Some better news for the economy of Italy as it faces up to Carige and Alitalia

For once we have the opportunity to look at some better news for the economy of Italy so let us take it. This came yesterday from the statistics office.

In May 2019 the seasonally adjusted industrial production index increased by 0.9% compared with the previous month.

That is at least something and happened in spite of the fact that the transport production sector declined by 2.5% meaning that manufacturing fell by 0.9%. Unfortunately as we look deeper we see that even a better month has only improved a declining trend.

The percentage change of the average of the last three months with respect to the previous three months was -0.1.
The calendar adjusted industrial production index decreased by 0.7% compared with May 2018 (calendar
working days in May 2019 being the same as in May 2018).

So we see that a better May provides some hope as it also happened in the UK and France

Bond Yields

There has been some relief for Italy from this area too as we note that the benchmark ten-year yield is now 1.7%. This has more than halved since the yield approached 3.7% in mid-October last year and as you can see there has been quite a plunge. Many countries have seen big falls in bond yields but Italy is perhaps the leader of the pack with the size of the fall. Part of this was driven by the news below which was reported by the Financial Times last week.

The European Commission on Wednesday ended weeks of negotiations with Rome by deciding not to trigger a so-called “excessive deficit procedure”, which could ultimately have led to financial sanctions.Italy’s ruling coalition promised to trim back this year’s budget shortfall by €7.6bn, or 0.42 per cent of gross domestic product, pushing the deficit down to 2.04 per cent and ensuring the country does not breach eurozone rules.

Thus those looking for yield piled into the Italian market with such enthusiasm that the two-year yield went negative for a while in response to this. When you look at the potential risks that seems rather mad to me and even the 0.08% as I type this seems much too low as we wonder how much of this will happen?

Italy instead said it would reduce its deficit by collecting an additional €6.2bn in revenues.

But the new apparent deal plus the likelihood that the ECB will add to its 365.4 billion Euro holdings of Italian government bonds ( BTPs) has created quite a bull market.

As a generic this will be very welcome for the government which can issue debt more cheaply. We saw an example of this only yesterday.

More than 80% of the demand for Italy’s 50-year debt issue on Tuesday came from foreign investors, with Germany in the forefront, the head of the Treasury’s debt management office told Reuters.

The 3-billion-euro top-up of the 2.80% March 2067 bond drew bids of more than 17 billion euros, with a final yield of 2.877%.

This is an ongoing job on a large-scale.

Total medium and long-term issuance this year will amount to some 240 billion euros, Iacovoni said ( Reuters )

I am a little unclear as to why Italy is planning this.

Italy is strongly committed to issuing its first dollar bond since 2010 before the end of this year and is also eyeing private placements in other currencies, the head of the Treasury’s debt management office told Reuters.

Maybe it is some sort of response to the plan we looked at from some sections of the government to issue government bonds in a new currency.

Labour Market

There was also some good news earlier this month as we saw the unemployment rate fall into single figures.

The unemployment rate dropped to 9.9% (-0.2 percentage points), the youth rate decreased to 30.5% (-0.7 percentage points).

Also 2019 so far seems to be seeing a pick-up in employment.

In the period from March to May 2019, employment rose compared with the previous quarter (+0.5%, +125
thousand).

Economics lives us to its reputation as the dismal science as we note that with growth hard to find this has implications for productivity. Also as we note elsewhere employment may not mean what we night assume.

Employed persons: comprise persons aged 15 and over who, during the reference week:
worked for at least one hour for pay or profit;

The Outlook

Our positive spin took a bit of a pounding from the European Commission yesterday.

Amid a challenging external environment real GDP growth in 2019 as a whole is forecast to be marginal (0.1%).
In 2020, economic activity should rebound moderately to 0.7% in line with the gradual improvement of the
global trade prospects and benefiting from a positive carryover effect and a calendar effect, given that 2020 has
two working days more than 2019.

Those are small numbers and I note that any improvement next year seems to rely on a calendar effect which will wash out. As Italy grew by 0.1% in the first quarter that is it for the year if this forecast is accurate. Also the forecast was worried about prospects for the labour market and underemployment in particular.

But weak economic activity is likely to weigh on the
labour market as indicated by the rising number of workers supported by the wage guarantee fund (Cassa
Integrazione Guadagni, CIG), which compensates for the income lost due to reduced work hours, and firms’
markedly lower employment expectations.

I also note that the Bank of Italy’s surveys show that Italians fear that unemployment may rise again.

The Banks

This has been quite a saga in the credit crunch era and the travails of Deutsche Bank earlier this week show that the problem extends way beyond the borders of Italy. In fact DB was not the only bank in the news on Monday as an old friend returned. From Reuters.

Italy is struggling to pull together a rescue plan for Carige (MI:CRGI) which the troubled Genoa-based bank needs to avoid a liquidation, two sources familiar with the matter said………..The latest attempt to salvage Carige revolves around a depositor protection fund (FITD) financed by Italian banks which, one of the sources said, would provide some 520 million euros ($583 million) in fresh capital out of a total of 800 million needed to save the bank.

