After a dynamic start in the first quarter (+0.5%) and a decline in the second quarter (-0.2%) there had been a slight recovery in the third quarter of the year (+0.2%). According to the latest calculations based on new statistical information, that recovery was 0.1 percentage points stronger than had been communicated in November 2019.

If we switch to the half year we see growth was only 0.2% which is how the running level of year on year growth is below the average for the year as a whole.

The Federal Statistical Office (Destatis) also reports that the resulting GDP growth was 0.6% for the year 2019 (both price and seasonally adjusted).

Analysing the latest quarter

Trade

We can open with something that fits neatly with the trade war theme, and the emphasis is mine.

The development of foreign trade slowed down the economic activity in the fourth quarter. According to provisional calculations, exports were slightly down on the third quarter after price, seasonal and calendar adjustment, while imports of goods and services increased.

There is something of an irony here. This is because the German trade surplus was one of the imbalances in the world economy in the run-up to the credit crunch. So more imports by Germany have been called for which would also help the Euro area economy. Actually if we look back to last week’s trade release this may have been in play for a while now.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports were up 0.8% from 2018. Imports rose by 1.4%. In 2018, exports increased by 3.0% and imports by 5.6% compared with the previous year. In 2017, exports were 6.2% and imports 8.0% higher than a year earlier.

Those numbers also show a clear trade growth deceleration and for those who like an idea of scale.

in 2019, Germany exported goods to the value of 1,327.6 billion euros and imported goods to the value of 1,104.1 billion euros.

Domestic Demand

There was something extra in the report which leapt off the page a bit.

 After a very strong third quarter, the final consumption expenditure of both households and government slowed down markedly.

That will change the pattern for the German economy if it should persist and it somewhat contradicts the rhetoric of ECB President Lagarde from earlier this week.

support the resilience of the domestic economy

I did point out at the time that the use of resilience by central bankers is worrying. This is because their meaning of the word frequently turns out to be the opposite of that which can be found in a dictionary.

If we switch to investment then they seem to be adopting the British model of prioritising housing.

Trends diverged for fixed capital formation. While gross fixed capital formation in machinery and equipment was down considerably compared to the third quarter, fixed capital formation in construction and other fixed assets continued to increase.

Ch-Ch-Changes

Yesterday the European Commission released its winter forecasts for the German economy. So let us go back a year and see what they forecast for this one.

Overall, real GDP growth is expected to strengthen to 2.3% in 2018 and remain above 2% in 2019.

In fact the message was let’s party.

Economic sentiment continues to improve across sectors, suggesting continued expansion in the coming quarters. Survey data show expectations of improving orders, higher output and greater demand.

Whereas in fact the punch bowl disappeared as growth faded from view.

Yesterday they told us this.

Overall, real GDP growth is forecast to rebound
somewhat to 1.1% in 2020, helped by a strong
calendar effect (0.4 pps.).

That is pretty optimistic in the circumstances perhaps driven by this, where they disagree with what the German statistics office told us earlier today.

Resilient domestic demand supported growth.
Private consumption increased robustly amid
record high employment and strong wage growth.

All rather Lennon-McCartney

Yesterday,
All my troubles seemed so far away,
Now it looks as though they’re here to stay
Oh I believe in yesterday.

Comment

From the detailed numbers one can get a small positive spin as GDP increased by 0.03% in the final quarter of 2019. But the catch is that in doing so you note that the 107.19 of the index is below the 107.21 of the first quarter. Care is needed because we are pinpointing below the margin of error but if we look further back we see that the index was 106.18 at the end of the first quarter of 2018.

There are three main perspectives from that of which the obvious is that growth since then has been only very marginally above 1%. So the European Commission forecasts were simply up in the clouds. But we have another problem which is that looking forwards from then the Markit business surveys ( PMIs) were predicting “Boom! Boom! Boom!” in the high 50s as the economy turned down. They later picked up the trend but missed the turning point. Or if you prefer looked backwards rather than forwards at the most crucial time.

Now we await the impact of the Corona Virus in this quarter. Let me leave you with one more issue which is productivity because if yearly output is only rising by 0.4% then we get a broad brush guide by comparing with this.

The economic performance in the fourth quarter of 2019 was achieved by 45.5 million persons in employment, which was an increase of roughly 300,000, or 0.7%, on a year earlier.

The Investing Channel

Was the Irish election result a case of its the economy stupid?

