It is boom time for UK wages growth

Today has opened with a reminder of one of the biggest hits of Steve Winwood.

While you see a chance take it
Find romance
While you see a chance take it
Find romance

It is on my mind for two reasons. The first is that the fifty-year Gilt yield in the UK has risen back to 1% after reaching an all-time low of 0.79%. It is still remarkably cheap for the UK to borrow for infrastructure projects and the like just not as cheap as it was. On the other side of the coin the Bank of England will be trying to make it cheaper today by buying some £1.27 billion of longer-dated ( 2036 – 2071) UK Gilts as part of its reinvestment programme for its £435 billion of QE holdings. This is an extension of QE which can do little good in my opinion which will now continue until 2071 as the Bank has bought a little over £2 billion of it, Something to affect our children and grandchildren.

PPI

There was more news on this subject yesterday as Barclays joined the list of banks adding to their exposure.

Total amounts set aside for PPI redress now stand at £51.8-£53.25 billion – over 5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 20 times over the past 8 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs. ( New City Agenda)

This has plainly boosted UK consumption and the stereotypical example would be on car sales. But it is not quite a free lunch for GDP as there have been offsetting impacts elsewhere.

  • At Lloyds, retail misconduct costs have amounted to a staggering £14 billion, compared to dividends of just £500 million.
  • RBS has not paid a penny in dividends to its shareholders, but has had to find £6.4 billion in misconduct costs and has chosen to pay £3.8 billion in bonuses.
  • If Barclays had managed to restrain its misconduct costs then it could have tripled its dividend.

People have asked me why this has taken so long? Easy, those in charge of the banks have been able to maintain their positions with the large salaries and bonuses by “managing” the news flow. In banking crises just like in war the first casualty is the truth.

Wages

After yesterday’s strong GDP reading for July we maybe should not have been surprised to see some really good wages numbers, but perhaps not this good.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 4.0% for total pay (including bonuses), and fell to 3.8% for regular pay (excluding bonuses).

As you can see total pay growth reached 4% so what is called a big figure change and it was driven by the July number rising to 4.2%. Below are the sectoral numbers.

Of the sectors reported on, Construction and Finance and Business services are experiencing the highest pay growth, of over 5% (not adjusted for inflation) for total pay; manufacturing is experiencing the lowest pay growth, of 2.4%.

Actually construction wages rose at an annual rate of 7% in July. The numbers here have been boosted by bonus payments which have been around £30 per week for the last year. So it looks as though something has changed there and in a good way for once. I have to admit that it raises a wry smile as it fits with my Nine Elms to Vauxhall crane count rather better than the official construction figures.

Real Wages

Let me first show you the official view.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 2.1% and annual growth in regular pay is estimated to be 1.9%.

The problem with that is that it relies on the CPIH inflation measure which is 17% fantasy via the use of Imputed Rents ( it assumes homeowners pay themselves rent which of course they do not). Thus on a technical level it should not be used as a deflator at all but sadly the UK statistics authorities have abandoned such logic. Let me explain by how they present the overall picture now. They start with regular pay.

£470 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£461 per week), but £3 (0.7%) lower than the pre-recession peak of £473 per week for April 2008……..The equivalent figures for total pay in real terms are £502 per week in July 2019 and £525 in February 2008, a 4.3% difference.

Now let me show some alternative numbers from Rupert Seggins.

How close is real pay compared to where it was at the start of the crisis? That answer still very much depends on your favoured measure of prices. For CPIH fans it’s close, -1% below. If CPI’s your thing it’s -3%. If you prefer RPI it’s -8% and -11% if you like RPIX.

The problem with real wage growth is one of the main issues of the credit crunch and trying to sweep it away with the stroke of a statistical pen is pretty shameful in my view.

Employment and Unemployment

The numbers here were pretty good too.

the estimated employment rate for everyone was estimated at 76.1%; this is the joint-highest on record since comparable records began in 1971 and 0.6 percentage points higher on the year………Estimates for May to July 2019 show 32.78 million people aged 16 years and over in employment, 369,000 more than for a year earlier.

The cautionary note for employment is that the rate of growth has slowed as shown below.

In the three months to July 2019, UK employment increased by 31,000 to reach 32.78 million.

On the other side of the coin we see that unemployment continues to trend lower.