That last number is revealing because I think last time around we were told that it was 600 million. No wonder no-one has been willing to step in. Also I note that FinanzaReport.it suggests this.

although some rumors in the last hours have raised the bar up to 900 million.

Those who recall the Atlante bailout fund will recall that it ended up weakening the other banks and had to call for more cash or Atlante II as we go down a familiar road.

The real issue is that all the dithering and denial means that things do not get sorted and thus the banks continue to be a drag on rather than an aid for growth in the Italian economy. Also the denial problem extends beyood the borders of Italy as the EU Auditors Commission pointed out yesterday.

The 2018 stress test imposed less severe adverse scenarios in countries with weaker economies
and more vulnerable financial systems. …. The
auditors also found that not all vulnerable banks were included in the test and that certain banks
with a higher level of risk were excluded.

I wonder which country was forefront in their minds?

Comment

Whilst there have been some flickers of better news we find ourselves in familiar “girlfriend in a coma” territory sadly. Italy is a lovely country but its economic problems can be symbolised by this from Corriere Della Salla

The government tries to close the game on Alitalia. The scheme is a veiled nationalization of the former flag company, focusing on the establishment of a new company where the majority of the capital will be in public hands. In practice, the process of re-launching the carrier, currently in the commissioning procedure, will have to be Ferrovie dello Stato, with a 35% stake, and the Ministry of Economy, through a 15% stake.

Still for an airline nicknames Always Late In Take-off Also Late In Arrival there was some more hopeful news in the report.

Last month Alitalia was also the most punctual carrier in Europe.

But as we look further ahead the weak birth rate will pose further problems should it continue.

Perhaps Italy should take the chance to claim it is rising to environmental and green challenges via this route

 

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Bank of England Forward Guidance ignores the falls in UK real wages

Yesterday evening Michael Saunders of the Bank of England spoke in Southampton and gave us his view on our subject of today the labour market.

 the output gap is probably closed……….. The labour
market continued to tighten, and the MPC judged in late 2018 that the output gap had closed, with supply
and demand in the economy broadly in balance.

As you can see we quickly go from it being “probably closed” to “had closed” and there is something else off beam. You see if there is anyone on the Monetary Policy Committee who would think it is closed is Michael via his past pronouncements, so if he is not sure, who is? This leads us straight into the labour market.

In general, labour market data suggest
the output gap has closed. For example, the jobless rate is slightly below the MPC’s estimate of equilibrium,
vacancies are around a record high, while pay growth has risen to around a target-consistent pace (allowing
for productivity trends).

Poor old Michael does not seem to realise that if pay growth is consistent with the inflation target he does not have a problem. Of course that is before we hit the issue of the “equilibrium” jobless rate where the Bank of England has been singing along to Kylie Minogue.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this

In terms of numbers the original Forward Guidance highlighted an unemployment rate of 7% which very quickly became an equilibrium one of 6.5% and I also recall 5.5% and 4.5% as well as the present 4.25%. Meanwhile the actual unemployment rate is 3.8%! What has actually happened is that they have been chasing the actual unemployment rate lower and have only escaped more general derision because most people do not understand the issue here. Let’s be generous and ignore the original 7% and say they have cut the equilibrium rate from 6.5% to 4.25%. What that tells me is that the concept tells us nothing because on the original plan annual wage growth should be between 5% and 6%.

What we see is that an example of Ivory Tower thinking that reality has a problem and that the theory is sound.  It then leads to this.

This would reinforce the prospect that the
economy moves into significant excess demand over the next 2-3 years, and hence that some further
monetary tightening is likely to be needed to keep inflation in line with the 2% target over time.

Somebody needs to tell the Reserve Bank of India about this excess demand as it has cut interest-rates three times this year and also Australia which cut only last week. Plus Mario Draghi of the ECB who said no twice before the journalist asking him if he would raise interest-rates last week finished his question and then added a third for good measure.

Wage Data

We gain an initial perspective from this. From this morning’s labour market release.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.1%, before adjusting for inflation, and by 1.2%, after adjusting for inflation, compared with a year earlier.

If we start with the economic situation these numbers are welcome and let me explain why. The previous three months had seen total weekly wages go £530 in January, but then £529 in both February and March. So the £3 rise to £532 in April is a welcome return to monthly and indeed quarterly growth. As to the number for real wages it is welcome that we have some real wage growth but sadly the official measure used called CPIH is a poor one via its use of imputed rents which are never paid.

Ivory Tower Troubles

However as we peruse the data we see what Taylor Swift would call “trouble, trouble trouble” for the rhetoric of Michael Saunders. Let us look at his words.

Wage income again is likely to do better than expected.

That has been something of a hardy perennial for the Bank of England in the Forward Guidance era where we have seen wage growth optimism for just under 6 years now. But whilst finally we have arrived in if not sunlit uplands we at least have some real wage growth there is a catch. Let me show you what it is with the latest four numbers for the three monthly total wages average. It has gone 3.5% in January then 3.5%, 3.3% and now 3.1%. Also if we drill into the detail of the April numbers I see that the monthly rise was driven by an £8 rise in weekly public-sector wages to £542 which looks vulnerable to me. Was there a sector which got a big rise?