Back in the day the presidential campaign of Bill Clinton came up with the phrase “Its the economy stupid” which worked on several levels. Firstly Bill got elected and secondly the phrase has echoed around since. But applying it to what has recently happened in Ireland is an example both of the phrase and the way we have these days to look beneath the official statistics.

Let me start the story by looking at GDP growth in Ireland.

On a seasonally adjusted basis, initial estimates indicate that GDP in volume terms increased by 1.7 per cent for the Q3 quarter of 2019. ( Central Statistics Office or CSO)

Something for an incumbent government to trumpet you might think and this continues with the annual comparison.

Initial estimates for the third quarter of 2019 indicate that there was an increase of 5.0 per cent in GDP in real terms in Q3 2019 compared with Q3 2018.

For these times that is quite a surge which puts Ireland far ahead of the Euro area average and the breakdown starts with a hint of a modern thriving economy.

 Information & Communication made the most positive contribution to the Q3 result, rising by 22.4 per cent with Agriculture recording an increase of 15.2 per cent.

Trouble,Trouble,Trouble

The Taylor Swift lyric appears as we look at some of the detail though.

 Capital formation decreased by 55.3 per cent or €25.2 billion in Q3 compared with the previous quarter.

That is quite a drop but you see we find the cause here with a similar number popping up elsewhere.

 Imports decreased commensurately by 22.5 per cent (€24.2 billion) in Q3 2019 compared with Q2 2019.

These are not the only conventional metrics which are lost in a land of confusion as Genesis would put it.

Exports increased by 2.4 per cent which meant that overall net exports increased by €26.8 billion quarter-on-quarter.

As you can see the economic growth story starts well but then has collapsing investment which is a warning and collapsing imports which is another warning accompanied by a triumph for net exports giving a strong signal.

Now let me bring in some context which is that if we look at Gross Value Added for the Irish economy it was 49.1 billion in the final quarter of 2014 and 79.7 billion in the third quarter of last year on a chain-linked basis. How could you not be re-elected with those numbers? Well regular readers may recall early 2015 which saw a 25.6% quarterly jump.

There are two major issues here which I looked at on December 18th 2017,

Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes. ( Finfacts )

Manufacturing has boomed but some of it has been the type of contract manufacturing described above. Next comes this issue.

These figures were affected by reduced levels of research and development costs, in particular intellectual property imports.

There is a large impact from intellectual property which sees money wash into and out of Ireland on such a grand scale it even affects the Euro area national account breakdown.

These have led the Central Bank of Ireland to develop this to try and help.

GNI* excludes the impact of redomiciled
companies and the depreciation of intellectual
property products and of leased aircraft from
GNI. When this is done, the level of nominal
GNI* is approximately two-thirds of the level
of nominal GDP in 2016.

Wealth and Debt

According to the Central Bank of Ireland there is a strong position here.

Household net worth reached a new high of €800bn in Q3 2019, which equates to €162,577 per capita. Household debt continued its downward trend, falling by €176m in Q3 2019.

If we look into the detail I note the following and the emphasis is mine.

The increase over Q3 2019 was driven by improvements in both households’ financial assets and housing assets. Financial assets rose by €11.5bn, due primarily to increases in the value of insurance and pension schemes. Housing assets rose to €545bn, an increase of €8.2bn over the quarter, the highest it has been since Q4 2008. Household liabilities remained unchanged at €147bn.

There has been success here too.

Household debt stood at €135bn, its lowest level since Q3 2005. This equates to €27,453 per capita. Household debt has decreased by a third, or €67.8bn, since its peak of €202bn in Q3 2008.

We can see by default that Irish companies borrow quite a bit.

Private sector debt as a proportion of GDP decreased by 2.4 percentage points to stand at 239 per cent in Q3 2019

Or do they as are the companies Irish?

 It should be noted that private sector debt in Ireland is significantly influenced by the presence of large multinational corporations (MNCs) and that restructuring by these entities has resulted in extremely large movements in Irish private sector debt, particularly from 2014 onwards.

Inflation

According to the official data there essentially has not been any in Ireland over the period we are looking at. The official Euro area measure was 101.8 last December after being set at 100 in 2015 so you can see I am guilty of only a slight exaggeration. But we are reminded of its flaw ( which even ECB policy makers are presently admitting) that is highlighted by this from the Irish Times on the 5th of this month.

House price growth is obviously one part of the equation; while it may be finally easing in Dublin, half a decade of double-digit growth has nonetheless pushed the cost of owning a home out of the reach of many.

Indeed as it goes on they have become both more expensive and unaffordable.