For May to July 2019, an estimated 1.29 million people were unemployed, 64,000 fewer than a year earlier and 716,000 fewer than five years earlier.

Some 11.000 lower in these numbers meaning it is at a 45 year low.

Comment

There is a lot to welcome in these numbers as we see wage growth pick-up with rising employment and falling unemployment. In the detail we see that the wage growth has been driven by bonuses and maybe there is a flattering of these numbers from timing changes. But it is also true that the change in the timing of NHS payments has fallen out of the numbers with no appreciable effect.

There are more than a few factors to consider. The wage growth has happened with little or no productivity growth as employment has risen by 1.1% over the past year. Next it is hard not to have a wry smile at the Resolution Foundation who had a conference on responding to recession yesterday. They are a little touchy if you point this out as this reply to me from their communications director highlights.

Given that the report says we’re not ready for a recession, we’re pretty glad we’re not in one . And as a pro-rising living standards think-tank, we’re obviously in favour of stronger wage growth.

Also there is an issue we have long expected. That is after countless occasions where it has been wrong, useless and misleading some were always going to cling to the Phillips Curve like a drowning (wo)man clings to a piece of wood.

For all the talk of its demise, the UK Phillips Curve shows signs of life ( FT economics editor Chris Giles )

To me this is a basic difference in approach. I adapt theory to reality whereas others adapt reality to suit pre-existing theory.

Oh and UK wage growth is now in line with the sort of rate at which the Bank of England would in the past be thinking of raising Bank Rate. So over to you Mark Carney and your Forward Guidance…..

 

 

 

What are the prospects for the US economy?

We find ourselves in a curious situation as we wait for ( or for readers over the weekend) mull the speech of Fed Chair Jerome Powell at Jackson Hole. There are several reasons for this and let me start with the pressure being applied by President Trump.

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!…….The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win!

We can see that The Donald has spotted that the US Dollar is strong with reports that the broad trade-weighted index is at an all time high. Care is needed with that as it starts in 1995 and the Dolllar peak was a decade before it, but the basic premise holds. But the real issue here is of course calling for interest-rate cuts when you are saying that the economy is strong! Is it?

Nowcasting

Let me hand you over to the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2019 is 2.2 percent on August 16, unchanged from August 15 after rounding. After this morning’s new residential construction report from the U.S. Census Bureau, the nowcast of third-quarter real residential investment growth increased from -1.2 percent to 0.7 percent.

That is not appreciably different to the New York Fed which has estimated 1.8%. So let us go forwards with 2% as an average. In terms of past definitions from President Trump ( 3%-4%) that is not doing really well but is hardly a call for an interest-rate cut.

Business Surveys

Something caught the eye yesterday in the Markit PMI survey.

The seasonally adjusted IHS Markit Flash U.S.
Manufacturing Purchasing Managers’ Index™
(PMI™) registered 49.9 in August, down from 50.4
in July and below the neutral 50.0 threshold for the
first time since September 2009.

The eye-catching elements were it going below the neutral threshold and the fact this is the lowest reading for nearly a decade. Some of this is symbolism as the PMI is not accurate to anything like 0.1 but there is also the downwards direction of travel. Also it had a consequence as we look wider.

August’s survey data provides a clear signal that
economic growth has continued to soften in the third
quarter. The PMIs for manufacturing and services
remain much weaker than at the beginning of 2019
and collectively point to annualized GDP growth of
around 1.5%

So we started with ~2% and now are at 1.5%.Prospects look none too bright either.

The past isn’t what we thought it was

Earlier this week we saw quite a revision affecting employment trends.

For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2019 total nonfarm employment of -501,000 (-0.3 percent).

This begs several questions as it means the monthly non-farm payroll numbers were too high in the year to March by more than 40,000 a month. The worst problem areas were retailing,,professional and business services and leisure and hospitality.

The change in the picture is covered by MarketWatch.

“This makes some sense, as the 223,000 average monthly increase in 2018 seemed too good to be true in light of how tight the labor market has become and how much trouble firms are said to be having finding qualified workers,” said chief economist Stephen Stanley of Amherst Pierpont Securities

In a sense that is both good and bad as he implies the economy might be at a literal version of full employment, at least in some areas. The bad is that growth was weaker than thought.