Thus as you can see on the evidence so far we have slowing wage growth rather than it picking up. That would be consistent with the slowing GDP growth yesterday. So we seem to be requiring something of a “growth fairy” that perhaps only Michael is seeing right now. This is what he thinks it will do to wage growth.

Pay growth has recently
risen to about 3% YoY and the May IR projects a further modest pickup (to about 3.5% in 2020 and 3.75% in 2021). That looks reasonable in my view: if anything, with the high levels of recruitment difficulties, risks may
lie slightly to the upside.

Real Wages

There is a deeper problem here as whilst the recent history has been better the credit crunch era has been a really poor one for UK real ages. Our official statisticians put it like this.

£468 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £5 lower than the pre-recession peak of £473 per week for April 2008.

As you can see even using their favoured ( aka lower) inflation measure real wages are in the red zone still. I noted that they have only given us the regular pay data so I checked the total wages series. There we have seen a fall from the £512 of January 2008 to £496 in April so £16 lower and just in case anyone looks it up I am ignoring the £525 of February 2008 which looks like the equivalent of what musicians call a bum note.

We see therefore that the closed output gap measured via the labour market has left us over a decade later with lower real wages!

Comment

If we view the UK labour market via the lenses of a pair of Bank of England spectacles then there is only one response to the data today.

Between February to April 2018 and February to April 2019: hours worked in the UK increased by 2.4% (to reach 1.05 billion hours) the number of people in employment in the UK increased by 1.1% (to reach 32.75 million).

From already strong numbers we see more growth and this has fed directly into the number they set as a Forward Guidance benchmark.

For February to April 2019, an estimated 1.30 million people were unemployed, 112,000 fewer than a year earlier and 857,000 fewer than five years earlier.

It is hard not to have a wry smile at falls in unemployment like that leading to in net terms the grand sum of one 0.25% Bank Rate rise. Also even a pair of Bank of England spectacles may spot that a 2.4% increase in hours worked suggests labour productivity is falling.

But the Forward Guidance virus is apparently catching as even the absent-minded professor has remembered to join in.

BoE’s Broadbent: If Economy Grows As BoE Forecasts, Interest Rates Will Probably Need To Rise A Bit Faster Than Market Curve Priced In May ( @LiveSquawk )

My conclusion is that we should welcome the better phase for the UK labour market and keep our fingers crossed for more in what look choppy waters. Part of the problem at the Bank of England seems to be that they think it is all about them.

Second, why should growth pick up without any easing in monetary or fiscal policies? ( Michael Saunders)

Of course that may be even more revealing…..

 

 

UK wage growth shows the first sign of weakness for a while

Today brings the UK labour market into focus as we hope for more good news. However we have seen over the past day or so some reminders that the credit crunch era left long lasting scars for some. In isolation the UK has recovered well in terms of employment and getting people back to work but has done much less well overall in terms of what they are paid for it. In particular the Resolution Foundation has taken a look at one rather unfortunate group.

This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were.

These individuals were of course guilty of nothing and were only involved via an accident of the timing of their birth. The Resolution Foundation discovered these effects.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low paying occupation rises.

The find something which resonates with past Bank of England research on this subject.

The chance of a graduate working in a lowpaid occupation rose by 30 per cent, and remained elevated a full seven
years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering
the labour market in a recession.

The issue I have with this is that we are looking at a period when being a graduate was not what it had been in the past due to the expansion of numbers in the Blair era. So that may well also have been in play but not fully considered. Whatever the cause there was a strong effect on wages.

This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn).

Thus not only did wages fall they took longer to recover to levels seen by those lucky enough not to start work and graduate as the credit crunch hit. A clear issue for thos affected.

However we did get one thing right in the sense that pre credit crunch we wanted to be what was considered to be more Germanic. In this instance that meant more flexible wages ( as in potentially down) in return for a better employment trajectory.

On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Many now seem to have forgotten that as it has turned out to be a success but at a price in terms of wages especially for those unlucky enough to be born at the wrong time. Although as this from BBC economics correspondent Andy Verity illustrates some are keener on lower unemployment than others.

The unemployment rate is now down to 3.8%. But is lower unemployment always a good thing? Not necessarily – if eg you’re a business and you can’t get the staff.

Today’s Data

The drumbeat of the UK data series for around the last seven years continues to beat out its tune.

Estimates for January to March 2019 show 32.70 million people aged 16 years and over in employment, 354,000 more than for a year earlier. This annual increase of 354,000 was due entirely to more people working full-time (up 372,000 on the year to reach 24.11 million). Part-time working showed a small fall of 18,000 on the year to reach 8.59 million……..The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.6%) and the joint- highest figure on record.

The bass line was in tune as well.