But in Ireland, and in many other countries across the globe, rising property prices have been compounded by wage stagnation. Pay rises have only returned in recent years and continue to significantly lag house price growth.

The inflation measure of the Euro area completely ignores the area of owner-occupied housing on the grounds of whatever excuse it thinks it can get away with.

Ireland has its own measure which tried to do better by including mortgage interest-rates but that valiant effort has been torpedoed by the advent of negative interest-rates and QE.

So here we see another problem for the official view as people are told there is no inflation and yet in Dublin the Irish Times tells us this.

Dublin has experienced the third-fastest rate of house price growth in the survey over the last five years, up by a staggering 61.9 per cent.

Although it has also had a relatively strong rate of income growth over the same period – up by 13.2 per cent – that still means there is a huge gap between the rates of increase.

In terms of house purchase real wages have not far off halved. No wonder people are unhappy and should be questioning the inflation data.

The official numbers do pick up rental inflation and both have it being around 17% since 2015. So even on the official data there has been a squeeze here too.

Comment

On today’s journey we have seen that the experience of an ordinary Irish person is very different to that of the official data. They are told it is a Celtic Tiger 2.0 but face ever more expensive housing costs and the concept of buying a home has changed fundamentally. Thus we see how what are fabulous looking metrics of surging GDP and virtually no inflation are for a type of virtual Ireland which is really rather different to the real one where housing costs have surged. This impacts in other sphere as for example national debt to GDP has plunged and Ireland has moved for being a recipient of EU funds to a net payer.

Context is needed as there have been economic improvements in Ireland for example the unemployment rate this January was 4.8% as opposed to the 16% of January 2012. Improved tax revenues have helped provide a budget with a surplus although this relies a bit on higher corporation tax from guess who?

The ECB now considers fiscal policy via QE to be its most effective economic weapon

Yesterday saw ECB President Christine Lagarde give a speech to the European Parliament and it was in some ways quite an extraordinary affair. Let me highlight with her opening salvo on the Euro area economy.

Euro area growth momentum has been slowing down since the start of 2018, largely on account of global uncertainties and weaker international trade. Moderating growth has also weakened pressure on prices, and inflation remains some distance below our medium-term aim.

In the circumstances that is quite an admittal of failure. After all the ECB has deployed negative interest-rates with the Deposit Rate most recently reduced to -0.5% and large quantities of QE bond buying. No amount of blaming Johnny Foreigner as Christine tries to do can cover up the fact that the switch to a more aggressive monetary policy stance around 2015 created what now seems a brief “Euro boom” but now back to slow and perhaps no growth.

But according to Christine the ECB has played a stormer.

 The ECB’s monetary policy since 2014 relies on four elements: a negative policy rate, asset purchases, forward guidance, and targeted lending operations. These measures have helped to preserve favourable lending conditions, support the resilience of the domestic economy and – most importantly in the recent period – shield the euro area economy from global headwinds.

It is hard not to laugh at the inclusion of forward guidance as a factor as let’s face it most will be unaware of it. Indeed some of those who do follow it ( mainstream economists) started last year suggesting there would be interest-rate increases in the Euro area before diving below the parapet. There seems to be something about them and the New Year because we saw optimistic forecasts this year too which have already crumbled in the face of an inconvenient reality. Moving on you may note the language of of “support” and “helped” has taken a bit of a step backwards.

Also as Christine has guided us to 2018 we get a slightly different message now to what her predecessor told us as this example from the June press conference highlights.

This moderation reflects a pull-back from the very high levels of growth in 2017, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

As you can see he was worried about the domestic economy too and mentioned it first before global and trade influences. This distinction matters because as we will come too Christine is suggesting that monetary policy is not far off “maxxed out” as Mark Carney once put it.

For balance whilst there is some cherry picking going on below I welcome the improved labour market situation.

Our policy stimulus has supported economic growth, resulting in more jobs and higher wages for euro area citizens. Euro area unemployment, at 7.4%, is at its lowest level since May 2008. Wages increased at an average rate of 2.5% in the first three quarters of 2019, significantly above their long-term average.

Although it is hard not to note that the level of wages growth is worse than in the US and UK for example and the unemployment rate is much worse. You may note that the rate of wages growth being above average means it is for best that the ECB is not hitting its inflation target. Also we get “supported economic growth” rather than any numbers, can you guess why?

Debt Monetisation

You may recall that one of the original QE fears was that central banks would monetise government debt with the text book example being it buying government bonds when they were/are issued. This expands the money supply ( cash is paid for the bonds) leading to inflation and perhaps hyper-inflation and a lower exchange-rate.