Money Supply

Back on the eighth of May I posted this warning.

The narrow measure of the money supply or M1 in the United States saw a fall of just over forty billion dollars in March. That catches the eye because it does not fit at all with an economy growing at an annual rate of 3.2%. Indeed we see now that over the three months to March M1 money supply contracted by 2.7%. That means that the annual rate of growth has been reduced to 1.9%. Thus we see that it has fallen below the rate of economic growth recorded which is a clear warning sign. Indeed a warning sign which has worked very well elsewhere.

That has played out and whilst it is a coincidence that the annual rate of economic growth seems now to be what narrow money supply growth was the broad sweep has worked. However that was then and this is now because M1 has been on something of a tear and the last three months have seen annualised growth of 8% pulling the actual annual rate of growth to 4.8%.

Will it be “Boom!Boom! Boom!” a la the Black-Eyed Peas? Well thank you to @RV3003 on twitter who drew my attention to this from Hosington.

First, Treasury deposits at the Fed, which
are not included in M2, fell dramatically as a
result of special measures taken to avoid hitting
the debt ceiling, thus giving M2 a large boost as
Treasury deposits moved to the private sector.
Once the debt ceiling is raised, Treasury deposits
will rebound, reversing the process and slowing
M2 growth.

Did this affect M1? Well maybe as demand deposits have risen by US $75 billion since the March and since the debt ceiling was raised they have fallen back by US $14 billion.

As you can imagine I will be tapping my foot waiting for the next monthly update. Fake money supply growth?

Comment

We can see that the US economy has slowed but if the money supply data is any guide is simply slowing for a bit and may then pick up. That scenario does not fit with the way that bond markets have surged expecting more interest-rate cuts. In fact bond market analysts are arguing that the Federal Reserve needs to cut interest-rates to keep up and avoid losing control, although they are not entirely clear what it would be losing control of.

So I have a lot of sympathy with Jerome Powell who has a very difficult speech to give today. The picture is murky and I would wait for more money supply data before giving any hints of what I would do next. In short I would be willing to be sacked rather than bowing to Presidential pressure.

 

 

Is Germany the new sick man of Europe?

The last twelve months have seen quite a turn around in not only perceptions about the performance of the German economy but also the actual data. With the benefit of hindsight we see that there was a clear peak at the end of 2017 when after a year of strong economic growth ( 0.6% to 1.2% quarterly) the annual rate of Gross Domestic Product or GDP growth reached 3.4%. Then things changed and quarterly growth plunged to 0.1% as 2018 opened as quarterly growth fell to 0.1%.

Actually there was a warning sign back then because looking at my post from the 3rd of January 2018 I reported on the good news as it was then but also noted this.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs.

This was in response to this from the Markit PMI.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday.

In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

So as you can see we have something else to add to the issues with GDP as in this instance it completely missed the turn in the German economy. The GDP data in fact misled us.

If we move forwards to April 25th last year we see the Bundesbank had seen something but blamed the poor old weather.

The Bundesbank expects the German economy’s boom to continue, although the Bank’s economists predict that the growth rate of gross domestic product might be distinctly lower in the first quarter of 2018 than in the preceding quarters.

The “boom to continue” then went in annual economic growth terms 2.3%, 2.1%, 1.1%, 0.6%,0.9% and most recently 0.4%.If we switch to the actual level it is not much of a boom to see GDP rise from 106.04 at the end of 2017 to 107.03 at the end of the second half of 2019.

Looking Ahead

The Bundesbank has changed its tone these days or if you prefer has been forced to change its tone so let us dip into yesterday’s monthly report.

“The domestic economy is still doing well; the weaknesses have so far been concentrated in industry and exports. International trade disputes and Brexit are important reasons behind this,” Mr Weidmann said.

As you can see its President has a good go at blaming Johnny Foreigner and in particular the UK. Actually the latter is somewhat contradicted by the report itself as it points out Germany has also benefited from the UK in 2019.

In particular, exports to the United Kingdom were weak in the second quarter. A contributing factor to this, according to the Bundesbank’s economists, was the original Brexit date scheduled for the end of March. This resulted in substantial stockpiling in the United Kingdom over the winter months. This led to a countermovement in the second quarter.