For January to March 2019, an estimated 1.30 million people were unemployed, 119,000 fewer than for a year earlier and 914,000 fewer than for five years earlier…….

the estimated unemployment rate: for everyone was 3.8%; it has not been lower since October to December 1974 (for men was 3.9%; it has not been lower since March to May 1975, for women was 3.7%, the lowest since comparable records began in 1971)

As you can see the unemployment performance is a case of lets hear it for the girls.

Also as I regularly get asked here is the other category.

The UK economic inactivity rate was estimated at 20.8%, lower than for a year earlier (21.1%) and close to a record low.

Wages

Here there was a more nuanced version of better news.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.2%, before adjusting for inflation, and by 1.3%, after adjusting for inflation, compared with a year earlier.

If we put to one side for a moment the attempt to sugar coat the real wages numbers, there is a fading of nominal wage growth here. We should welcome the fact that the annual rate of growth is still above 3% but there is an issue as it has fallen back from 3.5%. Why? Well weekly wages peaked at £530 in January and fell to £529 in February and £528 in March. Various areas contributed to this as the annual rate of pay growth in finance fell from 5% to 1.8% over the same period and growth in the wholesaling,retail and hotel sector actually went negative ( -0.3%). This was due to weak and in some cases negative bonus payments ( I am not sure how that works…) being recorded so it is a case of what that space.

I did say I would return to real wage growth and let me present it in chart form to illustrate the issue.

Those who have had a hard time in the credit crunch provide yet another reason to make the case for an RPI style measure of inflation I think. It also shows that choosing your inflation measure is a genuinely big deal and something that establishment’s love to manipulate.

Comment

One of the ironies of the credit crunch era is that the economics establishment regularly gets worked up about things it wanted. Of course some of those reporting the situation are too young to remember that but not all. We see that we got the better employment situation we wanted but that especially for those who joined the job market at what turned out to be the wrong time real wages shifted onto a lower path from which they have yet to recover. Sadly the main response from government has been to try to change the numbers via the use of the fantasies involved in Imputed Rents which are never paid, rather than dealing with reality. Also the way that the self-employed are ignored in the wages data is becoming a bigger and bigger issue.

4.93 million self-employed people (15.1% of all people in employment), 180,000 more than a year earlier.

As to the current situation it may no longer be quite so Goldilocks as whilst employment growth continues we face the possibility that wage growth is slowing again. Perhaps in spite of its many fault as a measure it is related to this.

In contrast, output per worker in Quarter 1 2019 increased by 0.7% compared with the same quarter in the previous year.

If you want the full picture it is the difference between the two numbers here.

It indicates that in Quarter 1 2019, all three economic indicators were above their pre-downturn levels, with GDP being 12.7% higher while both hours and employment were equally 10.2% higher.

Putting all this another way it is yet another punch hammered home on output gap style theories which must now be in boxing terms on the canvas again. What happened to the three knockdowns and you are out rule?

 

 

 

 

Will the UK labour market data prove to be a better guide than GDP again?

It was a week or so ago that we took an in-depth view on UK productivity and yesterday the Financial Times was on the case. As ever they open with what is their priority.

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

There are a few begged questions here as for example the particularly weak period for UK productivity was in 2013/14 well before Brexit and in fact late 2017 or so was a relatively good period for it. The next part is more soundly based I think.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Indeed we have had a problem here but I am afraid that the Conference Board then gets a little carried away as it veers towards Fake News territory.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

The UK employment performance is something we follow month by month and has been really good since about 2012 so I am afraid that Bart is barking up the wrong tree. If we look at matters from the perspective of the UK employment rate it has risen from 70.1% at the end of 2011 to 76.1% now. On a chart going back to 1971 there is only one period where it rose faster ( 87-89) and that sadly then led to a bust.

Here are the numbers from the Conference Board and you may spot the holes in this yourselves.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

So the “Not even employment is growing quickly any more” is also a “buoyant jobs market”! I note that rather than being hit by Brexit as originally claimed productivity last year was in line with the post credit crunch average, We end up with an expected weak 2019 leading to low productivity growth. If that makes you fear for Italy and Germany which at the moment have worse output prospects than us well apparently not.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, said the Conference Board.

If we use the OECD and compare ourselves in 2018 we did better than Italy ( -0.2%) Spain ( -0.3%) and Germany (0%) but worse than France (0.6%) albeit only slightly.

Investment

This has been a troubled area recently for the UK economy as the Brexit uncertainty has seen a drop in business investment. But it would seem that if we ever get over that hill money will be arriving from different quarters.

The United Kingdom has snatched the top spot in a survey that ranks how attractive countries are as investment destinations over the coming year.

Despite “continued uncertainty stemming from its intention to leave the European Union”, the UK knocked the United States off its perch, which it had held since 2014, according to the data conducted by accountancy firm EY. ( Daily Telegraph)

Of course that is a different definition of investment usually focusing more on the financial sector.

Today’s Data

Unfortunately for the rhetoric of the Conference Board above but fortunately for UK workers our official statisticians have released this.

Estimates for December 2018 to February 2019 show 32.72 million people aged 16 years and over in employment, 457,000 more than for a year earlier. This annual increase of 457,000 was due entirely to more people working full-time (up 473,000 on the year to reach 24.15 million)……The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.4%) and the joint-highest figure on record.