What we have seen has turned out to be rather different as for example QE has led to much more asset price inflation ( bond, equity and house prices) than consumer price inflation. But a sentence in the Christine Lagarde speech hints at a powerful influence from what we have seen.

 Indeed, when interest rates are low, fiscal policy can be highly effective:

Actually she means bond yields and there are various examples of which in the circumstances this is pretty extraordinary.

Another record for Greece: 10 yr government bonds fall below 1% for the first time in history (from almost 4% a year ago)  ( @gusbaratta )

This is in response to this quoted by Amna last week.

 “If the situation continues to improve and based on the criteria we implement for all these purchases, I am relatively convinced that Greek bonds will be eligible as well.” Greek bonds are currently not eligible for purchase by the ECB since they are not yet rated as investment grade, one of the basic criteria of the ECB.

Can anybody think why Greek bonds are not investment grade? There is another contradiction here if we return to yesterday’s speech.

Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of our measures.

Because poor old Greece is supposed to be running a fiscal surplus due to its debt burden, so how can it take advantage of this? A similar if milder problem is faced by Italy which you may recall was told last year it could not indulge in fiscal policy.

The main target in President Lagarde’s sights is of course Germany. It has plenty of scope to expand fiscal policy as it has a surplus. It would in fact in many instances actually be paid to do so as it has a ten-year yield of -0.37% as I type this meaning real or inflation adjusted yields are heavily negative. In terms of economics 101 it should be rushing to take advantage of this except we see another example of economic incentives not achieving much at all as Germany seems mostly oblivious to this. There is an undercut as the German economy needs a boost right now. Although there is another issue as it got a lower exchange rate and lower interest-rates via Euro membership now if it uses fiscal policy and that struggles too, what’s left?

Mission Creep

If things are not going well then you need a distraction, preferably a grand one

We also have to gear up on climate change – and not only because we care as citizens of this world. Like digitalisation, climate change affects the context in which central banks operate. So we increasingly need to take these effects into account in central banks’ policies and operations.

Readers will disagree about climate change but one thing everyone should be able to agree on is that central bankers are completely ill equipped to deal with the issue.

Comment

This morning’s release from Eurostat was simultaneously eloquent and disappointing.

In December 2019 compared with November 2019, seasonally adjusted industrial production fell by 2.1% in the
euro area (EA19)……In December 2019 compared with December 2018, industrial production decreased by 4.1% in the euro area……The average industrial production for the year 2019, compared with 2018, fell by 1.7% in the euro area

The index is at 100.6 so we are nearly back to 2015 levels as it was set at 100 and we have the impact of the Corona Virus yet to come. Actually we can go further back is this is where we were in 2011. Another context is that the Euro area GDP growth reading of 0.1% will be put under pressure by this.

In a nutshell this is why the ECB President wants to discuss things other than monetary policy as even central bankers are being forced to discuss this.

 We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income.

But central bankers are creatures of habit so soon some will be calling for yet another interest-rate cut.

Let me finish with some humour.

Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.

Yep, the ECB has leaked that there are no leaks….

 

 

 

UK GDP growth is services driven these days as manufacturing is in a depression

Today brings the UK into focus as we find out how it’s economy performed at the end of 2019. A cloudy perspective has been provided by the Euro area which showed 0.1% in the final quarter but sadly since then the news for it has deteriorated as the various production figures have been released.

Germany

WIESBADEN – In December 2019, production in industry was down by 3.5% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

France

In December 2019, output decreased in the manufacturing industry (−2.6%, after −0.4%), as well as in the whole industry (−2.8%, after 0.0%).

Italy

In December 2019 the seasonally adjusted industrial production index decreased by 2.7% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -1.4%.

Spain

The monthly variation of the Industrial Production Index stands at -1.4%, after adjusting for seasonal and calendar effects.

These were disappointing and were worse than the numbers likely to have gone into the GDP data. Most significant was Germany due both to the size of its production sector and also the size of the contraction. France caught people out as it had been doing better as had Spain. Italy sadly seems to be in quite a mire as its GDP was already 0.3% on the quarter. So the background is poor for the UK.

Today’s Data

With the background being not especially auspicious then this was okay in the circumstances.

UK gross domestic product (GDP) in volume terms was flat in Quarter 4 (Oct to Dec) 2019, following revised growth of 0.5% in Quarter 3 (July to Sept) 2019.

In fact if we switch to the annual numbers then they were better than the Euro area.