Actually the report itself does not seem entirely keen on the idea that it is all Johnny Foreigner’s fault either.

“Sales in construction and in the hotel and restaurant sector declined. Wholesale trade slid into the downturn afflicting industry”, the Bank’s economists write. Only retail trade as well as some other services sectors are likely to have provided positive momentum.

So it is more widespread than just trade.In fact if we look at the details below we see that it was the 0.4% growth in the first quarter which looks like the exception to the present trend.

Construction output declined steeply after posting a sharp increase during the first quarter due to favourable weather conditions. Meanwhile, the demand for cars, pent up by delivery bottlenecks last year, had largely been met at the start of 2019 and did not increase further in the second quarter.

Ominous in a way as we wonder if it might get the same treatment as the first quarter of 2018. But if we take the figures as we presently have them then GDP growth in the first half of this year has been a mere 0.3%. But they are not expecting much better and maybe worse.

Economic activity could decline slightly again in the current quarter, the economists suggest. There are, they write, no signs yet of an end to the downturn in industry, adding: “This could also gradually start to weigh on a number of services sectors.”

They also touch on an area which concerns others.

Leading labour market indicators painted a mixed picture. Industry further scaled back its hiring plans. By contrast, in the services sectors, except the wholesale and retail trade, and in construction, positive employment plans dominated.

Is the labour market turning? This morning’s numbers only really tell us what we already knew.

The year-on-year growth rate was slightly lower in the second quarter than in the first quarter of 2019 (+1.1%) and in the fourth quarter of 2018 (+1.3%).

Maybe we learn a little more here.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment increased by 50,000, or 0.1%, in the second quarter of 2019 compared with the previous quarter.

That number looks a fair bit weaker.

Markit PMI

This has not had a good run and let me illustrate this with the latest update from the 5th of this month.

The combination of a deepening downturn in manufacturing output and slower service sector business activity growth saw the Composite Output Index register 50.9 in July, down from 52.6 in June and its lowest reading in just over six years.

Yes it shows a fall but it has continued to suggest growth for Germany and sometimes strong growth when in fact there was not much and then actual declines.

Comment

The situation here is revealing on quite a few levels. Let me start with one perspective which is ironically provided by ECB President Mario Draghi when he suggested his policies  ( negative interest-rates and QE) added 1.5% to GDP. That was for the Euro area overall but if we apply it to Germany we see that the boom fades a bit and more crucially the German economy started “slip-sliding away” as soon as the stimulus began to fade. That is rather a different story to the consensus that it is the southern European countries that have depended most on stimulus policies.

Next is the German economic model which relies on exports or if you prefer demand from abroad. We have seen a phase where this has been reduced at least partly due to the “trade war” but also I think that the issues with diesel engines which damaged the reputation of its car manufacturers hit too. Whatever the reason there is not a lot behind it in terms of domestic consumption.

The issue with domestic consumption gets deeper as we note that economic policy is sucking demand out of the economy. At the beginning of the year the finance ministry thought that the surplus would be 1.75% of GDP. That seems much less likely now as economic growth has faded but it is one of the reasons why we keep getting reports that Germany will provide a fiscal stimulus which reached 50 billion Euros yesterday. With all of its bond maturities showing negative yields it could easily do so and in fact would be paid to do it, but it still looks unlikely as I note the mention of a “deep recession” being required.

As to my question in some ways the answer is yes. But we need to take care as the domestic consumption problem was always there and once export growth comes back we return to something of a status quo. I also expect the ECB to act in September but on the other side who would expect Germany to be the economic version of a junkie desperate for a hit?

 

 

 

 

Good news on UK real wage growth reminds us they are still in a depression

One of the features of the UK economic recovery post credit crunch has been the strong growth in employment. This has had the very welcome side effect of bringing unemployment down to levels that on their own would make you think we have fully recovered. However yesterday produced a flicker of a warning on this subject from the official survey on well-being.

Expectations for higher unemployment for the year ahead have been climbing and are now higher than at any point for the past five and a half years.

Of course with so many elements of the media and “think tanks” singing along with REM it is hard to know whether people actually think this or feel they should.

It’s the end of the world as we know it
It’s the end of the world as we know it

Intriguingly though the next line includes the words “I feel fine” which were also replicated at a time ( Brexit D-Day 1.0 ) you might nor expect this.