If we compare the annual rate above to the latest three-monthly one we see that job growth may even have sped up.

The level of employment in the UK increased by 179,000 to a record high of 32.72 million people in the three months to February 2019.

Considering the level of employment we are now at then this are pretty impressive numbers. If we switch to hours worked they are up by 2.1% on a year ago which again is strong. As GDP growth seems lower there may well be an issue here again for productivity growth but not for the opposite to the reason given by the Conference Board.

Wages

In the period since the quantity numbers for the UK economy turned for the better we have waited quite a long time for the quality or wages numbers to also do so. But more recently we have seen better news.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.5%, before adjusting for inflation, and by 1.6%, after adjusting for inflation, compared with a year earlier.

If we look at the more comprehensive category we note that bonuses are pulling up the numbers which may be a hopeful sign. As to the real wage figures whilst I believe we now have some growth sadly it is not as high as claimed due to the flaws in the inflation number used. For some perspective the Retail Prices Index grew by 2.5% in the year to February as opposed to the 1.8% recorded by the Imputed Rent influenced CPIH. So real wage growth is more like 1% I would argue.

If we look at the month of February alone then we see that at 3.2% the number is lower but the monthly numbers are erratic. The growth has been pulled higher by the construction sector which has seen wages rise by 4.6% over the year to February and pulled lower by manufacturing which saw growth of a mere 1.9%. Although it was not an especially good February for them a factor in the overall rise in UK wage growth has come from the public-sector where the circa 1% of a couple of years ago has been replaced by 2.6% over the three months to February.

Comment

As ever there is much to consider here. The picture presented by our official statisticians is as good as it has been for quite some time. With employment at these high levels in some ways it is a surprise it continues to rise at all. For wages the picture is different but is now brighter than it has been for some time. Although if we look for perspective there is still if not a mountain quite a hill to climb.

For February 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at: £465 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £8 lower than the pre-recession peak of £473 per week for March 2008.

Using a more realistic inflation measure than the officially approved CPIH only makes the perspective darken along the lines sung about by Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

Moving to productivity I would remind readers of my analysis of the subject from the 5th of this month. As to the Conference Board analysis well the idea of UK employment growth being weak has had a bad 7 years and there is an irony as of course it has been that pushing productivity growth lower. Looking ahead will the labour market numbers prove to be a better guide to the economic situation than the output or GDP ones like in 2012? Only time will tell…….

Less welcome is the new way of presenting the numbers which frankly is something of a mess.

Italy looks set for another economic recession sadly

A feature of the last year or so has been something of an economic car crash unfolding in Italy and we have received two further perspectives on that subject this morning. Sadly neither is an April Fool although in these times they have become ever harder to spot. According to Markit times not only remain hard but have deteriorated in the manufacturing sector.

Manufacturing business conditions in Italy continued
to worsen in March as a sharp reduction in new orders
led to a further decline in output. Production fell for the
eighth consecutive month, whilst new orders contracted
at the fastest rate in nearly six years. Meanwhile, business
confidence dipped slightly from February, but was
nonetheless positive.

The reported fall in new orders was led from abroad.

Additionally, new business from abroad fell in March
at a rate just shy of December 2018’s near six-and-a-half year record.

This meant that the reading was as follows.

At 47.4, the reading was down from 47.7 in February
and signalled the sharpest monthly decline in the health of
the sector since May 2013.

Also the optimism reported frankly seems at odds with reality.

Optimism regarding the year ahead outlook for output was
sustained in March, but concerns over further contractions
in customer demand and a continuation of negative market
trends meant sentiment weakened from February.

Markit itself does not seem to hold out much hope for a quick rebound.

All in all, Italian manufacturing output looks set to decline
further in Q2, especially when looking at slowdowns in key
sources of external demand in neighbouring European
markets.

Employment

The situation here posed a question too this morning.

In February 2019, the number of employed people moderately declined compared with January (-0.1%,
-14 thousand); the employment rate decreased to 58.6% (-0.1 percentage points). The fall of employment
involved mainly people aged 35-49 years (-74 thousand), while people aged over 50 continued to go up
(+51 thousand).

There is an interesting age shift in the pattern which we are seeing across a wide range of countries. There are two main drivers here which are interrelated. The first is the demographic of an ageing population. The second is the rises in official retirement ages and in Italy perhaps the ongoing economic troubles leading to actual retirements being postponed.

If the manufacturing PMI is any guide the employment falls continued in March too.

As a result of the setbacks in output and new work,
employment in Italy’s manufacturing sector declined in
March.

Also as IPE pointed out last September that the retirement situation in Italy is typically complex.

By comparison, the statutory retirement age in 2019 will be 67. This keeps rising, as planned by law, to keep up with demographic projections. In reality, however, people on average retire at about the age of 62. This is the result of the complicated legislative framework, which effectively means every worker’s personal circumstances can contribute to bringing his retirement age forward.

Also the current government has plans to reduce the official retirement age.

Returning to the employment data we see that the situation is turning as previously there had been rises.