When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 4 2019; down from a revised 1.2% in the previous period.

Marginal numbers because it grew by 1% on the same basis but we do learn a several things. Firstly for all the hype and debate the performances are within the margin of error. Next that UK economic growth in the two halves of 2019 looks the same. Finally that as I have argued all along the monthly GDP numbers are not a good idea as they are too erratic and prone to revisions which change them substantially.

Monthly gross domestic product (GDP) increased by 0.3% in December 2019, driven by growth in services. This followed a fall of 0.3% in November 2019.

Does anybody really believe that sequence is useful? I may find support from some of the economics organisations I have been debating with on twitter as their forecasts for today were based on the November number and were thus wrong-footed. Although of course they may have to deal with some calls from their clients first.

If we look into the detail we see that in fact our economic performance over the past two years has in fact been much more consistent than we might otherwise think.

GDP was estimated to have increased by 1.4% between 2018 and 2019 slightly above the 1.3% growth seen between 2017 and 2018.

Growth, just not very much of it or if we note the Bank of England “speed-limit” then if we allow for margins of error we could call it flat-out.

Switch to Services

Our long-running theme which is the opposite of the “rebalancing” of the now Baron King of Lothbury and the “march of the makers” of former Chancellor Osborne was right yet again.

Growth in the service sector slowed to 0.1% in Quarter 4 2019, while production output fell 0.8%.

So whilst there was not much growth it still pulled away from a contracting production sector and if we look further we see that the UK joined the Euro area in having a poor 2019 for manufacturing and production.

Production output fell by 1.3% in the 12 months to December 2019, compared with the 12 months to December 2018; this is the largest annual fall since 2012 and was led by manufacturing output, which fell by 1.5%.

Meanwhile a part of the services sector we have consistently noted did well again.

The services sector grew by 0.3% in the month of December 2019 after contracting by 0.4% in November 2019. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures, with a number of blockbuster films being released in December (PDF, 192.50KB).

That is something literally under my nose as Battersea Park is used regularly for this.

Balance of Payments

There is an irony here because if we look internationally they do not balance as there are examples of countries both thinking they have a surplus with each other.

The numbers such as they are had shown signs of improvement but like the GDP data actually had a case of groundhog day.

The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.

The latter bit reminds me that I wrote to the Bean Commission about the fact that our knowledge of services trade is really poor and today’s release confirms this is still the case.

The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments.

Let me explain this as it is different to what people are taught at school and in universities where net exports are part of GDP. The output version of GDP counts it up and then drives the expenditure version which includes trade and if they differ it is the trade and in particular services numbers in this instance which get altered. If they had more confidence in them they would not do that. This way round they become not far off useless in my opinion.

 

Gold and UK GDP

In the UK statisticians have a problem due to this.

For many countries the effect of gold on their trade figures is small, but the prominence of the industry in London means it can have a sizeable impact on the UK’s trade figures.

Rather confusingly the international standard means it affects trade but not GDP.

Firstly, imports and exports of gold are GDP-neutral. Most exports add to GDP, but not gold. This is because the sale of gold is counted as negative investment, and vice versa for imports and the purchase of gold. So, the trade in gold creates further problems for measuring investment.

So as well as the usual trade figures they intend to produce ones ignoring its impact.

Because a relatively small numbers of firms are involved in the gold trade, publishing detailed figures could be disclosive. However, within those limitations, we are now able to show our headline import and export figures with gold excluded.

A good idea I think as the impact on the UK economy is the various fees received not the movement of the gold itself, especially it we did not own it in the first place.

Oh and my influence seems to have even reached the Deputy National Statistician.

Gold, in addition to being a hit song by Spandau Ballet, is widely used as a store of value.

Comment

For all the hot air and hype generated the UK economic performance has in the past two years been remarkably similar. Actually the same is pretty much true of comparing us with the Euro area.As it happens 2020 looks as though we are now doing better but that has ebbed and flowed before.

Looking beneath this shows we continue to switch towards services and as I note the downwards revisions to net services trade I am left wondering two things. What if the services surveys are right and the switch to it is even larger than we are being told? Also it displays a lack of confidence in the services surveys to revise the numbers down on this scale. We know less than sometimes we think we do.

Meanwhile on a much less optimistic theme manufacturing has been in a decade long depression.

Manufacturing output in the UK remained 4.5% lower in Quarter 4 (Oct to Dec) 2019 than the pre-downturn peak in Quarter 1 (Jan to Mar) 2008.