Anxiety in the UK remained stable in the year ending March 2019, with no significant decrease in the proportion of people who reported the highest anxiety ratings.

Meanwhile the Bank of England will be expecting the economy to improve.

Net financial wealth per head increased by 3.0% for the quarter ending March 2019 compared to the same quarter a year ago, led by increases in equity and investment fund shares.

The only disappointment for it will be that it has not managed to keep house prices rising in real terms as well.

Unemployment

If we stay with that this morning’s release shows that the expectations had at least some basis in reality.

The UK unemployment rate was estimated at 3.9%; lower than a year earlier (4.0%); on the quarter the rate was 0.1 percentage points higher.

So there was a nudge higher in the unemployment rate. I have looked into the numbers as the release is shall we shall a bit light in this area. The rise in unemployment was by 37,000 to 1,329,000 but there is a nuance to this.

90,000 people from economic inactivity to unemployment

This is for a different time period as we are comparing the first three months of this year with the latest three but you can see that the shift is people joining the labour force. Over this period it is just about treble the change in unemployment of 31,000.

How can this be? We find it in the definition of employment that includes those above retirement age as over the same period it has risen by 104,000 which as the ordinary employment level only rose by 34,000 then 70,000 “retirees” have found work.

Nuance

I have pressed the numbers hard here so do not take them to the last thousand. But in a broad sweep it looks as though more “retirees” have looked for work and many of them have found jobs. But some others have not and because they are looking for work have been switched from not being in the numbers to raising both unemployment numbers and the rate. Awkward.

So we are not sure what this actually tells us.

Employment

I have stolen my own thunder to some extent in the previous section but these numbers were good again and took us to a joint record high in employment rate terms of 76.1%. But let me go wider as I have above as we reached what ELO might call A New World Record. Or rather a UK record because if we include those above retirement age we have a new record employment rate of 61.6% and have 32.8 million.

The catch is that whilst some of this is good in terms of older people being heathier and able to work some will be forced to by needing the money and we have no way of determining the split. Also there was this.

There were an estimated 896,000 people (not seasonally adjusted) in employment on zero-hour contracts in their main job, 115,000 more than for a year earlier, but 8,000 fewer than the same period in 2016. This represents 2.7% of all people in employment for April to June 2019.

So a rise in a number which had been falling and again we lack the nuance. These contracts suit some people but others only take them because it is all they can get and we do not know the split. Frankly to my mind if you do not get work in a week or maybe only a few hours then the numbers should be discounted into “full-time equivalents.”

Oh and there was something which contradicted a lot of the rhetoric we see flying around.

EU nationals working in the UK increased by 99,000 to 2.37 million.non-EU nationals working in the UK increased by 34,000 to 1.29 million

Wages

These were a bright spot.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.7% for total pay (including bonuses) and 3.9% for regular pay (excluding bonuses).

If we look at total pay the monthly pattern has improved going, £530,£534,£536 and now £538 for weekly wages. Pay in construction has risen at an annual rate of 5.9% although the monthly pattern was better in April and May than June. The fly in the ointment is the public sector which had a really good April due to the rise in the minimum wage and this.

Public sector annual pay growth has accelerated to 3.9% and is now at its highest since May 2010; this is driven in large part by the health and social work sub-sector in which the timing of pay rises for some NHS staff is different in 2019 compared with 2018.

As April drops out of the three monthly average next time we could see quite a dip in this area.

Real Wages

The official view is this.

In real terms (after adjusting for inflation), total pay is estimated to have increased by 1.8% compared with a year earlier, and regular pay is estimated to have increased by 1.9%.

Sadly it is not that good as they use the imputed rent driven CPIH for this measure. As an example of the issue RPI was 1% higher in June. So if we split this down the middle real wage growth is 1.3%.

This sort of thing matters and let me highlight it with this.

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

  • £505 per week in nominal terms
  • £469 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£460 per week), but £4 (0.8%) lower than the pre-recession peak of £473 per week for April 2008

The equivalent figures for total pay are £499 per week in June 2019 and £525 in February 2008, a 5.0% difference.

Firstly on both readings that is a depression. But many press the regular pay numbers which ignores the fact that the depression has been raging most in bonus pay. If we move to total pay we see why many people think they are poorer, it is because they are. That is before we get to the highly favourable inflation measure used here.