Employment rose by 0.5% (+113 thousand) compared with February 2018. The increase concerned men
and women, involving people aged 25-34 years (+21 thousand) and over 50 (+316 thousand).

Unemployment

There was something of a double whammy in the labour market in February.

In February, the number of unemployed persons rose by 1.2% (+34 thousand); the increase involved men
and women and persons aged over 35. The unemployment rate grow up to 10.7% (+0.1 percentage
points), while the youth rate slight decreased to 32.8% (-0.1 percentage points).

So both unemployment and the unemployment rate rose. There is also something of a swerve familiar to regular readers of my work which is that the unemployment rate in January was reported originally at 10.5%. However it is now reported as being up 0.1% at 10.7%. So the impression is given that it is 0.1% up when in fact it was worse in January and is now worse than that or if you like the rise is 0.2% against the original. The fall in youth unemployment is much more welcome but it is hard not to have a concern about the way that it is still 32.8%. In fact there are two concerns to my mind. Firstly that it too may start to rise as prospects weaken and secondly along the signs of the song from Ace.

How long has this been going on?
How long has this been going on?

There must be more than a few in the youth unemployment numbers who have been unemployed for years and must feel like giving up.

Over the past year the decline in unemployment now looks rather marginal.

On a yearly basis, the growth of employment was accompanied by the fall of unemployed persons (-1.4%,
-39 thousand) and inactive people aged 15-64 (-1.3%, -169 thousand).

Actually I can go further as the three-month average looked like it was heading to 10% and did make 10.25% if I stare hard at the chart. But the reality was that the response to the relative boom was already over and the unemployment rate was turning and then rising.

Two lost decades?

A research paper from Italy’s statisticians suggest two linked and thereby troubling trends especially for the south.

 Both qualifications of the latter manual type show, in the twenty years, a considerable increase in the stock of employees that exceeds the growth of the
employed people who carry out work with higher qualifications. Also on the positive side of the variations, there are clear territorial differences that have a
different impact on the employment balance for Italy and for the South, where the contribution to the medium-high and high qualification employment is less than one third of
the contribution given by this work to the employment of the Country.

This is a version of my “Good Italy: Bad Italy” theme where the south in particular has seen quite a deterioration in the quality of employment and in particular skilled manual work has been replaced by non-skilled.

Official economic surveys

As you can see these bring maybe a little hope as they give opposite results.

In March 2019, the consumer confidence index decreased from 112.4 to 111.2. All of its components worsened: the economic, the personal, the current and the future one (from 126.4 to 123.9, from 108.2 to 106.8, from 109.4 to 107.8 and from 116.9 to 115.9, respectively).

With regard to the business surveys, the business confidence index (IESI, Istat Economic Sentiment Indicator) bettered from 98.2 to 99.2.

The business sentiment gain came mostly from the services sector.

Comment

There was a time around six months ago that the Italian government was talking about economic growth of 2% and in some extreme cases 3% where yesterday we were told this. From Reuters.

 Italy can’t afford fiscal expansion at a time when its economic growth is heading to close to zero, Treasury Minister Giovanni Tria said on Sunday.

Tria said Italy was in a phase of economic slowdown and could not consider introducing restrictive measures. He was speaking at a conference in Florence, and his remarks were carried on Italian radio stations.

“Certainly we don’t have the room for expansionary measures,” he then added.

Actually the official data has shown it to have been at zero in the year to the last quarter of 2018 and we now fear that it is contracting.. Any decline this quarter will put Italy into yet another recession and the number-crunching is not favourable.

The carry-over annual GDP rate of change for 2019 is equal to -0.1%.

Meanwhile over to the banks National Resolution Fund and its 2018 accounts.

The main results of the annual accounts for the year ended 31 December 2018 are as follows:

  • Assets € 429,869,033;
  • Liabilities € 972,900,609;
  • Endowment fund (excluding the result for the year) € (484,918,684);
  • Net result for the period € (58,112,892);
  • Endowment fund at 31 December 2018 € (543,031,576).

The negative net result for the period is largely attributable to:

  • Interest expense € (31.4 million);
  • Allocations to the provisions for risks € (26.5 million).

How does a negative endowment fund work?

 

 

 

 

 

 

The UK labour market is booming Goldilocks style

Let me open by bringing you up to date with the latest attempt at monetary easing from the Bank of England. Yesterday it purchased some more UK Gilts as part of its ongoing Operation Twist effort.

As set out in the Minutes of the MPC’s meeting ending on 6 February 2019, the MPC has agreed to make £20.6 billion of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2019 of a gilt owned by the Asset Purchase Facility (APF)……….The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £1,146mn for each maturity sector.

Yesterday was for short-dated Gilts ( 3 to 7 year maturity) and today will be for long-dated Gilts ( 15 years plus). Why is this extra QE? This is because you are exchanging a maturing Git for one with a longer maturity and thus means QE will be with us for even longer. Odd for an emergency response don’t you think?

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion. Whereas we face not only a situation where nothing has been done in the meantime but today’s purchase of long and perhaps ultra long Gilts ( last week some of the 2037 Gilt was purchased) returns us to the QE to Infinity theme.

This area has been profitable for the Bank of England via the structure of UK QE as it charges the asset protection fund Bank Rate. So mostly 0.5% but for a while 0.25% and presumably now 0.75%. In the end the money goes to HM Treasury but if you get yourself close the the flow of money as Goldman Sachs have proven you benefit and in the Bank of England’s case you can see this by counting the number of Deputy-Governors. Also its plan to reverse QE at some point continues in my opinion to be ill thought out but for now that is not fully pertinent as it has no intention of actually doing it!

UK Labour Market

In ordinary times the UK government would be putting on a party hat after seeing this.

The level of employment in the UK increased by 222,000 to a record high of 32.71 million in the three months to January 2019……..The employment rate of 76.1% was the highest since comparable records began in 1971.

As you can see a trend which began in 2012 still seems to be pushing forwards and poses a question as to what “full employment” actually means? Also let me use the construction series as an example of maybe the output data has been too low. From @NobleFrancis.

ONS Employment in UK construction in 2018 Q4 was 2.41 million, 2.8% higher than in 2018 Q3 & 3.2% higher than one year earlier.

To my question about the output data he replied.

Given the strength of the construction employment data, potentially we may see an upward revision to ONS construction output in Q4 although there can be odd quarters where the construction employment & output data go in different directions.

To give you the full picture @brickonomics points out that different areas of construction have very different labour utilisation so we go to a definitely maybe although that gets a further nudge from the wages data as you see the annual rate of growth went from 3.2% in October to 5.5% in December. So whilst this is not proof it is a strong suggestion of better output news to come.

Let us complete this section with the welcome news that unlike earlier stages of the recovery we are now creating mostly full-time work.

 This estimated annual increase of 473,000 was due mainly to more people working full-time (up 424,000 on the year to reach 24.12 million). Part-time working also contributed, with an increase of 49,000 on the year to reach 8.60 million.

Unemployment

Again the news was good.

The UK unemployment rate was estimated at 3.9%; it has not been lower since November 1974 to January 1975…..For November 2018 to January 2019, an estimated 1.34 million people were unemployed, 112,000 fewer than for a year earlier. There have not been fewer unemployed people in the UK since October to December 1975.

There have been periods recently where we have feared a rise in unemployment whereas in fact the situation has continued to get better. We again find the numbers at odds with the output data we have for the economy. But let us welcome good news that has persisted.

Wage Growth

This was a case of and then there were three today.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.4%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

The total wages number which they now call including bonuses had a good January when they rose by 3.7% which means we have gone 4%,3.4%,3.3% and now 3.7% on a monthly basis. For numbers which are erratic this does by its standards suggest a new higher trend. This is good news for the economy and also for the Bank of England which after seven years of trying has finally got a winning lottery ticket. I will let readers decide whether to award it another go or a tenner ( £10) .

As to real wage growth we now have some but sadly not as much as the official figures claim. This is because the inflation measure used called CPIH has some fantasy numbers based on Imputed Rents which are never paid which lower it and thereby raise official real wage growth. Thus if we use the January data it has real wage growth at 1.9% but using the RPI gives us a still good but lower 1.2%

Putting that another way you can see why there has been so much establishment effort led by Chris Giles of the Financial Times to scrap the RPI.

Comment

The UK labour market seems to have entered something of a Goldilocks phase where employment rises, unemployment falls and added to that familiar cocktail we have real wage growth. So we should enjoy it as economics nirvana’s are usually followed by a trip or a fall. As to the detail there remain issues about the numbers like the way that the self-employed are not included in the wages numbers. Also whilst I welcome the rise in full-time work the definition is weak as the respondent to the survey chooses.

Next let me just raise two issues for the Bank of England as it finally clutches a winning wages lottery ticket. It is expanding monetary policy into a labour market boom with its only defence the recent rise in the UK Pound £. Next its natural or as some would put it full (un)employment rate of 4.5% needs to be modified again as we recall when it was 7%.

Those of you who follow me on social media will know I do an occasional series on how the BBC economics correspondent only seems to cover bad news. Sometimes Dharshini David does it by reporting the good as bad.

eyebrows raised as jobs market figs “defy” Brexit Uncertainty BUT 1) hiring/firing tends to lag couple quarters behind activity 2)as per financial crisis, workers relatively cheap so firms may be “hoarding” workers 3)some jobs will have been created to aid with Brexit prep

Podcast

 

 

UK real wages are finally growing but productivity dips

As we move onto the latest wages and employment data for the UK more bad news has affected the UK motor manufacturing sector. As Autocar points out.

The news that Honda is set to close its Swindon manufacturing plant in 2021 is a major shock, and a huge blow. To the UK car industry. To Swindon. And, most importantly, to the 3500 workers set to lose their jobs – and the thousands of others who work at firms that supply and service it.

Grim news indeed for those affected. Autocar continues with an explanation of why this is happening.