Comment

There is an element of good UK bad UK here so let me start with the good. Employment growth has been excellent and so overall has been the fall in unemployment. This month’s rise in the latter may be older people thinking they can get a job which many are but those that do not now count as unemployed. Wage growth is now pretty good and in fact is stellar for the credit crunch period.

The other side of the coin is that real wages are still in a depression and even at current rates of growth with take around 3 years to get back to the previous peak. Also if you have rising employment and falling (-0.2% GDP) you get this.

Data from the latest labour market statistics and GDP first quarterly estimate indicate that output per hour fell by 0.6% compared with the same quarter in the previous year….Output per worker in Q2 2019 also fell by 0.1%, compared with the same quarter in the previous year. This was the result of employment (1.3%) growing faster than gross value added (1.2%).

 

Why does Germany have such negative bond yields?

Much is happening in the economy of Germany right now and let me open with a perspective provided by when we looked at it on the 6th of June.

If we look towards Europe we see that the Federal Republic of Germany has set a new record for itself this morning as its benchmark ten-year bond yield has fallen to -0.23%. So it is being paid ever more to borrow which I will let sink in for a moment.

At the time that provided some shock value as in the previous wave of negative bond yields we had seen the shorter maturities go negative but this time the benchmark ten-year had joined the party. However the bond market surge continued and as I type this the German ten-year yield is -0.4%. There are various factors in this but the German statistics office has provided a significant one already today.

The debt owed by the overall public budget  to the non-public sector  amounted to 1,916.6 billion euros at the end of 2018. This represents a per capita debt of 23,124 euros in Germany. Based on final results, the Federal Statistical Office (Destatis) also reports that debt decreased by 2.7% (52.5 billion euros) compared with the revised results as at 31 December 2017.

This provides a perspective on the French debt numbers we looked at yesterday and whilst the basis is slightly different the broad picture holds. In fact the two countries are heading in different directions as this from back in April highlights.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

In fact looking at the annual data release Germany has been reducing its debt since 2015.

The next factor is the expected policy of the European Central Bank which already holds some 517 billion of German bonds or bunds and is expected to announce new purchases in September. The impact on the German bond market is higher because the ECB makes its purchases according to a Capital Key based on economic performance.

Five-yearly adjustment based on population and GDP data from European Commission.

Here Germany is strong getting 26.4% of the total and hence the QE bond purchases. But its bond market is relatively small due to the way it runs its public finances and according to its statisticians it has a securities debt ( bonds and treasury bills) of 1.521 trillion Euros and falling. In fact as the ECB has been buying the debt total has fallen by 51 billion Euros. If you want the price of something to rise then large purchases ( ECB) accompanied by falling and at times negative supply is the way to do it.

This creates quite a mess because you have a negative yield and thus an expected loss if you hold to maturity. Yet holders of German bonds have made large capital gains as for example the German bond future is up over 3 points since we looked at it on June 6th. Of course you are replacing guaranteed coupons with the “greater fool” theory but then that twists as we note the greater fool is often the central bank.

The Economy

This morning has brought more evidence of a slowing economy.

Compared with June 2018, the number of persons in employment increased by 0.9% (+394,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 1.0% in April. This means that employment growth slightly slowed in the course of 2019.

As you can see employment growth is slowing and June saw a rise of a mere 1,000 on a monthly basis which if adjusted for seasonality rises to 7,000 as opposed to the 44,000 average of the last five years.

If we switch to unemployment Reuters is reporting this.

German unemployment increased less than expected in July, data showed on Wednesday, suggesting that the labor market in Europe’s largest economy so far remains relatively immune to an economic downturn which is driven by a manufacturing crisis. Data from the Federal Labour Office showed the number of people out of work rose by 1,000 to 2.283 million in seasonally adjusted terms. That compared with the Reuters consensus forecast for a rise of 2,000.

I love the way that Reuters think you can accurately forecast unemployment to 1000! The broad view is that on this measure the decline in unemployment looks as if it may have stopped. This is backed up by this bit.

The jobless rate held steady at 5.0% – slightly above the record-low of 4.9% reached earlier this year.

If we switch to retail sales then the story starts well.

+3.5% on the previous month (in real terms, calendar and seasonally adjusted, provisional)

That was the best since 2001 on a monthly basis but then we also got this.

-1.6% on the same month a year earlier (in real terms, provisional)

This was partly driven by a large downwards revision to the May data which reminds us of how erratic retail sales numbers can be. Anyway so far this year the retail numbers have been helping to keep Germany going.

Compared with the previous year, turnover in retail trade was in the first six months of 2019 in real terms 2.2% and in nominal terms 2.9% higher than in the corresponding period of the previous year.

But if yesterday’s survey is any guide the times they are a-changing.

The GfK consumer sentiment indicator, based on a survey of about 2,000 Germans, edged down to 9.7 from 9.8 a month earlier. It was the lowest reading since April 2017 and in line with market expectations……….The GfK sub-indicator measuring consumers’ economic expectations dropped to -3.7, falling below its average of zero points for the first time since March 2016 and hitting the lowest level since November 2015. ( Reuters )

Economic Growth

This morning has brought the economic growth numbers for the Euro area.

Seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and the EU28 during the second quarter of
2019, compared with the previous quarter…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and
by 1.3% in the EU28 in the second quarter of 2019. In the previous quarter, GDP had grown by 1.2% in the euro
area and by 1.6% in the EU28.

We do not have the German numbers but there are more than a few clues from this. For example we looked at France ( 0.2%) yesterday and we know Austria was 0.4% and Spain 0.5%. By the time you read this you will know how much Italy contributed to the reduction in growth at which point we will know if the Bundesbank was right to suggest that the German economy may have contracted this quarter.

Comment

What we are seeing is the economic and financial market version of a perfect storm. A large buyer enters a market just as supply reduces and then net supply goes into reverse. Next we see an economic slow down which surprisingly at these levels retains the old knee-jerk effect of people buying bonds. However this time around that is not driven by the security of coupons as some bonds now don’t have them or yield because it is usually negative but instead the prospect of being able to sell at ever higher prices to the central bank. So it looks the same on the surface but is different as we look deeper.

Meanwhile we do not often get comparisons of this sort so here it is and as it is missing the UK is the same as France,

 

 

 

Problems are mounting again for the Riksbank of Sweden

Today is one which will concentrate the minds of the Riksbank of Sweden. One way or another they will find themselves affected by what action the European Central Bank takes. Conceptually this is really rather awkward for them as they took this action just before Christmas.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Even worse they gave Forward Guidance like this.

The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019.

Many central banks have a poor record with their Forward Guidance but the Riksbank competes with the Bank of England for the worst effort. Of course they could decide to support the Krona by raising interest-rates as the ECB eases but that would be a road to Damascus style change. But that does give us the opening influence on their policy which is the large influence of the Euro/Krona exchange rate on Swedish economic policy.

As to the Krona the Riksbank has produced a report suggesting this.

The overall conclusion is that the krona is unexpectedly weak and that a certain appreciation is to be
expected, but that there is considerable uncertainty as to both when and by how much the krona
will strengthen.

Perhaps the appreciation will be due to a new hard Krona policy or perhaps I am jesting. But how can they say their currency is “unexpectedly weak” after applying negative interest-rates and QE bond buying? Of course they do expect people to believe the new version of Forward Guidance.

More precisely, the rate path means that an initial rate rise may occur in October, December or February. After that, the repo rate will be raised by just under 0.5 percentage points a year.

So we can note that the Riksbank is playing the same old song ignoring the fact that over the past 5/6 years it has been full of bum notes. Also as I regularly point out timing is nearly as important as what you do or as Bananarama put it.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

On that score the Riksbank took so long to try to get interest-rates out of negative territory that it has done so into a world downturn.

Labour Market

Riksbank policymakers will have been spluttering into their morning espresso as they read this earlier.

In June 2019, there were 427 000 unemployed persons aged 15–74, not seasonally adjusted. This corresponds to an unemployment rate of 7.6 percent. ( Sweden Statistics )

This caught expectations of 6.5% out and yes I did type that correctly. Firstly we should be clear that the monthly unadjusted number is an erratic series But last October and November it was 5.5% and ( with fluctuations) has been rising since. Or if we look at the latest 3 readings we see 6.2%,6.8% and now 7.6%.