You have to consider the decline in demand for diesel too: Honda’s Swindon engine plant produced diesel engines. Then there’s the ever-growing rise in popularity of SUVs, which is harming sales of traditional cars such as the Civic – the only model made in Swindon.

And you can’t ignore global trade, such as Donald Trump’s threat to impose huge tariffs on cars imported from Europe into the US – such as the Civic. At the same time, the European Union and Japan recently agreed a trade deal that effectively removes tariffs on Japanese-built cars imported into Europe. That reduces Honda’s need to have a European manufacturing base.

So ironically being in the European Union has made the decision easier for Honda as we also wonder about the next bit.

Is Brexit uncertainty a factor? Almost certainly.

Also Honda itself is not doing so well.

There’s also Honda itself. The firm continues to struggle in Europe, with sales markedly down on a decade ago. Last year it sold just under 135,000 cars in the European market, a three per cent decline on 2017 – and around half its sales of a decade ago.

As a result, it has increasingly focused production in its home country in Japan, at the expense of factories elsewhere. The Swindon factory produced around 160,000 Civic models last year, but at its peak ten years ago its output was around 250,000. This is the latest in a pattern of decline.

So much of this is familiar and let me add another trend which is that Japan Inc seems to be taking things home. Moving to today’s theme we will see lower employment from the motoring manufacturing sector as time passes and therefore presumably lower wage growth.

The real wages trend

Any downturn poses a problem for wages based on this from today’s release.

£494 per week in constant 2015 prices, up from £490 per week for a year earlier, but £31 lower than the pre-downturn peak of £525 per week for February 2008.

As you can see we are still quite some distance from the previous peak and that involves using the lowest measure of inflation they can find ( CPIH) as under all other measures the situation is worse. Just as a reminder the Rental Equivalence ( Imputed Rent under another name ) pillar of CPIH that drags it lower was roundly rejected by the Economic Affairs Committee of the House of Lords only last month. We do learn however that the main changes are to be found in bonuses and the like because the fall in regular pay has been much smaller.

£464 per week in constant 2015 prices (that is, adjusted for price inflation), up from £459 per week for a year earlier, but £9 lower than the pre-downturn peak of £473 per week for August and September 2007 and for February, March and April 2008.

Another way of putting it is to add up the total loss which this in the Guardian tried to do at the end of last month.

Wages are still worth a third less in some parts of the country than a decade ago, according to a report.

Research by the Trades Union Congress (TUC) found that the average worker has lost £11,800 in real earnings since 2008.

Today’s news

Firstly the employment situation continues to be really good continuing a trend that has been going for around seven years now.

There were an estimated 32.60 million people in work, 167,000 more than for July to September 2018 and 444,000 more than for a year earlier. The employment rate (the proportion of people aged from 16 to 64 years who were in work) was estimated at 75.8%, higher than for a year earlier (75.2%) and the joint-highest since comparable estimates began in 1971.

This has fed through over time into the unemployment numbers in another welcome development.

There were an estimated 1.36 million unemployed people (people not in work but seeking and available to work), 14,000 fewer than for July to September 2018 and 100,000 fewer than for a year earlier……The unemployment rate (the number of unemployed people as a proportion of all employed and unemployed people) was estimated at 4.0%, it has not been lower since December 1974 to February 1975.

The rate of fall of unemployment has slowed but then we would expect that as the number itself shrinks. Also these numbers are consistent with the other way of looking at the quantity situation in the labour market.

Latest estimates show that between October to December 2017 and October to December 2018: hours worked in the UK increased by 1.5% to reach 1.04 billion hours…..the number of people in employment in the UK increased by 1.4% to reach 32.60 million.

The combination of all of these factors has finally fed into some better wages growth.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.4% both excluding and including bonuses compared with a year earlier.

How you look at that in real terms depends on your inflation measure and whilst the official number is 1.2% for real growth we find that it shrinks as we look at the others but all of them now show a significant amount of real wage growth. So we are at least beginning to climb that mountain which will take us back to where we were in late 2007.

Productivity

This is a much less positive area as we are left mulling this.

Output per hour – Office for National Statistics’ (ONS’) main measure of labour productivity – comparing this quarter with a year ago, decreased by 0.2% in the year to Quarter 4 (Oct to Dec) 2018. Output per worker decreased by 0.1% in the year to Quarter 4 (Oct to Dec) 2018.

Regular readers will be aware that I have my doubts about this number and in particular how they apply to the services sector which not only the dominant but an increasingly dominant part of the UK economy. Returning to what they tell us it is that the credit crunch saw a shift lower which unlike wages is not getting any better.

Comment

We find ourselves in something of a sweet spot for the UK labour market with wages and employment rising and unemployment falling. Even real wages are on the up and we should welcome that as we have been hoping for it for so long. The catch in today’s data is productivity and as it happens the monthly trend for wages which has gone 4% in October, 3.3% in November and 2.8% in December. That is pretty clear and is another way of putting weekly wages which were £527 in each month so no growth at all on that basis. The latter numbers tend to go in bursts so we await the next month.

As ever there is the caveat that the average earnings numbers ignore the self-employed who comprise some 14.8% of those in work.