If we move to the adjusted series we see this.

Smoothed and seasonally adjusted data indicates a decrease in the employment rate and an increase of the unemployment rate. The unemployment rate was 6.3 percent.

The problem here is use of the word “Smoothed” or if you prefer averaging because it reduces the use of the number as an economic indicator as you will only learn of changes after a delay. The more the numbers are smoothed the more the delay. Danske Bank calculate their own seasonally adjusted series and put the number at 6.6% compared to a couple of occasions where it has dipped below 6%.

If we switch to employment which has worked as a leading indicator at times in the credit crunch era we see another hint of trouble.

 It was the second month in a row that employment did not increase, compared with the same month previous year. Before that, the number of employed persons has increased every month since September 2016……..Smoothed and seasonally adjusted data indicates a minor change in the number of employed persons and a decrease in the employment rate compared with recent months.

Money Supply

We have learnt over the past year or two that narrow measures of the money supply are the best economic leading indicator we have and here is this morning’s release.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

If we look back we see that the number has been falling since 13.8% was recorded in 2015. That followed the introduction of a negative official interest-rate ( repo rate) and the commencement of QE bond buying. Last year the growth rate had fallen to 7.3% and the latest data raises concerns about further falls as 2019 develops.

Another interesting development is that the stock of note and coins in Sweden rose last year. I note this because Sweden is famous for switching towards electronic forms of payment and cash and has previously seen some ten years of falls in the amount of physical cash. But whilst last year’s rise was small at 1.9% there was one.

Another possible guide is that credit to business seems to be slowing.

In June, the annual growth rate on loans to non-financial corporations was 5.2 percent, which is a decrease of 0.9 percentage points compared with May.

Household credit

This can be viewed through two windows of the Riksbank. A bit like in the BBC childrens TV series Blue Peter. Through the round window the number below is good because Sweden’s households are over indebted. Through the square window it is bad because they may consequently consume less and weaken GDP growth.

In June 2019, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 4.9 percent, which means that the growth rate decreased by 0.1 percentage point compared with May.

As to interest-rates you may be wondering what a mortgage typically costs in Sweden.

Households’ average housing loan rate for new agreements was 1.52 percent in June, unchanged compared with May. The floating housing loan rate amounted to 1.54 percent in June, which is unchanged compared with May.

That is a bit over a half a percent lower than the UK so the delta from reducing interest-rates seems to be around 0.5 at these levels or mortgage rates fall by around half off the official rate change.

Comment

We have looked at the domestic situation in Sweden and now let us widen our scope. We started the week by looking at signs of economic weakness in the Pacific and that has continued this morning with the news that Nissan is looking to shed around 9% of its workforce. These days Nissan also has strong links to Europe and the mood here will not be helped by this.

German business morale plunged in July to its lowest level in more than six years, a survey showed on Thursday, in a further sign that a manufacturing crisis is pulling Europe’s largest economy toward recession……..The Ifo institute said its business climate index fell to 95.7 from an upwardly revised 97.5 in June. The July reading undershot a consensus forecast for 97.1. It was the fourth monthly decline in a row and the lowest level since April 2013. ( Reuters)

For Sweden this means that the outlook for its major trading partner is poor. Thus the reality is that the Riksbank looks more likely to cut interest-rates again than raise them.

Meanwhile we get yet more evidence that banks take the “Be afraid, Be very afraid” strap line from the film The Fly about inflicting negative interest-rates on the ordinary depositor.

The average interest rate for new deposits by households in bank accounts was 0.07 percent in June, a decrease of 0.01 percentage points compared with May. The interest rate on accounts with fixed periods or a limited number of free withdrawals amounted to 0.17 percent in June, an increase of 0.01 percentage point compared with May.

The Investing Channel

 

Recession forecasts for the UK collide with stronger wage growth

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

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

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

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

Okay so what is it?

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

Okay and then we get the punchline.

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

Thoughts

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

Also frankly saying this is not much use.

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

 

UK Labour Market

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

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

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

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

The good news section of the report continued with these.

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

So higher wage growth and low unemployment.

Nuance

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

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

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

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

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

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

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

Wages

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

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

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

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

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

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

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

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

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

£503 per week in nominal terms

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

 

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

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

Comment

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

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

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

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

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

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